10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number: 0-23636

HAWTHORN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Missouri (State or other jurisdiction of	43-1626350 (I.R.S. Employer Identification No.)
incorporation or organization)

300 Southwest Longview Boulevard, Lee’s Summit, Missouri 64081
(Address of principal executive offices)                                          (Zip Code)

(816) 347-8100
(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class	Name of Each Exchange on Which Registered
None	N/A

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $1.00 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b 2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the 3,661,955 shares of voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the $9.90 closing price of such common equity on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was $36,253,351. Aggregate market value excludes an aggregate of 474,540 shares of common stock held by officers and directors and by each person known by the registrant to own 5% or more of the outstanding common stock on such date. Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. As of March 3, 2010, the registrant had 4,463,813 shares of common stock, par value $1.00 per share, issued and 4,301,955 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the following documents are incorporated by reference into the indicated parts of this report: (1) 2009 Annual Report to Shareholders — Part II and (2) definitive Proxy Statement for the 2010 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A — Part III.

TABLE OF CONTENTS

PART I
	Item 1. Business
	Item 1A. Risk Factors
	Item 1B. Unresolved Staff Comments
	Item 2 . Properties
	Item 3. Legal Proceedings
	Item 4. (Removed and Reserved)
PART II
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
	Item 6. Selected Financial Data.
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
	Item 8. Financial Statements and Supplementary Data.
	Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
	Item 9A. Controls and Procedures.
	Item 9B. Other Information.
PART III
	Item 10. Directors, Executive Officers and Corporate Governance.
	Item 11. Executive Compensation.
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
	Item 13. Certain Relationships and Related Transactions, and Director Independence.
	Item 14. Principal Accounting Fees and Services.
PART IV
	Item 15. Exhibits, Financial Statement Schedules.
SIGNATURES
EXHIBIT INDEX
EX-10.7
EX-10.8
EX-13
EX-21
EX-23
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1
EX-99.2

PART I

Item 1. Business.

     This report and the documents incorporated by reference herein contain forward-looking statements, which are inherently subject to risks and uncertainties. See “Forward Looking Statements” under Item 7 of this report.

General

     Our Company, Hawthorn Bancshares, Inc., is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Hawthorn was incorporated under the laws of the State of Missouri on October 23, 1992 as Exchange National Bancshares, Inc. and changed its name to Hawthorn Bancshares, Inc. in August 2007. Hawthorn owns all of the issued and outstanding capital stock of Union State Bancshares, Inc., which in turn owns all of the issued and outstanding capital stock of Hawthorn Bank. Hawthorn and Union State Bancshares each received approval from the Federal Reserve and elected to become a financial holding company on October 21, 2001.

     Hawthorn acquired Hawthorn Bank and its constituent predecessor banks, as well as Union State Bancshares, in a series of transactions that are summarized as follows:

• On April 7, 1993 our Company acquired all of the issued and outstanding capital stock of The Exchange National Bank of Jefferson City, a national banking association, pursuant to a corporate reorganization involving an exchange of shares;

• On November 3, 1997, our Company acquired Union State Bancshares, Inc., and Union’s wholly-owned subsidiary, Union State Bank and Trust of Clinton;

• Following the May 4, 2000 acquisition of Citizens State Bank of Calhoun by Union State Bank, Citizens State Bank merged into Union State Bank to form Citizens Union State Bank & Trust;

• On January 3, 2000, our Company acquired Osage Valley Bank;

• On June 16, 2000, Hawthorn acquired City National Savings Bank, FSB, which was then merged into Exchange National Bank; and

• On May 2, 2005, our Company acquired all of the issued and outstanding capital stock of Bank 10, a Missouri state bank.

     On December 1, 2006, our Company announced its development of a strategic plan in which, among other things, Exchange National Bank, Citizens Union State Bank, Osage Valley Bank and Bank 10 would be consolidated into a single bank under a Missouri state trust charter. This consolidation was completed in October 2007, and our subsidiary bank is now known as Hawthorn Bank.

Except as otherwise provided herein, references herein to “Hawthorn” or our “Company” include Hawthorn and its consolidated subsidiaries, and references herein to our “Bank” refers to Hawthorn Bank and its constituent predecessors.

Description of Business

     Hawthorn. Hawthorn is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company. Our Company’s activities currently are limited to ownership, indirectly through its subsidiary (Union State Bancshares, Inc.), of the outstanding capital stock of Hawthorn Bank. In addition to ownership of its subsidiaries, Hawthorn may seek expansion through acquisition and may engage in those activities (such as investments in banks or operations that are financial in

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nature) in which it is permitted to engage under applicable law. It is not currently anticipated that Hawthorn will engage in any business other than that directly related to its ownership of its banking subsidiary or other financial institutions.

     Union. Union State Bancshares, Inc. is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company. Union’s activities currently are limited to ownership of the outstanding capital stock of Hawthorn Bank. It is not currently anticipated that Union will engage in any business other than that directly related to its ownership of Hawthorn Bank.

     Hawthorn Bank. Hawthorn Bank was founded in 1932 as a Missouri bank and converted to a Missouri trust company on August 16, 1989. However, its predecessors trace their lineage back to the founding of Exchange National Bank in 1865. Hawthorn Bank has 24 banking offices, including its principal office at 132 East High Street in Jefferson City’s central business district. See “Item 2. Properties”.

     Hawthorn Bank is a full service bank conducting a general banking and trust business, offering its customers checking and savings accounts, internet banking, debit cards, certificates of deposit, trust services, brokerage services, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, single payment personal loans, installment loans and commercial and residential real estate loans.

     Hawthorn Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the extent provided by law. Hawthorn Bank’s operations are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of Hawthorn Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of the holders of Hawthorn Bank’s common stock. See “Regulation Applicable to Bank Holding Companies” and “Regulation Applicable to our Bank”.

     Hawthorn Real Estate. Hawthorn Real Estate, LLC, was formed in December 2008 in order to purchase and hold various nonperforming assets of Hawthorn Bank. The purpose for holding these nonperforming assets in Hawthorn Real Estate is to allow for the orderly disposition of these assets and strengthen Hawthorn Bank’s financial position.

Employees

     As of December 31, 2009, Hawthorn and its subsidiaries had approximately 311 full-time and 74 part-time employees. None of its employees is presently represented by any union or collective bargaining group, and our Company considers its employee relations to be satisfactory.

Competition

     Bank holding companies and their subsidiaries and affiliates encounter intense competition from nonbanking as well as banking sources in all of their activities. Our Bank’s competitors include other commercial banks, thrifts, savings banks, credit unions and money market mutual funds. Thrifts and credit unions now have the authority to offer checking accounts and to make corporate and agricultural loans and were granted expanded investment authority by recent federal regulations. In addition, large national and multinational corporations have in recent years become increasingly visible in offering a broad range of financial services to all types of commercial and consumer customers. In our Bank’s service areas, new competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on our Bank’s market share of deposits and loans in such service areas.

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     Our Bank experiences substantial competition for deposits and loans within both its primary service areas of Jefferson City, Clinton, Lee’s Summit, Warsaw, Springfield, and Branson, Missouri and its secondary service area of the nearby communities in Cole, Henry, Cass, Benton and Greene counties of Missouri. Hawthorn Bank’s principal competition for deposits and loans comes from other banks within its primary service areas and, to an increasing extent, other banks in nearby communities. Based on publicly available information, management believes that Hawthorn Bank is the third largest (in terms of deposits) of the thirteen banks within Cole county, the largest (in terms of deposits) of the nine banks within Henry county, the second largest (in terms of deposits) of the eighteen banks within Cass county, and the largest (in terms of deposits) of the five banks within Benton county. The main competition for Hawthorn Bank’s trust services is from other commercial banks, including those of the Kansas City metropolitan area.

Regulation Applicable to Bank Holding Companies

     General. As a registered bank holding company and a financial holding company under the Bank Holding Company Act (the “BHC Act”) and the Gramm-Leach-Bliley Act (the “GLB Act”), Hawthorn is subject to supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The FRB has authority to issue cease and desist orders against bank holding companies if it determines that their actions represent unsafe and unsound practices or violations of law. In addition, the FRB is empowered to impose civil money penalties for violations of banking statutes and regulations. Regulation by the FRB is intended to protect depositors of our Bank, not the shareholders of Hawthorn.

     Limitation on Activities. The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition, under the GLB Act, a bank holding company, all of whose controlled depository institutions are “well capitalized” and “well managed” (as defined in federal banking regulations) with “satisfactory” Community Reinvestment Act ratings, may declare itself to be a “financial holding company” and engage in a broader range of activities. As noted above, Hawthorn is registered as a financial holding company.

     A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. “Financial in nature” activities include:

• securities underwriting, dealing and market making;

• sponsoring mutual funds and investment companies;

• insurance underwriting and insurance agency activities;

• merchant banking; and

• activities that the FRB determines to be financial in nature or incidental to a financial activity or which is complementary to a financial activity and does not pose a safety and soundness risk.

     A financial holding company that desires to engage in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity. Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system.

     A financial holding company generally may acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature without prior approval from the FRB. Prior FRB approval is required, however, before the

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financial holding company may acquire control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association. In addition, under the FRB’s merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company’s controlled depository institutions.

     If any subsidiary bank of a financial holding company ceases to be “well-capitalized” or “well-managed” and fails to correct its condition within the time period that the FRB specifies, the FRB has authority to order the financial holding company to divest its subsidiary banks. Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company. If any subsidiary bank of a financial holding company receives a rating under the Community Reinvestment Act (the “CRA”) of less than “satisfactory”, then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations until the rating is raised to “satisfactory” or better.

     Limitation on Acquisitions. The BHC Act requires a bank holding company to obtain prior approval of the FRB before:

• taking any action that causes a bank to become a controlled subsidiary of the bank holding company;

• acquiring direct or indirect ownership or control of voting shares of any bank or bank holding company, if the acquisition results in the acquiring bank holding company having control of more than 5% of the outstanding shares of any class of voting securities of such bank or bank holding company, and such bank or bank holding company is not majority-owned by the acquiring bank holding company prior to the acquisition;

• acquiring substantially all of the assets of a bank; or

• merging or consolidating with another bank holding company.

     Regulatory Capital Requirements. The FRB has issued risk-based and leverage capital guidelines applicable to United States banking organizations. If a bank holding company’s capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends and make acquisitions of new bank subsidiaries may be restricted or prohibited. The FRB’s risk-based guidelines define a two-tier capital framework. Tier 1 capital generally includes common shareholders’ equity, a limited amount of trust preferred securities, minority interests and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital generally consists of preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for credit losses up to 1.25% of risk-weighted assets and other adjustments. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents our total capital.

     The risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets (including certain off-balance sheet activities). The FRB’s capital adequacy guidelines require that bank holding companies maintain a Tier 1 risk-based capital ratio equal to at least 4% of its risk-weighted assets and a total risk-based capital ratio equal to at least 8% of its risk-weighted assets. In addition, the FRB has established a minimum leverage ratio for bank holding companies. The FRB’s capital adequacy guidelines require that bank holding companies meeting specified criteria (including having the highest regulatory rating) maintain a Tier 1 leverage ratio equal to at least 3% of its average total consolidated assets. All other bank holding companies generally will be required to maintain a Tier 1 leverage ratio of at least 4%.

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     On December 31, 2009, Hawthorn was in compliance with all of the FRB’s capital adequacy guidelines. Hawthorn’s capital ratios on December 31, 2009 are shown below:

	Tier 1 Risk-Based	Total Risk-Based
Leverage Ratio	Capital Ratio	Capital Ratio
(3% minimum requirement)	(4% minimum requirement)	(8% minimum requirement)
11.35%	14.01%	16.49%

     Interstate Banking and Branching. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), a bank holding company is permitted to acquire the stock or substantially all of the assets of banks located in any state regardless of whether such transaction is prohibited under the laws of any state. The FRB will not approve an interstate acquisition if, as a result of the acquisition, the bank holding company would control more than 10% of the total amount of insured deposits in the United States or would control more than 30% of the insured deposits in the home state of the acquired bank. The 30% of insured deposits state limit does not apply if the acquisition is the initial entry into a state by a bank holding company or if the home state waives such limit. The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. Banks are also permitted to acquire and to establish de novo branches in other states where authorized under the laws of those states.

     Under the Riegle-Neal Act, individual states may restrict interstate acquisitions in two ways. A state may prohibit an out-of-state bank holding company from acquiring a bank located in the state unless the target bank has been in existence for a specified minimum period of time (not to exceed five years). A state may also establish limits on the total amount of insured deposits within the state which are controlled by a single bank holding company, provided that such deposit limit does not discriminate against out-of-state bank holding companies.

     Source of Strength. FRB policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. Under this “source of strength doctrine,” a bank holding company is expected to stand ready to use its available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and to maintain resources and the capacity to raise capital which it can commit to its subsidiary banks. Furthermore, the FRB has the right to order a bank holding company to terminate any activity that the FRB believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank.

     Liability of Commonly Controlled Institutions. Under cross-guaranty provisions of the Federal Deposit Insurance Act (the “FDIA”), bank subsidiaries of a bank holding company are liable for any loss incurred by the Deposit Insurance Fund (the “DIF”), the federal deposit insurance fund for banks, in connection with the failure of any other bank subsidiary of the bank holding company.

     Missouri Bank Holding Company Regulation. Missouri prohibits any bank holding company from acquiring ownership or control of any bank or Missouri depository trust company that has Missouri deposits if, after such acquisition, the bank holding company would hold or control more than 13% of total Missouri deposits. Because of this restriction, among others, a bank holding company, prior to acquiring control of a bank or depository trust company that has deposits in Missouri, must receive the approval of the Missouri Division of Finance.

Regulation Applicable to our Bank

     General. Hawthorn Bank, a Missouri state non-member depository trust company, is subject to the regulation of the Missouri Division of Finance and the FDIC. The FDIC is empowered to issue cease and desist orders against our Bank if it determines that any activities of our Bank represent unsafe and unsound banking practices or violations of law. In addition, the FDIC has the power to impose civil money penalties

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for violations of banking statutes and regulations. Regulation by these agencies is designed to protect the depositors of the Bank; not shareholders of Hawthorn.

     Bank Regulatory Capital Requirements. The FDIC has adopted minimum capital requirements applicable to state non-member banks, which are similar to the capital adequacy guidelines established by the FRB for bank holding companies. Federal banking laws require the federal regulatory agencies to take prompt corrective action against undercapitalized financial institutions. A bank is identified as being “well-capitalized” if it has a total Tier 1 leverage ratio of 5% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a total risk-based capital ratio of 10% or greater (and is not subject to any order or written directive requiring the bank to adhere to a higher ratio).

     On December 31, 2009, our Bank was classified as “well-capitalized,” which is required for Hawthorn to remain a financial holding company. The capital ratios and classifications of our Bank as of December 31, 2009 are shown on the following chart.

	Tier 1 Risk-Based	Total Risk-Based
Leverage Ratio	Capital Ratio	Capital Ratio
(5% minimum requirement)	(6% minimum requirement)	(10% minimum requirement)
10.04%	12.36%	13.62%

     Limitations on Interest Rates and Loans to One Borrower. The rate of interest a bank may charge on certain classes of loans is limited by state and federal law. At certain times in the past, these limitations have resulted in reductions of net interest margins on certain classes of loans. Federal and state laws impose additional restrictions on the lending activities of banks. Generally, the maximum amount that a Missouri state-chartered bank may lend to any one person or entity is generally limited to 15% of the unimpaired capital of the bank located in a city having a population of 100,000 or more, 20% of the unimpaired capital of the bank located in a city having a population of less than 100,000 and over 7,000, and 25% of the unimpaired capital of the bank if located elsewhere in the state. In the case of Missouri state-chartered banks with a composite rating of 1 or 2 under the Capital, Assets, Management, Earnings, Liquidity and Sensitivity (CAMELS) rating system, the maximum amount is the greater of (i) the limits listed in the foregoing sentence or (ii) 25% of the unimpaired capital of the bank.

     Payment of Dividends. Our Bank is subject to federal and state laws limiting the payment of dividends. Under the FDIA, an FDIC-insured institution may not pay dividends while it is undercapitalized or if payment would cause it to become undercapitalized. The National Bank Act and Missouri banking law also prohibit the declaration of a dividend out of the capital and surplus of the bank. Our Bank will be required to receive regulatory approval prior to paying dividends to our Company until such time as the Bank’s unappropriated retained earnings balance is restored to a positive balance. In addition to the above limitations, our ability to pay dividends on our common stock is limited by our participation in the U.S. Treasury’s Capital Purchase Program (or CPP). Prior to December 19, 2011, unless we have redeemed the Series A preferred stock issued to the U.S. Treasury in the CPP or the U.S. Treasury has transferred the Series A preferred stock to a third party, we must receive the consent of the U.S. Treasury before we can pay quarterly dividends on our common stock of more than $0.20 per share. Furthermore, if we are not current in the payment of quarterly dividends on the Series A preferred stock, we cannot pay dividends on our common stock.

     Community Reinvestment Act. Our Bank is subject to the CRA and implementing regulations. CRA regulations establish the framework and criteria by which the bank regulatory agencies assess an institution’s record of helping to meet the credit needs of its community, including low- and moderate-income neighborhoods. CRA ratings are taken into account by regulators in reviewing certain applications made by Hawthorn and its banking subsidiary.

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     Limitations on Transactions with Affiliates. Hawthorn and its non-bank subsidiaries are “affiliates” within the meaning of the Federal Reserve Act. The amount of loans or extensions of credit which our Bank may make to non-bank affiliates, or to third parties secured by securities or obligations of the non-bank affiliates, are substantially limited by the Federal Reserve Act and the FDIA. Such acts further restrict the range of permissible transactions between a bank and an affiliated company. A bank and its subsidiaries may engage in certain transactions, including loans and purchases of assets, with an affiliated company only if the terms and conditions of the transaction, including credit standards, are substantially the same as, or at least as favorable to the bank as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms and conditions that would be offered to non-affiliated companies.

     Other Banking Activities. The investments and activities of our Bank are also subject to regulation by federal and state banking agencies regarding, among other things, investments in subsidiaries, investments for their own account (including limitations on investments in junk bonds and equity securities), loans to officers, directors and their affiliates, security requirements, anti-tying limitations, anti-money laundering, financial privacy and customer identity verification requirements, truth-in-lending, the types of interest bearing deposit accounts which it can offer, trust department operations, brokered deposits, audit requirements, issuance of securities, branching and mergers and acquisitions.

Changes in Laws and Monetary Policies

     Recent Legislation. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide the enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. The proposed changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently.

     The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the Securities and Exchange Commission, or “SEC”, under the Securities and Exchange Act of 1934. Further, the Sarbanes-Oxley Act includes very specified additional disclosure requirements and new corporate governance rules, requires the SEC, securities exchanges and the Nasdaq Global Select Market to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. Given the extensive SEC role in implementing rules relating to many of the Sarbanes-Oxley Act’s new requirements, the final scope of these requirements remains to be determined.

     The Sarbanes-Oxley Act addresses, among other matters: audit committees; certification of financial statements by the chief executive officer and the chief financial officer; the forfeiture of bonuses and profits made by directors and senior officers in the twelve month period covered by restated financial statements; a prohibition on insider trading during pension plan blackout periods; disclosure of off-balance sheet transactions; a prohibition on personal loans to directors and officers (excluding federally insured financial institutions); expedited filing requirements for stock transaction reports by officers and directors; the formation of a public accounting oversight board; auditor independence; and various increased criminal penalties for violations of securities laws. Management has taken various measures to comply with the requirements of the Sarbanes-Oxley Act.

     Future Legislation. Various pieces of legislation, including proposals to change substantially the financial institution regulatory system, are from time to time introduced and considered by the Missouri state legislature and the United States Congress. On December 11, 2009, the United States House of Representatives passed a bill that would create an inter-agency council to police systemic risk in the economy, crack down on hedge funds and credit rating agencies, set up a financial consumer watchdog agency, and

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expose Federal Reserve monetary policy to unprecedented congressional scrutiny, among other reforms. On January 22, 2009, President Barack Obama announced his proposal to limit the size of the nation’s largest commercial banks and reduce the risks they take in complex and exotic investments by prohibiting such banks from engaging in proprietary trading. The United States Senate is also considering similar financial services reform. While the final form of any such legislation is impossible to predict, it seems likely that some form of financial services legislation will be passed in the near future. This, and any other similar, legislation may change banking statutes and the operating environment of Hawthorn in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. Hawthorn cannot predict whether any of this potential legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, could have on Hawthorn’s business, results of operations or financial condition.

     Fiscal Monetary Policies. Hawthorn’s business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. Hawthorn is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are:

• conducting open market operations in United States government securities;

• changing the discount rates of borrowings of depository institutions;

• imposing or changing reserve requirements against depository institutions’ deposits; and

• imposing or changing reserve requirements against certain borrowings by bank and their affiliates.

     These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB have a material effect on Hawthorn’s business, results of operations and financial condition.

     The references in the foregoing discussion to various aspects of statutes and regulation are merely summaries, which do not purport to be complete and which are qualified in their entirety by reference to the actual statutes and regulations.

Available Information

     The address of our principal executive offices is 300 Southwest Longview Boulevard, Lee’s Summit, Missouri 64081 and our telephone number at this location is (816) 347-8100. Our common stock trades on the Nasdaq Global Select Market under the symbol “HWBK”.

     We electronically file certain documents with the SEC. We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (as appropriate), along with any related amendments and supplements. From time-to-time, we also may file registration and related statements pertaining to equity or debt offerings. You may read and download our SEC filings over the internet from several commercial document retrieval services as well as at the SEC’s internet website (www.sec.gov). You may also read and copy our SEC filings at the SEC’s public reference room located at 100 F Street, NE., Washington, DC 20549. Please call the SEC 1-800-SEC-0330 for further information concerning the public reference room and any applicable copy charges.

     Our internet website address is www.hawthornbancshares.com. Under the “Documents” section of our website (www.hawthornbancshares.com), we make available, without charge, our public filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or any amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) of the

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     Securities Exchange Act of 1934. Please note that any internet addresses provided in this report are for information purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such internet addresses is intended or deemed to be incorporated by reference herein.

Item 1A. Risk Factors.

Risk Factors

     We are identifying important risks and uncertainties that could affect our Company’s results of operations, financial condition or business and that could cause them to differ materially from our Company’s historical results of operations, financial condition or business, or those contemplated by forward-looking statements made herein or elsewhere, by, or on behalf of, our Company. Factors that could cause or contribute to such differences include, but are not limited to, those factors described below. The risk factors highlighted below are not the only ones that our Company faces.

     Because We Primarily Serve Central And West Central Missouri, A Decline In The Local Economic Conditions Could Lower Our Profitability. The profitability of Hawthorn is dependent on the profitability of its banking subsidiary, which operates out of central and west central Missouri. The financial condition of this bank is affected by fluctuations in the economic conditions prevailing in the portion of Missouri in which its operations are located. Accordingly, the financial conditions of both Hawthorn and its banking subsidiary would be adversely affected by deterioration in the general economic and real estate climate in Missouri.

     An increase in unemployment, a decrease in profitability of regional businesses or real estate values or an increase in interest rates are among the factors that could weaken the local economy. With a weaker local economy:

• customers may not want or need the products and services of our Bank,

• borrowers may be unable to repay their loans,

• the value of the collateral security of our Bank’s loans to borrowers may decline,

• the number of loan delinquencies and foreclosures may increase, and

• the overall quality of our Bank’s loan portfolio may decline.

     Making mortgage loans and consumer loans is a significant source of profits for Hawthorn’s banking subsidiary. If individual customers in the local area do not want or need these loans, profits may decrease. Although our Bank could make other investments, our Bank may earn less revenue on these investments than on loans. Also, our Bank’s losses on loans may increase if borrowers are unable to make payments on their loans.

     Interest Rate Changes May Reduce Our Profitability And Our Banking Subsidiary’s. The primary source of earnings for Hawthorn’s banking subsidiary is net interest income. To be profitable, our Bank has to earn more money in interest and fees on loans and other interest-earning assets than it pays as interest on deposits and other interest-bearing liabilities and as other expenses. If prevailing interest rates decrease, as has already happened on several occasions in recent years, including in 2008, the amount of interest our Bank earn on loans and investment securities may decrease more rapidly than the amount of interest our Bank has to pay on deposits and other interest-bearing liabilities. This would result in a decrease in the profitability of Hawthorn and its banking subsidiary.

     Changes in the level or structure of interest rates also affect

• our Bank’s ability to originate loans,

• the value of our Bank’s loan and securities portfolios,

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• our Bank’s ability to realize gains from the sale of loans and securities,

• the average life of our Bank’s deposits, and

• our Bank’s ability to obtain deposits.

     Fluctuations in interest rates will ultimately affect both the level of income and expense recorded on a large portion of our Bank’s assets and liabilities, and the market value of all interest-earning assets, other than interest-earning assets that mature in the short term. Our Bank’s interest rate management strategy is designed to stabilize net interest income and preserve capital over a broad range of interest rate movements by matching the interest rate sensitivity of assets and liabilities. Although Hawthorn believes that its Bank’s current mix of loans, mortgage-backed securities, investment securities and deposits is reasonable, significant fluctuations in interest rates may have a negative effect on the profitability of our Bank.

     Our Profitability Depends On Our Bank’s Asset Quality And Lending Risks. Success in the banking industry largely depends on the quality of loans and other assets. The loan officers of Hawthorn’s banking subsidiary are actively encouraged to identify deteriorating loans. Loans are also monitored and categorized through an analysis of their payment status. For example, recent reviews by our credit officer identified areas of concern that resulted in heightened attention being given to reducing concentrations of credit and, in particular, to strengthening credit quality and administration. Our Bank’s failure to timely and accurately monitor the quality of its loans and other assets could have a materially adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary. There is a degree of credit risk associated with any lending activity. Our Bank attempts to minimize its credit risk through loan diversification. Although our Bank’s loan portfolio is varied, with no undue concentration in any one industry, substantially all of the loans in the portfolio have been made to borrowers in central, west central, and southwest Missouri. Therefore, the loan portfolio is susceptible to factors affecting the central, west central, and southwest Missouri area and the level of non-performing assets is heavily dependent upon local conditions. There can be no assurance that the level of our Bank’s non-performing assets will not increase above current levels. High levels of non-performing assets could have a materially adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.

     Our Provision For Probable Loan Losses May Need To Be Increased. Hawthorn’s banking subsidiary makes a provision for loan losses based upon management’s estimate of probable losses in the loan portfolio and its consideration of prevailing economic conditions. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future. Our Bank may need to increase the provision for loan losses through additional provisions in the future if, among other things, the financial condition of any of its borrowers deteriorates, if its borrower fails to perform its obligations to it, or if real estate values decline. Furthermore, various regulatory agencies, as an integral part of their examination process, periodically review our Bank’s loan portfolio, provision for loan losses, and real estate acquired by foreclosure. Such agencies may require our Bank to recognize additions to the provision for loan losses based on their judgments of information available to them at the time of the examination. Any additional provision for probable loan losses, whether required as a result of regulatory review or initiated by Hawthorn itself, may materially alter the financial outlook of Hawthorn and its banking subsidiary and may have a material adverse effect on our financial condition and results of operations.

     The Continuation Of Adverse Market Conditions In The U.S. Economy And The Markets In Which We Operate Could Adversely Impact Our Business. Negative developments beginning in the latter half of 2007 in the sub-prime mortgage market and the securitization markets for such loans, together with substantial volatility in oil prices and other factors, have resulted in uncertainty in the financial markets in general and a related general economic downturn, which have continued in 2009 and in the first quarter of 2010. Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and

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resulted in significant write-downs of assets by many financial institutions. In addition, the values of real estate collateral supporting many loans have declined and may continue to decline. General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Competition among depository institutions for deposits has increased significantly. Financial institutions have experienced decreased access to deposits or borrowings.

     A continued deterioration of overall market conditions, a continued economic downturn or prolonged economic stagnation in our markets may have a negative impact on our business, financial condition, results of operations and the trading price of our common stock. If the strength of the U.S. economy in general and the strength of the economy in areas where we lend continue to decline, this could result in, among other things, a further deterioration in credit quality or a continued reduced demand for credit, including a resultant adverse effect on our loan portfolio and provision for losses on loans. In addition, the severity and duration of the economic downturn is unknown and may exacerbate our exposure to credit risk, impair our ability to assess the creditworthiness of our customers or to estimate the values of our assets and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us. Negative conditions in the real estate markets where we operate could adversely affect our borrowers’ ability to repay their loans and the value of the underlying collateral. Real estate values are affected by various factors, including general economic conditions, governmental rules or policies and natural disasters. These factors may adversely impact our borrowers’ ability to make required payments, which in turn, may negatively impact our financial results. As a result of the difficult market and economic conditions referred to above, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and for bank regulatory agencies to be very aggressive in responding to concerns and trends identified in examinations. This increased government action may increase our costs and limit our ability to pursue certain business opportunities.

     We do not expect that the difficult market and economic conditions are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult conditions on us, our customers and the other financial institutions in our market. As a result, we may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds, and our business, financial condition, results of operations and stock price may be adversely affected.

     The Soundness Of Other Financial Institutions Could Adversely Affect Us. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.

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     Current And Further Deterioration In The Housing Market Could Cause Further Increases In Delinquencies And Non-Performing Assets, Including Loan Charge-Offs, And Depress Our Income And Growth. The volume of our one-to-four family residential mortgages and home equity lines of credit may decrease during economic downturns as a result of, among other things, a decrease in real estate values, an increase in unemployment, a slowdown in housing price appreciation or increases in interest rates. These factors could reduce our earnings and consequently our financial condition because:

• the borrowers may not be able to repay their loans;

• the value of the collateral securing our loans to borrowers may decline further;

• the quality of our loan portfolio may decline further; and

• customers may not want or need our products and services.

Any of these scenarios could cause an increase in delinquencies and non-performing assets, require us to charge-off a higher percentage of our loans, increase substantially our provision for losses on loans, or make fewer loans, which would reduce income.

     Recent Legislative And Regulatory Actions To Address Difficult Market And Economic Conditions May Not Stabilize The U.S. Financial System. There can be no assurance as to the actual impact that the Emergency Economic Stabilization Act of 2008, the Treasury’s Capital Purchase Program, the FDIC’s Temporary Liquidity Guarantee Program, or any other governmental program will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of any such program or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions and the national and regional economy could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

     The FDIC’s Increases In Deposit Insurance Premiums and Ability to Levy Special Assessments Will Increase Our Non-Interest Expense And May Reduce Our Profitability. In response to the recent failures of FDIC-insured institutions and the expectation that the rate of institution failures will continue to be high in the next several years, in 2008 the FDIC adopted a plan to restore the Deposit Insurance Fund. On April 1, 2009, the range of initial base assessment rates was increased from 12 to 45 basis points depending on an institution’s risk category, with newly added financial measures resulting in increased assessment rates for institutions heavily relying on brokered deposits to support rapid asset growth. The FDIC also introduced three possible adjustments to an institution’s initial base assessment rate: (1) a decrease of up to 5 basis points for long-term unsecured and subordinated debt (excluding debt guaranteed under the Temporary Liquidity Program), (2) an increase of up to 50% for secured liabilities in excess of 25% of domestic deposits, and (3) for certain higher risk institutions, up to a 10 basis point increase if brokered deposits are in excess of 10% of domestic deposits. In October 2009, the FDIC adopted a uniform 3 basis point increase in assessment rates effective January 1, 2011. On a semi-annual basis, the FDIC will update its loss and income projections for the Deposit Insurance Fund and, if necessary, impose further increases to assessment rates. The FDIC has the statutory authority to impose special assessments on insured depository institutions in an amount, and for such purposes, as the FDIC may deem necessary.

     The increased deposit insurance premiums and the possible emergency special assessments are expected to significantly increase our non-interest expense and may adversely affect our profitability.

     Our Participation In The FDIC’s Temporary Liquidity Guaranty Program Would Increase Our Non-Interest Expense And Decrease Net Income. In October 2008, the FDIC implemented the Temporary Liquidity Guaranty Program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. One aspect of the Temporary Liquidity Guaranty Program is that the FDIC will, until June 30, 2010,

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fully guarantee all funds held in noninterest-bearing transaction deposit accounts (which includes all IOLTAs and functionally equivalent accounts, as well as negotiable order of withdrawal accounts with an interest rate of .50 percent or less). In exchange for this guarantee, the FDIC collects an annual surcharge to noninterest-bearing transaction deposit amounts over $250,000. As currently applied to our Bank, the annual surcharge will be 15 basis points, but the surcharge could be as much as 25 basis points if our Bank’s risk category changes during the year. As a result of Hawthorn’s participation in transaction account guaranty program, the associated surcharge will increase our non-interest expense and may adversely affect our profitability.

