Hawthorn Bancshares, Inc. (HWBK): PESTLE Analysis [Nov-2025 Updated]

You need to know if Hawthorn Bancshares, Inc. (HWBK) is positioned to thrive or just survive, and the answer isn't just in their balance sheet. The real story is in the macro environment-the Political, Economic, Social, Technological, Legal, and Environmental (PESTLE) forces acting on their Missouri-centric business. We're seeing strong loan growth and a Net Interest Margin (NIM) of 3.97% in Q3 2025, but rising compliance costs and tech demands are defintely pressuring the bottom line. Let's dive into the external risks and opportunities you need to factor into your next decision.

Political Factors: Rate Path and Tax Risk

The Federal Reserve's interest rate path is the single biggest political lever affecting HWBK. It dictates their cost of funds and how much loan demand they see. Right now, stability in Missouri's state-level politics is a quiet positive, helping local infrastructure and business lending stay predictable.

But, you have to watch for potential changes to corporate tax law. Any major shift could directly impact their strong nine-month 2025 net income of $17.6 million. Also, government-backed Small Business Administration (SBA) loan programs are a key growth tool, so keep an eye on funding levels there. It's all about Washington and Jefferson City right now.

Economic Factors: Strong Margins and Loan Growth

The numbers here are strong and show smart management. Hawthorn Bancshares expanded its Net Interest Margin (NIM)-the difference between interest earned and interest paid-to a solid 3.97% in the third quarter of 2025. That's a clear win for their asset-liability strategy.

Loan growth is also robust, increasing by $51.1 million, or 3.5%, in Q3 2025. Plus, their funding base is stable; total deposits hit $1.53 billion as of September 30, 2025. Honestly, the health of the regional employment and housing market in Missouri is the main driver for the quality of all those commercial and mortgage loans. A strong local economy makes their job easier.

Sociological Factors: Trust vs. Digital Demand

The bank's 150+ year history is a huge, intangible asset, fostering deep community trust and customer loyalty-something FinTechs can't buy. Still, customer preferences are changing fast, demanding a seamless blend of digital tools and in-person branch service.

This shift has a direct cost. Increased employee salaries and benefits contributed to a nine-month 2025 non-interest expense of $37.6 million. To offset this, expanding the wealth management group is a smart strategy to boost non-interest income. You need to pay people well to offer a high-touch service.

Technological Factors: Efficiency and Modernization Costs

This is where regional banks feel the heat. Continuous investment in digital banking platforms is necessary just to compete with rivals, let alone the FinTechs. Cybersecurity risk management is a constant, defintely rising cost for protecting customer data, and you can't skimp on it.

The efficiency ratio-a measure of a bank's overhead to revenue-was 62.30% in Q3 2025. To improve this, adoption of automation and Artificial Intelligence (AI) is crucial. Legacy system modernization costs are a hidden pressure on the operating budget, but ignoring them will only make that efficiency ratio worse.

Legal Factors: Capital Strength and Compliance Burden

Hawthorn Bancshares maintains a strong regulatory position, holding a well capitalized status with a Total Risk-Based Capital ratio of 15.12% at Q2 2025. That's a sign of a very safe balance sheet.

However, compliance with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations imposes high and non-negotiable operational costs. Also, new consumer protection rules on things like overdraft or interchange fees are a clear risk that could reduce non-interest income. To be fair, the Board did authorize a common stock repurchase program for up to $10.0 million in June 2025, which shows confidence in their capital position despite the regulatory headwinds.

Environmental Factors: Indirect Risk and Green Opportunity

While not a primary driver, Environmental, Social, and Governance (ESG) is a growing factor. HWBK has indirect exposure to climate risk through the collateral in its loan portfolio, especially real estate valuation in Missouri. Institutional investors are also pressuring for transparent ESG disclosures.

On the operational side, focusing on energy efficiency in the branch network is a simple way to manage utility costs. Plus, there's a clear opportunity to offer green lending products for commercial real estate or renewable energy projects. Action: Management should task the Commercial Lending team to draft a green lending product proposal by year-end.