     Due To Our Participation In The Treasury’s Capital Purchase Program, We Are Subject To Several Restrictions Including Restrictions On Our Ability To Declare Or Pay Dividends And Repurchase Our Shares. In December 2008, we elected to participate in the Treasury’s Capital Purchase Program by issuing and selling to the Treasury shares of our Fixed Rate Cumulative Perpetual Preferred Stock and a warrant to purchase shares of our common stock. As a result of this participation, our ability to declare or pay dividends on our common stock is limited. Specifically, until December 19, 2011 we will not be permitted to increase dividends on our common stock without the Treasury’s approval unless the preferred stock issued to the Treasury has been redeemed or transferred. Further, we will not be able to declare dividends payments on common, junior preferred or pari passu shares if we are in arrears on the dividends on the preferred stock issued to the Treasury. In addition, our ability to repurchase our common stock and other securities is restricted. The Treasury’s consent generally will be required for us to repurchase any of our common stock or other securities until December 19, 2011 unless the preferred stock issued to the Treasury has been redeemed or transferred. Further, common, junior preferred or pari passu shares may not be repurchased if we are in arrears on the dividends payable to the Treasury on the preferred stock.

     The Failure Of Our Bank To Restore Unappropriated Retained Earnings To A Positive Balance Or Receive Regulatory Approval To Pay Dividends Could Impair Our Company’s Liquidity And Ability To Pay Dividends. As a result of an impairment of goodwill in 2008, our Bank had an accumulated deficit at December 31, 2008 and 2009. Our Bank will therefore be required to receive regulatory approval prior to paying dividends to our Company until such time as our Bank’s unappropriated retained earnings is restored to a positive balance. If our Bank is unable to receive such regulatory approval, it will impair our liquidity and we may not be able to pay dividends on our common stock.

     We May Elect Or Be Compelled To Seek Additional Capital In The Future, But That Capital May Not Be Available When It Is Needed. We are required by our regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support the growth of our business or to finance acquisitions, if any, or we may elect to raise additional capital for other reasons. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Should we elect or be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or securities convertible into our common stock, which could dilute your ownership interest in the Company. Although we remain “well-capitalized” and have not had a deterioration in our liquidity, the future cost and availability of capital may be adversely affected by illiquid credit markets, economic conditions and a number of other factors, many of which are outside of our control. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed or on terms acceptable to us, it may have a material adverse effect on our financial condition and results of operations.

     If We Are Unable To Successfully Compete For Customers In Our Market Area, Our Financial Condition And Results Of Operations Could Be Adversely Affected. Hawthorn’s banking subsidiary faces substantial competition in making loans, attracting deposits and providing other financial products and services. Our Bank has numerous competitors for customers in its market area.

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Such competition for loans comes principally from:

• other commercial banks

• savings banks

• savings and loan associations

• mortgage banking companies

• finance companies

• credit unions

Competition for deposits comes principally from:

• other commercial banks

• savings banks

• savings and loan associations

• credit unions

• brokerage firms

• insurance companies

• money market mutual funds

• mutual funds (such as corporate and government securities funds)

     Many of these competitors have greater financial resources and name recognition, more locations, more advanced technology and more financial products to offer than our Bank. Competition from larger institutions may increase due to an acceleration of bank mergers and consolidations in Missouri and the rest of the nation. In addition, the Gramm-Leach-Bliley Act removes many of the remaining restrictions in federal banking law against cross-ownership between banks and other financial institutions, such as insurance companies and securities firms. The law will likely increase the number and financial strength of companies that compete directly with our Bank. The profitability of our Bank depends of its continued ability to attract new customers and compete in Missouri. New competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on our Bank’s market share of deposits and loans in our Bank’s service areas. If our Bank is unable to successfully compete, its financial condition and results of operations will be adversely affected.

     We May Experience Difficulties In Managing Our Growth And In Effectively Integrating Newly Acquired Companies. As part of our general strategy, Hawthorn may continue to acquire banks and businesses that it believes provide a strategic fit with its business. To the extent that our Company does grow, there can be no assurances that we will be able to adequately and profitably manage such growth. Acquiring other banks and businesses will involve risks commonly associated with acquisitions, including:

• potential exposure to liabilities of the banks and businesses acquired;

• difficulty and expense of integrating the operations and personnel of the banks and businesses acquired;

• difficulty and expense of instituting the necessary systems and procedures, including accounting and financial reporting systems, to manage the combined enterprises on a profitable basis;

• potential disruption to our existing business and operations;

• potential diversion of the time and attention of our management; and

• impairment of relationships with and the possible loss of key employees and customers of the banks and businesses acquired.

The success of our internal growth strategy will depend 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. There is no assurance that we will be successful in implementing our internal growth strategy.

     We May Be Adversely Affected By Changes In Laws And Regulations Affecting The Financial Services Industry. Banks and bank holding companies such as Hawthorn are subject to regulation by both federal and state bank regulatory agencies. The regulations, which are designed to protect borrowers and promote certain social policies, include limitations on the operations of banks and bank holding companies,

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such as minimum capital requirements and restrictions on dividend payments. The regulatory authorities have extensive discretion in connection with their supervision and enforcement activities and their examination policies, including the imposition of restrictions on the operation of a bank, the classification of assets by an institution and requiring an increase in a bank’s allowance for loan losses. These regulations are not necessarily designed to maximize the profitability of banking institutions.

     On December 11, 2009, the United States House of Representatives passed a bill that would create an inter-agency council to police systemic risk in the economy, crack down on hedge funds and credit rating agencies, set up a financial consumer watchdog agency, and expose Federal Reserve monetary policy to unprecedented congressional scrutiny, among other reforms. On January 22, 2009, President Barack Obama announced his proposal to limit the size of the nation’s largest commercial banks and reduce the risks they take in complex and exotic investments by prohibiting proprietary trading. The United States Senate is also considering similar financial services reform. While the final form of any such legislation is impossible to predict, it seems likely that some form of financial services legislation will be passed in the near future. Although it is unclear what, if any, additional legislation will be enacted into law or rules will be issued, certain laws or rules may be enacted that could restrict our operations or increase governmental oversight of our business.

     In December 2008, we elected to participate in the Treasury’s Capital Purchase Program. Congress has held hearings on implementation of, and the use of funds received in, the Capital Purchase Program and may adopt further legislation impacting financial institutions that have obtained funding under the program. The Special Inspector General for the Troubled Asset Relief Program has requested information from Capital Purchase Program participants, including a description of past and anticipated uses of the funds received and plans for addressing executive compensation requirements. We have responded to the Special Inspector General’s request, but it is unclear at this point what the ramifications of such disclosure are or may be in the future.

     These, and other future changes in the banking laws and regulations, could have a material adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.

     Our Success Largely Depends On The Efforts Of Our Executive Officers. The success of Hawthorn and its banking subsidiary has been largely dependent on the efforts of James Smith, Chairman and CEO and David Turner, President and the other executive officers. These individuals are expected to continue to perform their services. However, the loss of the services of Messrs. Smith or Turner, or any of the other key executive officers could have a materially adverse effect on Hawthorn and its subsidiary bank.

     We Cannot Predict How Changes In Technology Will Affect Our Business. The financial services market, including banking services, is increasingly affected by advances in technology, including developments in:

• telecommunications

• data processing

• automation

• Internet-based banking

• telebanking

• debit cards and so-called “smart cards”

     Our ability to compete successfully in the future will depend on whether they can anticipate and respond to technological changes. To develop these and other new technologies our Bank will likely have to make additional capital investments. Although our Bank continually invests in new technology, there can be no assurance that our Bank will have sufficient resources or access to the necessary proprietary technology to remain competitive in the future.

     Additional Factors. Additional risks and uncertainties that may affect the future results of operations, financial condition or business of our Company and its banking subsidiary include, but are not

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limited to: (i) adverse publicity, news coverage by the media, or negative reports by brokerage firms, industry and financial analysts regarding our Bank or our Company; and (ii) changes in accounting policies and practices.

Item 1B. Unresolved Staff Comments.

     None.

Item 2. Properties.

     Neither our Company nor Union State Bancshares owns or leases any property.

     On February 14, 2007, our principal offices were relocated from Jefferson City, Missouri to Hawthorn Bank’s branch located at 300 Southwest Longview Boulevard, Lee’s Summit, Missouri. The Lee’s Summit location temporarily serves as our principal office until permanent facilities are located in the Kansas City metropolitan area.

The table below provides a list of our Bank’s facilities.

					Net Book Value at
	Approximate Square				December 31, 2009
Location	Footage			Owned or Leased	(in thousands)
8127 East 171st Street, Belton, MO		13,000		Owned	$	2,370
4675 Gretna Road, Branson, MO		11,000		Owned	$	1,634
1000 West Buchanan Street, California, MO		2,270		Owned	$	452
102 North Second Street, Clinton, MO		11,524		Owned	$	1,725
1400 East Ohio Street, Clinton, MO		13,551		Owned	$	3,484
1712 East Ohio Street, Clinton, MO (inside a Wal-Mart store)		600		Leased (1)		N/A
1101 North Highway 13,Collins, MO		1,500		Owned	$	27
1110 Club Village Drive, Columbia, MO		5,000		Owned	$	1,761
115 South 2nd Street, Drexel, MO		4,000		Owned	$	285
100 Plaza Drive, Harrisonville, MO		4,000		Owned	$	320
17430 East 39th Street, Independence, MO		4,070		Owned	$	764
220 West White Oak, Independence, MO		1,800		Owned	$	103
132 East High Street, Jefferson City, MO		34,800		Owned	$	3,772
3701 West Truman Blvd, Jefferson City, MO		21,000		Owned	$	360
211 West Dunklin Street, Jefferson City, MO		2,400		Owned	$	13
800 Eastland Drive, Jefferson City, MO		4,100		Owned	$	836
300 S.W. Longview Blvd, Lee’s Summit, MO		11,700		Owned	$	2,443
335 Chestnut, Osceola, MO		1,580		Owned	$	62
500 North Mott Drive, # 103C, Raymore, MO (in the Foxwood Springs Seniors Center)		462		Leased (2)		N/A
595 VFW Memorial Drive, St. Robert, MO		2,236		Owned	$	49
321 West Battlefield, Springfield, MO		12,500	(3)	Owned	$	682
200 West Main Street, Warsaw, MO		8,900		Owned	$	178
1891 Commercial Drive, Warsaw, MO		11,000		Owned	$	1,907
125 South Main, Windsor, MO		3,600		Owned	$	324

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(1)	The term of this lease began in January 1999 and ends in January 2014.
(2)	The term of this lease can be terminated at any time upon thirty days notice.
(3)	Of the 12,500 square feet of space, 6,600 square feet of space is leased to a non-affiliate.

     Management believes that the condition of each of our Bank’s facilities presently is adequate for its business and that such facilities are adequately covered by insurance.

Item 3. Legal Proceedings.

     None of Hawthorn or its subsidiaries is involved in any material pending legal proceedings, other than routine litigation incidental to their business.

Item 4. (Removed and Reserved).

EXECUTIVE OFFICERS OF THE REGISTRANT

     Executive officers of our Company are appointed by the board of directors and serve at the discretion of the board. The following table sets forth certain information with respect to all executive officers of our Company.

Name	Age		Position
James E. Smith		65	Chairman, Chief Executive Officer and Director
David T. Turner		53	President and Director
Richard G. Rose		58	Chief Financial Officer
Kathleen L. Bruegenhemke		44	Senior Vice President and Secretary

     The business experience of the executive officers of our Company during the last five years is as follows:

     James E. Smith has served as a director of Hawthorn Bank (or of its constituent predecessors) since 1975 and of our Company since 1997. He served as vice chairman of our Company from 1998 through March 2002 when he assumed the responsibilities of chairman and chief executive officer, as president and secretary of Hawthorn Bank from 1975 through May 2000 when he was promoted to chairman and chief executive officer, as president of a predecessor to Hawthorn Bank from January 2000 through October 2002, and as vice chairman of another predecessor to Hawthorn Bank from October 2002 through March 2007.

     David T. Turner has served as a director of Hawthorn Bank (or of its constituent predecessors) and of our Company since January 1997. Mr. Turner served as vice chairman of our Company from June 1998 through March 2002 when he assumed the position of president. From 1993 until June 1998, he served as senior vice president of our Company. Mr. Turner served as president of a predecessor to Hawthorn Bank from January 1997 through March 2002 when he assumed the position of chairman, chief executive officer and president. He served as senior vice president of that same predecessor from June 1992 through December 1996 and as its vice president from 1985 until June 1992.

     Richard G. Rose has served as Chief Financial Officer of our Company since June 2007 and Senior Vice President and Chief Financial Officer of Hawthorn Bank (or of one of its constituent predecessors) since June 2007. Mr. Rose served as Treasurer of our Company from July 1998 through June 2007 and Senior Vice President and Controller of our Bank from July 1998 through June 2007. Prior to joining Hawthorn Bank, he served as Senior Vice President and Controller of the First National Bank of St. Louis from June 1979 until June 1998.

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     Kathleen L. Bruegenhemke has served as Senior Vice President and Secretary of our Company since November 1997. From January 1992 until November 1997, she served as Internal Auditor of Hawthorn Bank (or of one of its constituent predecessors). Prior to joining our Bank, Ms. Bruegenhemke served as a Commissioned Bank Examiner for the Federal Deposit Insurance Corporation.

     There is no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was selected as an officer.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item, other than that referred to below, is incorporated herein by reference to the information under the caption “Market Price of and Dividends on Equity Securities and Related Matters” in our Company’s 2009 Annual Report to Shareholders.

     We refer you to Item 12 of this report under the caption “Securities Authorized For Issuance Under Equity Compensation Plans” for certain equity plan information.

Our Purchases of Equity Securities

     The following table summarizes the purchases made by or on behalf of our Company or certain affiliated purchasers of shares of our common stock during the fourth quarter of the year ended December 31, 2009:

							(d) Maximum Number
					(c) Total Number of		(or Approximate
					Shares (or Units)		Dollar Value) of
					Purchased as Part		Shares (or Units)
	(a) Total Number of		(b) Average Price		of Publicly		that May Yet Be
	Shares (or Units)		Paid per Share (or		Announced Plans or		Purchased Under the
Period	Purchased		Unit)		Programs		Plans or Programs *
October 1-31, 2009		—		—		—	$	333,038
November 1-30, 2009		—		—		—	$	333,038
December 1-31, 2009		—		—		—	$	333,038
Total		—		—		—	$	333,038

* On August 22, 2001, our Company announced that our Board of Directors authorized the purchase, through open market transactions, of up to $2,000,000 market value of our Company’s common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as, the timing of any such purchases. On November 26, 2002, our Company announced that our board of directors authorized an additional $2,000,000 for the purchase of our Company’s stock through open market transactions. As a result of our participation in the U.S. Treasury’s Capital Purchase Program, however, our ability to redeem, purchase or acquire any shares of our common stock is limited. Specifically, until December 19, 2011 we will not be permitted to redeem, purchase or acquire any shares of our common stock without the Treasury’s approval unless the shares of our Fixed Rate Cumulative Perpetual Preferred Stock issued to the Treasury have been redeemed or transferred. Further, we will not be able to redeem, purchase or acquire any shares of our common stock if we are in arrears in the payment of dividends on the preferred stock issued to the Treasury.

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Recent Issuance of Securities

     None.

Item 6. Selected Financial Data.

     Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the report of the independent auditors and the information under the caption “Selected Consolidated Financial Data” in our Company’s 2009 Annual Report to Shareholders.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

     Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Company’s 2009 Annual Report to Shareholders.

Forward-Looking Statements

     This report, including information included or incorporated by reference in this report, contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, strategy, future performance and business of our Company and its subsidiaries, including, without limitation:

• statements that are not historical in nature, and

• statements preceded by, followed by or that include the words “believes,” “expects,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “intends” or similar expressions.

Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• competitive pressures among financial services companies may increase significantly,

• changes in the interest rate environment may reduce interest margins,

• general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

• increases in non-performing assets in our loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,

• costs or difficulties related to the integration of the business of Hawthorn and its acquisition targets may be greater than expected,

• legislative or regulatory changes may adversely affect the business in which Hawthorn and its subsidiaries are engaged, and

• changes may occur in the securities markets.

We have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements, which factors are identified in Item 1A of this report under the heading “Risk Factors.” Other factors that we have not identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date such statement is made. Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

     Our Company’s exposure to market risk is reviewed on a regular basis by our Bank’s asset/liability committee and board of directors. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize those risks. Tools used by our Bank’s management include the standard GAP report subject to different rate shock scenarios. At December 31, 2009, the rate shock scenario models indicated that annual net interest income could change by as much as (18.6)% to 22.3% should interest rates rise or fall within 300 basis points from their current level over a one year period. However there are no assurances that the change will not be more or less than this estimate.

     Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item, other than that provided above, is incorporated herein by reference to:

(i)	the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Sensitivity and Liquidity” in our Company’s 2009 Annual Report to Shareholders; and
(ii)	the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk” in our Company’s 2009 Annual Report to Shareholders.

Item 8. Financial Statements and Supplementary Data.

     Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the report of the independent auditors and the information under the caption “Consolidated Financial Statements” in our Company’s 2009 Annual Report to Shareholders.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

     None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

     Our Company’s management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as of December 31, 2009. Based upon and as of the date of that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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Internal Controls Over Financial Reporting.

Management’s Report on Internal Control Over Financial Reporting.

     Our Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our Company’s management concluded that our internal control over financial reporting was effective as of December 31, 2009. The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Controls.

     There has been no change in our Company’s internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Hawthorn Bancshares, Inc.:

     We have audited Hawthorn Bancshares, Inc.’s (the Company) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that

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transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, Hawthorn Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control —Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hawthorn Bancshares, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated March 15, 2010 expressed an unqualified opinion on those consolidated financial statements.

/s / KPMG LLP

St. Louis, Missouri

March 15, 2010

Item 9B. Other Information.

     None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

     Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item, other than that referred to below, is incorporated herein by reference to:

(i)	the information under the caption “Item 1: Election of Directors—What is the structure of our board and how often are directors elected?” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;
(ii)	the information under the caption “Item 1: Election of Directors—Who are this year’s nominees?” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;
(iii)	the information under the caption “Item 1: Election of Directors—What is the business experience of the nominees and of our continuing board members?” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;
(iv)	the information under the caption “Executive Officers of the Registrant” in Part I of this report;

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(v)	the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;
(vi)	the information under the caption “Corporate Governance and Board Matters—Consideration of Director Nominees” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and
(vii)	the information under the caption “Corporate Governance and Board Matters—Committees of the Board—Audit Committee” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Code of Ethics

     Our Company has adopted a Code of Business Conduct and Ethics for directors, officers and employees including, our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. This Code of Business Conduct and Ethics is posted on our internet website (www.hawthornbancshares.com) under “Governance Documents” and is available for your examination. A copy of this Code will be furnished without charge upon written request to Kathleen L. Bruegenhemke, Secretary, Hawthorn Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101. Any substantive amendment to, or waiver from, a provision of this Code that applies to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions will be disclosed in a report on Form 8-K.

Item 11. Executive Compensation.

     Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to:

(i)	the information under the caption “Executive Compensation and Related Matters” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;
(ii)	the information under the caption “Corporate Governance and Board Matters—Director Compensation” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and
(iii)	the information under the caption “Corporate Governance and Board Matters—Compensation Committee Interlocks and Insider Participation” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

     Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item, other than that presented below, is incorporated herein by reference to the information under the caption “Ownership of Common Stock” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

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Securities Authorized For Issuance Under Equity Compensation Plans

     Our Company has two equity compensation plans for its employees pursuant to which options, rights or warrants may be granted. The following is a summary of the shares reserved for issuance pursuant to outstanding options, rights or warrants granted under equity compensation plans as of December 31, 2009:

						Number of
						securities
						remaining available
	Number of					for future issuance
	securities to be					under equity
	issued upon			Weighted-average		compensation plans
	exercise of			exercise price of		(excluding
	outstanding			outstanding		securities
	options, warrants			options, warrants		reflected in column
Plan category	and rights			and rights		(a))
	(a)			(b)		(c)
Equity compensation plans approved by security holders		275,966	*	$	25.07		594,333	**
Equity compensation plans not approved by security holders		-0-			-0-		-0-
Total		275,966	*	$	25.07		594,333	**

*	Consists of shares reserved for issuance pursuant to outstanding stock option grants under our Company’s incentive stock option plan.
**	Consists of 178,333 shares available for future issuance under our Company’s incentive stock option plan and 416,000 shares available for future issuance under our Company’s 2007 omnibus incentive plan.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

     Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to:

(i)	the information under the caption “Related Party Transactions” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;
(ii)	the information under the caption “Item 1: Election of Directors—What is the structure of our board and how often are directors elected?” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and
(iii)	the information under the caption “Corporate Governance and Board Matters—Committees of the Board” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Item 14. Principal Accounting Fees and Services.

     Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption “Independent Auditor Fees and Services” in our Company’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)	Exhibits, Financial Statements and Financial Statement Schedules:
1.	Financial Statements:

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     The following consolidated financial statements of our Company and reports of our Company’s independent auditors, included in our Annual Report to Shareholders for the year ended December 31, 2009 under the caption “Consolidated Financial Statements”, are incorporated herein by reference:

	Report of Independent Registered Public Accounting Firm.
	Consolidated Balance Sheets as of December 31, 2009 and 2008.
	Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007.
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007.
	Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007.
	Notes to Consolidated Financial Statements.
2.	Financial Statement Schedules:

     Financial statement schedules have been omitted because they either are not required or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.

3. Exhibits:

Exhibit No. Description

3.1	Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on August 9, 2007 and incorporated herein by reference).
3.1.1	Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008, dated December 17, 2008 (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of our Company (filed as Exhibit 3.2 to our Company’s current report on Form 8-K on November 1, 2007 and incorporated herein by reference).
4.1	Specimen certificate representing shares of our Company’s $1.00 par value Common Stock (filed as Exhibit 4 to our Company’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).
4.2	Specimen certificate representing shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008 (filed as Exhibit 4.2 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
4.3	Warrant to purchase shares of our Company’s $1.00 par value Common Stock, dated December 19, 2008 (filed as Exhibit 4.1 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
10.1	Employment Agreement, dated November 3, 1997, between our Company and James E. Smith (filed as Exhibit 10.4 to our Company’s Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference).*
10.2	Exchange National Bancshares, Inc. Incentive Stock Option Plan (filed as Exhibit 10.2 to our Company’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).*

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Exhibit No. Description

10.3	Form of Change of Control Agreement and schedule of parties thereto (filed as Exhibit 10.2 to our Company’s Quarterly Report on Form 10-Q for the quarterly period March 31, 2005 and incorporated herein by reference).*
10.4	Letter Agreement dated December 19, 2008 by and between our Company and the United States Department of the Treasury, including the Securities Purchase Agreement — Standard Terms (filed as Exhibit 10.1 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
10.5	Form of Waiver of our Company’s Senior Executive Officers (filed as Exhibit 10.2 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).*
10.6	Form of Letter Agreement between our Company’s Senior Executive Officers and our Company (filed as Exhibit 10.3 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).*
10.7	Form of Letter Agreement entered into between our Company and certain officers and employees of our Company, including our Company’s senior executive officers.
10.8	Our Company’s 2007 Omnibus Incentive Plan.
13	Our Company’s 2009 Annual Report to Shareholders (only those portions of this Annual Report to Shareholders which are specifically incorporated by reference into this Annual Report on Form 10-K shall be deemed to be filed with the Commission).
14	Code of Business Conduct and Ethics of our Company (filed as Exhibit 14 to our Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
21	List of Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney (included on the signature page to this Annual Report on Form 10-K).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Certification of Principal Executive Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008 (“EESA”)
99.2	Certification of Principal Financial Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008 (“EESA”)

*	Management contracts or compensatory plans or arrangements required to be identified by Item 15(a).
	(b)  Exhibits.
	See exhibits identified above under Item 15(a)3.

27

     (c) Financial Statement Schedules.

See financial statement schedules identified above under Item 15(a)2, if any.

28

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HAWTHORN BANCSHARES, INC.
Dated: March 15, 2010	By:	/s/ James E. Smith
		James E. Smith, Chairman of the Board
		and Chief Executive Officer

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James E. Smith and Richard G. Rose, or either of them, his attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date Signature and Title

March 15, 2010	/s/ James E. Smith
	James E. Smith, Chairman of the Board and Chief
	Executive Officer (Principal Executive Officer)
March 15, 2010	/s/ Richard G. Rose
	Richard G. Rose, Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)
March 15, 2010	/s/ David T. Turner
	David T. Turner, Director
March 15, 2010	/s/ Charles G. Dudenhoeffer, Jr.
	Charles G. Dudenhoeffer, Jr., Director
March 15, 2010	/s/ Philip D. Freeman
	Philip D. Freeman, Director
March 15, 2010	/s/ Kevin L. Riley
	Kevin L. Riley, Director
March 15, 2010	/s/ Gus S. Wetzel, II
	Gus S. Wetzel, II, Director

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EXHIBIT INDEX

Exhibit No. Description Page No.

10.7	Form of Letter Agreement entered into between our Company and certain officers and employees of our Company, including our Company’s senior executive officers.
10.8	Our Company’s 2007 Omnibus Incentive Plan.
13	Our Company’s 2009 Annual Report to Shareholders (only those portions of this Annual Report to Shareholders which are specifically incorporated by reference into this Annual Report on Form 10-K shall be deemed to be filed with the Commission).
21	List of Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney (included on the signature page to this Annual Report on Form 10-K).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Certification of Principal Executive Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008 (“EESA”).
99.2	Certification of Principal Financial Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008 (“EESA”).

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EX-10.7

Exhibit 10.7

[HAWTHORN BANCSHARES LETTERHEAD]

[Date]

Dear                                         :

     Hawthorn Bancshares, Inc. (the “Company”) is a party to a Letter Agreement and accompanying Securities Purchase Agreement — Standard Terms (collectively, the “Purchase Agreement”) with the United States Department of Treasury (“Treasury”) that provides for the Company’s participation in the Capital Purchase Program (“CPP”) established by the Treasury under the Emergency Economic Stabilization Act of 2008 (“EESA”). Pursuant to the Purchase Agreement, the Company issued and sold, and the Treasury purchased, shares of the Company’s preferred stock and warrants for the purchase of the Company’s common stock.

     As a condition to the Company’s continued participation in the CPP and as a requirement of the Treasury’s investment pursuant to the CPP, the Company is required to adopt and abide by the Treasury’s standards for executive compensation and corporate governance as set forth in Section 111(b) of EESA and in 31 C.F.R. Part 30. To comply with these requirements, and in consideration of the benefits received as a result of the Company’s participation in the CPP and your continued employment by the Company or its subsidiaries, and notwithstanding any other agreement or right set forth in any Benefit Plan (defined in Section 6 below), by signing this letter agreement you agree as follows:

     1. Prohibit Golden Parachute Payments. The Company is prohibited from making or accruing and shall not make or accrue any golden parachute payment to you if you are either a senior executive officer or one of the five most highly compensated employees of the Company.

     2. Bonus and Incentive Compensation Clawback. If you are either a senior executive officer or one of the twenty most highly compensated employees of the Company, any bonus or other incentive compensation paid to you is subject to recovery or “clawback” by the Company, and you agree to pay back to the Company such bonus or other incentive compensation, if all or any portion of such bonus or incentive compensation is based on materially inaccurate financial statements of earnings (including, without limitation, statements of earnings, revenues and gains), or any other materially inaccurate performance criteria, as such terms are defined and interpreted under 31 C.F.R. Part 30.

     3. Bonus Payments. The Company is prohibited from making and shall not make any bonus payment to you if you are one of the five most highly compensated employees of the Company. In addition, the Treasury will review bonuses, retention awards, and other compensation paid before February 17, 2009 to senior executive officers and the next twenty most highly compensated employees. Such payments are subject to recovery by the Treasury if the Treasury determines that a payment was inconsistent with the purposes of EESA section 111 or the CPP or otherwise contrary to the public interest.

     4. Tax Gross Up Payment. If you are either a senior executive officer or one of the twenty most highly compensated employees of the Company, you will not be entitled to receive from the Company any tax gross-up or other reimbursements for the payment of taxes.

     5. Effect of Restrictions. If you become contractually entitled to a golden parachute, tax gross up or bonus payment while the Company is participating in the CPP (and are prohibited from receiving such a payment due to the restrictions set forth above), you will not have a right to receive, and you will not receive, any such payment either (a) while the Company is a current participant in the CPP or (b) after the Company ceases to participate in the CPP. The Company’s repayment of all amounts owed to the Treasury will not revive any payment to which you would have otherwise been contractually entitled but for the Company’s participation in the CPP and this letter agreement.

     6. Amendment. You hereby acknowledge and agree that each of the Company’s compensation, bonus, incentive and other benefit plans, arrangements and agreements, including golden parachute, change of control, severance and employment agreements (collectively, “Benefit Plans”) with respect to you are each hereby deemed amended to the extent necessary to comply with the requirements of the CPP and as set forth in this letter agreement. In no event will any amendments to the Benefit Plans pursuant to this letter agreement trigger an adverse change in circumstances or such other adverse change as set forth in the Benefit Plans.

     7. Waiver. You voluntarily waive any claim against the Company for any changes to your compensation or benefits that are required to comply with the Department of the Treasury’s standards for executive compensation and corporate governance as set forth in Section 111(b) of EESA and in 31 C.F.R. Part 30. This waiver includes all claims you may have under the laws of the United States or any state related to the requirements imposed by the aforementioned laws and regulations, including without limitation a claim for any compensation or other payments you would otherwise receive, any challenge to the process by which such laws or regulations were adopted and any tort or constitutional claim about the effect of these laws or regulations on your employment with the Company.

     8. Definitions and Interpretation. This letter agreement shall be interpreted as follows:

     a) “bonus payment”, “golden parachute payment”, “gross up” and “senior executive officer” each has the meaning assigned to such terms in 31 C.F.R. §30.1.

     b) The determination of whether, and for what periods, you are a “senior executive officer” or one of the top 5 or top 20 most highly compensated employees of the Company will be made pursuant to 31 C.F.R. § 30.3.

     c) As used in this letter agreement, the term “Company” includes Hawthorn Bank and any other entities treated as a single employer with the Company, as such a determination is made under the definition of “TARP Recipient” in 31 C.F.R. § 30.1.

     d) This letter agreement is intended to, and will be interpreted, administered and construed to, comply with Section 111 of EESA and 31 C.F.R. Part 30 (and, to the maximum extent consistent with the preceding, to permit operation of the Benefit Plans in accordance with their terms before giving effect to this letter agreement).

     9. Miscellaneous. This letter agreement may be executed in two or more counterparts, each of which will be deemed to be an original. This letter agreement will be governed by and construed in accordance with the laws of Missouri. A signature transmitted by facsimile will be deemed an original signature. Except as set forth in paragraph 5, this letter agreement will automatically be of no further force and effect upon the Company ceasing to participate in the CPP and repaying all obligations to the Treasury arising from the Treasury’s financial assistance. [This letter agreement supersedes and replaces the prior agreement between you and the Company relating to executive compensation that was signed on December ___, 2008 (except that the waiver delivered in connection therewith is not superseded) — NOTE: only need this provision for SEOs that signed in December]

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Sincerely, HAWTHORN BANCSHARES, INC.
By:
	David T. Turner, President

AGREED TO AND ACCEPTED
THIS ___DAY OF ___, 20___,
INTENDING TO BE LEGALLY BOUND

Name:  

Title:  

3

PARTIES TO FOREGOING LETTER AGREEMENT

Hawthorn Bancshares, Inc. has entered into letter agreements in the form of the foregoing letter agreement with each of the following senior executive officers and other highly compensated employees of Hawthorn Bancshares, Inc. or of its subsidiary bank:

          James E. Smith
          David T. Turner
          Richard G. Rose
          Kathleen L. Bruegenhemke

4

EX-10.8

Exhibit 10.8

EXCHANGE NATIONAL BANCSHARES, INC.

2007 OMNIBUS INCENTIVE PLAN*

* Pursuant to resolutions adopted by the Board of Directors of Hawthorn Bancshares, Inc. (formerly known as Exchange National Bancshares, Inc.), (i) the name of the Exchange National Bancshares, Inc. 2007 Omnibus Incentive Plan was changed to the Hawthorn Bancshares, Inc. 2007 Omnibus Incentive Plan and (ii) all references to Exchange National Bancshares, Inc. in the Hawthorn Bancshares, Inc. 2007 Omnibus Incentive Plan were changed to Hawthorn Bancshares, Inc., and this Plan shall be deemed to be amended in accordance with such resolutions.