Hawthorn Bancshares, Inc. (HWBK) - PESTLE Analysis: Political factors

Federal Reserve's interest rate path dictates cost of funds and loan demand.

The Federal Reserve's (the Fed) monetary policy remains the single most powerful political-economic factor for Hawthorn Bancshares, Inc. (HWBK). As of late 2025, the market is navigating a complex shift from the aggressive tightening cycle of the past two years to a measured easing phase, which directly impacts HWBK's net interest margin (NIM).

Analysts project the Fed will continue its cutting cycle, with some forecasts suggesting the key borrowing benchmark, the federal funds rate, could land in the 3.5%-3.75% range by year-end 2025. This is still elevated compared to the pre-2022 era. For HWBK, a lower interest rate environment is a double-edged sword:

• Opportunity: Reduced cost of funds, as the bank's deposit costs-especially for interest-bearing accounts-will eventually fall, helping to sustain the net interest income, which was already strong at $48.3 million for the nine months ended September 30, 2025.
• Risk: Lower rates will reduce the yield on new loans and reinvestments, potentially compressing the NIM, which stood at a robust 3.97% in the third quarter of 2025.

The bank must defintely focus on managing deposit costs faster than the decline in asset yields. That's the quick math for maintaining profitability in a rate-cutting cycle.

State-level political stability in Missouri affects local infrastructure and business lending.

The political stability in Missouri, HWBK's primary operating region, provides a clear, near-term opportunity for commercial and real estate lending. The state's political commitment to infrastructure spending translates directly into local business activity and loan demand.

The Missouri state government enacted its Fiscal Year (FY) 2025 operating budget, which totaled approximately $50.47 billion. A significant portion of this is earmarked for key infrastructure projects, which HWBK's commercial lending arm can capitalize on:

• Roads: Continued funding for major projects like the expansion of Interstate 44 (I-44) and repairs to rural roads.
• Broadband: Investment in expanding broadband access, especially in the rural areas where Hawthorn Bank operates, spurs new commercial development.

Furthermore, Missouri's move to eliminate the capital gains surcharge tax in 2025 signals a pro-business tax environment, which encourages local investment and entrepreneurship. The stability of the state budget, enacted in June 2025, means HWBK can plan its local lending strategy with high confidence in sustained economic activity.

Potential changes to corporate tax law could impact the $17.6 million nine-month 2025 net income.

The federal corporate tax landscape for 2025 is marked by an unexpected degree of stability, which is a net positive for HWBK's financial planning. The major legislative action, the 'One Big Beautiful Bill Act' passed in July 2025, made permanent several key provisions of the 2017 Tax Cuts and Jobs Act (TCJA).

Crucially, the statutory corporate tax rate remains at 21%, as this rate was not a sunsetting provision of the TCJA. This predictability is vital for accurately forecasting the bank's tax expense against its strong nine-month 2025 net income of $17.6 million.

However, the tax environment for HWBK's client base is changing. The permanent extension of the Qualified Business Income Deduction (QBID) under Section 199A is a significant political win for small and mid-sized businesses, HWBK's core customers. This deduction reduces the effective tax rate on pass-through business income, leaving more capital for business owners to invest, which often translates into higher demand for commercial loans from a local bank like Hawthorn Bank.

Government-backed Small Business Administration (SBA) loan programs influence local growth strategy.

Federal government-backed lending programs, particularly those from the Small Business Administration (SBA), are a key political tool for stimulating local economies and a strategic growth avenue for HWBK. The SBA 7(a) loan program, the most popular, offers loan amounts up to $5 million.

In Missouri, the average SBA loan size in the second quarter of 2025 was approximately $750,467, with an average interest rate of 9.8%. This high average loan size and competitive rate profile make SBA lending a lucrative and lower-risk segment for HWBK, as the government guarantee mitigates much of the credit risk.

Furthermore, the SBA has been highly active in 2025 with disaster relief. The availability of Economic Injury Disaster Loans (EIDL) in Missouri, with loan amounts up to $2 million and interest rates as low as 4% for small businesses impacted by drought and adverse weather, presents a direct opportunity for HWBK to act as a crucial financial partner in the community's recovery, strengthening customer loyalty and deposit relationships.

Hawthorn Bancshares, Inc. (HWBK) - PESTLE Analysis: Economic factors

You're looking for a clear map of Hawthorn Bancshares' (HWBK) economic footing in the current climate, and the takeaway is simple: the bank is defintely executing on its core strategy, but the regional economy in Missouri presents a mixed backdrop that demands caution. The key financial metrics for Q3 2025 show strong internal performance, yet the broader employment trends suggest a softening that could eventually pressure loan quality.

Net Interest Margin (NIM) expanded to 3.97% in Q3 2025, reflecting effective asset-liability management.

The Net Interest Margin (NIM), which is the profit engine for any bank, expanded to a robust 3.97% on a fully taxable equivalent (FTE) basis in the third quarter of 2025. This is a significant improvement from 3.89% in the prior quarter and 3.36% a year ago. That's a strong signal of effective asset-liability management (ALM)-the bank is earning more on its loans and investments (assets) than it is paying out on deposits (liabilities).

Here's the quick math on what drove that NIM expansion:

• Yield earned on average loans increased to 6.12% (FTE) in Q3 2025.
• The average cost of deposits remained contained, only rising slightly to 2.36% in Q3 2025.
• Net interest income for the quarter hit $16.9 million, up $2.5 million from the same quarter last year.

This is solid execution. The bank is capitalizing on the higher interest rate environment by pricing new loans effectively while keeping its funding costs low, partly due to a stable base of non-interest bearing demand deposits, which represented 27.8% of total deposits as of September 30, 2025.

Loan growth was strong, increasing $51.1 million, or 3.5%, in the third quarter of 2025.

Hawthorn Bancshares delivered tangible balance sheet momentum, growing its loan portfolio by $51.1 million, which translates to a strong 3.5% quarter-over-quarter increase. This brought the total loans held for investment to approximately $1.51 billion as of September 30, 2025. This growth is a clear opportunity, as it fuels the higher net interest income we just discussed. Still, you have to watch the credit quality.

The credit quality metrics remain strong for now, with non-performing assets (NPA) to total loans at 0.48%, an improvement from 0.58% in the prior year quarter. What this estimate hides, however, is that NPAs did tick up slightly from the previous quarter due to a single commercial relationship moving to non-accrual status, which is a key watchpoint for Q4.

Total deposits reached $1.53 billion as of September 30, 2025, showing stable funding.

A bank's deposit base is its lifeblood, and Hawthorn Bancshares shows a stable, albeit slow, growth trend. Total deposits reached approximately $1.53 billion as of September 30, 2025, an increase of $7.9 million, or 0.5%, from the end of the previous quarter. This stability is critical because it keeps the cost of funds low, which directly supports the NIM.

The composition of the deposit base matters more than the raw number. The bank's ability to maintain a high percentage of non-interest bearing demand deposits (27.8%) is a competitive advantage in a high-rate environment. This stable funding structure is a significant defense against the deposit flight seen at some larger regional banks.

Regional employment and housing market health in Missouri directly drives commercial and mortgage loan quality.

As a Missouri-centric bank, Hawthorn Bancshares' loan quality is directly tied to the health of the state's economy. While the overall picture is one of resilience, there are subtle shifts you need to monitor. The state's unemployment rate was 4.1% in August 2025, which is relatively low but has increased from 3.7% a year prior.