TABLE OF CONTENTS

	Page
SECTION 1 INTRODUCTION	5
1.1 Establishment	5
1.2 Purpose	5
1.3 Duration	5
1.4 Plan Subject to Shareholder Approval	5
SECTION 2 DEFINITIONS	5
2.1 The following terms shall have the meanings set forth below.	5
“1933 Act”	5
“1934 Act”	5
“Affiliate”	6
“Award”	6
“Award Agreement”	6
“Beneficiary”	6
“Board”	6
“Bonus Shares”	6
“Cause”	6
“Change in Control”	7
“Code”	8
“Committee”	8
“Company”	8
“Continuing Director”	8
“Control”	8
“Covered Employee”	8
“Date of Grant” or “Grant Date”	8
“Deferred Shares”	9
“Disabled” or “Disability”	9
“Effective Date”	9
“Eligible Employees”	9
“Employee”	9
“Executive Officer”	9
“Fair Market Value”	9
“Freestanding SAR”	9
“Holder”	10
“Incentive Stock Option”	10
“Nonqualified Stock Option”	10
“Option”	10
“Option Agreement” or “Option Award Agreement”	10
“Option Exercise Price”	10
“Optionee”	10

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“Participant”	10
“Performance Award”	10
“Performance Period”	10
“Performance Shares”	10
“Performance Units”	10
“Person”	11
“Plan”	11
“Restricted Stock”	11
“Restricted Stock Unit”	11
“Rule 16b-3”	11
“SAR” or “Stock Appreciation Right”	11
“SAR Holder”	11
“Section 16 Person”	11
“Service Provider”	11
“Share”	11
“Stock”	11
“Subsidiary”	11
“Tandem SAR”	11
“Vested Option”	11
2.2 General Interpretive Principles	12
SECTION 3 PLAN ADMINISTRATION	12
3.1 Composition of Committee	12
3.2 Authority of Committee	12
3.3 Committee Delegation	13
3.4 Determination Under the Plan	13
SECTION 4 STOCK SUBJECT TO THE PLAN	13
4.1 Number of Shares	13
4.2 Unused and Forfeited Stock	14
4.3 Adjustments in Authorized Shares	14
4.4 General Adjustment Rules.	14
SECTION 5 PARTICIPATION	15
5.1 Basis of Grant	15
5.2 Types of Grants; Limits	15
5.3 Award Agreements	15
5.4 Restrictive Covenants	15
5.5 Maximum Annual Award	15
SECTION 6 STOCK OPTIONS	16
6.1 Grant of Options	16
6.2 Option Agreements	16

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(a)Number of Shares	16
(b)Price	16
(c)Duration of Options	17
(d)Termination of Service, Death, Disability, etc	17
(e)Transferability	17
(f)Exercise, Payments, etc.	17
(g)Date of Grant	18
(h)Withholding	18
(i)Adjustment of Options	19
6.3 Shareholder Privileges	19
SECTION 7 STOCK APPRECIATION RIGHTS	20
7.1 Grant of SARs	20
(a)Number of Shares	20
(b)Exercise Price and Other Terms	20
7.2 SAR Award Agreement	20
7.3 Exercise of Tandem SARs	20
7.4 Exercise of Freestanding SARs	20
7.5 Expiration of SARs	21
7.6 Payment of SAR Amount	21
SECTION 8 AWARDS OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS	21
8.1 Restricted Stock Awards Granted by Committee	21
8.2 Restricted Stock Unit Awards Granted by Committee	21
8.3 Restrictions	21
8.4 Privileges of a Shareholder, Transferability	22
8.5 Enforcement of Restrictions	22
8.6 Termination of Service, Death, Disability, etc	22
SECTION 9 PERFORMANCE SHARES, PERFORMANCE UNITS, BONUS SHARES AND DEFERRED SHARES	23
9.1 Awards Granted by Committee	23
9.2 Terms of Performance Shares or Performance Units	23
9.3 Bonus Shares	23
9.4 Deferred Shares	23
SECTION 10 Performance Awards; Section 162(M) Provisions	23
10.1 Terms of Performance Awards	23
10.2 Performance Goals	24
10.3 Adjustments	25
10.4 Other Restrictions	25
10.5 Section 162(m) Limitations	25

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SECTION 11 REORGANIZATION, CHANGE IN CONTROL OR LIQUIDATION	25
SECTION 12 RIGHTS OF EMPLOYEES; PARTICIPANTS	26
12.1 Employment	26
12.2 Nontransferability	26
12.3 Permitted Transfers	27
SECTION 13 GENERAL RESTRICTIONS	27
13.1 Investment Representations	27
13.2 Compliance with Securities Laws.	27
13.3 Stock Restriction Agreement	28
SECTION 14 OTHER EMPLOYEE BENEFITS	28
SECTION 15 PLAN AMENDMENT, MODIFICATION AND TERMINATION	28
15.1 Amendment, Modification, and Termination	28
15.2 Adjustment Upon Certain Unusual or Nonrecurring Events	28
15.3 Awards Previously Granted	28
SECTION 16 WITHHOLDING	29
16.1 Withholding Requirement	29
16.2 Withholding with Stock	29
SECTION 17 NONEXCLUSIVITY OF THE PLAN	29
17.1 Nonexclusivity of the Plan	29
SECTION 18 REQUIREMENTS OF LAW	30
18.1 Requirements of Law	30
18.2 Code Section 409A	30
18.3 Rule 16b-3	30
18.4 Governing Law	30

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EXCHANGE NATIONAL BANCSHARES, INC.
2007 OMNIBUS INCENTIVE PLAN

SECTION 1
INTRODUCTION

1.1	Establishment. Exchange National Bancshares, Inc., a corporation organized and existing under the laws of the state of Missouri (the “Company”), hereby establishes the Exchange National Bancshares, Inc. 2007 Omnibus Incentive Plan (the “Plan”) for certain employees of the Company and its affiliates, certain non-employee directors of the Company and its affiliates and certain non-employee advisory directors of the Company and its affiliates.
1.2	Purpose. The purpose of this Plan is to encourage employees, non-employee directors and non-employee advisory directors of the Company and its affiliates and subsidiaries to acquire a proprietary and vested interest in the growth and performance of the Company. The Plan also is designed to assist the Company in attracting and retaining employees, non-employee directors and non-employee advisory directors by providing them with the opportunity to participate in the success and profitability of the Company.
1.3	Duration. The Plan shall commence on the Effective Date and shall remain in effect, subject to the right of the Board to amend or terminate the Plan at any time pursuant to Section 15 hereof, until all Shares subject to the Plan shall have been issued, purchased or acquired according to the Plan’s provisions. Unless the Plan shall be reapproved by the shareholders of the Company and the Board renews the continuation of the Plan, no Awards shall be issued pursuant to the Plan after the tenth (10th) anniversary of the Effective Date.
1.4	Plan Subject to Shareholder Approval. Although the Plan is effective on the Effective Date, the Plan’s continued existence is subject to the Plan being approved by the Company’s shareholders within 12 months of the Effective Date. Any Awards granted under the Plan after the Effective Date but before the approval of the Plan by the Company’s shareholders will become null and void if the Company’s shareholders do not approve this Plan within such 12-month period.

SECTION 2
DEFINITIONS

2.1	The following terms shall have the meanings set forth below.
	“1933 Act” means the Securities Act of 1933, as it may be amended from time to time.
	“1934 Act” means the Securities Exchange Act of 1934, as it may be amended from time to time.

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“Affiliate” of the Company means any Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by, or is under common Control with the Company.

“Award” means a grant made under this Plan in any form, which may include but is not limited to, Stock Options, Restricted Stock, Restricted Stock Units, Bonus Shares, Deferred Shares, Performance Shares, Stock Appreciation Rights and Performance Units.

“Award Agreement” means a written agreement or instrument between the Company and a Holder evidencing an Award.

“Beneficiary” means the person, persons, trust or trusts which have been designated by a Holder in his or her most recent written beneficiary designation filed with the Company to receive the benefits specified under this Plan upon the death of the Holder, or, if there is no designated beneficiary or surviving designated beneficiary, then the Person or Persons entitled by will or the laws of descent and distribution to receive such benefits.

“Board” means the Board of Directors of the Company.

“Bonus Shares” means Shares that are awarded to a Participant without cost and without restriction in recognition of past performance (whether determined by reference to another employee benefit plan of the Company or otherwise) or as an incentive to become an employee of the Company or a Subsidiary.

“Cause” means, unless otherwise defined in an Award Agreement:

(i)	Participant’s conviction of, plea of guilty to, or plea of nolo contendere to a felony or other crime that involves fraud or dishonesty;
(ii)	Any willful action or omission by a Participant which would constitute grounds for immediate dismissal under the employment policies of the Company by which Participant is employed, including intoxication with alcohol or illegal drugs while on the premises of the Company, or violation of sexual harassment laws or the internal sexual harassment policy of the Company by which Participant is employed;
(iii)	Participant’s habitual neglect of duties, including repeated absences from work without reasonable excuse; or
(iv)	Participant’s willful and intentional material misconduct in the performance of his duties that results in financial detriment to the Company;

provided, however, that for purposes of clauses (ii), (iii) and (iv), “Cause” shall not include any one or more of the following: bad judgment, negligence or any act or omission believed by the Participant in good faith to have been in or not opposed to the interest of the Company (without intent of the Participant to gain,

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directly or indirectly, a profit to which the Participant was not legally entitled). A Participant who agrees to resign from his affiliation with the Company in lieu of being terminated for Cause may be deemed, in the sole discretion of the Committee, to have been terminated for Cause for purposes of this Plan.

“Change in Control” means the first to occur of the following events:

(i)	Any Person is or becomes the Beneficial Owner (within the meaning set forth in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company (not including for this purpose any securities acquired directly from the Company or its Affiliates or held by an employee benefit plan of the Company) representing 50% or more of the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (x) of paragraph (iii) of this definition; or
(ii)	The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors on the Effective Date or whose appointment, election or nomination for election was previously so approved or recommended; or
(iii)	There is consummated a merger or consolidation of the Company with any other corporation, OTHER THAN (x) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (y) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including for this purpose any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a

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business) representing 50% or more of the combined voting power of the Company’s then outstanding securities; or

(iv) The shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.

Notwithstanding the foregoing, a “Change in Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Company’s common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the Company’s assets immediately following such transaction or series of transactions.

“Code” means the Internal Revenue Code of 1986, as it may be amended from time to time, and the rules and regulations promulgated thereunder.

“Committee” means (i) the Board, or (ii) one or more committees of the Board to whom the Board has delegated all or part of its authority under this Plan. Initially, the Committee shall be the Compensation Committee of the Board which is delegated all of the Board’s authority under this Plan as contemplated by clause (ii) above.

“Company” means Exchange National Bancshares, Inc., a Missouri corporation, and any successor thereto.

“Continuing Director” means any person who was a member of the Board as of the Effective Date, and any person who subsequently becomes a member of such Board if such person’s appointment, election or nomination for election to such Board is recommended or approved by a majority of the then Continuing Directors, unless the Continuing Directors designate such person as not a Continuing Director.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.

“Covered Employee” means an Employee that meets the definition of “covered employee” under Section 162(m)(3) of the Code.

“Date of Grant” or “Grant Date” means, with respect to any Award, the date as of which such Award is granted under the Plan.

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“Deferred Shares” means Shares that are awarded to a Grantee on a deferred basis pursuant to Section 9.4.

“Disabled” or “Disability” means an individual (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than 3 months under a Company-sponsored accident and health plan. Notwithstanding the above, with respect to an Incentive Stock Option and the period of time following a separation from service in which a Holder may exercise such Incentive Stock Option, “disabled” shall have the same meaning as defined in Code section 22(e)(3).

“Effective Date” means June 13, 2007.

“Eligible Employees” means all Employees (including officers and directors who are also Employees) of the Company or an Affiliate upon whose judgment, initiative and efforts the Company depends, or will depend, for the successful conduct of the Company’s business.

“Employee” means a common law employee of the Company or an Affiliate.

“Executive Officer” means (i) the president of the Company, any vice president of the Company, including any vice president of the Company in charge of a principal business unit, division or function (such as sales, administration, or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the Company, (ii) Executive Officers (as defined in part (i) of this definition) of subsidiaries of the Company who perform policy making functions for the Company, and (iii) any Person designated or identified by the Board as being an Executive Officer for purposes of the 1933 Act or the 1934 Act, including any Person designated or identified by the Board as being a Section 16 Person.

“Fair Market Value” means, as of any date, the value of the Stock determined in good faith, from time to time, by the Committee in its sole discretion, and for this purpose the Committee may adopt such formulas as in its opinion shall reflect the true fair market value of such Stock from time to time and may rely on such independent advice with respect to such fair market value as the Committee shall deem appropriate. In the event that the Shares of the Company are traded on a national securities exchange, the Committee may determine that the Fair Market Value of the Stock shall be based upon the closing price on the trading day of the applicable date as reported in The Wall Street Journal and consistently applied. If the securities exchange is closed on the applicable date, the closing price on the next day the securities exchange is open will be the Fair Market Value.

“Freestanding SAR” means any SAR that is granted independently of any Option.

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“Holder”means a Participant, Beneficiary or Permitted Transferee who is in possession of an Award Agreement representing an Award that (i) in the case of a Participant has been granted to such individual, (ii) in the case of a Beneficiary has transferred to such person under the laws of descent and distribution, or (iii) in the case of a Permitted Transferee, has been transferred to such person as permitted by the Committee, and, with respect to all of the above cases (i), (ii) and (iii), such Award Agreement has not expired, been canceled or terminated.

“Incentive Stock Option” means any Option designated as such and granted in accordance with the requirements of Section 422 of the Code.

“Nonqualified Stock Option” means any Option to purchase Shares that is not an Incentive Stock Option.

“Option” means a right to purchase Stock at a stated price for a specified period of time. Such definition includes both Nonqualified Stock Options and Incentive Stock Options.

“Option Agreement” or “Option Award Agreement” means a written agreement or instrument between the Company and a Holder evidencing an Option.

“Option Exercise Price” means the price at which Shares subject to an Option may be purchased, determined in accordance with Section 6.2(b).

“Optionee” shall have the meaning as set forth in Section 6.2. For the avoidance of any doubt, in situations where the Option has been transferred to a Permitted Transferee or passed to a Beneficiary in accordance with the laws of descent and distribution, the Optionee will not be the same person as the Holder of the Option.

“Participant” means a Service Provider of the Company designated by the Committee from time to time during the term of the Plan to receive one or more Awards under the Plan.

“Performance Award” means any Award that will be issued or granted, or become vested or payable, as the case may be, upon the achievement of certain performance goals (as described in Section 10) to a Participant pursuant to Section 10.

“Performance Period” means the period of time as specified by the Committee during which any performance goals are to be measured.

“Performance Shares” means an Award made pursuant to Section 9 which entitles a Holder to receive Shares, their cash equivalent, or a combination thereof based on the achievement of performance targets during a Performance Period.

“Performance Units” means an Award made pursuant to Section 9 which entitles a Holder to receive cash, Stock or a combination thereof based on the achievement of performance goals during a Performance Period.

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“Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the 1934 Act and used in Sections 13(d) and 14(d) thereof, including “group” as defined in Section 13(d) thereof.

“Plan” means the Exchange National Bancshares, Inc. 2007 Omnibus Incentive Plan, as set forth in this instrument and as hereafter amended from time to time.

“Restricted Stock” means Stock granted under Section 8 that is subject those restrictions set forth therein and the Award Agreement.

“Restricted Stock Unit” means an Award granted under Section 8 evidencing the Holder’s right to receive a Share (or, at the Committee’s discretion, a cash payment equal to the Fair Market Value of a Share) at some future date and that is subject those restrictions set forth therein and the Award Agreement.

“Rule 16b-3” means Rule 16b-3 promulgated under the 1934 Act.

“SAR” or “Stock Appreciation Right” means an Award, granted either alone or in connection with an Option, that is designated as a SAR pursuant to Section 7.

“SAR Holder” shall have the meaning as set forth in Section 7.2.

“Section 16 Person” means a Person who is subject to obligations under Section 16 of the 1934 Act with respect to transactions involving equity securities of the Company.

“Service Provider” means an Eligible Employee, a non-employee director of the Company and its affiliates or a non-employee advisory director of the Company and its affiliates.

“Share” means a share of Stock.

“Stock” means authorized and issued or unissued common stock of the Company, at such par value as may be established from time to time.

“Subsidiary” means (i) in the case of an Incentive Stock Option a “subsidiary corporation,” whether now or hereafter existing, as defined in section 424(f) of the Code, and (ii) in the case of any other type of Award, in addition to a subsidiary corporation as defined in clause (i), a limited liability company, partnership or other entity in which the Company controls fifty percent (50%) or more of the voting power or equity interests.

“Tandem SAR” means a SAR which is granted in connection with, or related to, an Option, and which requires forfeiture of the right to purchase an equal number of Shares under the related Option upon the exercise of such SAR; or alternatively, which requires the cancellation of an equal amount of SARs upon the purchase of the Shares subject to the Option.

“Vested Option” means any Option, or portion thereof, which is exercisable by the Holder. Vested Options remain exercisable only for that period of time as provided for

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under this Plan and any applicable Option Award Agreement. Once a Vested Option is no longer exercisable after otherwise having been exercisable, the Option shall become null and void.

2.2 General Interpretive Principles. (i) Words in the singular shall include the plural and vice versa, and words of one gender shall include the other gender, in each case, as the context requires; (ii) the terms “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Plan and not to any particular provision of this Plan, and references to Sections are references to the Sections of this Plan unless otherwise specified; (iii) the word “including” and words of similar import when used in this Plan shall mean “including, without limitation,” unless otherwise specified; and (iv) any reference to any U.S. federal, state, or local statute or law shall be deemed to also refer to all amendments or successor provisions thereto, as well as all rules and regulations promulgated under such statute or law, unless the context otherwise requires.

SECTION 3
PLAN ADMINISTRATION

3.1

Composition of Committee. The Plan shall be administered by the Committee. To the extent the Board considers it desirable for transactions relating to Awards to be eligible to qualify for an exemption under Rule 16b-3, the Committee shall consist of two or more directors of the Company, all of whom qualify as “non-employee directors” within the meaning of Rule 16b-3. To the extent the Board considers it desirable for compensation delivered pursuant to Awards to be eligible to qualify for an exemption from the limit on tax deductibility of compensation under section 162(m) of the Code, the Committee shall consist of two or more directors of the Company, all of whom shall qualify as “outside directors” within the meaning of Code section 162(m).

3.2

Authority of Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to:

(a)	select the Service Providers to whom Awards may from time to time be granted hereunder;
(b)	determine the type or types of Awards to be granted to eligible Service Providers;
(c)	determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards;
(d)	determine the terms and conditions of any Award;
(e)	determine whether, and to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property;

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(f)	determine whether, and to what extent, and under what circumstance Awards may be canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended;
(g)	correct any defect, supply an omission, reconcile any inconsistency and otherwise interpret and administer the Plan and any instrument or Award Agreement relating to the Plan or any Award hereunder;
(h)	modify and amend the Plan, establish, amend, suspend, or waive such rules, regulations and procedures of the Plan, and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and
(i)	make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.

3.3

Committee Delegation. The Committee may delegate to any member of the Board or committee of Board members such of its powers as it deems appropriate, including the power to sub-delegate, except that, pursuant to such delegation or sub-delegation, only a member of the Board (or a committee thereof) may grant Awards from time to time to specified categories of Service Providers in amounts and on terms to be specified by the Board or the Committee; provided that no such grants shall be made other than by the Board or the Committee to individuals who are then Section 16 Persons or other than by the Committee to individuals who are then or are deemed likely to become a “covered employee” within the meaning of Code Section 162(m). A majority of the members of the Committee may determine its actions and fix the time and place of its meetings.

3.4

Determination Under the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, adjustments, interpretations, and other decisions under or with respect to the Plan, any Award or Award Agreement shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all persons, including the Company, any Participant, any Holder, and any shareholder. No member of the Committee shall be liable for any action, determination or interpretation made in good faith, and all members of the Committee shall, in addition to their rights as directors, be fully protected by the Company with respect to any such action, determination or interpretation.

SECTION 4
STOCK SUBJECT TO THE PLAN

4.1 Number of Shares. Subject to adjustment as provided in Section 4.3 and subject to the maximum amount of Shares that may be granted to an individual in a calendar year as set forth in Section 5.5, no more than a total of Four Hundred Thousand (400,000) Shares are authorized for issuance under the Plan in accordance with the provisions of the Plan and subject to such restrictions or other provisions as the Committee may from time to time deem necessary. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. The Shares may be divided among the various Plan components as the Committee shall determine. Shares that are subject to an

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underlying Award and Shares that are issued pursuant to the exercise of an Award shall be applied to reduce the maximum number of Shares remaining available for use under the Plan. The Company shall at all times during the term of the Plan and while any Awards are outstanding retain as authorized and unissued Stock, or as treasury Stock, at least the number of Shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder.

4.2	Unused and Forfeited Stock. Any Shares that are subject to an Award under this Plan that are not used because the terms and conditions of the Award are not met, including any Shares that are subject to an Award that expires or is terminated for any reason, any Shares that are used for full or partial payment of the purchase price of Shares with respect to which an Option is exercised and any Shares retained by the Company pursuant to Section 16.2 shall automatically become available for use under the Plan. Notwithstanding the foregoing, any Shares used for full or partial payment of the purchase price of the Shares with respect to which an Option is exercised and any Shares retained by the Company pursuant to Section 16.2 that were originally Incentive Stock Option Shares must still be considered as having been granted for purposes of determining whether the Share limitation provided for in Section 4.1 has been reached for purposes of Incentive Stock Option grants.
4.3	Adjustments in Authorized Shares. If, without the receipt of consideration therefore by the Company, the Company shall at any time increase or decrease the number of its outstanding Shares or change in any way the rights and privileges of such Shares such as, but not limited to, the payment of a stock dividend or any other distribution upon such Shares payable in Stock, or through a stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the Stock, such that an adjustment is necessary in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan then in relation to the Stock that is affected by one or more of the above events, the numbers, rights and privileges of (i) the Shares as to which Awards may be granted under the Plan, (ii) the exercise or purchase price of each outstanding Award, and (iii) the Shares then included in each outstanding Award granted hereunder, shall be increased, decreased or changed in like manner as if the Shares underlying the Award had been issued and outstanding, fully paid and non assessable at the time of such occurrence. The manner in which Awards are adjusted pursuant to this Section 4.3 is to be determined by the Board or the Committee; provided that all adjustments must be determined by the Board or Committee in good faith, and must be effectuated so as to preserve the value that any Participant has in outstanding Awards as of the time of the event giving rise to any potential dilution or enlargement of rights.
4.4	General Adjustment Rules.

(a) If any adjustment or substitution provided for in this Section 4 shall result in the creation of a fractional Share under any Award, such fractional Share shall be rounded to the nearest whole Share and fractional Shares shall not be issued.

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(b) In the case of any such substitution or adjustment affecting an Option or a SAR (including a Nonqualified Stock Option) such substitution or adjustments shall be made in a manner that is in accordance with the substitution and assumption rules set forth in Treasury Regulations 1.424-1 and the applicable guidance relating to Code section 409A.

SECTION 5
PARTICIPATION

5.1	Basis of Grant. Participants in the Plan shall be those Service Providers, who, in the judgment of the Committee, have performed, are performing, or during the term of their incentive arrangement will perform, important services in the management, operation and development of the Company, and significantly contribute, or are expected to significantly contribute, to the achievement of long-term corporate economic objectives.
5.2	Types of Grants; Limits. Participants may be granted from time to time one or more Awards; provided, however, that the grant of each such Award shall be separately approved by the Committee or its designee, and receipt of one such Award shall not result in the automatic receipt of any other Award. Written notice shall be given to such Person, specifying the terms, conditions, right and duties related to such Award. Under no circumstance shall Incentive Stock Options be granted to (i) non-employee directors, (ii) non-employee advisory directors, or (iii) any person not permitted to receive Incentive Stock Options under the Code.
5.3	Award Agreements. Each Participant shall enter into an Award Agreement(s) with the Company, in such form as the Committee shall determine and which is consistent with the provisions of the Plan, specifying such terms, conditions, rights and duties. Unless otherwise explicitly stated in the Award Agreement, Awards shall be deemed to be granted as of the date specified in the grant resolution of the Committee, which date shall be the date of any related agreement(s) with the Participant. Unless explicitly provided for in a particular Award Agreement that the terms of the Plan are being superseded, in the event of any inconsistency between the provisions of the Plan and any such Award Agreement(s) entered into hereunder, the provisions of the Plan shall govern.
5.4	Restrictive Covenants. The Committee may, in its sole and absolute discretion, place certain restrictive covenants in an Award Agreement requiring the Participant to agree to refrain from certain actions. Such Restrictive Covenants, if contained in the Award Agreement, will be binding on the Participant.
5.5	Maximum Annual Award. The maximum number of Shares with respect to which an Award or Awards may be granted to any Participant in any one taxable year of the Company (the “Maximum Annual Participant Award”) shall not exceed Forty Thousand (40,000) Shares (subject to adjustment pursuant to Sections 4.3 and 4.4). If an Option is in tandem with a SAR, such that the exercise of the Option or SAR with respect to a Share cancels the tandem SAR or Option right, respectively, with respect to each Share, the tandem Option and SAR rights with respect to each Share shall be counted as covering but one Share for purposes of the Maximum Annual Participant Award.

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SECTION 6
STOCK OPTIONS

6.1

Grant of Options. A Participant may be granted one or more Options. The Committee in its sole discretion shall designate whether an Option is an Incentive Stock Option or a Nonqualified Stock Option. The Committee may grant both an Incentive Stock Option and a Nonqualified Stock Option to the same Participant at the same time or at different times. Incentive Stock Options and Nonqualified Stock Options, whether granted at the same or different times, shall be deemed to have been awarded in separate grants, shall be clearly identified, and in no event shall the exercise of one Option affect the right to exercise any other Option or affect the number of Shares for which any other Option may be exercised.

6.2

Option Agreements. Each Option granted under the Plan shall be evidenced by a written Option Award Agreement which shall be entered into by the Company and the Participant to whom the Option is granted (the “Optionee”), and which shall contain, or be subject to, the following terms and conditions, as well as such other terms and conditions not inconsistent therewith, as the Committee may consider appropriate in each case.

(a)

Number of Shares. Each Option Award Agreement shall state that it covers a specified number of Shares, as determined by the Committee. To the extent that the aggregate Fair Market Value of Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year exceeds $100,000 or, if different, the maximum limitation in effect at the time of grant under section 422(d) of the Code, such Options in excess of such limit shall be treated as Nonqualified Stock Options. The foregoing shall be applied by taking Options into account in the order in which they were granted. For the purposes of the foregoing, the Fair Market Value of any Share shall be determined as of the time the Option with respect to such Share is granted. In the event the foregoing results in a portion of an Option designated as an Incentive Stock Option exceeding the $100,000 limitation, only such excess shall be treated as a Nonqualified Stock Option.

(b)

Price. Each Option Award Agreement shall state the Option Exercise Price at which each Share covered by an Option may be purchased. Such Option Exercise Price shall be determined in each case by the Committee, but in no event shall the Option Exercise Price for each Share covered by an Option be less than the Fair Market Value of the Stock on the Option’s Grant Date, as determined by the Committee; provided, however, that the Option Exercise Price for each Share covered by an Incentive Stock Option granted to an Eligible Employee who then owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or Subsidiary corporation of the Company must be at least 110% of the Fair Market Value of the Stock subject to the Incentive Stock Option on the Option’s Grant Date.

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(c)	Duration of Options. Each Option Award Agreement shall state the period of time, determined by the Committee, within which the Option may be exercised by the Holder (the “Option Period”). The Option Period must expire, in all cases, not more than ten years from the Option’s Grant Date; provided, however, that the Option Period of an Incentive Stock Option granted to an Eligible Employee who then owns Stock possessing more than 10% of the total combined voting power of all classes of Stock of the Company must expire not more than five years from the Option’s Grant Date. Each Option Award Agreement shall also state the periods of time, if any, as determined by the Committee, when incremental portions of each Option shall become exercisable. If any Option or portion thereof is not exercised during its Option Period, such unexercised portion shall be deemed to have been forfeited and have no further force or effect.
(d)	Termination of Service, Death, Disability, etc. Each Option Agreement shall state the period of time, if any, determined by the Committee, within which the Vested Option may be exercised after an Optionee ceases to be a Service Provider on account of the Participant’s death, Disability, voluntary resignation, retirement, cessation as a director, or the Company having terminated such Optionee’s employment with or without Cause. Unless an Option Agreement provides otherwise, a Participant’s change in status between serving as an employee and/or director will not be considered a termination of the Participant serving as a Service Provider for purposes of any Option expiration period under the Plan.
(e)	Transferability. Except as otherwise determined by the Committee, Options shall not be transferable by the Optionee except by will or pursuant to the laws of descent and distribution. Each Vested Option shall be exercisable during the Optionee’s lifetime only by him or her, or in the event of Disability or incapacity, by his or her guardian or legal representative. Shares issuable pursuant to any Option shall be delivered only to or for the account of the Optionee, or in the event of Disability or incapacity, to his or her guardian or legal representative.
(f)	Exercise, Payments, etc.

(i) Unless otherwise provided in the Option Award Agreement, each Vested Option may be exercised by delivery to the Corporate Secretary of the Company a written notice specifying the number of Shares with respect to which such Option is exercised and payment of the Option Exercise Price. Such notice shall be in a form satisfactory to the Committee or its designee and shall specify the particular Vested Option that is being exercised and the number of Shares with respect to which the Vested Option is being exercised. The exercise of the Vested Option shall be deemed effective upon receipt of such notice by the Corporate Secretary and payment to the Company. The purchase of such Stock shall take place at the principal offices of the Company upon delivery of such notice, at which time the purchase price of the Stock shall be paid in full by any

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of the methods or any combination of the methods set forth in clause (ii) below.

(ii) The Option Exercise Price may be paid by any of the following methods:

A.	Cash or certified bank check;
B.	By delivery to the Company Shares then owned by the Holder, the Fair Market Value of which equals the purchase price of the Stock purchased pursuant to the Vested Option, properly endorsed for transfer to the Company; provided, however, that Shares used for this purpose must have been held by the Holder for such minimum period of time as may be established from time to time by the Committee; and provided further that the Fair Market Value of any Shares delivered in payment of the purchase price upon exercise of the Options shall be the Fair Market Value as of the exercise date, which shall be the date of delivery of the Stock used as payment of the Option Exercise Price;
	In lieu of actually surrendering to the Company the Shares then owned by the Holder, the Committee may, in its discretion permit the Holder to submit to the Company a statement affirming ownership by the Holder of such number of Shares and request that such Shares, although not actually surrendered, be deemed to have been surrendered by the Holder as payment of the exercise price;
C.	For any Holder other than an Executive Officer or except as otherwise prohibited by the Committee, by payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board; or
D.	Any combination of the consideration provided in the foregoing subsections (A), (B), and (C).

(iii) The Company may not guarantee a third-party loan obtained by a Holder to pay any portion of the entire Option Exercise Price of the Shares.

(g)	Date of Grant. Unless otherwise specifically specified in the Option Award Agreement, an option shall be considered as having been granted on the date specified in the grant resolution of the Committee.
(h)	Withholding.

(A) Nonqualified Stock Options. Upon any exercise of a Nonqualified Stock Option, the Optionee shall make appropriate arrangements with the Company to provide for the minimum amount of additional withholding required by applicable federal and state income tax and payroll laws,

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including payment of such taxes through delivery of Stock or by withholding Stock to be issued under the Option, as provided in Section 16 hereof.

(B) Incentive Stock Options. In the event that an Optionee makes a disposition (as defined in Section 424(c) of the Code) of any Stock acquired pursuant to the exercise of an Incentive Stock Option prior to the later of (i) the expiration of two years from the date on which the Incentive Stock Option was granted or (ii) the expiration of one year from the date on which the Option was exercised, the Participant shall send written notice to the Company at its principal office (Attention: Corporate Secretary) of the date of such disposition, the number of shares disposed of, the amount of proceeds received from such disposition, and any other information relating to such disposition as the Company may reasonably request. The Optionee shall, in the event of such a disposition, make appropriate arrangements with the Company to provide for the amount of additional withholding, if any, required by applicable Federal and state income tax laws.

(i) Adjustment of Options. Subject to the limitations set forth below and those contained in Sections 6 and 15, the Committee may make any adjustment in the Option Exercise Price, the number of Shares subject to, or the terms of, an outstanding Option and a subsequent granting of an Option by amendment or by substitution of an outstanding Option. Such amendment, substitution, or re-grant may result in terms and conditions (including Option Exercise Price, number of Shares covered, vesting schedule or exercise period) that differ from the terms and conditions of the original Option; provided, however, the Committee may not, without shareholder approval (i) amend an Option to reduce its Option Exercise Price, (ii) cancel an Option and regrant an Option with a lower Option Exercise Price than the original Option Exercise Price of the cancelled Option, or (iii) take any other action (whether in the form of an amendment, cancellation or replacement grant) that has the effect of “repricing” an Option, as defined under applicable NYSE rules or the rules of the established stock exchange or quotation system on which the Company Stock is then listed or traded if such exchange’s or quotation system’s rules define what constitutes a repricing. The Committee also may not adversely affect the rights of any Optionee to previously granted Options without the consent of such Optionee. If such action is affected by the amendment, the effective date of such amendment shall be the date of the original grant. Any adjustment, modification, extension or renewal of an Option shall be effected such that the Option is either exempt from, or is compliant with, Code section 409A.