The employment market is showing a mixed bag of sectoral performance:

• Year-over-Year Job Growth: Missouri added a net +33,900 jobs between August 2024 and August 2025.
• Leading Sectors: Private education and health services led the growth with +19,600 jobs, followed by leisure and hospitality with +11,200 jobs.
• Slowing Sectors: Professional and business services saw a decline of -7,300 jobs over the year, signaling a broad-based slowdown in white-collar hiring.

This slowdown in business services is a risk factor for commercial loan quality. On the housing side, the St. Louis multifamily market is projected to stabilize in Q4 2025 with an average effective rent of $1,289 and a stable occupancy rate of 91.7%, which supports the quality of the bank's commercial real estate portfolio in that region.

The following table summarizes the key economic performance indicators for Hawthorn Bancshares as of Q3 2025:

Hawthorn Bancshares, Inc. (HWBK) - PESTLE Analysis: Social factors

The social landscape for Hawthorn Bancshares is a dual-edged sword: its deep-rooted community trust is a massive competitive advantage, but it must defintely adapt to the modern customer who expects a perfect mix of digital convenience and human advisory. The cost of retaining quality talent to deliver that human element is directly impacting your non-interest expense line right now.

Expanding the wealth management group is a key strategy for non-interest income growth.

You need to look beyond traditional lending to grow your revenue, and Hawthorn Bancshares is correctly focusing on its wealth management group to capture more non-interest income (NII). This is a critical strategic move, as NII is less sensitive to interest rate fluctuations than net interest income.

The company's leadership has explicitly stated that adding resources and structure to its Wealth Management products and services is a strategic opportunity for growth. For the nine months ended September 30, 2025, the total non-interest income stood at $10.7 million. While this NII was slightly down year-over-year, the strategic investment in wealth management is geared toward making this line item a more stable and growing contributor in future periods, especially as the CEO noted experiencing 'growth in our wealth management group' during the third quarter of 2025.

The bank's 150+ year history fosters strong community bank trust and customer loyalty.

In a financial world where trust is a fragile commodity, Hawthorn Bank's history is an invaluable asset. Operating as a community bank with a 'relationship-driven and community-focused approach' for more than 150 years creates deep customer loyalty and a powerful brand moat, especially across its markets in Missouri and Kansas. This long-standing presence helps attract and retain core deposit relationships, which are typically less rate-sensitive and therefore cheaper to fund than brokered deposits.

This history translates into a social expectation of personalized service, which is a key differentiator against national banks and digital-only competitors. The bank's strength is its local footprint, with 18 locations throughout Missouri, including Jefferson City, Columbia, and Springfield. That's a huge competitive edge in relationship banking.

Changing customer preferences demand a seamless blend of digital tools and in-person branch service.

The social trend in banking is clear: customers want digital-first access but still demand a human touch for complex financial decisions. The challenge is integrating the two without sacrificing the community feel.

The American Bankers Association's 2025 data shows a stark preference shift, which Hawthorn Bancshares must manage for its diverse customer base:

• Mobile App Banking: 54% of Americans prefer this method.
• Online Banking: 22% prefer this.
• Bank Branches: Only 9% prefer branches for routine transactions.

Hawthorn Bank meets this with 'FREE digital banking,' including a mobile app, mobile deposit, and digital wallet access. However, the continued value of its physical branches lies in serving as advisory centers, where customers-especially for wealth management and complex commercial loans-still seek face-to-face consultation. You can't cut the branch network without risking the 'community bank' identity, but you must make sure those branches are focused on high-value conversations, not just simple transactions.

Increased employee salaries and benefits contributed to a nine-month 2025 non-interest expense of $37.6 million.

The social pressure to offer competitive compensation to attract and retain skilled financial talent, particularly for the expanding wealth management group, is a significant driver of operating costs. For the nine months ended September 30, 2025, Hawthorn Bancshares' total non-interest expense was $37.6 million. This represents an increase of $1.0 million over the same period in 2024, and the company attributed this rise primarily to increases in salaries and employee benefits.