6.3 Shareholder Privileges. No Holder shall have any rights as a shareholder with respect to any Shares covered by an Option until the Holder becomes the holder of record of such Stock, and no adjustments shall be made for dividends or other distributions or other

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rights as to which there is a record date preceding the date such Holder becomes the holder of record of such Stock, except as provided in Section 4.

SECTION 7
STOCK APPRECIATION RIGHTS

7.1 Grant of SARs. Subject to the terms and conditions of this Plan, a SAR may be granted to a Participant at any time and from time to time as shall be determined by the Committee in its sole discretion. The Committee may grant Freestanding SARs or Tandem SARs, or any combination thereof.

(a)

Number of Shares. The Committee shall have complete discretion to determine the number of SARs granted to any Participant, subject to the limitations imposed in this Plan and by applicable law.

(b)

Exercise Price and Other Terms. All SARs shall be granted with an exercise price no less than the Fair Market Value of the underlying Shares on the SARs’ Date of Grant. The Committee, subject to the provisions of this Plan, shall have complete discretion to determine the terms and conditions of SARs granted under this Plan. The exercise price per Share of Tandem SARs shall equal the exercise price per Share of the related Option.

7.2	SAR Award Agreement. Each SAR granted under the Plan shall be evidenced by a written SAR Award Agreement which shall be entered into by the Company and the Participant to whom the SAR is granted (the “SAR Holder”), and which shall specify the exercise price per share, the terms of the SAR, the conditions of exercise, and such other terms and conditions as the Committee in its sole discretion shall determine.
7.3	Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. With respect to a Tandem SAR granted in connection with an Incentive Stock Option: (a) the Tandem SAR shall expire no later than the expiration of the underlying Incentive Stock Option; (b) the value of the payout with respect to the Tandem SAR shall be for no more than one hundred percent (100%) of the difference between the Exercise Price per Share of the underlying Incentive Stock Option and the Fair Market Value per Share of the Shares subject to the underlying Incentive Stock Option at the time the Tandem SAR is exercised; and (c) the Tandem SAR shall be exercisable only when the Fair Market Value per Share of the Shares subject to the Incentive Stock Option exceeds the per share Option Price per Share of the Incentive Stock Option.
7.4	Exercise of Freestanding SARs. Freestanding SARs shall be exercisable on such terms and conditions as the Committee in its sole discretion shall determine; provided, however, that no Freestanding SAR granted to a Section 16 Person shall be exercisable until at least six (6) months after the Date of Grant or such shorter period as may be permissible while maintaining compliance with Rule 16b-3.

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7.5

Expiration of SARs. Each SAR Award Agreement shall state the period of time, if any, determined by the Committee, within which the SAR may be exercised after a SAR Holder ceases to be a Service Provider on account of the Participant’s death, Disability, voluntary resignation, cessation as a director, or the Company having terminated such SAR Holder’s employment with or without Cause. Unless otherwise specifically provided for in the SAR Award agreement, a Tandem SAR granted under this Plan shall be exercisable at such time or times and only to the extent that the related Option is exercisable. The Tandem SAR shall terminate and no longer be exercisable upon the termination or exercise of the related Options, except that Tandem SARs granted with respect to less than the full number of shares covered by a related Option shall not be reduced until the exercise or termination of the related Option exceeds the number of Shares not covered by the SARs.

7.6

Payment of SAR Amount. Upon exercise of a SAR, a Holder shall be entitled to receive payment from the Company in an amount determined by multiplying (i) the positive difference between the Fair Market Value of a Share on the date of exercise over the exercise price per Share by (ii) the number of Shares with respect to which the SAR is exercised. The payment upon a SAR exercise may be in whole Shares of equivalent value, cash, or a combination of whole Shares and cash. Fractional Shares shall be rounded to the nearest whole Share.

SECTION 8
AWARDS OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS

8.1	Restricted Stock Awards Granted by Committee. Coincident with or following designation for participation in the Plan and subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Restricted Stock to any Service Provider in such amounts as the Committee shall determine.
8.2	Restricted Stock Unit Awards Granted by Committee. Coincident with or following designation for participation in the Plan and subject to the terms and provisions of the Plan, the Committee may grant a Service Provider Restricted Stock Units in connection with or separate from a grant of Restricted Stock. Upon the vesting of Restricted Stock Units, the Holder shall be entitled to receive the full value of the Restricted Stock Units payable in either Shares or cash.
8.3	Restrictions. A Holder’s right to retain Shares of Restricted Stock or be paid with respect to Restricted Stock Units shall be subject to such restrictions, including him or her continuing to perform as a Service Provider for a restriction period specified by the Committee, or the attainment of specified performance goals and objectives, as may be established by the Committee with respect to such Award. The Committee may in its sole discretion require different periods of service or different performance goals and objectives with respect to (i) different Holders, (ii) different Restricted Stock or Restricted Stock Unit Awards, or (iii) separate, designated portions of the Shares constituting a Restricted Stock Award. Any grant of Restricted Stock or Restricted Stock Units shall contain terms such that the Award is either exempt from Code section 409A or complies with such section.

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8.4

Privileges of a Shareholder, Transferability. Unless otherwise provided in the Award Agreement, a Participant shall have all voting, dividend, liquidation and other rights with respect to Shares of Restricted Stock, provided however that any dividends paid on Shares of Restricted Stock prior to such Shares becoming vested shall be held in escrow by the Company and subject to the same restrictions on transferability and forfeitability as the underlying Shares of Restricted Stock. Any voting, dividend, liquidation or other rights shall accrue to the benefit of a Holder only with respect to Shares of Restricted Stock held by, or for the benefit of, the Holder on the record date of any such dividend or voting date. A Participant’s right to sell, encumber or otherwise transfer such Restricted Stock shall, in addition to the restrictions otherwise provided for in the Award Agreement, be subject to the limitations of Section 12.2 hereof. The Committee may determine that a Holder of Restricted Stock Units is entitled to receive dividend equivalent payments on such units. If the Committee determines that Restricted Stock Units shall receive dividend equivalent payments, such feature will be specified in the applicable Award Agreement. Restricted Stock Units shall not have any voting rights.

8.5

Enforcement of Restrictions. The Committee may in its sole discretion require one or more of the following methods of enforcing the restrictions referred to in Section 8.2 and 8.3:

(a)	placing a legend on the stock certificates, or the Restricted Stock Unit Award Agreement, as applicable, referring to restrictions;
(b)	requiring the Holder to keep the stock certificates, duly endorsed, in the custody of the Company while the restrictions remain in effect;
(c)	requiring that the stock certificates, duly endorsed, be held in the custody of a third party nominee selected by the Company who will hold such Shares of Restricted Stock on behalf of the Holder while the restrictions remain in effect; or
(d)	inserting a provision into the Restricted Stock Award Agreement prohibiting assignment of such Award Agreement until the terms and conditions or restrictions contained therein have been satisfied or released, as applicable.

8.6 Termination of Service, Death, Disability, etc. In the event of the death or Disability of a Participant, all service period and other restrictions applicable to Restricted Stock Awards then held by him or her shall lapse, and such Awards shall become fully nonforfeitable. Subject to Section 11, in the event a Participant ceases to be a Service Provider for any other reason, any Restricted Stock Awards as to which the service period or other vesting conditions for have not been satisfied shall be forfeited.

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SECTION 9
PERFORMANCE SHARES, PERFORMANCE UNITS, BONUS SHARES
AND DEFERRED SHARES

9.1	Awards Granted by Committee. Coincident with or following designation for participation in the Plan, a Participant may be granted Performance Shares or Performance Units.
9.2	Terms of Performance Shares or Performance Units. The Committee shall establish maximum and minimum performance targets to be achieved during the applicable Performance Period. Each grant of a Performance Share or Performance Unit Award shall be subject to additional terms and conditions not inconsistent with the provisions of the Plan. The Committee shall determine what, if any, payment is due with respect to an Award and whether such payment shall be made in cash, Stock or some combination.
9.3	Bonus Shares. Subject to the terms of the Plan, the Committee may grant Bonus Shares to any Participant, in such amount and upon such terms and at any time and from time to time as shall be determined by the Committee.
9.4	Deferred Shares. Subject to the terms and provisions of the Plan, Deferred Shares may be granted to any Participant in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Committee. The Committee may impose such conditions or restrictions on any Deferred Shares as it may deem advisable, including time-vesting restrictions and deferred payment features. The Committee may cause the Company to establish a grantor trust to hold Shares subject to Deferred Share Awards. Without limiting the generality of the foregoing, the Committee may grant to any Participant, or permit any Participant to elect to receive, Deferred Shares in lieu of or in substitution for any other compensation (whether payable currently or on a deferred basis, and whether payable under this Plan or otherwise) which such Participant may be eligible to receive from the Company or a Subsidiary. Any grant of Deferred Shares shall comply with Section 409A of the Code.

SECTION 10
PERFORMANCE AWARDS; SECTION 162(M) PROVISIONS

10.1 Terms of Performance Awards. Except as provided in Section 11, Performance Awards will be issued or granted, or become vested or payable, only after the end of the relevant Performance Period. The performance goals to be achieved for each Performance Period and the amount of the Award to be distributed upon satisfaction of those performance goals shall be conclusively determined by the Committee. When the Committee determines whether a performance goal has been satisfied for any Performance Period, the Committee, where the Committee deems appropriate, may make such determination using calculations which alternatively include and exclude one, or more than one, “extraordinary items” as determined under U.S. generally accepted accounting principles, and the Committee may determine whether a performance goal has been satisfied for any Performance Period taking into account the alternative which the Committee deems appropriate under the circumstances. The Committee also may take into account any

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other unusual or non-recurring items, including the charges or costs associated with restructurings of the Company, discontinued operations, and the cumulative effects of accounting changes and, further, may take into account any unusual or non-recurring events affecting the Company, changes in applicable tax laws or accounting principles or such other factors as the Committee may determine reasonable and appropriate under the circumstances (including any factors that could result in the Company’s paying non-deductible compensation to an Employee, non-employee director or non-employee advisory director).

10.2 Performance Goals. If an Award is subject to this Section 10, then the lapsing of restrictions thereon, or the vesting thereof, and the distribution of cash, Shares or other property pursuant thereto, as applicable, shall be subject to the achievement of one or more objective performance goals established by the Committee, which shall be based on the attainment of one or any combination of the following metrics, and which may be established on an absolute or relative basis for the Company as a whole or any of its subsidiaries, operating divisions or other operating units:

(a)	Earnings (either in the aggregate or on a per-Share basis);
(b)	Growth or rate of growth in earnings (either in the aggregate or on a per-Share basis);
(c)	Net income or loss (either in the aggregate or on a per-Share basis);
(d)	Cash flow provided by operations, either in the aggregate or on a per-Share basis;
(e)	Growth or rate of growth in cash flow (either in the aggregate or on a per-Share basis);
(f)	Free cash flow (either in the aggregate on a per-Share basis);
(g)	Reductions in expense levels, determined either on a Company-wide basis or in respect of any one or more business units;
(h)	Operating and maintenance cost management and employee productivity;
(i)	Shareholder returns (including return on assets, investments, equity, or gross sales);
(j)	Return measures (including return on assets, equity, or sales);
(k)	Growth or rate of growth in return measures (including return on assets, equity, or sales);
(l)	Share price (including attainment of a specified per-Share price during the Performance Period; growth measures and total shareholder return or attainment by the Shares of a specified price for a specified period of time);

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(m)	Strategic business criteria, consisting of one or more objectives based on meeting specified revenue, market share, market penetration, geographic business expansion goals, objectively identified project milestones, production volume levels, cost targets, and goals relating to acquisitions or divestitures; and/or
(n)	Achievement of business or operational goals such as market share and/or business development;

provided that applicable performance goals may be applied on a pre- or post-tax basis; and provided further that the Committee may, when the applicable performance goals are established, provide that the formula for such goals may include or exclude items to measure specific objectives, such as losses from discontinued operations, extraordinary gains or losses, the cumulative effect of accounting changes, acquisitions or divestitures, foreign exchange impacts and any unusual, nonrecurring gain or loss. In addition to the foregoing performance goals, the performance goals shall also include any performance goals which are set forth in a Company bonus or incentive plan, if any, which has been approved by the Company’s shareholders, which are incorporated herein by reference. Such performance goals shall be set by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Code Section 162(m).

10.3	Adjustments. Notwithstanding any provision of the Plan other than Section 4.3 or Section 11, with respect to any Award that is subject to this Section 10, the Committee may not adjust upwards the amount payable pursuant to such Award, nor may it waive the achievement of the applicable performance goals except in the case of the death or Disability of the Participant.
10.4	Other Restrictions. The Committee shall have the power to impose such other restrictions on Awards subject to this Section 10 as it may deem necessary or appropriate to insure that such Awards satisfy all requirements for “performance-based compensation” within the meaning of Code Section 162(m)(4)(B).
10.5	Section 162(m) Limitations. Notwithstanding any other provision of this Plan, if the Committee determines at the time any Award is granted to a Participant that such Participant is, or is likely to be at the time he or she recognizes income for federal income tax purposes in connection with such Award, a Covered Employee, then the Committee may provide that this Section 10 is applicable to such Award.

SECTION 11
REORGANIZATION, CHANGE IN CONTROL OR LIQUIDATION

Except as otherwise provided in an Award Agreement or other agreement approved by the Committee to which any Participant is a party, in the event that the Company undergoes a Change in Control, each Option, share of Restricted Stock and/or other Award shall without regard to any vesting schedule, restriction or performance target, automatically become fully exercisable, fully vested or fully payable, as the case may be, as of the date of such Change in Control. In addition to the foregoing, in the event the Company undergoes a Change in Control or in the event of a corporate merger, consolidation, major acquisition of property (or stock),

25

separation, reorganization or liquidation in which the Company is a party and in which a Change in Control does not occur, the Committee, or the board of directors of any corporation assuming the obligations of the Company, shall have the full power and discretion to prescribe and amend the terms and conditions for the exercise, or settlement, of any outstanding Awards granted hereunder. The Committee may remove restrictions on Restricted Stock and Restricted Stock Units and may modify the performance requirements for any other Awards. The Committee may provide that Options or other Awards granted hereunder must be exercised in connection with the closing of such transactions, and that if not so exercised such Awards will expire. Any such determinations by the Committee may be made generally with respect to all Participants, or may be made on a case-by-case basis with respect to particular Participants. Notwithstanding the foregoing, any transaction undertaken for the purpose of reincorporating the Company under the laws of another jurisdiction, if such transaction does not materially affect the beneficial ownership of the Company’s capital stock, such transaction shall not constitute a merger, consolidation, major acquisition of property for stock, separation, reorganization, liquidation, or Change in Control.

SECTION 12
RIGHTS OF EMPLOYEES; PARTICIPANTS

12.1

Employment. Nothing contained in the Plan or in any Award granted under the Plan shall confer upon any Participant any right with respect to the continuation of his or her services as a Service Provider or interfere in any way with the right of the Company, subject to the terms of any separate employment or consulting agreement to the contrary, at any time to terminate such services or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Award. Whether an authorized leave of absence, or absence in military or government service, shall constitute a termination of Participant’s services as a Service Provider shall be determined by the Committee at the time.

12.2

Nontransferability. Except as provided in Section 12.3, no right or interest of any Holder in an Award granted pursuant to the Plan shall be assignable or transferable during the lifetime of the Participant, either voluntarily or involuntarily, or be subjected to any lien, directly or indirectly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge or bankruptcy. In the event of a Participant’s death, a Holder’s rights and interests in all Awards shall, to the extent not otherwise prohibited hereunder, be transferable by testamentary will or the laws of descent and distribution, and payment of any amounts due under the Plan shall be made to, and exercise of any Options or SARs may be made by, the Holder’s legal representatives, heirs or legatees. If, in the opinion of the Committee, a person entitled to payments or to exercise rights with respect to the Plan is disabled from caring for his or her affairs because of a mental condition, physical condition or age, payment due such person may be made to, and such rights shall be exercised by, such person’s guardian, conservator, or other legal personal representative upon furnishing the Committee with evidence satisfactory to the Committee of such status. “Transfers” shall not be deemed to include transfers to the Company or “cashless exercise” procedures with third parties who provide financing for

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the purpose of (or who otherwise facilitate) the exercise of Awards consistent with applicable laws and the authorization of the Committee.

12.3 Permitted Transfers. Pursuant to conditions and procedures established by the Committee from time to time, the Committee may permit Awards to be transferred to, exercised by and paid to certain persons or entities related to a Participant, including members of the Participant’s immediate family, charitable institutions, or trusts or other entities whose beneficiaries or beneficial owners are members of the Participant’s immediate family and/or charitable institutions (a “Permitted Transferee”). In the case of initial Awards, at the request of the Participant, the Committee may permit the naming of the related person or entity as the Award recipient. Any permitted transfer shall be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes on a gratuitous or donative basis and without consideration (other than nominal consideration). Notwithstanding the foregoing, Incentive Stock Options shall only be transferable to the extent permitted in Section 422 of the Code, or such successor provision thereto, and the treasury regulations thereunder.

SECTION 13
GENERAL RESTRICTIONS

13.1

Investment Representations. The Company may require any person to whom an Option or other Award is granted, as a condition of exercising such Option or receiving Stock under the Award, to give written assurances in substance and form satisfactory to the Company and its counsel to the effect that such person is acquiring the Stock subject to the Option or the Award for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. Legends evidencing such restrictions may be placed on the certificates evidencing the Stock.

13.2

Compliance with Securities Laws.

(a)

Each Award shall be subject to the requirement that, if at any time counsel to the Company shall determine that the listing, registration or qualification of the Shares subject to such Award upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance or purchase of Shares thereunder, such Award may not be accepted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Committee. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification.

(b)

Each Holder who is a director or an Executive Officer is restricted from taking any action with respect to any Award if such action would result in a (i) violation of Section 306 of the Sarbanes-Oxley Act of 2002, and the regulations

27

promulgated thereunder, whether or not such law and regulations are applicable to the Company, or (ii) any policies adopted by the Company restricting transactions in the Stock.

13.3 Stock Restriction Agreement. The Committee may provide that Shares issuable upon the exercise of an Option shall, under certain conditions, be subject to restrictions whereby the Company has (i) a right of first refusal with respect to such Shares, (ii) specific rights or limitations with respect to the Participant’s ability to vote such Shares, or (iii) a right or obligation to repurchase all or a portion of such Shares, which restrictions may survive a Participant’s cessation or termination as a Service Provider.

SECTION 14
OTHER EMPLOYEE BENEFITS

The amount of any compensation deemed to be received by a Participant as a result of the exercise of an Option or the grant, payment or vesting of any other Award shall not constitute “earnings” with respect to which any other benefits of such Participant are determined, including benefits under (a) any pension, profit sharing, life insurance or salary continuation plan or other employee benefit plan of the Company or (b) any agreement between the Company and the Participant, except as such plan or agreement shall otherwise expressly provide.

SECTION 15
PLAN AMENDMENT, MODIFICATION AND TERMINATION

15.1	Amendment, Modification, and Termination. The Board may at any time terminate, and from time to time may amend or modify, the Plan; provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the shareholders if shareholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements, to comply with the requirements for listing on any exchange where the Shares are listed, or if the Company, on the advice of counsel, determines that shareholder approval is otherwise necessary or desirable.
15.2	Adjustment Upon Certain Unusual or Nonrecurring Events. The Board may make adjustments in the terms and conditions of Awards in recognition of unusual or nonrecurring events (including the events described in Section 4.3) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Board determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.
15.3	Awards Previously Granted. Notwithstanding any other provision of the Plan to the contrary (but subject to a Holder’s employment being terminated for Cause and Section 15.2), no termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Holder of such Award.

28

SECTION 16
WITHHOLDING

16.1

Withholding Requirement. The Company’s obligations to deliver Shares upon the exercise of an Option, or upon the vesting of any other Award, shall be subject to the Participant’s satisfaction of all applicable federal, state and local income and other tax withholding requirements.

16.2

Withholding with Stock. The Committee may, in its sole discretion, permit the Holder to pay all minimum required amounts of tax withholding, or any part thereof, by electing to transfer to the Company, or to have the Company withhold from the Shares otherwise issuable to the Holder, Shares having a value not to exceed the minimum amount required to be withheld under federal, state or local law or such lesser amount as may be elected by the Holder. The Committee may require that any shares transferred to the Company have been held or owned by the Participant for a minimum period of time. All elections shall be subject to the approval or disapproval of the Committee. The value of Shares to be withheld shall be based on the Fair Market Value of the Stock on the date that the amount of tax to be withheld is to be determined (the “Tax Date”), as determined by the Committee. Any such elections by Holder to have Shares withheld for this purpose will be subject to the following restrictions:

(a)	All elections must be made prior to the Tax Date;
(b)	All elections shall be irrevocable; and
(c)	If the Participant is an officer or director of the Company within the meaning of Section 16 of the 1934 Act (“Section 16”), the Participant must satisfy the requirements of such Section 16 and any applicable rules thereunder with respect to the use of Stock to satisfy such tax withholding obligation.

SECTION 17
NONEXCLUSIVITY OF THE PLAN

17.1 Nonexclusivity of the Plan. Neither the adoption of the Plan nor the submission of the Plan to shareholders of the Company for approval shall be construed as creating any limitations on the power or authority of the Board or of the Committee to continue to maintain or adopt such other or additional incentive or other compensation arrangements of whatever nature as the Board or the Committee, as the case may be, may deem necessary or desirable, or to preclude or limit the continuation of any other plan, practice or arrangement for the payment of compensation or fringe benefits to employees, non-employee directors or non-employee advisory directors generally, or to any class or group of employees, non-employee directors or non-employee advisory directors, which the Company now has lawfully put into effect, including any retirement, pension, savings and stock purchase plan, insurance, death and disability benefits and executive short-term incentive plans.

29

SECTION 18
REQUIREMENTS OF LAW

18.1	Requirements of Law. The issuance of Stock and the payment of cash pursuant to the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or stock exchanges as may be required. Notwithstanding any provision of the Plan or any Award, Holders shall not be entitled to exercise or receive benefits under any Award, and the Company shall not be obligated to deliver any Shares or other benefits to a Holder, if such exercise, receipt of benefits or delivery would constitute a violation by the Holder or the Company of any applicable law or regulation.
18.2	Code Section 409A. This Plan is intended to meet or to be exempt from the requirements of Section 409A of the Code, and shall be administered, construed and interpreted in a manner that is in accordance with and in furtherance of such intent. Any provision of this Plan that would cause an Award to fail to satisfy Section 409A of the Code or, if applicable, an exemption from the requirements of that Section, shall be amended (in a manner that as closely as practicable achieves the original intent of this Plan) to comply with Section 409A of the Code or any such exemption on a timely basis, which may be made on a retroactive basis, in accordance with regulations and other guidance issued under Section 409A of the Code.
18.3	Rule 16b-3. Each transaction under the Plan is intended to comply with all applicable conditions of Rule 16b-3, to the extent Rule 16b-3 reasonably may be relevant or applicable to such transaction. To the extent any provision of the Plan or any action by the Committee under the Plan fails to so comply, such provision or action shall, without further action by any person, be deemed to be automatically amended to the extent necessary to effect compliance with Rule 16b-3; provided, however, that if such provision or action cannot be amended to effect such compliance, such provision or action shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee.
18.4	Governing Law. The Plan and all agreements hereunder shall be construed in accordance with and governed by the laws of the state of Missouri without giving effect to the principles of the conflict of laws to the contrary.

[The remainder of this page intentionally has been left blank]

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SUBJECT TO THE SHAREHOLDER APPROVAL REQUIREMENT NOTED BELOW, THIS EXCHANGE NATIONAL BANCSHARES, INC. 2007 OMNIBUS INCENTIVE PLAN HEREBY IS ADOPTED BY THE BOARD OF DIRECTORS OF EXCHANGE NATIONAL BANCSHARES, INC. THIS 14^th DAY OF FEBRUARY, 2007.

THE PLAN SHALL BECOME EFFECTIVE ONLY IF APPROVED BY THE SHAREHOLDERS OF THE COMPANY AND THE EFFECTIVE DATE OF THE PLAN SHALL BE SUCH DATE OF SHAREHOLDER APPROVAL.

EXCHANGE NATIONAL BANCSHARES, INC.
By:
	Name:
	Title:

31

EX-13

Exhibit 13

2009

ANNUAL REPORT

TO

SHAREHOLDERS

HAWTHORN BANCSHARES, INC.

Lee’s Summit, Missouri

March 15, 2010

Dear Investors:

Hawthorn is very much a part of the communities in which our 24 branches are located and as such, our performance is directly tied to the local economies in which we operate. 2009 proved to be a challenging economic environment for the entire country and more specifically, the banking industry. However, despite significant increases in FDIC insurance costs ($2.3 million over 2008) and a continued larger than normal loan loss provision ($8.4 million for 2009 compared to $8.2 million and $1.2 million for 2008 and 2007, respectively), our core operations remained strong as we realized increases in both net interest income and non-interest income.

As Chairman, I recognize that the sustainability of a bank is centered on 1) asset quality, 2) capital strength and 3) liquidity. At Hawthorn, our credit portfolio has experienced moderate deterioration as evidenced by the spike in non-performing loans of 4.27% of total loans compared to 2.46% for 2008. Despite deterioration in asset quality, the level of problem assets is manageable. Capital levels for Hawthorn continue to far exceed regulatory requirements and even increased during 2009 due to earnings retention and lowering the quarterly common dividend.

The common dividend was reduced to $0.11 per share on July 1, 2009 due to lower earnings. Recognizing the potential long term capital erosion effect of paying out more in dividends than is earned and due to uncertainty in the financial markets, it was prudent to lower the cash dividend. To offset the lower cash dividend, the Board was pleased to declare a 4% stock dividend which provided investors with additional opportunity to directly share in Hawthorn’s growth.

In spite of the impact of the current recession, in 2009 we did have positive earnings and we continued to pay dividends. Many banks in Missouri and across the nation are unable to say this. Net income for 2009 of $5.0 million was greatly improved over 2008’s net loss of $30.6 million which included a $40.3 million non-cash goodwill impairment charge. Exclusive of the impairment charge, the increase over 2008 is primarily attributed to a stronger net interest margin and increased residential refinancing activity. 2009’s net interest margin increased to 3.50% from 3.42% for 2008 which contributed an additional $2.4 million to earnings. Gains from residential refinancing activity contributed an additional $2.0 million for 2009.

I am often asked about management’s plans to continue participation in the U.S. Treasury’s capital purchase program. Your Board of Directors met on several occasions to evaluate the benefits of continuing in the program and after much analysis, management feels it remains practical for Hawthorn to retain higher than normal capital levels to protect shareholder value.

In summary, Hawthorn is a well capitalized, liquid organization which has the ability to endure the challenging operating environment which everyone is experiencing. Your continued support as we move forward to 2010 is much appreciated!

Sincerely,

James E. Smith
Chairman & Chief Executive Officer

Hawthorn Bancshares | 300 S.W. Longview Blvd. | Lee’s Summit, MO 64081-2101 | T 816.268.6318 | F 816.268.6318 | NASDAQ:HWBK

A WORD CONCERNING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of our Company and its subsidiaries, including, without limitation:

• statements that are not historical in nature, and

• statements preceded by, followed by or that include the words “believes,” “expects,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “intends” or similar expressions.

Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• competitive pressures among financial services companies may increase significantly,

• changes in the interest rate environment may reduce interest margins,

• general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

• increases in non-performing assets in our loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,

• costs or difficulties related to the integration of the business of Hawthorn and its acquisition targets may be greater than expected,

• legislative or regulatory changes may adversely affect the business in which Hawthorn and its subsidiaries are engaged, and

• changes may occur in the securities markets.

     We have described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, and in other reports that we file with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that we have not identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.

3

HAWTHORN BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     Through its branch network, our Company, Hawthorn Bancshares, Inc., provides a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. We also provide a wide range of lending services, including real estate, commercial, installment, and other consumer loans. Other financial services that we provide include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The geographic areas in which we provide our products and services include the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. The products and services are offered to customers primarily within these geographical areas.

     Our Company’s primary source of revenue is net interest income derived primarily from lending and deposit taking activities. A secondary source of revenue is investment income. Our Company also derives income from trust, brokerage, credit card and mortgage banking activities and service charge income.

     Much of our Company’s business is commercial, commercial real estate development, and mortgage lending. Our Company has experienced continued strong loan demand in the communities within which we operate even during the current economic slowdown. Our Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancings.

     The successes of our Company’s 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. Our Company’s financial performance also depends, in part, on our ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of our Company’s growth strategy depends on our ability to maintain sufficient regulatory capital levels during general economic conditions and during economic conditions that are beyond our control.

     Our subsidiary Bank is a full service bank conducting a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, our Bank provides trust services.

     The deposit accounts of our Bank are insured by the Federal Deposit Insurance Corporation or “FDIC” to the extent provided by law. The operations of our Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of our Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. Hawthorn Bancshares is subject to supervision and examination by the Federal Reserve Board.

     Except as otherwise provided herein, references herein to “Hawthorn” or our “Company” include Hawthorn and its consolidated subsidiaries, and references herein to our “Bank” refers to Hawthorn Bank and its constituent predecessors.

4

SELECTED CONSOLIDATED FINANCIAL DATA

     The following table presents selected consolidated financial information for our Company as of and for each of the years in the five-year period ended December 31, 2009. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of our Company, including the related notes, presented elsewhere herein.

Income Statement Data
(In thousands, except per share data)	2009			2008			2007			2006			2005
Interest income	$	63,562		$	69,715		$	74,207		$	71,423		$	57,340
Interest expense		22,974			31,599			37,175			32,766			23,673
Net interest income		40,588			38,116			37,032			38,657			33,667
Provision for loan losses		8,354			8,211			1,154			1,326			1,322
Net interest income after provision for loan losses		32,234			29,905			35,878			37,331			32,345
Non-interest income		10,702			9,294			10,223			8,618			7,290
Security gains (losses), net		606			3			(2	)		(18	)		(25	)
Total non-interest income		11,308			9,297			10,221			8,600			7,265
Non-interest expense		36,730			75,975			35,054			30,148			25,368
Income (loss) before income taxes		6,812			(36,773	)		11,045			15,783			14,242
Income taxes (benefit)		1,856			(6,146	)		3,245			4,908			4,327
Net income (loss)		4,956			(30,627	)		7,800			10,875			9,915
Less: preferred stock dividends		1,994			66			—			—			—
Net income available to common shareholders	$	2,962		$	(30,693	)	$	7,800		$	10,875		$	9,915
Dividends on Common Stock
Declared	$	2,270		$	3,486		$	3,504		$	3,503		$	3,503
Paid		2,666			3,486			3,504			3,503			3,378
Ratio of total dividends declared to net income		76.64	%		N.M.			44.92	%		32.21	%		35.33	%
Per Share Data
Basic earnings (loss) per common share	$	0.69		$	(7.10	)	$	1.80		$	2.51		$	2.29
Diluted earnings (loss) per common share		0.69			(7.10	)		1.78			2.49			2.27
Basic weighted average shares of common stock outstanding		4,301,955			4,321,979			4,338,438			4,336,641			4,336,641
Diluted weighted average shares of common stock outstanding		4,301,955			4,321,979			4,376,096			4,369,795			4,363,857

5

(In thousands, except per share data)	2009			2008			2007			2006			2005
Balance Sheet Data (at period end)
Total assets	$	1,236,471		$	1,279,699		$	1,195,804		$	1,142,712		$	1,126,470
Loans		991,614			1,009,104			911,278			812,312			813,535
Investment securities		152,927			149,401			151,742			183,566			173,389
Total deposits		956,323			955,296			921,257			899,865			881,455
Subordinated notes		49,486			49,486			49,486			49,486			49,486
Other borrowed money		79,317			129,057			77,915			47,368			52,180
Common stockholders’ equity		79,406			78,530			111,199			104,945			96,733
Total stockholders’ equity		107,771			106,418			111,199			104,945			96,733
Balance Sheet Data (average balances)
Total assets	$	1,258,381		$	1,251,496		$	1,156,500		$	1,146,150		$	1,083,746
Loans		1,002,830			963,252			848,771			824,706			743,382
Investment securities		151,907			156,870			171,179			182,902			201,995
Total deposits		977,826			914,218			921,257			899,865			982,360
Subordinated notes		49,486			49,486			49,486			49,486			44,614
Other borrowed money		78,626			124,025			53,626			56,757			48,430
Common stockholders’ equity		79,828			112,307			108,052			100,821			94,663
Total stockholders’ equity		107,938			113,375			108,052			100,821			94,663
Key Ratios
Earnings Ratios
Return (loss) on average total assets		0.39	%		(2.45)	%		0.67	%		0.95	%		0.91	%
Return (loss) on average common stockholders’ equity		3.71			(27.33	)		7.22			10.79			10.47
Efficiency ratio (3)		71.66			160.25			74.18			63.80			61.98
Asset Quality Ratios
Allowance for loan losses to loans		1.49			1.26			1.02			1.11			1.12
Nonperforming loans to loans (1)		4.27			2.46			0.67			0.62			1.11
Allowance for loan losses to nonperforming loans (1)		34.94			50.94			152.54			177.95			100.39
Nonperforming assets to loans and foreclosed assets (2)		5.08			3.21			0.92			0.96			1.30
Net loan charge-offs to average loans		0.62			0.50			0.10			0.17			0.15
Capital Ratios
Average stockholders’ equity to average total assets		8.58	%		9.06	%		9.34	%		8.80	%		8.73	%
Period-end common stockholders’ equity to period-end assets		6.42			6.14			9.30			9.18			8.59
Period-end tangible common stockholders’ equity to period-end tangible assets		6.15			5.89			5.81			5.42			6.07
Period-end stockholders’ equity to period-end assets		8.72			8.32			9.30			9.18			8.59
Total risk-based capital ratio		16.49			16.01			13.24			13.84			12.70
Tier 1 risk-based capital ratio		14.01			13.55			11.08			11.28			9.83
Leverage ratio		11.35			10.80			9.12			8.77			7.88

(1)	Nonperforming loans consist of nonaccrual loans and loans contractually past due 90 days or more and still accruing interest.
(2)	Nonperforming assets consist of nonperforming loans and foreclosed assets.
(3)	Efficiency ratio is calculated as non-interest expense as a percent of revenue. Total revenue includes net interest income and non-interest income.

6

CRITICAL ACCOUNTING POLICIES

     The following accounting policies are considered most critical to the understanding of our Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such polices affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 of our consolidated financial statements.

Allowance for Loan Losses

     We have identified the accounting policy related to the allowance for loan losses as critical to the understanding of our Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. The impact and any associated risks related to these policies on our business operations are discussed in the “Lending and Credit Management” section below.

Income Taxes

     Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that been that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing our Company’s future tax consequences of events that have been recognized in our consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forward, and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, our Company would adjust the recorded value of our deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Likewise, our Company would reverse the valuation allowance when the realization of the deferred tax asset is expected. In addition, our Company is subject to the continuous examination of our tax returns by the Internal Revenue Service and other taxing authorities. Our Company accrues for interest related to income taxes in income tax expense. Total interest expense recognized was $53,000 and $77,000 in 2009 and 2008, respectively. As of December 31, 2009 and 2008, total accrued interest was $94,000 and $131,000, respectively.

Goodwill and Intangible Assets

     Goodwill and intangible assets that have indefinite useful lives are not amortized, but tested annually for impairment. Intangible assets that have finite useful lives, such as core deposit intangibles and mortgage servicing rights, are amortized over their estimated useful lives. Core deposit intangibles are amortized over periods of 7 to 8 years representing their estimated lives using straight line and accelerated methods. Mortgage servicing rights are amortized over the shorter of 7 years or the life of the loan.

     When facts and circumstances indicate potential impairment of amortizable intangible assets, our Company evaluates the recoverability of the carrying value based upon future cash flows expected to result from the use of the underlying asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the underlying asset, the Company recognizes an impairment loss. The impairment loss recognized represents the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset. As a result of the 2008 annual review, our Company determined that goodwill was fully impaired and recorded an impairment charge of $40,323,775, before tax.

7

RESULTS OF OPERATIONS ANALYSIS

     Our Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, our Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.

									$ Change						% Change
(Dollars in thousands)	2009		2008			2007			‘09-‘08			‘08-‘07			‘09-‘08			‘08-‘07
Net interest income (loss)	$	40,588	$	38,116		$	37,032		$	2,472		$	1,084			6.5	%		2.9	%
Provision for loan losses		8,354		8,211			1,154			143			7,057			1.7			611.5
Noninterest income		10,702		9,294			10,223			1,408			(929	)		15.1			(9.1	)
Investment securities gains (losses), net		606		3			(2	)		603			5		NM				(250.0	)
Noninterest expense		36,730		75,975			35,054			(39,245	)		40,921			(51.7	)		116.7
Income (loss) before income taxes		6,812		(36,773	)		11,045			43,585			(47,818	)		118.5			(432.9	)
Income taxes (benefit)		1,856		(6,146	)		3,245			8,002			(9,391	)		130.2			(289.4	)
Net income (loss)	$	4,956	$	(30,627	)	$	7,800		$	35,583		$	(38,427	)		116.2	%		(492.7	)%
Less: preferred dividends		1,994		66			—			1,928			66			—			—
Net income (loss) available to common shareholders	$	2,962	$	(30,693	)	$	7,800		$	33,655		$	(38,493	)		109.7	%		(493.5	)%

     Our Company’s consolidated net income of $4,956,000 for the year ended December 31, 2009 increased $35,583,000 compared to a loss of $(30,627,000) for the year ended December 31, 2008. Our Company recorded preferred stock dividends of $1,994,000 for the year ended December 31, 2009, resulting in $2,962,000 of net income available to common shareholders, or $0.69 per diluted common share, compared to a net loss of $(30,693,000), or $(7.10) per diluted common share for the year ended December 31, 2008. This $33,655,000 increase from 2008 is primarily due to a one time $40,324,000 ($33,211,000 after tax) goodwill impairment charge to income taken in the fourth quarter of 2008. Excluding this one time goodwill impairment charge, net income available for the common shareholders increased $444,000 from $2,518,000 to $2,962,000. This non-GAAP measure of operating results is discussed more fully below. Our Company did experience substantial real estate refinancing activity in 2009, which contributed additional revenues of approximately $2,001,000. However, this was offset by an industry-wide increase in FDIC insurance assessments. Our Company paid $2,519,000 during 2009 in comparison to $204,000 during 2008. Net interest margin increased 0.08% from 3.42% to 3.50%. Net interest income, on a tax equivalent basis, increased $2,353,000 or 6.0% from 2008 to 2009. Total assets at December 31, 2009 were $1,236,471,000, compared to $1,279,699,000 at December 31, 2008, a decrease of $43,228,000, or 3.4%. The return on average assets was 0.39%, the return on average common shareholders’ equity was 3.71%, and the efficiency ratio was 71.6%.

     Our Company’s consolidated net loss of $(30,627,000) for the year ended December 31, 2008 decreased $(38,427,000) compared to net income of $7,800,000 for the year ended December 31, 2007. Our Company recorded preferred stock dividends of $66,000 for the year ended December 31, 2008, resulting in a $(30,693,000) net loss available for common shareholders, or $(7.10) per diluted common share, compared to net income of $7,800,000, or $1.78 per diluted common share for the year ended December 31, 2007. This $38,493,000 decrease from 2007 is a result of a one time $40,324,000 goodwill impairment charge to income. Excluding this one time goodwill impairment charge, $33,211,000 after tax, net income would have been $2,518,000, or $0.58 per diluted common share. This non-GAAP measure of operating results is discussed more fully below. The largest component of the decline in net income was a $8,211,000 provision for loan losses in 2008 compared with a provision of $1,154,000 in 2007. In addition, a lower net interest margin of 3.4% compared to 3.7% at December 31, 2007, was offset by an $114,481,000 increase in average loans increasing net interest income, on a tax equivalent basis, $958,000, or 2.5%, over 2007. Total assets at December 31, 2008 were $1,279,699,000, compared to $1,195,804,000 at December 31, 2007, an increase of $83,895,000, or 7.0%. The return on average assets was (2.45)%, the return on average common shareholders’ equity was (27.33)%, and the efficiency ratio was 160.2%.

8

Comparison of GAAP and Non-GAAP Information

     As a supplement to our U.S. GAAP financial results, our Company has provided non-GAAP operating results for the year ended December 31, 2009. Our Company believes that these non-GAAP financial measures are useful because they allow investors to assess, on a consistent basis, our Company’s performance exclusive of items management believes are not indicative of the operations of our Company. Management uses non-GAAP financial measures to evaluate financials results and to establish operational goals. These non-GAAP financial measures should be considered a supplement to, and not a substitute for, financial measures determined in accordance with GAAP. The non-GAAP measures presented below exclude the non-recurring pre-tax charge to write-off our entire goodwill in the fourth quarter of 2008 which is explained in more detail in the “Non-interest Income and Expense” section of this discussion and Note 8 of the consolidated financial statements.

										$ Change						% Change
(Dollars in thousands)	2009			2008			2007			‘09-‘08			‘08-‘07			‘09-‘08			‘08-‘07
Non-interest expense (GAAP)	$	36,730		$	75,975		$	35,054		$	(39,245	)	$	40,921			(51.7	)%		1.2	%
Goodwill impairment		—			(40,324	)		—			40,324			(40,324	)		N.M			N.M
Non-interest expense (non-GAAP)		36,730			35,651			35,054			1,079			597			3.0			1.7
Net income (loss) (GAAP)	$	4,956		$	(30,627	)	$	7,800		$	35,583		$	(38,427	)		(116.2	)%		(492.7	)%
Goodwill impairment, net of tax effect		—			33,211			—			(33,211	)		33,211			N.M			N.M
Less: preferred dividends		1,994			66			—			1,928			66			N.M			N.M
Net income available to common shareholders (non-GAAP)	$	2,962		$	2,518		$	7,800		$	444		$	(5,282	)		17.6	%		(67.7	)%
GAAP basis:
Basic earnings (loss) per share	$	0.69		$	(7.10	)	$	1.80		$	7.79		$	(8.90	)		(109.7	)%		(494.4	)%
Diluted earnings (loss) per share		0.69			(7.10	)		1.78			7.79			(8.88	)		(109.7	)		(498.9	)
Return (loss) on average assets		0.39	%		(2.45	)%		0.67	%
Return (loss) on average common equity		3.71	%		(27.33	)%		7.22	%
Efficiency ratio		71.66	%		160.25	%		74.18	%
Non-GAAP basis:
Basic earnings per share	$	0.69		$	0.58		$	1.80		$	0.11		$	(1.22	)		19.0	%		(67.8	)%
Diluted earnings per share		0.69			0.58			1.78			0.11			(1.20	)		19.0			(67.4	)
Return on average assets		0.39	%		0.20	%		0.67	%
Return on average common equity		3.71	%		2.24	%		7.22	%
Efficiency ratio		71.66	%		75.20	%		74.18	%

Comparison of years ending 2009 and 2008 Non-GAAP results:

     Based on non-GAAP operating results as shown above, our Company’s diluted earnings per common share were $0.69 in 2009 compared to $0.58 in 2008, an increase of 19.0%. Consolidated net income for 2009 was $2,962,000, compared to $2,518,000 in 2008. Return on average total assets increased from 0.20% in 2008 to 0.24% in 2009, and return on average common equity decreased from 2.24% in 2008 to 1.40% in 2009. The efficiency ratio was 71.66% in 2009 compared with 75.20% in 2008.

Comparison of years ending 2008 and 2007 Non-GAAP results:

     Based on non-GAAP operating results as shown above, our Company’s diluted earnings per common share were $0.58 in 2008 compared to $1.78 in 2007, a decrease of 67.4%. Consolidated net income for 2008 was $2,518,000, compared to $7,800,000 in 2007. Return on average total assets decreased from 0.67% in 2007 to 0.20% in 2008, and return on average common equity decreased from 7.22% in 2007 to 2.24% in 2008. The efficiency ratio was 75.20% in 2008 compared with 74.18% in 2007.

9

Net Interest Income

     Net interest income is the largest source of revenue resulting from our Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities.

Average Balance Sheets

     The following table presents average balance sheets, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the years in the three year period ended December 31, 2009.

(Dollars In thousands)	2009									2008								2007
					Interest		Rate						Interest		Rate						Interest		Rate
		Average			Income/		Earned/			Average			Income/		Earned/			Average			Income/		Earned/
		Balance			Expense(1)		Paid(1)			Balance			Expense(1)		Paid(1)			Balance			Expense(1)		Paid(1)
ASSETS
Loans: (2) (4)		$	1,002,830		$	57,514		5.74	%	$	963,252		$	62,766		6.52	%	$	848,771		$	65,636		7.73	%
Investment in securities: (3)
Government sponsored enterprises			112,091			4,417		3.94			110,840			4,917		4.44			117,208			5,614		4.79
State and municipal			39,816			2,166		5.44			46,030			2,503		5.44			53,971			2,969		5.50
Restricted Investements			8,817			164		1.86			8,440			316		3.74			5,883			312		5.30
Federal funds sold			309			—		—			2,925			60		2.05			11,313			615		5.44
Interest bearing deposits in other financial institutions			18,807			53		0.28			8,738			24		0.27			1,128			58		5.14
Total interest earning assets			1,182,670			64,314		5.44			1,140,225			70,586		6.19			1,038,274			75,204		7.24
All other assets			89,108								121,373								127,336
Allowance for loan losses			(13,397	)							(10,102	)							(9,110	)
Total assets		$	1,258,381							$	1,251,496							$	1,156,500
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts		$	138,456		$	1,131		0.82	%	$	117,487		$	1,317		1.12	%	$	110,658		$	1,482		1.34	%
Savings			46,464			139		0.30			44,253			226		0.51			46,634			260		0.56
Money market			175,894			1,747		0.99			168,418			3,340		1.98			159,767			5,668		3.55
Time deposits of $100,000 and over			140,502			3,862		2.75			142,713			5,698		3.99			141,645			7,045		4.97
Other time deposits			351,597			10,543		3.00			319,919			12,872		4.02			318,469			14,826		4.66
Total time deposits			852,913			17,422		2.04			792,790			23,453		2.96			777,173			29,281		3.77
Federal funds purchased and securities sold under agreements to repurchase			33,923			88		0.26			41,633			869		2.09			31,061			1,381		4.45
Interest — bearing demand notes to U.S. Treasury			—			—		—			—			—		—			205			11		5.37
Subordinated notes			49,486			2,447		4.94			49,486			3,046		6.16			49,486			3,617		7.31
Other borrowed money			78,626			3,017		3.84			124,025			4,231		3.41			53,626			2,885		5.38
Total interest bearing liabilities			1,014,948			22,974		2.26			1,007,934			31,599		3.14			911,551			37,175		4.08
Demand deposits			124,913								121,428								126,708
Other liabilities			10,582								8,759								10,189
Total liabilities			1,150,443								1,138,121								1,048,448
Stockholders’ equity			107,938								113,375								108,052
Total liabilities and stockholders’ equity		$	1,258,381							$	1,251,496							$	1,156,500
Net interest income (FTE)					$	41,340							$	38,987							$	38,029
Net interest spread								3.18	%							3.05	%							3.16	%
Net interest margin								3.50	%							3.42	%							3.66	%

(1)	Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled $751,000, $871,000 and $,997,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
(2)	Non-accruing loans are included in the average amounts outstanding.
(3)	Average balances based on amortized cost.
(4)	Fees and costs on loans are included in interest income.

10

Comparison of Years ended December 31, 2009 and 2008

     Financial results for 2009 compared to 2008 included an increase in net interest income, on a tax equivalent basis, of $2,353,000, or 6.0%. Average interest-earning assets increased $42,445,000, or 3.7% to $1,182,670,000 at December 31, 2009 compared to $1,140,225,000 at December 31, 2008 and average interest bearing liabilities increased $7,014,000, or 0.7%, to $1,014,948,000 at December 31, 2009 compared to $1,007,934,000 at December 31, 2008.

     Average loans outstanding increased $39,578,000 or 4.1% to $1,002,830,000 for 2009 compared to $963,252,000 for 2008. The following is a summary of the changes in average loan balance by major category:

					$ Change			% Change
(Dollars in thousands)	2009		2008		‘09-‘08			‘09-‘08
Average loans:
Commercial	$	149,694	$	151,342	$	(1,648	)		(1.1	)%
Real estate construction — residential		42,307		68,728		(26,421	)		(38.4	)
Real estate construction — commercial		74,969		80,918		(5,949	)		(7.4	)
Real estate mortgage — residential		238,012		223,093		14,919			6.7
Real estate mortgage — commercial		463,391		406,697		56,694			13.9
Consumer		34,457		32,474		1,983			6.1
Total	$	1,002,830	$	963,252	$	39,578			4.1	%

See the “Lending and Credit Management” section of this discussion for further discussion of changes in the composition of our lending portfolio.

     Average investment securities and federal funds sold decreased $7,579,000 or 4.7% to $152,216,000 for 2009 compared to $159,795,000 for 2008. Average interest bearing deposits increased $10,069,000 to $18,807,000 at December 31, 2009 compared to $8,738,000 at December 31, 2008. This increase was a result of changing our Company’s overnight investment of excess funds from federal funds sold to interest bearing reserve balances held at the Federal Reserve Bank.

     Average time deposits increased $60,123,000, or 7.6%, to $852,913,000 at December 31, 2009 compared to $792,790,000 at December 31, 2008. The increase was primarily a result of increased public fund deposits. Product specials promoting interest bearing checking accounts and certificate of deposits also contributed to new deposits.

     Average federal funds purchased and securities sold under agreements to repurchase decreased $7,710,000 or 18.5% to $33,923,000 for 2009 compared to $41,633,000 for 2008. This reflects a $5,387,000 decrease in repurchase agreements for public funds and a $2,323,000 decrease in federal funds purchased from 2008 to 2009.

Average other borrowed money decreased $45,399,000 or 36.6% to $78,626,000 for 2009 compared to $124,025,000 for 2008. The decrease in 2009 reflects a net decrease in Federal Home Loan Bank advances.

Comparison of Years ended December 31, 2008 and 2007

     Financial results for 2008 compared to 2007 included growth in net interest income. Average interest-earning assets increased $101,951,000, or 9.8% to $1,140,225,000 at December 31, 2008 compared to $1,038,274,000 at December 31, 2007. This increase to net interest income was offset by a higher provision for loan loss and an increase to non-interest expense including a goodwill impairment charge of $40,324,000. Net interest income, on a tax equivalent basis, increased $958,000, or 2.5%, reflecting growth in average loan balances.

     Average loans outstanding increased $114,481,000 or 13.5% to $963,252,000 for 2008 compared to $848,771,000 for 2007. Average commercial loans outstanding decreased approximately $1,837,000 or 1.2% for 2008 compared to 2007. Average real estate loans outstanding increased approximately $113,555,000 or 17.0% for 2008 compared to 2007. Average consumer loans outstanding decreased approximately $1,032,000 or 3.0% for 2008 compared to 2007. See the “Lending and Credit Management” section of this discussion for further discussion of changes in the composition of our lending portfolio.

     Average investment securities and federal funds sold decreased $22,697,000 or 12.4% to $159,795,000 for 2008 compared to $182,492,000 for 2007. The decrease in average investment securities during 2008 and 2007 reflects the use of investment liquidity to fund our Company’s growth in the loan portfolio.

11

     Average interest bearing liabilities increased $96,383,000, or 10.6%, to $1,007,934,000 at December 31, 2008 compared to $911,551,000 at December 31, 2007. Average time deposits increased $15,617,000 or 2.0% to $792,790,000 for 2008 compared to $777,173,000 for 2007. The increase was primarily a result of a marketing campaign during the third quarter designed to attract new deposits and establish new customer relationships.

     Average federal funds purchased and securities sold under agreements to repurchase increased $10,572,000 or 34.0% to $41,633,000 for 2008 compared to $31,061,000 for 2007. This reflects an increase in public funds received during 2008 over 2007. Average other borrowed money increased $70,399,000 or132.2% to $124,025,000 for 2008 compared to $53,626,000 for 2007. The increase in 2008 reflects a net increase in Federal Home Loan Bank advances to fund loan growth.

Rate and volume analysis

     The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, indentifying changes related to volumes and rates for the years ended December 31, 2009, compared to December 31, 2008 and for the years ended December 31, 2008 compared to December 31, 2007. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.

	2009										2008
					Change due to									Change due to
		Total			Average			Average			Total			Average			Average
(Dollars In thousands)		Change			Volume			Rate			Change			Volume			Rate
Interest income on a fully taxable equivalent basis:
Loans: (1) (3)		$	(5,252	)	$	2,508		$	(7,760	)	$	(2,870	)	$	8,212		$	(11,082	)
Investment securities:
Government sponsored entities			(500	)		55			(555	)		(697	)		(295	)		(402	)
State and municipal(2)			(337	)		(338	)		1			(466	)		(433	)		(33	)
Restricted Investments			(152	)		13			(165	)		4			112			(108	)
Federal funds sold			(60	)		(28	)		(32	)		(555	)		(302	)		(253	)
Interest bearing deposits in other financial institutions			29			29			—			(34	)		67			(101	)
Total interest income			(6,272	)		2,239			(8,511	)		(4,618	)		7,361			(11,979	)
Interest expense:
NOW accounts			(186	)		211			(397	)		(165	)		88			(253	)
Savings			(87	)		10			(97	)		(34	)		(13	)		(21	)
Money market			(1,593	)		143			(1,736	)		(2,328	)		292			(2,620	)
Time deposits of 100,000 and over			(1,836	)		(88	)		(1,748	)		(1,347	)		53			(1,400	)
Other time deposits			(2,329	)		1,187			(3,516	)		(1,954	)		68			(2,022	)
Federal funds purchased and securities sold under agreements to repurchase			(781	)		(136	)		(645	)		(512	)		373			(885	)
Interest-bearing demand notes to U.S. Treasury			—			—			—			(11	)		(5	)		(6	)
Subordinated notes			(599	)		—			(599	)		(571	)		—			(571	)
Other borrowed money			(1,214	)		(1,695	)		481			1,346			2,708			(1,362	)
Total interest expense			(8,625	)		(368	)		(8,257	)		(5,576	)		3,564			(9,140	)
Net interest income on a fully taxable equivalent basis		$	2,353		$	2,607		$	(254	)	$	958		$	3,797		$	(2,839	)

(1)	Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 35%, net of
	nondeductible interest expense. Such adjustments totaled $751,000, $871,000 and $997,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
(2)	Non-accruing loans are included in the average amounts outstanding.
(3)	Fees and costs on loans are included in interest income.

12

     Net interest income on a fully taxable equivalent basis increased $2,353,000 or 6.0% to $41,340,000 for 2009 compared to $38,987,000 for 2008 and followed a $958,000 or 2.5% increase for 2008 compared to 2007. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased from 3.66% for 2007 to 3.42% for 2008, and increased to 3.50% for 2009. Our Company’s net interest spread increased to 3.18% in 2009 from 3.05% in 2008 and 3.16% in 2007.

     While our Company was able to decrease the rate paid on interest bearing liabilities to 2.26% in 2009 from 3.14% in 2008, this decrease was partially offset by the decrease in the rates earned on interest bearing assets from 6.19% in 2008 to 5.44% in 2009.

Provision for loan losses

     The provision for loan losses for 2009 was $8,354,000, compared to $8,211,000 for 2008, and $1,154,000 for 2007. Loans charged off, net of recoveries, for 2009 were $6,224,000 compared to $4,826,000 for 2008 and $887,000 for 2007. Approximately $1,191,000 of the 2009 net charge-offs is represented by various commercial loans, $1,457,000 is represented by increased real estate construction losses, $3,336,000 is represented by real estate mortgage loans and approximately $240,000 is represented by various consumer loans.

     Further discussion of managements’ methodology related to the allowance and provision for loan losses may be found in the “Lending and Credit Management” section of this report.

Non-interest Income and Expense

Non-interest income for the years ended December 31, 2009, 2008, and 2007 were as follows:

										$ Change						% Change
(Dollars in thousands)	2009			2008			2007			‘09-‘08			‘08-‘07			‘09-‘08			‘08-‘07
Non-interest Income
Service charges on deposit accounts	$	5,864		$	6,164		$	5,707		$	(300	)	$	457			(4.9)	%		8.0	%
Trust department income		815			827			968			(12	)		(141	)		(1.5	)		(14.6	)
Gain on sales of mortgage loans		2,974			973			666			2,001			307			205.7			46.1
Other		1,049			1,330			2,882			(281	)		(1,552	)		(21.1	)		(53.9	)
Total non-interest income	$	10,702		$	9,294		$	10,223		$	1,408		$	(929	)		15.1	%		(9.1	)%
Investment securities gains (losses), net	$	606		$	3		$	(2	)	$	603		$	5		NM %				(250.0	)%
Non-interest income as a % of total revenue *		20.9	%		19.6	%		21.6	%
Total revenue per full time equivalent employee	$	147.4		$	137.8		$	135.4

* Total revenue is calculated as net interest income plus non-interest income

Years Ended December 31, 2009 and 2008

     Noninterest income increased $1,408,000 or 15.1% to $10,702,000 for 2009 compared to $9,294,000 for 2008. The increase was primarily the result of a $2,001,000 increase in the gains on sales of mortgage loans due to increased refinancing activity. Our Company was servicing $269,475,000 of mortgage loans at December 31, 2009 compared to $213,074,000 at December 31, 2008. This increase was partially offset by a $300,000 decrease in service charge income and a $281,000 decrease in other income. The decrease in other income includes an $112,000 increase in 2009 real estate servicing fees offset by a $275,000 increase in amortization of mortgage loan servicing rights, and a $71,000 decrease in brokerage and credit card income. Our Company recognized $606,000 in gain on sales and calls of debt securities during the 2009 compared to $3,000 during 2008.

Years Ended December 31, 2008 and 2007

     Noninterest income decreased $929,000 or 9.1% to $9,294,000 for 2008 compared to $10,223,000 for 2007. Service charge income increased $457,000 or 8.0%. Trust department income decreased $141,000 or 14.6%. Mortgage loan servicing fees decreased $206,000 or 21.2%. This decrease in servicing fees was the result of an increase in the amortization of mortgage servicing rights due to increased refinancing of existing mortgage loans.

13

However, gain on sales of mortgage loans increased $307,000 or 46.2% as a result of increased refinancing activity. Our Company was servicing $213,074,000 of mortgage loans at December 31, 2008 compared to $209,734,000 at December 31, 2007. Our Company recognized $3,000 in gain on sales and calls of debt securities during the 2008 compared to losses of $2,000 during 2007. Other income decreased $1,346,000 or 53.0% to $1,195,000. $1,200,000 of the decrease represents the amount received from the sales of Osage Valley Bank, Bank 10, and Exchange National Bank’s bank charters in 2007 and $254,000 of the decrease reflects recovery of prior years’ legal and collection costs as a result of settlement of a lawsuit in our Company’s favor in 2007.

Non-interest expense for the years ended December 31, 2009, 2008, and 2007 were as follows:

										$ Change						% Change
(Dollars in thousands)	2009			2008			2007			‘09-‘08			‘08-‘07			‘09-‘08			‘08-‘07
Non-interest Expense
Salaries	$	13,253		$	14,099		$	14,261		$	(846	)	$	(162	)		(6.0	)		% (1.1	)%
Employee benefits		4,204			4,151			4,472			53			(321	)		1.3			(7.2	)
Goodwill impairment		—			40,324			—			(40,324	)		N.M			N.M			N.M
Occupancy expense, net		2,335			2,440			2,202			(105	)		238			(4.3	)		10.8
Furniture and equipment expense		2,286			2,437			2,879			(151	)		(442	)		(6.2	)		(15.4	)
FDIC insurance assessment		2,519			204			97			2,315			107			1,134.8			110.3
Legal, examination, and professional fees		1,222			1,145			1,583			77			(438	)		6.7			(27.7	)
Advertising and promotion		1,272			1,166			1,196			106			(30	)		9.1			(2.5	)
Postage, printing, and supplies		1,168			1,221			1,297			(53	)		(76	)		(4.3	)		(5.9	)
Processing expense		3,420			3,102			1,470			318			1,632			10.3			111.0
Other real estate expense		1,189			862			681			327			181			37.9			26.6
Other		3,862			4,824			4,916			(962	)		(92	)		(19.9	)		(1.9	)
Total non-interest expense	$	36,730		$	75,975		$	35,054		$	(39,245	)	$	597			(51.7	)%		1.7	%
Efficiency ratio*		71.6	%		75.2	%		74.2	%
Salaries and benefits as a % of total non-interest expense *		47.5	%		51.2	%		53.4	%
Number of full-time equivalent employees		348			344			349

 * Goodwill impairment not included in ratio calculation

Years Ended December 31, 2009 and 2008

     Noninterest expense decreased $39,245,000, or 51.7%, to $36,730,000 for 2009 compared to $75,975,000 for 2008. This decrease is primarily a result of the $40,324,000 goodwill impairment charge taken during the fourth quarter of 2008. Other items such as salary expense decreased $846,000, or 6.0%, FDIC insurance assessment increased $2,315,000, real estate loan expense increased $327,000, or 37.9%, and other expenses decreased $962,000 or 19.9%. The decrease in salary expense includes a $362,000 decrease in salaries, a $393,000 reduction in incentive and deferred compensation expense, and a $101,000 decrease in stock option compensation expense. The increase in the FDIC insurance assessment is a result of higher regular and special assessment rates in effect for the current year as well as the depletion of the Bank’s one-time FDIC assessment credit. The increase in real estate loan expense reflects expenses incurred on the maintenance and preparation to sell the increase in foreclosed properties, including a $67,000 impairment charge on six of the properties. The decrease in other expenses primarily is a result of a $591,000 donation of a large parcel of other real estate owned and an abandoned branch to charitable organizations in 2008, a $100,000 final payment on a contract in 2008, a $89,000 decrease in correspondent bank charges, and a $33,000 decrease in insurance after further consolidating accounts from the 2007 Bank charter merger.

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Years Ended December 31, 2008 and 2007

     Noninterest expense increased $40,921,000 or 116.7% to $75,975,000 for 2008 compared to $35,054,000 for 2007. $40,324,000 of the increase reflects a goodwill impairment charge taken during the fourth quarter of 2008. Based upon an analysis of the fair value of our Company’s net assets, it was determined that the entire carrying value of goodwill was impaired requiring the impairment charge to earnings. Salaries decreased $162,000 or 1.1%, employee benefits decreased $321,000 or 7.2%, occupancy expense increased $238,000 or 10.8%, furniture and equipment expense decreased $441,000 or 15.3%, legal and professional fees decreased $390,000 or 24.6%, processing expense increased $1,632,000 or 111.0% and donations increased $591,000 or 262.7.9%. The $162,000 decrease in salaries reflects a reduction in incentive compensation expense. The $321,000 decrease in employee benefits primarily represents reductions in profitsharing expense as a result of lower earnings. The $1,632,000 increase in processing expense reflects both the cost of outsourcing our data processing function as well as investment in new technologies including remote deposit capture and document imaging. The $591,000 increase in donations reflects the donation of a large parcel of other real estate owned and an abandoned branch location to charitable organizations.

Income taxes

     Income taxes as a percentage of earnings (loss) before income taxes as reported in the consolidated financial statements were 27.3% for 2009 compared to 16.7% for 2008. The increase in the effective tax rate for 2009 in comparison to 2008 is due to the decrease in 2008 earnings resulting from the goodwill impairment charge. In addition, 2009 tax expense reflects the recognition of tax benefits as a result of the expiration of the statute of limitations on our Company’s 2005 state tax return during the fourth quarter of 2009.

     Income taxes as a percentage of earnings (loss) before income taxes as reported in the consolidated financial statements were 16.7% for 2008 compared to 29.4% for 2007. The decrease in the effective tax rate for 2008 is due to an increase in non-taxable income as a percentage of total income in the current year and a taxable loss before taxes. In addition, 2008 tax benefit reflects the recognition of tax benefits as a result of the expiration of the statute of limitations on our Company’s 2004 and 2005 federal tax returns during the year. The decrease in 2008 earnings was due to a $40,323,775 goodwill impairment charge in the fourth quarter and an additional $7,056,784 increase in the loan provision in comparison to the year ended 2007. While goodwill impairment is normally a non-tax deductible item, $16,916,000 of our goodwill was related to asset purchases and therefore deductible for book tax purposes.

Fourth Quarter Results for 2009

     Comparing fourth quarter 2009 to third quarter 2009:

     Our Company’s net income of $788,000 for the fourth quarter ended December 31, 2009 decreased $1,119,000, compared to net income of $1,907,000 for the third quarter ended September 30, 2009. Net interest income of $10,604,000 increased $168,000 from third quarter 2009 due to an increase in net interest margin to 3.66% for the fourth quarter compared to 3.57% for the third quarter.

     The fourth quarter 2009 provision for loan losses of $3,950,000 was $2,700,000 higher than third quarter 2009’s provision of $1,250,000 and was based upon management’s determination of the loan loss reserve required to cover probable losses in the loan portfolio at year-end and as a result of increased nonperforming loans at year-end.

     Noninterest income of $3,135,000 for fourth quarter 2009 increased $534,000 from third quarter 2009’s noninterest income of $2,601,000. This increase was a result of $600,000 investment gains realized during the fourth quarter.

     Noninterest expense of $9,034,000 for fourth quarter 2009 decreased slightly by $6,000 from third quarter 2009’s noninterest expense of $9,040,000.

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     Comparing fourth quarter 2009 to fourth quarter 2008:

     Our Company’s net income of $788,000 for the fourth quarter ended December 31, 2009 increased $35,833,000, compared to net loss of $(35,045,000) for same period in 2008. Net interest income of $10,605,000 increased $1,403,000 in the fourth quarter of 2009 compared to the fourth quarter of 2008 due to an increase in net interest margin to 3.66% for 2009 compared to 3.14% for the same period of 2008.