Here's the quick math on that expense increase:

What this estimate hides is the strategic nature of the increase: the $0.829 million jump in compensation costs is a necessary investment to staff the growing wealth management and digital service areas, not just a general inflation cost. You are paying for higher-skilled, advisory-focused employees. Finance: track the revenue per employee in the wealth management group to ensure this increased cost is delivering a strong return on investment by the end of Q4 2025.

Hawthorn Bancshares, Inc. (HWBK) - PESTLE Analysis: Technological factors

Continuous investment in digital banking platforms is necessary to compete with FinTech rivals.

You know that regional bank customers now expect a seamless digital experience, and frankly, Hawthorn Bancshares is playing catch-up against nimble FinTechs and larger national banks. To stay competitive, the bank must defintely prioritize investment in its core digital platforms. This isn't about having a mobile app; it's about maturing the entire digital lifecycle, from account origination to customer service.

The industry-wide trend shows banks are expected to spend 4.7% more on technology in 2025 compared to 2024, focusing on consolidating disparate systems to create a unified customer view. For Hawthorn Bancshares, this means ensuring its digital tools can handle the growth seen in its loan portfolio, which increased by $51.1 million (or 3.5%) in Q3 2025 alone.

Here are the immediate digital platform focus areas for HWBK:

• Streamline account opening for faster onboarding.
• Enhance mobile payment and instant transfer capabilities.
• Integrate wealth management services digitally.
• Improve API developer portals for open banking (Application Programming Interface).

Cybersecurity risk management is a constant, defintely rising cost for protecting customer data.

Cybersecurity is a non-discretionary expense, and the cost of failure is staggering. The average cost of a data breach in the U.S. reached $9.5 million in 2023, the highest globally. That number alone is a huge risk for a bank of Hawthorn Bancshares' size, so the investment in defense must continue to rise, even if it pressures non-interest expense.

Global spending on cybersecurity is projected to hit $213 billion in 2025, driven by the expanding threat landscape and the risks associated with AI-powered attacks. North American banks, on average, are allocating a significant portion of their IT budgets to this area. The challenge isn't just budget; it's talent. Cybersecurity topped the technology difficulty rankings for finding skilled professionals in 2024.

What this means is that Hawthorn Bancshares must either pay a premium for in-house talent or rely more heavily on external managed security services, pushing up operating costs either way.

Adoption of automation and Artificial Intelligence (AI) is needed to improve the 62.30% Q3 2025 efficiency ratio.

The bank's efficiency ratio-a key measure of operating cost against revenue-stood at 62.30% for Q3 2025. While this is an improvement from 66.23% a year ago, that gain was primarily due to higher net interest margin (NIM) expansion, not a fundamental reduction in operating expense. To sustain a better ratio, you need to attack the cost base directly, and that means automation.

Artificial Intelligence (AI) and automation are now top-three investment areas for banks in 2025. Hawthorn Bancshares needs to move past basic process digitization and start implementing intelligent automation in back-office functions like compliance checks, loan processing, and fraud detection. Here's the quick math: every dollar saved via automation in non-interest expense directly improves that 62.30% ratio.

The focus should be on leveraging AI to drive down the cost-to-serve and improve risk management, which are the top functional objectives for bank technology spending in 2025.

Legacy system modernization costs pressure the operating budget.

The reality for many regional banks is that they are running on decades-old core banking systems (legacy systems) that are expensive to maintain and difficult to integrate with new digital tools. The cost of modernizing these systems is a major pressure point on the operating budget.

For Hawthorn Bancshares, non-interest expense rose by $0.6 million quarter-over-quarter (a 4.5% increase) in Q3 2025. While the press release attributed this mainly to salaries and benefits, a significant portion of that increase is often tied to the escalating cost of IT talent and the maintenance/integration work required for legacy infrastructure.

The bank must manage the trade-off between short-term cost control and long-term strategic necessity. Delaying core modernization only increases the technical debt and makes the eventual, unavoidable overhaul more expensive. This table shows the core dilemma:

Finance: Start modeling a 3-year capital expenditure plan for core system replacement by the end of Q1 2026.