     The fourth quarter 2009 provision for loan losses of $3,950,000 was $311,000 less than the fourth quarter 2008 provision of $4,261,000 and was based upon management’s determination of the loan loss reserve required to cover probable losses in the loan portfolio at year-end and as a result of increased nonperforming loans at year-end.

     Noninterest income of $3,135,000 for fourth quarter 2009 increased by $849,000 from noninterest income of $2,286,000 for fourth quarter 2008. $249,000 of the increase reflects gains on sales of mortgage loans due to increased refinancing activity and $600,000 reflects investment gains realized during the fourth quarter.

     Noninterest expense of $9,034,000 for fourth quarter 2009 decreased $41,289,000 from fourth quarter 2008 noninterest expense of $50,323,000. The goodwill impairment charge of $40,324,000 represents the majority of the variance between periods.

Lending and Credit Management

     Interest earned on the loan portfolio is a primary source of interest income for our Company. Net loans represented 79.0% of total assets as of December 31, 2009 compared to 77.8% as of December 31, 2008.

     Lending activities are conducted pursuant to an established loan policy approved by our Bank’s Board of Directors. The Bank’s credit review process is comprised of a regional loan committee with an established approval limit. In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised of senior managers of the Bank.

     The following table shows the composition of the loan portfolio by major category and each category as a percentage of the total portfolio as of the dates indicated.

	Balance at December 31,
(In thousands)	2009					2008					2007					2006					2005
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Commercial, financial and agricultural	$	151,399		15.3	%	$	153,386		15.2	%	$	151,488		16.6	%	$	145,697		17.9	%	$	154,868		19.0	%
Real estate — Construction		116,778		11.8			129,639		12.9			147,432		16.2			150,891		18.6			139,316		17.1
Real estate — Mortgage		686,307		69.2			692,530		68.6			575,552		63.2			478,854		59.0			480,531		59.1
Installment loans to individuals		37,130		3.7			33,548		3.3			36,806		4.0			36,870		4.5			38,820		4.8
Total loans	$	991,614		100.0	%	$	1,009,103		100.0	%	$	911,278		100.0	%	$	812,312		100.0	%	$	813,535		100.0	%

     Our Company’s loan portfolio decreased $17,490,000, or 1.7% from 2008 to 2009. This decrease was primarily in our Bank’s commercial and real estate mortgage lending. Commercial loans decreased $1,987,000, or 1.3%, real estate construction loans decreased $12,861,000, or 9.9%, and real estate mortgage loans decreased $6,223,000 or 1.0%, from 2008 to 2009, respectively. Partially offsetting these decreases was an increase in consumer loans of $3,582,000 or 10.7%. During the current down-turn in the economy, management continues to focus on the improvement of asset quality. Management has tightened underwriting standards and is focused on lending to credit worthy borrowers with the capacity to service the debts. The decrease in lending activities in the real estate construction market also reflects the slow down in the housing industry and residential construction industry as well as foreclosures on various residential construction properties. Construction lending will continue to be closely monitored during 2010.

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     Our Company experienced loan growth of $97,825,000 or 10.7% from 2007 to 2008. This growth was primarily in our Bank’s commercial and real estate mortgage lending. Commercial loans increased $1,898,000 or 1.3% from 2007 to 2008 and real estate mortgage loans increased $116,978,000 or 20.3%. Offsetting these increases were a decrease in real estate construction loans of $17,793,000 or 12.1% and a decrease in individual consumer loans of $3,258,000 or 8.9%. Although management tightened underwriting standards during the 2008, our Company continued to find opportunities to lend to credit worthy borrowers with the capacity to service the debts. This growth was not centered in any one industry, region or borrower and included a fairly diversified portfolio of loans ranging from owner occupied and regional retail properties to include some hospitality properties. Our growth in real estate loans was also partially the result of loans moving from construction to amortizing loans, thus contributing to the decrease in our construction portfolio. In addition, the decrease in lending activities in the real estate construction market also reflects the slow down in the housing industry and residential construction industry as well as foreclosures on various residential construction properties during 2008.

     Our Company does not participate in extending credit to sub-prime residential real estate markets. While much publicity has been directed at this market during the past year, our Company extends credit to its local community market through traditional mortgage products.

     The contractual maturities of loan categories at December 31, 2009, and the break down of those loans between fixed rate and floating rate loans are as follows:

	Principal Payments Due
			Over One		Over
	One Year		Year Through		Five
	Or Less		Five Years		Years		Total
Commercial, financial, and agricultural	$	99,682	$	49,040	$	2,677	$	151,399
Real estate — construction		116,778		—		—		116,778
Real estate — mortgage		251,525		377,436		57,346		686,307
Installment loans to individuals		14,276		21,810		1,044		37,130
Total loans net of unearned income	$	482,261	$	448,286	$	61,067	$	991,614
Loans with fixed rates		294,260		391,788		14,131		700,179
Loans with floating rates		188,001		56,498		46,936		291,435
Total loans net of unearned income	$	482,261	$	448,286	$	61,067	$	991,614

     Our Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers, but are not funded until our Company has a non-recourse purchase commitment from the secondary market at a predetermined price. At December 31, 2009 our Company was servicing approximately $269,475,000 of loans sold to the secondary market.

     Mortgage loans retained in our Company’s portfolio generally include provisions for rate adjustments at one to three year intervals. Commercial loans and real estate construction loans generally have maturities of less than one year. Installment loans to individuals are primarily fixed rate loans with maturities from one to five years.

     The provision for loan losses is based on management’s evaluation of the loan portfolio in light of national and local economic conditions, changes in the composition and volume of the loan portfolio, changes in the volume of past due and nonaccrual loans, value of underlying collateral and other relevant factors. The allowance for loan losses which is reported as a deduction from loans is available for loan charge-offs. This allowance is increased by the provision charged to expense and is reduced by loan charge-offs net of loan recoveries.

     Management along with senior loan committee, and internal loan review, formally reviews all loans in excess of certain dollar amounts (periodically established) at least annually. Currently, loans in excess of $2,000,000 in aggregate and all adversely classified credits identified by management as containing more than usual risk are reviewed. On a monthly basis, the senior loan committee reviews and reports to the Board of Directors past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also determines what loans should be considered impaired. Management follows the guidance provided in the FASB ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to

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be impaired. Once a loan has been identified as impaired, management generally measures impairment based upon the fair value of the underlying collateral. Management believes, but there can be no assurance, that these procedures keep management informed of possible problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered adequate by management for probable losses inherent in the loan portfolio.

Allowance for Loan Losses

     The provision for loan losses increased $143,000 or 1.7% to $8,354,000 for 2009 compared to $8,211,000 for 2008 and followed a $7,057,000 or 611.4% increase for 2008 compared to 2007. The provision reflects the amounts management determined necessary to maintain the allowance for loan losses at a level that was adequate to cover probable losses in the loan portfolio. The allowance for loan losses totaled $14,797,000 or 1.5% of loans outstanding at December 31, 2009 compared to $12,667,000 or 1.3% of loans outstanding at December 31, 2008 and $9,282,000 or 1.0% of loans outstanding at December 31, 2007. The allowance for loan losses expressed as a percentage of nonperforming loans was 34.9% at December 31, 2009, 50.9% at December 31, 2008 and 152.5% at December 31, 2007.

The following table summarizes loan loss experience for the years indicated:

	Years Ended December 31,
(Dollars in thousands)	2009			2008			2007			2006			2005
Analysis of allowance for loan losses:
Balance beginning of year	$	12,667		$	9,282		$	9,015		$	9,085		$	7,496
Allowance for loan losses of acuired companies at date of acquisitions		—			—			—			—			1,418
Charge-offs:
Commercial, financial, and agricultural		1,404			3,571			524			809			589
Real estate — construction		1,462			681			56			84			185
Real estate — mortgage		3,401			532			413			474			286
Installment loans to individuals		534			656			314			484			261
Total charge-offs		6,801			5,440			1,307			1,851			1,321
Recoveries:
Commercial, financial, and agricultural		213			153			151			206			40
Real estate — construction		5			35			11			13			—
Real estate — mortgage		65			81			100			91			28
Installment loans to individuals		294			345			158			145			102
Total recoveries		577			614			420			455			170
Net charge-offs		6,224			4,826			887			1,396			1,151
Provision for loan losses		8,354			8,211			1,154			1,326			1,322
Balance at end of year	$	14,797		$	12,667		$	9,282		$	9,015		$	9,085
Loans outstanding:
Average	$	1,002,829		$	963,252		$	848,772		$	824,706		$	743,382
End of period		991,614			1,009,104			911,278			812,312			813,535
Allowance for loan losses to loans outstanding:
Average		1.48	%		1.32	%		1.09	%		1.09	%		1.22	%
End of period		1.49			1.26			1.02			1.11			1.12
Net charge-offs to average loans outstanding		0.62			0.50			0.10			0.17			0.15

The increased provision for loan losses during 2009 and 2008 was the result of an increased level of charged-off loans and an increase in the level of non-performing loans. As shown in the table above, our Company experienced net loan charge-offs of $6,224,000 during 2009 compared to $4,826,000 in 2008 and $887,000 in 2007.

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The following table is a summary of the allocation of the allowance for loan losses as of the dates indicated:

	Years Ended December 31,
(Dollars in thousands)	2009		2008			2007			2006			2005
Allocation of allowance for loan losses at end of period:
Commercial, financial, and agricultural	$	2,644	$	1,712		$	3,762		$	3,114		$	2,687
Real estate — construction		3,802		2,490			590			755			764
Real estate — mortgage		6,596		6,571			3,873			3,526			4,138
Installment loans to individuals		380		391			419			529			473
Unallocated		1,375		1,503			638			1,091			1,023
Total	$	14,797	$	12,667		$	9,282		$	9,015		$	9,085
Percent of categories to total loans:
Commercial, financial, and agricultural		15.3		15.2	%		16.6	%		17.9	%		19.0	%
Real estate — construction		11.8		12.9			16.2			18.6			17.1
Real estate — mortgage		69.2		68.6			63.2			59.0			59.1
Installment loans to individuals		3.7		3.3			4.0			4.5			4.8
Total		100.0		100.0			100.0			100.0			100.0

     Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due, and restructured loans totaled $42,347,000 or 4.27% of total loans at December 31, 2009 compared to $24,866,000 or 2.46% of total loans at December 31, 2008. The following table summarizes our Company’s nonperforming assets at the dates indicated:

	Years Ended December 31,
(Dollars in thousands)	2009			2008			2007			2006			2005
Nonaccrual loans:
Commercial, financial, and agricultural	$	2,067		$	2,071		$	2,983		$	2,495		$	5,705
Real estate — construction		11,955			10,347			866			1,657			1,760
Real estate — mortgage		19,853			7,850			658			644			1,090
Installment loans to individuals		279			119			32			73			56
Total nonaccrual loans		34,154			20,387			4,539			4,869			8,611
Loans contractually past — due 90 days or more and still accruing:
Commercial, financial, and agricultural		2			140			454			5			238
Real estate — construction		—			52			158			—			—
Real estate — mortgage		—			547			864			170			187
Installment loans to individuals		—			4			70			22			14
Total loans contractually past -due 90 days or more and still accruing		2			743			1,546			197			439
Restructured troubled loans		8,191			3,736			—			—			—
Total nonperforming loans		42,347			24,866			6,085			5,066			9,050
Other real estate		8,452			7,828			2,337			2,720			1,568
Repossessions		39			—			—			15			—
Total nonperforming assets	$	50,838		$	32,694		$	8,422		$	7,801		$	10,618
Loans	$	991,614		$	1,009,103			911,278			812,313			813,535
Allowance for loan losses to loans		1.49	%		1.26	%		1.02	%		1.11	%		1.12	%
Nonperforming loans to loans		4.27	%		2.46	%		0.67	%		0.62	%		1.11	%
Allowance for loan losses to nonperforming loans		34.94	%		50.94	%		152.54	%		177.95	%		100.39	%
Nonperforming assets to loans and foreclosed assets		5.08	%		3.21	%		0.92	%		0.96	%		1.30	%

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     It is our Company’s policy to discontinue the accrual of interest income on loans when the full collection of principal or interest is in doubt, or when the payment of principal or interest has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectibles of such principal; otherwise, such receipts are recorded as interest income. Interest on year-end nonaccrual loans, which would have been recorded under the original terms of the loans, was approximately $1,568,000, $1,522,000 and $745,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Approximately $158,000, $239,000 and $330,000 was actually recorded as interest income on such loans for the year ended December 31, 2009, 2008 and 2007, respectively.

     Total non-accrual loans at year end 2009 increased $13,767,000 over 2009. The increase resulted mainly from an increase of $1,608,000 in real estate construction non-accrual loans and an increase of $12,003,000 in real estate mortgage non-accrual loans. The increase primarily represents five commercial customers with balances totaling $18,848,000.

     Loans past due 90 days and still accruing interest decreased $741,000 from December 31, 2008 to December 31, 2009. At December 31, 2009, loans classified as trouble debt restructured loans (TDR) totaled $11,233,000, of which $3,042,000 was on non-accrual status and $8,191,000 was on accrual status. At December 31, 2008, loans classified as TDR totaled $3,736,000 were on accrual status. Our Company has experienced an increase in its loan delinquencies much like the rest of the banking industry as current economic conditions negatively impact our borrowers’ ability to keep their debt payments current.

     While the ratio of allowance for loan losses to nonperforming loans has decreased from 152.54% at year end 2007 to 50.94% at year end 2008 and to 34.94% at year end 2009, management believes that based on detailed analysis of each nonperforming credit and the value of any associated collateral that the allowance for loan losses at December 31, 2009 is sufficient to cover probable losses in the nonperforming loans.

     A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due — both principal and interest — according to the contractual terms of the loan agreement. In addition to nonaccrual loans at December 31, 2009 included in the table above, which were considered impaired, management has identified additional loans totaling approximately $39,713,000 which are not included in the nonaccrual table above but are considered by management to be impaired compared to $9,546,000 in December 31, 2008. $23,950,000 of the $39,713,000 of other impaired loans is represented by three credits. Based upon the value of collateral in excess of these loan balances, management has determined that, although these credits are currently considered impaired, no reserve allocation is required for these credits.

     Once a loan has been identified as impaired under ASC Topic 310, Accounting by Creditors for Impairment of a Loan, management generally measures impairment based upon the fair value of the underlying collateral. In general, market prices for loans in our portfolio are not available, and we have found the fair value of the underlying collateral to be more readily available than discounting expected future cash flows to be received. Once a fair value of collateral has been determined and the impairment amount calculated, a specific reserve allocation is made. At December 31, 2009, $6,415,000 of our Company’s allowance for loan losses was allocated to impaired loans totaling approximately $73,867,000. Based upon detailed analysis of all impaired loans, management has determined that of the $73,867,000 of impaired loans $45,572,000 require no reserve allocation due to excess collateral valuations.

     As of December 31, 2009 and 2008 approximately $15,944,000 and $13,389,000, respectively, of loans not included in the nonaccrual table above or identified by management as being impaired were classified by management as having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. The $2,555,000 increase in classified loans is the result of several borrowers who have experienced cash flow problems and as well as some deterioration in collateral value. Management elected to allocate non-specific reserves to these credits based upon the inherent risk present. This increase in reserves was the result of our Company’s internal loan review process which assesses credit risk. In addition to the classified list, our Company also maintains an internal loan watch list of loans which for various reasons, not all related to credit quality, management is monitoring more closely than the average loan in the portfolio. Loans may be added to this list for reasons which are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added as soon as any problem is detected which might affect the borrower’s ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Once a loan is placed on our Company’s watch list, its condition

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is monitored closely. Any further deterioration in the condition of the loan is evaluated to determine if the loan should be assigned to a higher risk category.

     The allowance for loan losses is available to absorb probable loan losses regardless of the category of loan to be charged off. The allowance for loan losses consists of three components: asset-specific reserves, reserves based on expected loss estimates, and unallocated reserves.

     The asset-specific component applies to loans evaluated individually for impairment and is based on management’s best estimate of proceeds from liquidating collateral. The actual timing and amount of repayments and the ultimate realizable value of the collateral may differ from management’s estimate.

     The expected loss component is generally determined by applying percentages to pools of loans by asset type. These pre-established percentages are based upon standard bank regulatory classification percentages as well as average historical loss percentages. These expected loss estimates are sensitive to changes in delinquency status, realizable value of collateral, and other risk factors.

     The unallocated portion of the allowance is based on management’s evaluation of conditions that are not directly reflected in the determination of the asset-specific component and the expected loss component discussed above. The evaluation of inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. Conditions evaluated in connection with the unallocated portion of the allowance include general economic and business conditions affecting our key lending areas, credit quality trends (including trends in substandard loans expected to result from existing conditions), collateral values, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of our internal loan review department.

     The underlying assumptions, estimates and assessments used by management to determine these components are continually evaluated and updated to reflect management’s current view of overall economic conditions and relevant factors impacting credit quality and inherent losses. Changes in such estimates could significantly impact the allowance and provision for credit losses. Our Company could experience credit losses that are different from the current estimates made by management.

     At December 31, 2009, management allocated $13,422,000 of the $14,797,000 total allowance for loan losses to specific loans and loan categories and $1,375,000 was unallocated. Management believes that the December 31, 2009 allowance for loan losses is adequate.

     Our Company does not lend funds for the type of transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, our Company does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table. Our Company does not have any interest-earning assets which would have been included in nonaccrual, past due, or restructured loans if such assets were loans.

Investment Portfolio

     Our Company classifies its debt and equity securities into one of the following two categories:

     Held-to-Maturity — includes investments in debt securities which our Company has the positive intent and ability to hold until maturity. Available-for-Sale — includes investments in debt and equity securities not classified as held to maturity or trading (i.e., investments which our Company has no present plans to sell in the near-term but may be sold in the future under different circumstances). Our Company’s investment portfolio consists of available-for-sale securities.

     Debt securities classified as held-to-maturity are carried at amortized cost, while debt and equity securities classified as trading or available-for-sale are carried at estimated market value. Unrealized holding gains and losses from available-for-sale securities are excluded from earnings and reported, net of applicable taxes, as a separate component of stockholders’ equity until realized.

     Our Company does not engage in trading activities and accordingly does not have any debt or equity securities classified as trading securities. Historically our Company’s practice had been to purchase and hold debt instruments until maturity unless special circumstances exist. However, since the investment portfolio’s major function is to provide liquidity and to balance our Company’s interest rate sensitivity position, certain debt securities are classified as available-for-sale.

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     At December 31, 2009, debt securities classified as available-for-sale represented 12.4% of total consolidated assets. Future levels of held-to-maturity and available-for-sale investment securities can be expected to vary depending upon liquidity and interest sensitivity needs as well as other factors.

The following table presents the composition of the investment portfolio by major category.

	December 31,
(In thousands)	2009		2008		2007
Government sponsored enterprises	$	44,381	$	55,545	$	87,370
Asset-backed securities		69,435		50,091		10,892
Obligations of states and political subdivisions		39,111		43,765		53,480
Total available for sale debt securities		152,927		149,401		151,742

As of December 31, 2009, the maturity of debt securities in the investment portfolio was as follows:

				Over One			Over Five									Weighted
	One Year			Through			Through			Over						Average
(In thousands)	Or Less			Five Years			Ten Years			Ten Years			Total			Yield (1)
Available-for-Sale
Government sponsored enterprises	$	7,846		$	31,812		$	4,723		$	—		$	44,381			3.34	%
Asset-backed (2)		4,273			61,094			4,068			—			69,435			3.89
States and political subdivisions (3)		3,467			16,855			14,509			4,280			39,111			5.37
Total available-for-sale debt securities	$	15,586		$	109,761		$	23,300		$	4,280		$	152,927			4.11	%
Weighted average yield (1)		4.42	%		3.92	%		4.55	%		5.57	%		5.57	%

(1)	Weighted average yield is based on amortized cost.
(2)	Asset-backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio experience during the twelve months ended December 31, 2009 calculated separately for each mortgage-backed security. These repayment speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage interest rates.
(3)	Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the statutory Federal income tax rate of 34%.

     At December 31, 2009, $204,000 of debt securities classified as available-for-sale in the table above had variable rate provisions with adjustment periods ranging from one week to twelve months.

     The following non-marketable securities are restricted securities which, lacking a market, are carried at cost. These securities are reported in other assets. At December 31, 2009, $5,107,000 of the total included Federal Home Loan Bank (Des Moines) stock held by the Bank in accordance with debt and regulatory requirements. Other non-marketable securities include an $1,486,000 equity investment in our Company’s unconsolidated Trusts.

	December 31,
(In thousands)	2009		2008		2007
Federal Home Loan Bank of Des Moines Stock	$	5,107	$	7,228	$	3,979
Federal Reserve Bank Stock		—		—		—
Midwest Independent Bank Stock		151		151		151
Federal Agricultural Mortgage Corporation		10		10		10
Investment in unconsolidated trusts		1,486		1,486		1,486
Total non-marketable investment securities		6,754		8,875		5,626

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Liquidity and Capital Resources

Liquidity Management

     The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet the demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by our Company, management prefers to focus on transaction accounts and full service relationships with customers. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than the market rate.

     Our Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for our Company’s liquidity position and profile. A combination of daily, weekly and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital and exposure to contingent draws on our Company’s liquidity.

     Our Company has a number of sources of funds to meet liquidity needs on a daily basis. Our Company’s most liquid assets are comprised of available for sale marketable investment securities, federal funds sold, and securities purchased under agreements to resell, and excess reserves held at the Federal Reserve as follows:

(dollars in thousands)	2009		2008
Liquid assets:
Federal funds sold	$	90	$	104
Federal Reserve — excess reserves		2,216		31,099
Available for sale investments securities		152,927		149,401
Total	$	155,233	$	180,604

     Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available for sale investment portfolio was $152,927,000 at December 31, 2009 and included an unrealized net gain of $2,318,000. The portfolio includes maturities of approximately $15,586,000 with an additional $6,472,000 callable over the next twelve months, which offer resources to meet either new loan demand or reductions in our Company’s deposit base. Our Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowing capacity at the Federal Reserve Bank.

At December 31, 2009, total investment securities pledged for these purposes were as follows:

(dollars in thousands)	2009
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	3,569
Repurchase agreements		42,835
Other Deposits		85,918
Total pledged, at fair value	$	132,322

     At December 31, 2009, our Company’s unpledged securities in the available for sale portfolio totaled approximately $20,604,000.

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     Liquidity is also available from our Company’s base of core customer deposits, defined as demand, interest, checking, savings, and money market deposit accounts. At December 31, 2009, such deposits totaled $354,284,000 and represented 51.2% of our Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of our Company through long lasting relationships. Time deposits and certificates of deposit of $100,000 and over totaled $467,021,000 at December 31, 2009. These accounts are normally considered more volatile and higher costing representing 48.8% of total deposits at December 31, 2009.

(dollars in thousands)	2009		2008
| |
Core deposit base:
Non-interest bearing demand	$	135,018	$	125,245
Interest checking		139,624		123,289
Savings and money market		214,660		219,338
Total	$	489,302	$	467,872

     Other components of liquidity are the level of borrowings from third party sources and the availability of future credit. Our Company’s outside borrowings are comprised of securities sold under agreements to repurchase, FHLB advances, and subordinated notes as follows:

(dollars in thousands)	2009		2008
Borrowings:
Federal funds purchased	$	4,980	$	—
Securities sold under agreements to repurchase		31,665		29,139
FHLB advances		79,317		129,057
Subordinated notes		49,486		49,486
Total	$	160,468	$	207,682

     Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which our Company maintains approved credit lines. As of December 31, 2009, under agreements with these unaffiliated banks, the Bank may borrow up to $35,000,000 in federal funds on an unsecured basis and $11,713,000 on a secured basis. There was $4,980,000 of federal funds purchased outstanding at December 31, 2009. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of our Company’s investment portfolio. At December 31, 2009 there was $28,595,000 in repurchase agreements and $3,070,000 in a term repurchase agreement due July 2010. Our Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window; although no such borrowings were outstanding at the year end. The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. As of December 31, 2009, the Bank had $79,317,000 in outstanding borrowings with the FHLB. In addition, our Company has $49,486,000 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

     Our Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and borrow from these entities. Based on the type and value of collateral pledged, our Company may draw advances against this collateral. The following table reflects collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to our Company at December 31, 2009:

	December 31, 2009
				Federal
(dollars in thousands)	FHLB			Reserve		Other
Collateral value pledged	$	292,975		$	3,569	$	10,853
Advances outstanding		(79,317	)		—		—
Letters of credit issued		(100	)		—		—
Total	$	213,558		$	3,569	$	10,853

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Sources and Uses of Funds

     Cash and cash equivalents were $24,666,000 at December 31, 2009 compared to $53,827,000 at December 31, 2008. The $29,162,000 decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of our Company, as shown in the accompanying consolidated statement of cash flows for the year ended December 31, 2009. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $9,751,000 during the year ended 2009. Investing activities consisting mainly of purchases, sales and maturities of available for sale securities, and changes in the level of the loan portfolio, provided cash flow of $6,329,000. The cash inflow primarily consisted of a $4,283,000 decrease in the loan portfolio, $151,954,000 in proceeds from maturities, calls, and pay-downs of investment securities, $6,168,000 in proceeds from sales of other real estate owned and repossessions, partially offset by $156,460,000 purchases of investment securities.

     Financing activities used total cash of $45,242,000, resulting primarily from a $49,740,000 net repayment of FHLB advances. Partly offsetting this cash outflow was an increase of $7,507,000 of federal funds purchased and securities sold under agreements to repurchase. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2010.

     During 2008, liquidity risk became a concern affecting the general banking industry. Because of the uncertainty in the economy, our Company decided to participate in the U.S. Treasury Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. During 2009, our Company elected to cease market purchases of treasury stock and preserve its cash and capital position. Cash used for treasury stock purchases, net of cash received in connection with stock programs, and dividend payments were as follows:

(Dollars in thousands)	2009		2008		2007
Purchases of treasury stock	$	—	$	802	$	145
Exercise of stock options		—		—		(100	)
Cash dividends — preferred		1,370		—		—
Cash dividends — common		2,666		3,486		3,504
Total	$	4,036	$	4,288	$	3,549

     Our Company’s liquidity depends primarily on the dividends paid to it as the sole shareholder of our subsidiary Bank. As discussed in Note 6 to the consolidated financial statements, the Bank will be required to receive regulatory approval prior to paying dividends to our Company until such time as the Bank’s unappropriated retained earnings balance is restored to a positive balance.

     In the normal course of business, our Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through our Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of our Company’s liquidity. In the section entitled, Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements, below we disclose that our Company has $134,392,000 in unused loan commitments and standby letters of credit as of December 31, 2009. While this commitment level would be difficult to fund given our Company’s current liquidity resources, we know that the nature of these commitments are such that the likelihood of such a funding demand is very low.

     Our Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. On December 19, 2008, as part of our Company’s participation in the U.S. Treasury Department’s Capital Purchase Program (CPP), our Company issued 30,255 shares of senior preferred stock and a ten year warrant to purchase approximately 255,260 shares of common stock to the U.S. Department of Treasury in exchange for $30,255,000. See Note 15 of Notes to Consolidated Financial Statements. The Company’s ongoing liquidity needs primarily include funding its operating expenses and paying cash dividends to its common and preferred shareholders. During the years ended December 31, 2009 and 2008, the Company paid cash dividends to its common and preferred shareholders totaling $4,035,000 and $3,486,00. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank must obtain regulatory approval prior to paying dividends to the Company until such time as the unappropriated retained earnings balance is restored to a positive balance. See Note 6 of Notes to Consolidated Financial Statements. At December 31, 2009 and 2008, the Company had cash and cash equivalents totaling $14,738,000 and $29,968,000 respectively.

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Capital Management

     Risk-based capital guidelines for financial institutions were adopted by regulatory authorities effective January 1, 1991. These guidelines are designed to relate regulatory capital requirements to the risk profiles of the specific institutions and to provide more uniform requirements among the various regulators. Our Company is required to maintain a minimum risk-based capital to risk-weighted assets ratio of 8.00%, with at least 4.00% being “Tier 1” capital. In addition, a minimum leverage ratio, Tier 1 capital to adjusted total assets, of 3.00% must be maintained. However, for all but the most highly rated financial institutions, a leverage ratio of 3.00% plus an additional cushion of 100 to 200 basis points is expected.

										Well-Capitalized
										Regulatory
	2009			2008			2007			Guidelines
Risk-based capital ratios:
Total capital		16.49	%		16.01	%		13.24	%		10.00	%
Tier I capital		14.01			13.55			11.08			6.00
Leverage ratio		11.35			10.80			9.12			5.00
Common equtiy/assets		6.42			6.14			9.30
Common dividend payout ratio		90.01		NM				44.92

Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements

The required payments of time deposits and other borrowed money, not including interest, at December 31, 2009 are as follows:

	Payments due by Period
			Less than 1		1-3		3-5		Over 5
(Dollars in thousands)	Total		Year		Years		Years		Years
Time deposits	$	467,021	$	342,750	$	94,601	$	29,584	$	86
Other borrowed money		79,317		22,331		46,860		126		10,000

     In the normal course of business, our Company is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in our Company’s consolidated financial statements. Such activities include traditional off-balance sheet credit related financial instruments.

     Our Company provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2009 are as follows:

	Amount of Commitment Expiration per Period
			Less than		1-3		3-5		Over 5
Dollars in thousands)	Total		1 Year		Years		Years		Years
Unused loan commitments	$	131,593	$	105,532	$	14,291	$	4,406	$	7,364
Standby letters of credit		2,800		1,491		609		700		—

     Since many of the unused commitments are expected to expire or be only partially used, the total amount of commitments in the preceding table does not necessarily represent future cash requirements.

Quantitative and Qualitative Disclosures About Market Risk

Interest Sensitivity

     Our Company’s exposure to market risk is reviewed on a monthly basis by our Company’s Asset/Liability Committee and Board of Directors. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize those risks. Tools used by our Bank’s management include the

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standard gap report subject to different rate shock scenarios. At December 31, 2009, the rate shock scenario models indicated that annual net interest income could change by as much as (18.6)% to 22.3% should interest rates rise or fall within 300 basis points from their current level over a one year period. However there are no assurances that the change will not be more or less than this estimate. Management further believes this is an acceptable level of risk.

     The following table represents the estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of December 31, 2009. Significant assumptions used for this table included: loans will repay at historic repayment rates; certain interest-bearing demand accounts are interest sensitive due to immediate repricing, and fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table.

															Over
															5 years or
															no stated
(Dollars in thousands)	Year 1			Year 2			Year 3			Year 4			Year 5		Maturity		Total
ASSETS
Investment securities	$	22,058		$	7,443		$	6,265		$	18,232		$	17,288	$	81,641	$	152,927
Interest-bearing deposits		2,570			—			—			—			—		—		2,570
Other restricted investments		6,754																6,754
Federal funds sold and securities purchased under agreements to resell		90			—			—			—			—		—		90
Loans		526,948			155,806			132,588			100,659			41,707		33,906		991,614
Total	$	558,420		$	163,249		$	138,853		$	118,891		$	58,995	$	115,547	$	1,153,955
LIABILITIES
Savings, Now deposits	$	—		$	—		$	123,050		$	—		$	—	$	—	$	123,050
Rewards checking, Super Now, money market deposits		231,313														—		231,313
Time deposits		342,751			74,119			20,482			27,461			2,123		7		466,943
Federal funds purchased and securities sold under agreements to repurchase		36,645			—			—			—			—		—		36,645
Subordinated notes		49,486			—			—			—			—		—		49,486
Other borrowed money		27,343			43,589			8,306			79			—		—		79,317
Total	$	687,538		$	117,708		$	151,838		$	27,540		$	2,123	$	7	$	986,754
Interest-sensitivity GAP
Periodic GAP	$	(129,118	)	$	45,541		$	(12,985	)	$	91,351		$	56,872	$	115,540	$	167,201
Cumulative GAP	$	(129,118	)	$	(83,577	)	$	(96,562	)	$	(5,211	)	$	51,661	$	167,201	$	167,201
Ratio of interest-earnings assets to interest-bearing liabilities
Periodic GAP		0.81			1.39			0.91			4.32			27.79	NM			1.17
Cumulative GAP		0.81			0.90			0.90			0.99			1.05		1.17		1.17

Impact of Recently Issued Accounting Standards

In December 2008, the FASB issued authoritative guidance on Employers’ Disclosures about Postretirement Benefit Plan Assets which was subsequently incorporated into ASC Topic 715 Compensation — Retirement Benefits. This guidance became effective for fiscal years ending after December 15, 2009. ASC Topic 715 requires more detailed disclosures regarding defined benefit pension plan assets including investment policies and strategies, major categories of plan assets, valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. Upon initial application, the provisions of ASC Topic 715 are not required for earlier periods that are presented for comparative purposes. The disclosures required by ASC Topic 715 are reported in the notes to our Company’s consolidated financial statements.