Hawthorn Bancshares, Inc. (HWBK) - PESTLE Analysis: Legal factors

You're looking at Hawthorn Bancshares, Inc. (HWBK) and trying to map out the legal landscape, which is really about regulatory risk and capital efficiency. The good news is the company is starting from a position of strength, but you defintely need to track the ongoing regulatory tug-of-war over consumer fees and compliance costs. That's where the near-term risk sits.

The company maintains a 'well capitalized' regulatory status, with a Total Risk-Based Capital ratio of 15.12% at Q2 2025.

Hawthorn Bancshares maintains a rock-solid regulatory capital position, which is the primary legal requirement for any bank. The company is classified as 'well capitalized,' a status that provides a significant operational cushion and flexibility. This is a critical factor for shareholders and regulators alike, signaling low risk.

Here's the quick math on their capital strength as of June 30, 2025, which is far above the minimum thresholds required by the Federal Reserve and other regulators:

A Total Risk-Based Capital ratio of 15.12% gives management a clear runway to execute on strategy, whether that's lending growth or capital return programs, without immediate pressure from regulators to raise capital. That's a powerful position to be in.

Compliance with Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations imposes high operational costs.

The cost of keeping up with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) rules is enormous across the industry, and Hawthorn Bancshares is not immune. This is an operational tax on every bank, driven by staffing, technology, and reporting requirements.

Collectively, financial institutions in the US and Canada spend an estimated $61 billion annually on financial crimes compliance. For mid-sized US banks, close to 50% of all risk management spending is dedicated to BSA/AML compliance, covering things like transaction monitoring systems and compliance staff salaries.

The good news is that the regulatory environment is shifting slightly for community banks. In November 2025, the Office of the Comptroller of the Currency (OCC) announced it is easing BSA examination procedures for community banks (those under the $30 billion asset threshold) and ending the Money Laundering Risk System data collection, which should reduce some of the administrative burden going forward.

The Board authorized a common stock repurchase program for up to $10.0 million in June 2025.

A key legal action that directly impacts shareholder value is the Board's authorization of a new common stock repurchase program. This is a direct function of the bank's strong capital position and management's decision to return value to shareholders.

The new program, authorized in June 2025, allows for the repurchase of up to $10.0 million in market value of the company's common stock, replacing the prior program. This move signals confidence in the stock's valuation and provides a mechanism to manage outstanding share count, potentially boosting earnings per share (EPS) over time.

The repurchase program has no set termination date, giving management the flexibility to execute purchases based on market conditions, which is smart capital management.

New consumer protection rules on overdraft or interchange fees could reduce non-interest income.

While the threat of new fees is constant, the immediate risk from the most publicized 2025 rule has been nullified. The Consumer Financial Protection Bureau (CFPB) rule finalized in late 2024 to cap overdraft fees for large banks (those with over $10 billion in assets) was blocked by Congress and the President in 2025. This is a win for the banking industry, but the regulatory pressure remains high.

For Hawthorn Bancshares, Inc., the risk is primarily indirect:

• Overdraft Fees: The overturned CFPB rule would have applied to banks with over $10 billion in assets. Hawthorn Bancshares is well below this threshold (deposits of $1.5 billion as of Q2 2025), so the specific cap would not have applied. However, the political and market pressure to lower fees will continue to influence all banks.
• Interchange Fees: Hawthorn Bancshares is also exempt from the Durbin Amendment's cap on debit card interchange fees, as the exemption threshold is $10 billion in assets. Still, the Federal Reserve has proposed a rule to reduce the cap for large banks (from $0.21 to a proposed $0.144 base component), and a federal judge vacated the existing Regulation II in August 2025 (though stayed pending appeal). Even though HWBK is exempt, a reduction in the fee cap for large competitors can create market pressure that eventually impacts all fee structures, forcing smaller banks to compete or raise other account fees to compensate.