In April 2009, the FASB issued authoritative guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly, which

27

was subsequently incorporated into ASC Topic 820, Fair Value Measurements and Disclosures, and is effective for interim and fiscal years ending after June 15, 2009. This new guidance amends ASC Topic 820 and provides additional guidance for estimating fair value when there is no active market or where the price inputs being used represent distressed sales. Our Company follows the new requirements provided by ASC Topic 820 which did not have a material effect on the consolidated financial statements or the disclosures presented in the consolidated financial statements.

In April 2009, the FASB issued authoritative guidance on recognition and presentation of other-than-temporary impairment, which was subsequently incorporated into ASC Topic 320, Investments — Debt and Equity Securities, which became effective for periods ending after June 15, 2009. This new guidance amends ASC Topic 320 for determining whether an impairment is other than temporary to debt securities and replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security and (b) it is more likely than not it will not have to sell the security prior to its anticipated recovery. Under this guidance, declines in fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. Our Company follows the new requirements under ACS Topic 320, which did not have a material effect on the consolidated financial statements or the disclosures presented in the consolidated financial statements.

In May 2009, the FASB issued authoritative guidance for disclosing subsequent events, which was subsequently incorporated into ASC 855, Subsequent Events, and became effective for interim and annual periods ending after June 15, 2009. The new guidance amends ASC Topic 855 and incorporates accounting and disclosure requirements related to subsequent events into U.S. Generally Accepted Accounting Principles (GAAP) making management directly responsible for subsequent events account and disclosure. ASC Topic 855 sets forth: (a) the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (b) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and (c) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The disclosures required by ASC Topic 855 are reported in the consolidated financial statements and the notes to our Company’s consolidated financial statements.

In June 2009, the FASB issued authoritative guidance on accounting for transfers of financial assets, which was subsequently incorporated into ASC Topic 860, Transfers and Servicing. The new guidance amends ASC Topic 860 and requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. This is effective for the annual period beginning after November 15, 2009 and for interim periods within the first annual reporting period, and must be applied to transfers occurring on or after the effective date. Management is currently evaluating the provisions of this Topic, which is not expected to have a material effect on the consolidated financial statements or the disclosures presented in the consolidated financial statements.

In June 2009, the FASB issued authoritative guidance which amends how a company determines when a variable interest entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated, and requires additional disclosures about involvement with variable interest entities, any significant changes in risk exposure due to that involvement and how that involvement affects our company’s financial statements. This guidance was subsequently incorporated into ASC Topic 810, Consolidation, and changes how a company determines whether it is required to consolidate an entity based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The provisions of this Topic are effective for the annual period beginning after November 15, 2009 and for interim periods within the first annual reporting period. Management is currently evaluating the provisions of this Topic, which is not expected to have a material effect on the consolidated financial statements or the disclosures presented in the consolidated financial statements.

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Effects of Inflation

     The effects of inflation on financial institutions are different from the effects on other commercial enterprises since financial institutions make few significant capital or inventory expenditures which are directly affected by changing prices. Because bank assets and liabilities are virtually all monetary in nature, inflation does not affect a financial institution as much as do changes in interest rates. The general level of inflation does underlie the general level of most interest rates, but interest rates do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy.

     Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on our Company’s operations for the three years ended December 31, 2009.

29

CONSOLIDATED FINANCIAL STATEMENTS

     The following consolidated financial statements of our Company and reports of our Company’s independent auditors appear on the pages indicated.

	Page
Report of Independent Registered Public Accounting Firm		31
Consolidated Balance Sheets as of December 31, 2009 and 2008		32
Consolidated Statements of Operations for each of the years ended December 31, 2009, 2008 and 2007		33
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the years ended December 31, 2009, 2008 and 2007		34-35
Consolidated Statements of Cash Flows for each of the years ended December 31, 2009, 2008 and 2007		36
Notes to Consolidated Financial Statements		37

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Hawthorn Bancshares, Inc.:

We have audited the accompanying consolidated balance sheets of Hawthorn Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hawthorn Bancshares, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hawthorn Bancshares, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2010 expressed an unqualified opinion on the effectiveness of Hawthorn Bancshares Inc.’s internal control over financial reporting.

/s/ KPMG LLP
St. Louis, Missouri
March 15, 2010

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	December 31,
	2009			2008
ASSETS
Loans	$	991,614,007		$	1,009,103,532
Allowances for loan losses		(14,796,549	)		(12,666,546	)
Net loans		976,817,458			996,436,986
Investment in available-for-sale securities, at fair value		152,926,685			149,400,929
Federal funds sold and securities purchased under agreements to resell		89,752			104,393
Cash and due from banks		24,575,943			53,723,075
Premises and equipment — net		38,623,293			39,260,220
Other real estate owned and repossessed assets		8,490,914			7,828,278
Accrued interest receivable		6,625,557			7,476,093
Mortgage servicing rights		2,020,964			1,171,225
Intangible assets — net		1,503,986			2,130,097
Cash surrender value — life insurance		1,929,910			1,852,902
Other assets		22,866,092			20,314,669
Total assets	$	1,236,470,554		$	1,279,698,867
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand	$	135,017,639		$	125,245,200
Savings, interest checking and money market		354,284,004			342,626,702
Time deposits $100,000 and over		137,860,435			142,972,489
Other time deposits		329,160,719			344,451,998
Total deposits		956,322,797			955,296,389
Federal funds purchased and securities sold under agreements to repurchase		36,645,434			29,138,623
Subordinated notes		49,486,000			49,486,000
Other borrowed money		79,317,302			129,057,483
Accrued interest payable		2,438,121			3,847,415
Other liabilities		4,489,617			6,454,574
Total liabilities		1,128,699,271			1,173,280,484
Stockholders’ equity:
Preferred stock, $1,000 par value Authorized and issued 30,255 shares		28,364,768			27,888,294
Common stock, $1 par value Authorized 15,000,000 shares; issued 4,463,813 and 4,298,353 shares respectively		4,463,813			4,298,353
Surplus		26,970,745			25,144,323
Retained earnings		50,576,551			51,598,678
Accumulated other comprehensive income, net of tax		912,224			1,005,553
Treasury stock; 161,858 shares, at cost		(3,516,818	)		(3,516,818	)
Total stockholders’ equity		107,771,283			106,418,383
Total liabilities and stockholders’ equity	$	1,236,470,554		$	1,279,698,867

See accompanying notes to consolidated financial statements.

32

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

	Years ended December 31,
	2009		2008			2007
INTEREST INCOME
Interest and fees on loans	$	57,409,274	$	62,636,558		$	65,533,873
Interest on debt securities:
Taxable		4,495,259		4,989,794			5,702,806
Nontaxable		1,441,418		1,688,871			1,986,171
Interest on federal funds sold and securities purchased under agreements to resell		373		60,550			614,571
Interest on interest-bearing deposits		52,761		23,755			57,963
Dividends on other securities		163,533		315,685			311,723
Total interest income		63,562,618		69,715,213			74,207,107
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		3,017,488		4,883,042			7,411,043
Time deposit accounts $100,000 and over		3,862,075		5,698,073			7,045,209
Other time deposit accounts		10,542,476		12,871,957			14,825,176
Interest on federal funds purchased and securities sold under agreements to repurchase		88,573		868,528			1,380,328
Interest-bearing demand notes to U.S. Treasury		—		—			10,734
Interest on subordinated notes		2,446,742		3,046,238			3,617,254
Interest on other borrowed money		3,016,872		4,231,062			2,885,119
Total interest expense		22,974,226		31,598,900			37,174,863
Net interest income		40,588,392		38,116,313			37,032,244
Provision for loan losses		8,354,000		8,211,000			1,154,216
Net interest income after provision for loan losses		32,234,392		29,905,313			35,878,028
NON-INTEREST INCOME
Service charges on deposit accounts		5,864,090		6,163,650			5,706,934
Trust department income		814,988		826,546			967,774
Gain on sale of mortgage loans, net		2,973,630		973,095			665,817
Other		1,049,441		1,330,760			2,882,216
Total non-interest income		10,702,149		9,294,051			10,222,741
INVESTMENT SECURITIES GAINS (LOSSES), NET		605,716		2,773			(1,747	)
NON-INTEREST EXPENSE
Salaries and employee benefits		17,457,123		18,250,469			18,733,125
Goodwill impairment		—		40,323,775			—
Occupancy expense, net		2,335,496		2,440,082			2,201,809
Furniture and equipment expense		2,286,014		2,437,558			2,878,810
FDIC insurance assessment		2,518,743		204,131			97,264
Legal, examination, and professional fees		1,221,861		1,144,777			1,582,763
Advertising and promotion		1,272,046		1,165,559			1,196,216
Postage, printing, and supplies		1,168,290		1,220,938			1,296,518
Processing expense		3,419,939		3,101,562			1,470,475
Other real estate expense		1,188,972		862,474			680,832
Other		3,861,896		4,824,133			4,915,995
Total non-interest expense		36,730,380		75,975,458			35,053,807
Income (loss) before income taxes		6,811,877		(36,773,321	)		11,045,215
Less income taxes (benefit)		1,856,120		(6,145,965	)		3,245,239
Net income (loss)		4,955,757		(30,627,356	)		7,799,976
Preferred stock dividends		1,993,426		66,090			—
Net income (loss) available to common shareholders	$	2,962,331	$	(30,693,446	)	$	7,799,976
Basic earnings (loss) per share	$	0.69	$	(7.10	)	$	1.80
Diluted earnings (loss) per share	$	0.69	$	(7.10	)	$	1.78

See accompanying notes to consolidated financial statements.

33

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

										Accumulated						Total
										other						Stock -
	Preferred		Common				Retained			Comprehensive			Treasury			holders’
	Stock		Stock		Surplus		Earnings			Income (Loss)			Stock			Equity
Balance, December 31, 2006	$	—	$	4,298,353	$	22,248,319	$	81,431,713		$	(381,286	)	$	(2,652,509	)	$	104,944,590
Net income		—		—		—		7,799,976			—			—			7,799,976
Change in unrealized gain (loss) on securities:
Unrealized gain on debt and equity securities available-for-sale, net of tax		—		—		—		—			1,403,925			—			1,403,925
Adjustment on sales and calls of debt and equity securities, net of tax		—		—		—		—			1,136			—			1,136
Defined benefit pension plans:
Prior service cost arising during year from plan amendment, net of tax		—		—		—		—			61,701			—			61,701
Net gain arising during year, net of tax		—		—		—		—			234,562			—			234,562
Amortization of prior service cost included in net periodic pension cost, net of tax		—		—		—		—			36,500			—			36,500
Total other comprehensive income (loss)																	1,737,824
Total comprehensive income (loss)																	9,537,800
Stock based compensation expense		—		—		264,881		—			—			—			264,881
Exercise of stock options		—		—		16,991		—			—			83,436			100,427
Treasury stock purchased		—		—		—		—			—			(145,300	)		(145,300	)
Cash dividends declared, $0.84 per share		—		—		—		(3,503,575	)		—			—			(3,503,575	)
Balance, December 31, 2007	$	—	$	4,298,353	$	22,530,191	$	85,728,114		$	1,356,538		$	(2,714,373	)	$	111,198,823
Net loss		—		—		—		(30,627,356	)		—			—			(30,627,356	)
Change in unrealized gain (loss) on securities:
Unrealized gain on debt and equity securities available-for-sale, net of tax		—		—		—		—			1,325,559			—			1,325,559
Adjustment on sales and calls of debt and equity securities, net of tax		—		—		—		—			(1,692	)		—			(1,692	)
Defined benefit pension plans:
Net loss arising during the year, net of tax		—		—		—		—			(1,696,706	)		—			(1,696,706	)
Amortization of prior service cost included in net periodic pension cost, net of tax		—		—		—		—			21,854			—			21,854
Total other comprehensive income (loss)																	(350,985	)
Total comprehensive income (loss)																	(30,978,341	)
Stock based compensation expense		—		—		231,761		—			—			—			231,761
Issuance of 30,255 shares of preferred stock and 245,443 common stock warrants, net of expenses		27,872,629		—		2,382,371		—			—			—			30,255,000
Accretion of preferred stock discount		15,665		—		—		(15,665	)		—			—			—
Treasury stock purchased		—		—		—		—			—			(802,445	)		(802,445	)
Cash dividends declared, $0.84 per share		—		—		—		(3,486,415	)		—			—			(3,486,415	)
Balance, December 31, 2008	$	27,888,294	$	4,298,353	$	25,144,323	$	51,598,678		$	1,005,553		$	(3,516,818	)	$	106,418,383

See accompanying notes to consolidated financial statements.

34

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) — Continued

										Accumulated						Total
										other						Stock -
	Preferred		Common				Retained			Comprehensive			Treasury			holders’
	Stock		Stock		Surplus		Earnings			Income (Loss)			Stock			Equity
Balance, December 31, 2008	$	27,888,294	$	4,298,353	$	25,144,323	$	51,598,678		$	1,005,553		$	(3,516,818	)	$	106,418,383
Net income		—		—		—		4,955,757			—			—			4,955,757
Change in unrealized gain (loss) on securities:
Unrealized loss on debt and equity securities available-for-sale, net of tax		—		—		—		—			(277,903	)		—			(277,903	)
Adjustment on sales and calls of debt and equity securities, net of tax		—		—		—		—			(369,487	)		—			(369,487	)
Defined benefit pension plans:
Net gain arising during the year, net of tax		—		—		—		—			511,634			—			511,634
Amortization of prior service cost included in net periodic pension cost, net of tax		—		—		—		—			42,427			—			42,427
Total other comprehensive loss																	(93,329	)
Total comprehensive income																	4,862,428
Stock based compensation expense		—		—		130,459		—			—			—			130,459
Accretion of preferred stock discount		476,474		—		—		(476,474	)		—			—			—
Stock dividend		—		165,460		1,695,963		(1,861,423	)		—			—			—
Cash dividends declared, preferred stock								(1,369,879	)								(1,369,879	)
Cash dividends declared, common stock		—		—		—		(2,270,108	)		—			—			(2,270,108	)
Balance, December 31, 2009	$	28,364,768	$	4,463,813	$	26,970,745	$	50,576,551		$	912,224		$	(3,516,818	)	$	107,771,283

See accompanying notes to consolidated financial statements.

35

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Years ended December 31,
	2009			2008			2007
Cash flows from operating activities:
Net income (loss)	$	4,955,757		$	(30,627,356	)	$	7,799,976
Adjustments to reconcile net income to net cash provided by operating activities:
Goodwill impairment		—			40,323,775			—
Provision for loan losses		8,354,000			8,211,000			1,154,216
Depreciation expense		2,044,257			2,158,740			2,050,122
Net amortization (accretion) of debt securities, premiums, and discounts		524,639			(15,372	)		(46,306	)
Amortization of intangible assets		626,111			701,443			922,337
Stock based compensation expense		130,459			231,761			264,881
Decrease in accrued interest receivable		850,536			1,288,103			9,490
Increase in cash surrender value -life insurance		(77,008	)		(32,370	)		(70,112	)
Increase in other assets		(4,419,959	)		(2,007,842	)		(749,866	)
(Decrease) increase in accrued interest payable		(1,409,294	)		(876,550	)		357,715
(Decrease) increase in other liabilities		(730,764	)		(1,820,022	)		7,232
(Gain) loss on sales of debt securities		(605,716	)		(2,773	)		1,747
Origination of mortgage loans for sale		(150,628,000	)		(54,892,543	)		(39,575,067	)
Proceeds from the sale of mortgage loans		153,601,630			55,865,638			40,240,884
Gain on sale of mortgage loans, net		(2,973,630	)		(973,095	)		(665,817	)
Loss on sales and dispositions of premises and equipment		137,209			49,830			323,752
(Increase) decrease in deferred tax asset		(1,016,107	)		(6,493,604	)		651,591
Other, net		387,035			437,681			710,763
Net cash provided by operating activities		9,751,155			11,526,444			13,387,538
Cash flows from investing activities:
Net decrease (increase) in loans		4,283,403			(115,310,652	)		(103,830,110	)
Purchase of available-for-sale debt securities		(156,459,542	)		(280,670,587	)		(65,747,670	)
Proceeds from maturities of available-for-sale debt securities		115,169,758			212,071,519			66,572,206
Proceeds from calls of available-for-sale debt securities		24,237,200			42,282,640			26,288,700
Proceeds from sales of available-for-sale debt securities		12,546,609			30,920,778			6,910,634
Purchase of FHLB stock		—			(5,040,800	)		(2,015,900	)
Proceeds from sales of FHLB stock		2,121,700			1,791,600			2,597,025
Purchases of premises and equipment		(2,369,890	)		(1,034,021	)		(8,948,850	)
Proceeds from sales of premises and equipment		632,165			51,450			738,287
Proceeds from sales of other real estate owned and repossessions		6,168,067			6,809,258			3,996,405
Net cash provided (used) in investing activities		6,329,470			(108,128,815	)		(73,439,273	)
Cash flows from financing activities:
Net increase (decrease) in demand deposits		9,772,439			(13,110,320	)		(530,363	)
Net increase in interest-bearing transaction accounts		11,657,302			13,405,039			20,348,280
Net (decrease) increase in time deposits		(20,403,333	)		33,744,379			1,574,640
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		7,506,811			3,408,760			(3,730,629	)
Net decrease increase in interest-bearing demand notes to U.S. Treasury		—			—			(1,735,638	)
Proceeds from Federal Home Loan Bank advances		20,145,000			345,300,000			137,000,000
Repayment of Federal Home Loan Bank advances		(69,885,181	)		(294,157,544	)		(106,453,288	)
Proceeds from sale of treasury stock, net of expenses		—			—			100,427
Proceeds from issuance of preferred stock and warrants		—			30,255,000			—
Purchase of treasury stock		—			(802,445	)		(145,300	)
Cash dividends paid — preferred stock		(1,369,879	)		—			—
Cash dividends paid — common stock		(2,665,557	)		(3,486,415	)		(3,503,575	)
Net cash (used) provided by financing activities		(45,242,398	)		114,556,454			42,924,554
Net (decrease) increase in cash and cash equivalents		(29,161,773	)		17,954,083			(17,127,181	)
Cash and cash equivalents, beginning of year		53,827,468			35,873,385			53,000,566
Cash and cash equivalents, end of year	$	24,665,695		$	53,827,468		$	35,873,385
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	24,383,520		$	32,475,450		$	36,817,148
Income taxes	$	1,487,000		$	2,240,000		$	3,507,000
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans	$	6,982,125		$	12,658,929		$	3,977,012

36

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(1) Summary of Significant Accounting Policies

Hawthorn Bancshares, Inc. (the Company) provides a broad range of banking services to individual and corporate customers located within the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. The Company is subject to competition from other financial and nonfinancial institutions providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles and conform to predominant practices within the banking industry. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

On July 1, 2009, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2009. For all periods presented, share information, including basic and diluted earnings (loss) per share, have been adjusted retroactively to reflect this change

In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance on – The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification^TM, or Codification, became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission, or SEC, under authority of federal securities laws, are also sources of authoritative GAAP for SEC registrants. The Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. This is effective for financial statements issued for periods ending after September 15, 2009. The disclosures required by this new guidance are reported in the notes to the Company’s consolidated financial statements.

The significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below:

Principles of Consolidation

As further described in note 16, during 2007 the Company combined its banking subsidiaries into Hawthorn Bank (the Bank), a wholly owned subsidiary. In December of 2008, the Company formed Hawthorn Real Estate, LLC. (the Real Estate Company), a wholly owned subsidiary of the Company. The consolidated financial statements include the accounts of the Company, the Bank,

37

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

and the Real Estate Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans

Loans are stated at unpaid principal balance amount less unearned income and the allowance for loan losses. Income on loans is accrued on a simple-interest basis.

Loans are placed on nonaccrual status when management believes that the borrower’s financial condition, after consideration of business conditions and collection efforts, is such that collection of interest is doubtful. Subsequent interest payments received on such loans are applied to principal if doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current.

Loan origination fees and certain direct costs are deferred and recognized over the life of the loan as an adjustment to yield.

The Bank originates certain loans which are sold in the secondary mortgage market. These long-term, fixed-rate loans are sold on a note-by-note basis. Immediately upon locking in an interest rate, the Company enters into an agreement to sell the mortgage loan without recourse, thereby eliminating the Company’s exposure to interest rate fluctuations. At December 31, 2009 and 2008, $114,000 and $77,000 mortgage loans were held for sale, respectively. Mortgage loan servicing fees earned on loans sold are reported as income when the related loan payments are collected net of mortgage servicing right amortization. Operational costs to service such loans are charged to expense as incurred.

Allowance for Loan Losses

The allowance for loan losses is increased by provisions charged to expense and is reduced by loan charge-offs, net of recoveries. Management utilizes a systematic, documented approach in determining an adequate allowance for loan losses. Management’s approach, which provides for general and specific valuation allowances, is based on current economic conditions, past losses, collection experience, risk characteristics of the portfolio, assessment of collateral values by obtaining independent appraisals for significant properties, and such other factors, which, in management’s judgment, deserve current recognition in estimating loan losses.

Management believes the allowance for loan losses is adequate to absorb probable losses in the loan portfolio. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to increase the allowance for loan losses based on their judgment about information available to them at the time of their examination.

A loan is considered impaired when it is probable the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at

38

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

the loan’s effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, the Company measures impairment based on the fair value of the collateral when foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan’s effective rate of interest as stated in the original loan agreement.

Investment in Debt and Equity Securities

At the time of purchase, debt securities are classified into one of two categories: available-for-sale or held-to-maturity. Held-to-maturity securities are those securities which the Company has the ability and positive intent to hold until maturity. All debt securities not classified as held-to-maturity are classified as available-for-sale. The Company’s securities are classified as available-for-sale and are carried at fair value. Changes in fair value, excluding certain losses associated with other-than-temporary impairment, are reported in other comprehensive income, a component of stockholders’ equity. Securities are periodically evaluated for other-than-temporary impairment in accordance with guidance provided in the FASB ASC Topic 320, Investments –Debt and Equity Securities. For those securities with other-than-temporary impairment, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it likely that it will be required to sell the security before the anticipated recovery. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred, which is then recognized in current earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Premiums and discounts are amortized using the interest method over the lives of the respective securities, with consideration of historical and estimated prepayment rates for mortgage-backed securities, as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings based on the specific identification method for determining the cost of securities sold.

Capital Stock of the Federal Home Loan Bank

The Bank, as a member of the Federal Home Loan Bank System administered by the Federal Housing Finance Board, is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Des Moines (FHLB) in an amount equal to 12 basis points of the Bank’s year-end total assets plus 4.45% of advances from the FHLB to the Bank. These investments are recorded at cost, which represents redemption value.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improvements and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such lives are estimated to be 5 to 40 years for buildings and improvements and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.

39

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Goodwill and Intangible Assets

Goodwill and intangible assets that have indefinite useful lives are not amortized, but tested annually for impairment. Intangible assets that have finite useful lives, such as core deposit intangibles and mortgage servicing rights, are amortized over their estimated useful lives. Core deposit intangibles are amortized over periods of 7 to 8 years representing their estimated lives using straight line and accelerated methods. Mortgage servicing rights are amortized over the shorter of 7 years or the life of the loan.

When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the carrying value based upon future cash flows expected to result from the use of the underlying asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the underlying asset, the Company recognizes an impairment loss. The impairment loss recognized represents the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset. As a result of the 2008 annual review, the Company determined that goodwill was fully impaired and recorded an impairment charge of $40,323,775, before tax.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis.

40

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Pension Plan

The Company provides a noncontributory defined benefit pension plan for all full-time employees. The benefits are based on age, years of service and the level of compensation during the employees highest ten years of compensation before retirement. Net periodic costs are recognized as employees render the services necessary to earn the retirement benefits. The Company records annual amounts relating to its pension plan based on calculations that incorporate various actuarial and other assumptions including discount rates, mortality, assumed rates of return, compensation increases and turnover rates. The Company reviews its assumptions on an annual basis and may make modifications to the assumptions based on current rates and trends when it is appropriate to do so. The Company believes that the assumptions utilized in recording its obligations under its plan are reasonable based on its experience and market conditions.

The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation –Retirement Plans under the subtopic Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the funded status of a plan as of the date of its fiscal year-end, with limited exceptions. Additional disclosures are required to provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures.

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the Company’s future tax consequences of events that have been recognized in the consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forward, and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, the Company would adjust the recorded value of our deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Likewise, the Company would reverse the valuation allowance when the realization of the deferred tax asset is expected. In addition, the Company is subject to the continuous examination of our tax returns by the Internal Revenue Service and other taxing authorities. The Company accrues for interest related to income taxes in income tax expense. Total interest expense recognized was $53,000 and $77,000 in 2009 and 2008, respectively. As of December 31, 2009 and 2008, total accrued interest was $94,000 and $131,000, respectively.

41

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Trust Department

Property held by the Bank in fiduciary or agency capacity for customers is not included in the accompanying consolidated balance sheets, since such items are not assets of the Company. Trust department income is recognized on the accrual basis.

Consolidated Statements of Cash Flows

For the purpose of the consolidated statements of cash flows, cash and cash equivalents consist of federal funds sold and securities sold or purchased under agreements to resell, cash, and due from banks.

Stock-Based Compensation

The Company’s stock-based employee compensation plan is described in Note 14, Stock Compensation. In accordance with FASB ASC Topic 718, Compensation – Stock Compensation, the Company measures the cost of the stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The expense recognized is based on an estimation of the number of awards for which the requisite service is expected to be rendered, and is included in salaries and employee benefits in the accompanying consolidated statements of operations. The standard also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.

Treasury Stock

The purchase of the Company’s common stock is recorded at cost. Purchases of the stock are made both in the open market and through negotiated private purchases based on market prices. At the date of subsequent reissue, the treasury stock account is reduced by the cost associated with such stock on a first-in-first-out basis.

Comprehensive Income

The Company reports comprehensive income (loss) in the consolidated statements of stockholders’ equity and comprehensive income (loss).

Reclassifications

Certain prior year information has been reclassified to conform to the current year presentation.

Recently Issued Accounting Standards

In December 2008, the FASB issued authoritative guidance on Employers’ Disclosures about Postretirement Benefit Plan Assets which was subsequently incorporated into ASC Topic 715 Compensation – Retirement Benefits. This guidance became effective for fiscal years ending after December 15, 2009. ASC Topic 715 requires more detailed disclosures regarding defined benefit pension plan assets including investment policies and strategies, major categories of plan assets, valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. Upon initial application, the provisions of ASC Topic 715 are not required

42

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

for earlier periods that are presented for comparative purposes. The disclosures required by ASC Topic 715 are reported in the notes to the Company’s consolidated financial statements.

In April 2009, the FASB issued authoritative guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly, which was subsequently incorporated into ASC Topic 820, Fair Value Measurements and Disclosures, and is effective for interim and fiscal years ending after June 15, 2009. This new guidance amends ASC Topic 820 and provides additional guidance for estimating fair value when there is no active market or where the price inputs being used represent distressed sales. The Company follows the new requirements provided by ASC Topic 820 which did not have a material effect on the consolidated financial statements or the disclosures presented in the consolidated financial statements.

In April 2009, the FASB issued authoritative guidance on recognition and presentation of other-than-temporary impairment, which was subsequently incorporated into ASC Topic 320, Investments – Debt and Equity Securities, and became effective for periods ending after June 15, 2009. This new guidance amends ASC Topic 320 for determining whether an impairment is other than temporary to debt securities and replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security and (b) it is more likely than not it will not have to sell the security prior to its anticipated recovery. Under this guidance, declines in fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. The Company follows the new requirements under ACS Topic 320, which did not have a material effect on the consolidated financial statements or the disclosures presented in the consolidated financial statements.

In May 2009, the FASB issued authoritative guidance for disclosing subsequent events, which was subsequently incorporated into ASC 855, Subsequent Events, and became effective for interim and annual periods ending after June 15, 2009. The new guidance amends ASC Topic 855 and incorporates accounting and disclosure requirements related to subsequent events into U.S. Generally Accepted Accounting Principles (GAAP) making management directly responsible for subsequent events account and disclosure. ASC Topic 855 sets forth: (a) the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (b) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and (c) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The disclosures required by ASC Topic 855 are reported in the consolidated financial statements and the notes to the Company’s consolidated financial statements.

In June 2009, the FASB issued authoritative guidance on accounting for transfers of financial assets, which was subsequently incorporated into ASC Topic 860, Transfers and Servicing. The new guidance amends ASC Topic 860 and requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks

43

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

related to transferred financial assets. The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. This is effective for the annual period beginning after November 15, 2009 and for interim periods within the first annual reporting period, and must be applied to transfers occurring on or after the effective date. Management is currently evaluating the provisions of this Topic, which is not expected to have a material effect on the consolidated financial statements or the disclosures presented in the consolidated financial statements.

In June 2009, the FASB issued authoritative guidance which amends how a company determines when a variable interest entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated, and requires additional disclosures about involvement with variable interest entities, any significant changes in risk exposure due to that involvement and how that involvement affects the company’s financial statements. This guidance was subsequently incorporated into ASC Topic 810, Consolidation, and changes how a company determines whether it is required to consolidate an entity based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The provisions of this Topic are effective for the annual period beginning after November 15, 2009 and for interim periods within the first annual reporting period. Management is currently evaluating the provisions of this Topic, which is not expected to have a material effect on the consolidated financial statements or the disclosures presented in the consolidated financial statements.

(2) Loans and Allowance for Loan Losses

A summary of loans, by major classification within the Company’s loan portfolio, at December 31, 2009 and 2008 are as follows:

	2009		2008
Commercial	$	151,399,300	$	153,386,062
Real estate construction — residential		38,840,664		49,623,350
Real estate construction — commercial		77,936,569		80,015,409
Real estate mortgage — residential		232,332,124		238,041,340
Real estate mortgage — commercial		453,975,271		454,488,912
Installment and other consumer		36,966,018		33,404,048
Unamortized loan origination fees and costs, net		164,061		144,411
Total loans	$	991,614,007	$	1,009,103,532

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles.

44

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Following is a summary of activity in 2009 of loans made by the Bank to executive officers and directors or to entities in which such individuals had a beneficial interest. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present unfavorable features.

Balance at December 31, 2008	$	7,608,022
New loans		1,628,941
Amounts collected		(1,680,038	)
Balance at December 31, 2009	$	7,556,925

The following is a summary of the allowance for loan losses for 2009, 2008 and 2007 is as follows:

	Years Ended December 31,
	2009			2008			2007
Balance, beginning of year	$	12,666,546			9,281,848			9,015,378
Additions:
Provision for loan losses		8,354,000			8,211,000			1,154,216
Deductions:
Loans charged off		6,800,942			5,439,827			1,307,644
Less recoveries on loans		(576,945	)		(613,525	)		(419,898	)
Net loans charged off		6,223,997			4,826,302			887,746
Balance, end of year	$	14,796,549			12,666,546			9,281,848

A summary of impaired loans for 2009, 2008, and 2007 is as follows:

	2009		2008		2007
Loans classified as impaired:
Non-accrual loans	$	34,153,731	$	20,387,859	$	4,538,364
Impaired loans continuing to accrue interest		39,713,014		9,545,914		4,026,976
Total impaired loans	$	73,866,745	$	29,933,773	$	8,565,340
Balance of impaired loans with reserves	$	26,294,560	$	18,482,148	$	8,065,104
Balance of impaired loans without reserves		47,572,185		11,451,625		500,236
Total impaired loans	$	73,866,745	$	29,933,773	$	8,565,340
Reserves for impaired loans	$	6,414,729	$	3,837,419	$	3,256,342
Average balance of impaired loans during the period		39,048,298		20,645,519		8,914,807
Balance of trouble debt restructured loans included in impaired loans		11,233,326		3,736,105		—

45

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Interest income recognized on non-accrual loans was approximately $158,124, $239,320, and $329,566 for the years ended December 31, 2009, 2008, and 2007, respectively. The gross amount of interest that would have been recognized under the original terms of non-accrual loans was $1,568,271, $1,521,701, and $744,675 for the years ended December 31, 2009, 2008, and 2007, respectively. The amount recognized as interest income on impaired loans continuing to accrue interest was $436,787, $116,521, and $359,229, for the years ended December 31, 2009, 2008, and 2007, respectively.

(3) Investment in Debt and Equity Securities

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2009 and 2008 are as follows:

				Gross		Gross
	Amortized			unrealized		unrealized
	cost			gains		losses		Fair value
December 31, 2009
Government sponsored enterprises	$	44,059,540		$	371,258	$	50,000	$	44,380,798
Asset-backed securities		68,092,852			1,585,774		243,976		69,434,650
Obligations of states and political subdivisions		38,456,246			708,196		53,205		39,111,237
Total available for sale securities	$	150,608,638		$	2,665,228	$	347,181	$	152,926,685
Weighted average yield at end of period		4.11	%

				Gross		Gross
	Amortized			unrealized		unrealized
	cost			gains		losses		Fair value
December 31, 2008
Government sponsored enterprises	$	54,018,436		$	1,526,240	$	—	$	55,544,676
Asset-backed securities		48,801,151			1,292,982		3,148		50,090,985
Obligations of states and political subdivisions		43,201,999			755,091		191,822		43,765,268
Total available for sale securities	$	146,021,586		$	3,574,313	$	194,970	$	149,400,929
Weighted average yield at end of period		4.67	%

Restricted investments in equity securities, reported in other assets, in the amount of $6,753,550 and $8,875,250 as of December 31, 2009 and 2008, respectively, are recorded at cost, and consist primarily of Federal Home Loan Bank Stock and the Company’s interest in the statutory trusts described in Note 10. While some Federal Home Loan Banks have suspended dividends, the Bank is a member of the Federal Home Loan Bank of Des Moines and has continued to receive dividend payments each quarter.