Hawthorn Bancshares, Inc. (HWBK) - PESTLE Analysis: Environmental factors

Indirect exposure to climate risk through collateral in the loan portfolio (e.g., real estate valuation)

You need to recognize that Hawthorn Bancshares' primary environmental risk is not direct pollution, but rather the indirect financial risk (physical risk) embedded in your collateral. Your loan portfolio is heavily concentrated in central, west central, and southwest Missouri, plus eastern Kansas, which are regions susceptible to extreme weather events like flooding and drought.

As of September 30, 2025, your Loans Held for Investment totaled $\mathbf{\$1.51}$ billion. A significant portion of this is Commercial Real Estate (CRE), with Non-Owner Occupied CRE alone standing at $\mathbf{\$635.4}$ million as of June 30, 2025. Any climate-driven property damage or sustained economic disruption in your core markets could directly impair the value of this collateral, increasing your Non-Performing Assets (NPA) which were already at $\mathbf{0.48\%}$ of total loans in Q3 2025.

This is a credit risk masquerading as an environmental one. You must start stress-testing your CRE portfolio against local climate scenarios.

Growing pressure from institutional investors for transparent Environmental, Social, and Governance (ESG) disclosures

The pressure for transparent ESG reporting, particularly on climate risk, is intensifying globally in 2025, driven by the SEC's pending climate disclosure rules for large filers and frameworks like the Task Force on Climate-related Financial Disclosures (TCFD). For a regional bank like Hawthorn Bancshares, the risk isn't regulatory fines yet, but rather a higher cost of capital and exclusion from ESG-mandated funds.

Honestly, you currently lack a formal, publicly available ESG or Corporate Social Responsibility (CSR) report. This opacity is a red flag for institutional investors, including major asset managers, who are using these disclosures to screen for long-term risk. Your current governance documents cover traditional areas but ignore the environmental component. Not having a clear climate risk strategy makes you look defintely behind the curve.

The lack of disclosure means investors cannot assess how your capital is protected from the physical risks tied to your $\mathbf{\$1.51}$ billion loan book.

Operational focus on energy efficiency in the branch network to manage utility costs

Controlling non-interest expense is a core operational lever, and in 2025, energy costs are becoming a material headwind in your operating region. Your total non-interest expense for Q3 2025 was $\mathbf{\$12.8}$ million.

In Missouri, commercial property owners faced a $\mathbf{12\%}$ electricity rate increase in June 2025, with projections suggesting rates could climb an additional $\mathbf{60\%}$ by 2026. This is a massive, structural increase in your utility expense line. Focusing on energy efficiency in your branch network isn't just a green initiative; it's a direct, necessary cost-control measure to protect your efficiency ratio, which was $\mathbf{62.30\%}$ in Q3 2025.

Clear actions to manage this risk include:

• Conducting energy audits on your Missouri and Kansas branches.
• Investing in LED lighting retrofits and HVAC system upgrades.
• Leveraging utility incentive programs to offset the initial cost by $\mathbf{20\%}$ or more.

Opportunity to offer green lending products for commercial real estate or renewable energy projects

The rising utility costs in your market create a clear demand for financing energy-efficiency upgrades, which presents a significant strategic opportunity for Hawthorn Bancshares. When commercial property owners face a $\mathbf{60\%}$ jump in electricity costs, they will seek capital to mitigate that expense.

You can capture market share by launching tailored green lending products:

• Commercial Property Assessed Clean Energy (C-PACE) Financing: Offer specialized loans to commercial clients for energy efficiency and renewable energy projects, using the property tax mechanism for repayment.
• Small Business Green Loans: Create a product for small businesses to finance LED conversions or solar installations, capitalizing on incentives before they phase out.

This is a chance to turn a macro-environmental risk (rising energy costs) into a new revenue stream, diversifying your loan book beyond the traditional CRE exposure of $\mathbf{\$635.4}$ million. This is how you proactively manage risk and grow at the same time.