46

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2009, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

	Amortized		Fair
	cost		value
Due in one year or less	$	11,182,662	$	11,312,689
Due after one year through five years		48,087,053		48,667,242
Due after five years through ten years		18,990,078		19,232,158
Due after ten years		4,255,993		4,279,947
		82,515,786		83,492,036
Asset-backed securities		68,092,852		69,434,649
Total	$	150,608,638	$	152,926,685

Debt securities with carrying values aggregating approximately $132,322,000 and $136,057,000 at December 31, 2009 and 2008, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

	2009		2008		2007
Proceeds from sales	$	12,546,609	$	30,920,778	$	6,910,634
Gains		605,716		2,733		—
Losses		—		—		(1,747	)
Net gains (losses)	$	605,716	$	2,733	$	(1,747	)

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009, were as follows:

	Less than 12 months					12 months or more							Total
											Number of
	Fair		Unrealized			Fair		Unrealized			Investment		Fair		Unrealized
	Value		Losses			Value		Losses			Positions		Value		Losses
Government sponsored enterprises	$	5,943,819	$	(50,000	)	$	—	$	—			6	$	5,943,819		(50,000	)
Asset-backed securities		14,600,160		(243,904	)		20,551		(72	)		15		14,620,711	$	(243,976	)
Obligations of states and political subdivisions		3,576,780		(53,205	)		—		—			14		3,576,780		(53,205	)
	$	24,120,759	$	(347,109	)	$	20,551	$	(72	)		35	$	24,141,310	$	(347,181	)

The $72 unrealized losses included in other comprehensive income at December 31, 2009 on asset-backed securities were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by various government or government sponsored enterprises. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments are not considered

47

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

other-than-temporarily impaired. As of December 31, 2009, the Company had no other-than-temporary impairment losses.

(4) Fair Value Measurement

The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

The fair value hierarchy is as follows:

Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 – Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s best information and assumptions that a market participant would consider.

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability has significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

The Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred.

48

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Valuation methods for instruments measured at fair value on a recurring basis

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

Available-for-sale securities

Available-for-sale securities are recorded at fair value on a recurring basis. Available-for-sale securities is the only balance sheet category the Company is required, in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), to carry at fair value on a recurring basis. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

			Fair Value Measurements
			At December 31, 2009 Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	December 31, 2009		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities	$	152,926,685	$	—	$	152,926,685	$	—

Valuation methods for instruments measured at fair value on a nonrecurring basis

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

Impaired Loans

The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the FASB ASC Topic 310, Accounting by Creditors for Impairment of a Loan. Impaired loans for which an allowance is established are generally based on market prices for similar assets determined through independent appraisals, the fair value of the collateral for a collateral-dependent loan, or in the case of trouble debt restructured loans, impairment is measured by discounting the total expected future cash flows. Because many of these inputs are not observable, the measurements are classified as Level 3. As of December 31, 2009, the Company identified $26.2 million in impaired loans that had specific allowances for losses aggregating $6.4 million. Related to these loans, there was $4.2 million in charge-offs recorded during 2009.

49

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. The Company relies on external appraisals and assessment of property values by our internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

			Fair Value Measurements
			At December 31, 2009 Using
			Quoted Prices
			in Active						The Year
			Markets for		Other		Significant		Ended
	Fair Value		Identical		Observable		Unobservable		Dec. 31, 2009
	December 31,		Assets		Inputs		Inputs		Total Gains
Description	2009		(Level 1)		(Level 2)		(Level 3)		(Losses)
Impaired loans	$	19,879,831	$	—	$	—	$	19,879,831	$	(4,220,285	)
Other real estate owned and repossessed assets	$	8,490,914	$	—	$	—	$	8,490,914	$	(1,367,207	)

(5) Earnings (loss) per Share

Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share gives effect to all dilutive potential common shares that were outstanding during the year. The calculations of basic and diluted earnings (loss) per share are as follows:

	2009		2008			2007
Net income (loss), basic and diluted	$	4,955,757	$	(30,627,356	)	$	7,799,976
Less: preferred stock dividends		1,993,426		66,090			—
Net income (loss) available to common shareholders	$	2,962,331	$	(30,693,446	)	$	7,799,976
Average shares outstanding		4,301,955		4,321,979			4,338,438
Effect of dilutive stock options		—		—			37,658
Average shares outstanding including dilutive stock options		4,301,955		4,321,979			4,376,096
Net income (loss) per share, basic	$	0.69	$	(7.10	)	$	1.80
Net income (loss) per share, diluted		0.69		(7.10	)		1.78

50

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when the Company has a loss from continuing operations available to common shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

The following options to purchase shares during the fiscal years ended 2009, 2008, and 2007 were not included in the respective computations of diluted earnings (loss) per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.

	Years Ended December 31,
	2009		2008		2007
Anti-dilutive shares		531,226		532,714		214,986

(6) Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of December 31, 2009 and 2008, the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2009, the most recent notification from the regulatory authorities categorized the bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since the notifications that management believes have changed the Bank’s categories.

51

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

The actual and required capital amounts and ratios for the Company and the Bank as of December 31, 2009 and 2008 are as follows (dollars in thousands):

						Minimum					Well-Capitalized
	Actual					Capital requirements					Capital Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2009
Total capital (to risk-weighted assets):
Company	$	165,969		16.49	%	$	80,502		8.00	%		—		—
Hawthorn Bank		134,673		13.62			79,129		8.00		$	98,911		10.00	%
Tier I capital (to risk-weighted assets):
Company	$	140,974		14.01		$	40,251		4.00	%		—		—
Hawthorn Bank		122,285		12.36			39,564		4.00		$	59,347		6.00	%
Tier I capital (to adjusted average assets):
Company	$	140,974		11.35		$	37,254		3.00	%		—		—
Hawthorn Bank		122,285		10.04			36,556		3.00		$	60,926		5.00	%

						Minimum					Well-Capitalized
	Actual					Capital requirements					Capital Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2008
Total capital (to risk-weighted assets):
Company	$	163,949		16.01	%	$	81,912		8.00	%		—		—
Hawthorn Bank		125,510		12.35			81,310		8.00		$	101,638		10.00	%
Tier I capital (to risk-weighted assets):
Company	$	138,756		13.55		$	40,956		4.00	%		—		—
Hawthorn Bank		113,158		11.13			40,655		4.00		$	60,983		6.00	%
Tier I capital (to adjusted average assets):
Company	$	138,756		10.80		$	38,543		3.00	%		—		—
Hawthorn Bank		113,158		8.82			38,497		3.00		$	64,162		5.00	%

Bank dividends are the principal source of funds for payment of dividends by the Company to it stockholders. The Bank is subject to regulations which require the maintenance of minimum capital requirements. As a result of the 2008 goodwill impairment charge, as described in Note 1, the Bank’s unappropriated retained earnings balance at December 31, 2009 is negative. As a result, the Bank must obtain regulatory approval prior to paying dividends to the Company until such time as the unappropriated retained earnings balance is restored to a positive balance.

52

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(7) Premises and Equipment

A summary of premises and equipment at December 31, 2009 and 2008 is as follows:

	2009		2008
Land and land improvements	$	9,837,854	$	10,136,974
Buildings and improvements		31,220,427		31,460,592
Furniture and equipment		10,734,460		11,096,332
Construction in progress		1,882,773		418,922
Total		53,675,514		53,112,820
Less accumulated depreciation		15,052,221		13,852,600
Net premises and equipment	$	38,623,293	$	39,260,220

     Depreciation expense for the past three years is as follows:

	For the Years Ended December 31,
	2009		2008		2007
Depreciation expense	$	2,044,257	$	2,158,740	$	2,050,122

(8) Goodwill and Other Intangible Assets

The Company’s goodwill is tested annually for potential impairment. As a result of the 2008 annual review, the Company determined that the goodwill was fully impaired as of December 31, 2008, and recorded an impairment charge of $40,323,775, in the fourth quarter of 2008.

A summary of other intangible assets at and for the years ended December 31, 2009 and 2008 is as follows:

	For the Years Ended December 31,
			2009							2008
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
	Amount		Amortization			Amount		Amount		Amortization			Amount
Amortizable intangible assets:
Core deposit intangible	$	7,060,224	$	(5,556,238	)	$	1,503,986	$	7,060,224	$	(4,930,127	)	$	2,130,097
Mortgage servicing rights		2,945,019		(924,055	)		2,020,964		2,767,180		(1,595,955	)		1,171,225
Total intangible assets	$	10,005,243	$	(6,480,293	)	$	3,524,950	$	9,827,404	$	(6,526,082	)	$	3,301,322

53

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Changes in the net carrying amount of other intangible assets for the years ended December 31, 2009 and 2008 are shown in the following table:

	Core Deposit			Mortgage
	Intangible			Servicing
	Asset			Rights
Balance at December 31, 2007	$	2,831,540		$	1,184,868
Additions		—			627,397
Amortization		(701,443	)		(641,040	)
Balance at December 31, 2008		2,130,097			1,171,225
Additions		—			1,765,832
Amortization		(626,111	)		(916,093	)
Balance at December 31, 2009	$	1,503,986		$	2,020,964

Mortgage loans serviced for others totaled approximately $269,475,000 and $213,074,000 at December 31, 2009 and 2008, respectively.

The Company’s amortization expense on intangible assets in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions. The following table shows the estimated future amortization expense based on existing asset balances and the interest rate environment as of December 31, 2009 for the next five years:

	Core Deposit		Mortgage
	Intangible		Servicing
	Asset		Rights
2010	$	526,477	$	555,000
2011		434,763		429,000
2012		408,062		332,000
2013		134,684		258,000
2014		—		200,000

The aggregate amortization expense of intangible assets subject to amortization for the past three years is as follows:

	For the Years Ended December 31,
Aggregate amortization expense	2009		2008		2007
Core deposit intangible asset	$	626,111	$	701,443	$	922,337
Mortgage servicing rights		916,093		641,040		450,780

54

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(9) Deposits

The scheduled maturities of total time deposits are as follows:

	2009		2008
Due within:
One year	$	342,749,968	$	362,059,020
Two years		74,118,865		62,484,223
Three years		20,481,957		32,505,028
Four years		27,461,147		4,634,125
Five years		2,123,433		25,674,091
Thereafter		85,784		68,000
	$	467,021,154	$	487,424,487

At December 31, 2009 and 2008, our Company had certificates and other time deposits in denominations of $100,000 or more which mature as follows:

	2009		2008
Due within:
Three months or less	$	35,336,996	$	39,041,405
Over three months through six months		30,808,596		27,215,330
Over six months through twelve months		44,787,905		48,556,441
Over twelve months		26,926,938		28,159,313
	$	137,860,435	$	142,972,489

55

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(10) Borrowings

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (repurchase agreements)

Information relating to federal funds purchased and repurchase agreements is as follows:

	Year End						Average		Maximum
	Weighted			Average			Balance		Outstanding at		Balance at
	Rate			Weighted Rate			Outstanding		any Month End		December 31,
2009
Federal funds purchased		0.9	%		0.9	%	$	1,507,904	$	7,175,000	$	4,980,000
Short-term repurchase agreements		0.2			0.2			32,414,635		32,489,362		31,665,434
Total												36,645,434
2008
Federal funds purchased		—	%		2.8	%	$	3,831,120	$	17,757,000	$	—
Short-term repurchase agreements		0.5			2.0			37,802,343		56,709,965		29,138,623
Total												29,138,623
2007
Federal funds purchased		5.1	%		5.3	%	$	7,041,300	$	14,950,000	$	7,365,000
Short-term repurchase agreements		3.2			4.2			26,806,926		28,704,922		18,364,863
Total												25,729,863

The securities underlying the agreements to repurchase are under the control of the Bank. All securities sold under agreements to repurchase are secured by a portion of the Company’s investment portfolio.

Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $35,000,000 on an unsecured basis and $12,000,000 on a secured basis at December 31, 2009.

56

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Other Borrowings

Other borrowings of the Company consisted of the following at December 31, 2009:

				Year End
		Maturity		Weighted
	Borrower	Date		Rate			Year End Balance
FHLB advances	Subsidiary bank		2010		4.6	%	$	22,331,324
			2011		3.6	%		38,575,989
			2012		1.6	%		8,283,528
			2013		4.1	%		126,461
			2014	na				—
			2015-18		2.5	%		10,000,000
Total								79,317,302
Subordinated notes	The Company		2034		3.0	%		25,774,000
			2035		6.3	%		23,712,000
Total							$	49,486,000

The Bank subsidiary of the Company is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has access to term financing from the FHLB. These borrowings are secured under a blanket agreement which assigns all investment in Federal Home Loan Bank of Des Moines stock, as well as mortgage loans equal to 125% to 175% (based on collateral type) of the outstanding advance balance, to secure amounts borrowed by the Bank. The outstanding balance of $79,317,000 includes $10,000,000 which the FHLB may call for early payment within the next two years. The FHLB has also issued letters of credit totaling $100,000 at December 31, 2009, to secure the Company’s obligations to depositors of public funds.

Based upon the collateral pledged to the Federal Home Loan Bank of Des Moines at December 31, 2009, the Bank could borrow up to an additional $213,558,000 under the agreement.

On March 17, 2005, Exchange Statutory Trust II, a business trust issued $23,000,000 of 30-year floating rate Trust Preferred Securities (TPS) to a TPS Pool. The interest rate on the TPS is a fixed rate at 6.30% until March 17, 2010, at which time it converts to a floating rate equal to a three-month LIBOR rate plus 1.83% and will reprice quarterly. The TPS can be prepaid without penalty at any time after five years from the issuance date.

The TPS represent preferred interests in the trust. The Company invested approximately $712,000 in common interests in the trust and the purchaser in the private placement purchased $23,000,000 in preferred interests. The proceeds were used by the trust to purchase from the Company its 30-year deeply subordinated debentures whose terms mirror those stated above for the TPS. The debentures are guaranteed by the Company pursuant to a subordinated guarantee. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The trustee for the TPS holders is U.S. Bank, N.A. The trustee does not have the power to take enforcement action in the event of a default under the TPS for five years from the date of default. In the event of default, however, the Company would be precluded from paying dividends until the default is cured.

57

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

On March 17, 2004, Exchange Statutory Trust I, a Delaware business trust and subsidiary of the Company issued $25,000,000 of floating TPS to a TPS Pool. The floating rate is equal to the three-month LIBOR rate plus 2.70% and reprices quarterly (2.95% at December 31, 2009). The TPS are fully, irrevocably, and unconditionally guaranteed on a subordinated basis by the Company. The proceeds of the TPS were invested in junior subordinated debentures of the Company. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The TPS mature on March 17, 2034. That maturity date may be shortened to a date not earlier than March 17, 2009 if certain conditions are met.

The Exchange Statutory Trusts are not consolidated in the Company’s financial statements. Accordingly, the Company does not report the securities issued by the Exchange Statutory Trusts as liabilities, and instead reports the subordinated notes issued by the Company and held by the Exchange Statutory Trusts as liabilities. The amount of the subordinated notes as of December 31, 2009 and 2008 was $49,486,000. The Company has recorded the investments in the common securities issued by the Exchange Statutory Trusts aggregating $1,486,000, and the corresponding obligations under the subordinated notes, as well as the interest income and interest expense on such investments and obligations in its consolidated financial statements.

(11) Reserve Requirements and Compensating Balances

The Federal Reserve Bank required the Bank to maintain cash or balances of $22,096,000 and $17,962,000 at December 31, 2009 and 2008, respectively, to satisfy reserve requirements.

Average compensating balances held at correspondent banks were $760,000 and $899,000 at December 31, 2009 and 2008, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks.

(12) Income Taxes

The composition of income tax expense (benefit) for 2009, 2008, and 2007 is as follows:

	2009			2008			2007
Current:
Federal	$	2,131,373		$	1,236,327		$	3,549,527
State		354,072			—			60,297
Total current		2,485,445			1,236,327			3,609,824
Deferred:
Federal		(564,779	)		(6,625,134	)		(364,585	)
State		(64,546	)		(757,158	)		—
Total deferred		(629,325	)		(7,382,292	)		(364,585	)
Total income tax (benefit) expense	$	1,856,120		$	(6,145,965	)	$	3,245,239

58

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Applicable income tax expense (benefit) for financial reporting purposes differ from the amount computed by applying the statutory Federal income tax rate for the reasons noted in the table below:

	2009						2008						2007
	Amount			%			Amount			%			Amount			%
Income (loss) before provision for income taxes	$	6,811,877					$	(36,773,321	)				$	11,045,215
Tax at statutory Federal income tax rate	$	2,316,038			34.00	%	$	(12,502,929	)		34.00	%	$	3,765,825			34.10	%
Goodwill impairment		—			—			7,112,827			(19.34	)		—			—
Tax-exempt income		(508,002	)		(7.46	)		(570,506	)		(1.55	)		(628,158	)		(5.69	)
State income tax, net of Federal tax benefit		191,087			2.81			—			—			39,796			0.36
Other, net		(143,003	)		(2.10	)		(185,357	)		0.50			67,776			0.61
Provision for income taxes	$	1,856,120			27.25	%	$	(6,145,965	)		16.71	%	$	3,245,239			29.38	%

The components of deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are as follows:

	2009		2008
Deferred tax assets:
Allowance for loan losses	$	5,770,654	$	4,939,953
Nonaccrual loan interest		710,918		270,265
Core deposit intangible		804,457		697,040
Goodwill		3,621,401		3,979,134
Deferred compensation		68,543		142,715
Other		795,133		1,105,844
Total deferred tax assets		11,771,106		11,134,951
Deferred tax liabilities:
Premises and equipment		756,632		855,698
Mortgage servicing rights		585,215		176,175
FHLB stock dividend		102,921		102,921
Available-for-sale securities		904,038		1,317,944
Pension		208,839		139,083
Other		16,230		34,895
Total deferred tax liabilities		2,573,875		2,626,716
Net deferred tax asset	$	9,197,231	$	8,508,235

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences at December 31, 2009 and, therefore, has not established a valuation reserve.

59

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

At December 31, 2009, the accumulation of prior years’ earnings representing tax bad debt deductions of the Bank was $2,931,503. If these tax bad debt reserves were charged for losses other than bad debt losses, the Bank would be required to recognize taxable income in the amount of the charge. It is not contemplated that such tax-restricted retained earnings will be used in a manner that would create federal income tax liabilities.

On January 1, 2007, the Company adopted the recognition and disclosure provision the FASB Interpretation No. 48, which was subsequently incorporated into ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions.

At December 31, 2009, the Company had $365,000 of gross unrecognized tax benefits that if recognized would affect the effective tax rate. The Company believes that during 2010 it is reasonably possible that there would be a reduction of $222,000 in gross unrecognized tax benefits as a result of the lapse of statute of limitations for the 2006 tax year.

At December 31, 2009, total interest was approximately $94,000. A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:

	2009			2008			2007
Unrecognized tax benefits as of January 1,	$	748,942		$	956,577		$	1,015,361
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during prior years		—			—			(164,793	)
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during year		—			—			340,351
The amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities		—			—			—
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations		(186,866	)		(207,635	)		(234,342	)
Unrecognized tax benefits as of December 31,	$	562,076		$	748,942		$	956,577

(13) Employee Benefit Plans

Employee benefits charged to operating expenses are summarized in the table below.

	2009		2008		2007
Payroll taxes	$	1,096,793	$	1,119,073	$	1,399,321
Medical plans		1,494,166		1,466,232		1,245,059
401k match		306,042		294,098		—
Pension plan		890,692		854,407		837,288
Profit-sharing		282,904		205,515		757,561
Other		133,803		211,501		232,929
Total employee benefits	$	4,204,400	$	4,150,826	$	4,472,158

Prior to 2008, the Company provided a non-contributory profit-sharing plan which covered all full-time employees. Beginning in 2008, the Company’s profit-sharing plan was amended to include a matching

60

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

401k portion, in which the Company matches the first 3% of eligible employee contributions. The Company made annual contributions in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for Federal income tax purposes, for each of the years shown. In addition, employees were able to make additional tax-deferred contributions.

Pension

The Company also provides a noncontributory defined benefit pension plan for all full-time employees.

An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company made a $1,000,000 contribution to the defined benefit plan in 2009, and the minimum required contribution for 2010 is estimated to be $864,000. The Company has not determined whether it will make any contributions other than the minimum required funding contribution for 2010.

Obligations and Funded Status At December 31

	2009			2008
Change in projected benefit obligation:
Balance, January 1	$	8,420,847		$	7,293,000
Service cost		850,940			820,401
Interest cost		509,482			452,524
Actuarial loss (gain)		(151,710	)		116,690
Benefits paid		(228,607	)		(261,768	)
Balance, December 31		9,400,952			8,420,847
Change in plan assets:
Fair value, January 1		5,995,985			6,968,205
Actual gain (loss) return on plan assets		1,226,317			(2,210,452	)
Employer contribution		1,000,000			1,500,000
Benefits paid		(228,607	)		(261,768	)
Fair value, December 31		7,993,695			5,995,985
Funded status at end of year	$	(1,407,257	)	$	(2,424,862	)
Accumulated benefit obligation	$	6,918,597		$	6,269,427

61

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Components of Net Pension Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income

The following items are components of net pension cost for the years ended December 31, 2009, 2008 and 2007:

	2009			2008			2007
Service cost—benefits earned during the year	$	850,940		$	820,401		$	797,675
Interest costs on projected benefit obligations		509,482			452,524			364,406
Expected return on plan assets		(539,283	)		(454,344	)		(385,269	)
Amortization of prior service cost		78,628			78,628			78,628
Amortization of net gains		(9,075	)		(42,802	)		(18,152	)
Net periodic pension expense	$	890,692		$	854,407		$	837,288

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at December 31, 2009 and 2008 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

	2009			2008
Prior service costs	$	(836,068	)	$	(914,696	)
Net accumulated actuarial net loss		(57,326	)		(886,995	)
Accumulated other comprehensive loss		(893,394	)		(1,801,691	)
Cumulative employer contributions in excess of net periodic benefit cost		(513,863	)		(623,171	)
Net amount recognized at December 31, balance sheet	$	(1,407,257	)	$	(2,424,862	)
Net (gain) loss arising during period	$	(838,744	)	$	2,781,486
Prior service cost amortization		(78,628	)		(78,628	)
Amortization of net actuarial gain / (loss)		9,075			42,802
Total recognized in other comprehensive income	$	(908,297	)	$	2,745,660
Total recognized in net periodic pension cost and other comprehensive income	$	(17,605	)	$	3,600,067

The estimated prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic cost in 2010 is $78,628. For 2010, there is no estimated amount of actuarial gain or loss subject to amortization into net periodic pension cost.

62

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Assumptions utilized to determine benefit obligations as of December 31, 2009, 2008 and 2007 and to determine pension expense for the year then ended are as follows:

	2009			2008			2007
Determination of Benefit obligation at year end:
Discount rate		6.00	%		6.15	%		6.25	%
Annual rate of compensation increase		4.50	%		4.50	%		4.50	%
Determination of Pension expense for year ended:
Discount rate for the service cost		6.00	%		6.25	%		5.50	%
Annual rate of compensation increase		4.50	%		4.50	%		4.50	%
Expected long-term rate of return on plan assets		7.00	%		7.00	%		7.00	%

The assumed overall expected long-term rate of return on pension plan assets used in calculating 2009 pension expense was 7%. Determination of the plan’s rate of return is based upon historical returns for equities and fixed income indexes. During the past five years the Company’s plan assets have experienced the following annual returns: 22.0% in 2009, (32.6)% in 2008, 7.4% in 2007, 14.4% in 2006, and 8.3% in 2005. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. With a traditional investment mix of over half of the plan’s investments in equities, the actual return for any one plan year may fluctuate significantly with changes in the stock market. Due to a decline in the economy and a decrease in discount rates used in the actuarial calculation of plan income, the Company expects to incur $865,000 expense in 2010 compared to $891,000 in 2009.

Plan Assets

The investment policy of the pension plan is designed for growth in value while minimizing risk to the overall portfolio. The Company diversifies the assets through investments in domestic and international fixed income securities and domestic and international equity securities. The assets are readily marketable and can be sold to fund benefit payment obligations as they become payable. The Company’s long-term investment target mix for the plan is 70% equity securities and 30% fixed income. As noted in the table below, cash equivalents were more heavily weighted due to a large contribution at the end of 2008 that was in the process of being invested. The Company regularly reviews its policies on the investment mix and may make changes depending on economic conditions and perceived investment mix.

63

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

The fair value of the Company’s pension plan assets at December 31, 2009 by asset category are as follows:

			Fair Value Measurements
			At December 31, 2009 Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
	Fair Value		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description	2009		(Level 1)		(Level 2)		(Level 3)
Cash equivalents	$	790,415	$	790,415	$	—	$	—
Equity securities:
U.S. large-cap (a)		3,222,262		3,222,262		—		—
U.S. mid-cap (b)		418,330		418,330		—		—
U.S. small-cap (c)		509,926		509,926		—		—
International (d)		1,154,615		1,154,615		—		—
Fixed income securities:
U.S. Govt Agency Obligations (e)		1,123,535		—		1,123,535		—
Corporate investment grade (e)		530,042		—		530,042		—
Corporate non-investment grade (e) (f)		244,570		—		244,570		—
Total	$	7,993,695	$	6,095,548	$	1,898,147	$	—

(a)	This category comprises low-cost equity index funds not actively managed that track the S&P 500.
(b)	This category comprises low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.
(c)	This comprises actively managed mutual funds.
(d)	37% of this category comprises low-cost equity index funds not actively managed that track the MSCI EAFE.
(e)	This category comprise individual bonds.
(f)	24% of this category is comprised of non-rated bonds.

The following future benefit payments are expected to be paid:

Year	Pension benefits
2010	$	270,952
2011		306,759
2012		307,195
2013		313,368
2014		376,464
2015 to 2019		2,122,566

(14) Stock Compensation

The Company’s stock option plan provides for the grant of options to purchase up to 468,000 shares of the Company’s common stock to officers and other key employees of the Company and its subsidiaries. All options have been granted at exercise prices equal to fair value and vest over periods ranging from four to five years, except 4,821 options issued in 2002, and 9,519 options issued in 2008 to acquire shares that vested immediately.

64

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

The following table summarizes the Company’s stock option activity:

										Weighted average
	Number of shares									exercise price
	December 31									December 31
	2009			2008			2007			2009		2008		2007
Outstanding, beginning of year		277,454			252,644			213,258		$	25.10	$	26.18	$	24.72
Granted		—			39,027			50,016			—		20.20		32.21
Exercised		—			—			(4,835	)		—		—		20.78
Forfeited		(1,488	)		(14,217	)		—			30.22		—		—
Canceled		—			—			(5,795	)		—		30.86		29.07
Outstanding, end of year		275,966			277,454			252,644		$	25.07	$	25.10	$	26.18
Exercisable, end of year		215,712			189,977			145,774		$	24.70	$	24.24	$	22.77

Amounts shown in table have been adjusted for the 4% stock dividend issued on July 1, 2009.

Options outstanding at December 31, 2009 had a weighted average remaining contractual life of approximately five years and no intrinsic value. Options outstanding at December 31, 2008 had a remaining contractual life of approximately six years and an intrinsic value of $35,000. No stock options were granted during 2009.

Options exercisable at December 31, 2009 had a weighted average remaining contractual life of approximately four years and no intrinsic value. Options exercisable at December 31, 2008 had a weighted average remaining contractual life of approximately five years and an intrinsic value of approximately $35,000. During 2007, 4,835 stock options were exercised. No stock options were exercised during 2009 or 2008.

Total stock-based compensation expense for the years ended December 31, 2009, 2008, and 2007 was $130,000, $232,000, and $265,000, respectively. As of December 31, 2009, the total unrecognized compensation expense related to non-vested stock awards was $243,000 and the related weighted average period over which it is expected to be recognized is approximately two years.

The weighted average grant-date fair values of stock options granted during the following years and the weighted average significant assumptions used to determine those fair values, using the Black-Scholes option-pricing model, are as follows:

	2008			2007
Fair value per share at grant date	$	4.53		$	7.13
Significant assumptions:
Risk-free interest rate at grant date		3.14	%		4.49	%
Expected annual rate of quarterly dividends		4.00			2.50
Expected stock price volatility		30			20
Expected life to exercise (years)		6.24			6.25

65

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(15) Preferred Stock

On December 19, 2008, the Company announced its participation in the U.S. Treasury Department’s Capital Purchase Program (CPP) a voluntary program that provides capital to financially healthy banks. This program is designed to attract broad participation by banking institutions to help stabilize the financial system by encouraging lending. The Company has used the funds received, as discussed below, to continue to provide loans to its customers and to look for ways to deploy additional funds to benefit the communities in the Company’s market area.

Participating in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 255,260 shares of common stock (see below for additional information) to the U.S. Department of Treasury in exchange for $30,255,000. The proceeds received were allocated between the preferred stock and the common stock warrant based upon their relative fair values. This resulted in the recording of a discount on the preferred stock upon issuance that reflects the value allocated to the warrant. The discount on the preferred stock will be accreted over five years, consistent with managements’ estimate of the life of the preferred stock. Such accretion will be treated as additional dividends on the preferred stock. The allocated carrying values of the senior preferred stock and common stock warrant at December 31, 2009 were $28,365,000 and $2,382,000, respectively.

The preferred shares carry a 5% cumulative dividend for the first five years and 9% thereafter if not redeemed. The preferred shares are redeemable after three years at par plus accrued dividends, or before three years if the Company raises Tier 1 capital in an amount equal to the preferred stock issued. The preferred stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends on the preferred stock for six or more quarterly periods, whether or not consecutive. Under such circumstances, the Treasury will be entitled to vote to elect two directors to the board until all unpaid dividends have been paid or declared and set apart for payment. The Company is prohibited from paying any dividends with respect to shares of common stock unless all accrued and unpaid dividends are paid in full on the senior preferred stock for all past dividend periods. The Treasury Department may also transfer the senior preferred stock to a third party at any time.

The common stock warrant is exercisable immediately with a ten year term, in whole or in part, at an exercise price of $17.78 per share.

Assumptions were used in estimating the fair value of common stock warrant on the date of its issuance. The weighted average expected life of the common stock warrant represents the period of time that common stock warrant is expected to be outstanding. The-risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of issuance. The expected volatility is based on the average expected life the warrant. The following assumptions were used in estimating the fair value for the common stock warrant using the Black-Scholes option-pricing model:

66

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Fair value per warrant at issue date	$	7.02
Significant assumptions:
Risk-free interest rate at issue date		2.29	%
Expected stock price volatility		33.9
Expected life to exercise (years)		10.00

The accounting for preferred stock and warrant is classified as stockholders’ equity in the consolidated balance sheet and qualifies, for regulatory capital purposes, as Tier I capital. For the year ended December 31, 2009, the Company had declared $1,516,000 of dividends and amortized $476,000 of accretion of the discount on preferred stock. Through December 31, 2009, the Company had paid dividends in the amount of $1,370,000 on the preferred stock.

As of December 31, 2009, $18,000,000 of the CPP proceeds have been used to capitalize a newly formed subsidiary, Hawthorn Real Estate, LLC, established to hold workout assets purchased from the Company’s subsidiary bank, Hawthorn Bank. Hawthorn Real Estate, LLC. purchased workout loans and other real estate owned properties from the Bank. The $12,255,000 balance of the CPP funds continues to be held in the Company’s interest bearing account at the Bank.

67

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(16) Condensed Financial Information of the Parent Company Only

Following are the condensed financial statements of Hawthorn Bancshares, Inc. (Parent only) as of and for the years indicated:

Condensed Balance Sheets

	December 31,
	2009		2008
Assets
Cash and due from bank subsidiaries	$	14,737,805	$	29,968,196
Investment in equity securities		1,486,000		1,486,000
Investment in subsidiaries		142,793,737		127,148,243
Premises and equipment		6,103		7,864
Deferred tax asset		238,049		685,440
Other assets		26,034		336,364
Total assets	$	159,287,728	$	159,632,107
Liabilities and Stockholders’ Equity
Subordinated notes	$	49,486,000	$	49,486,000
Other liabilities		2,030,445		3,727,724
Stockholders’ equity		107,771,283		106,418,383
Total liabilities and stockholders’ equity	$	159,287,728	$	159,632,107

Condensed Statements of Operations

	For the Years Ended December 31,
	2009			2008			2007
Revenue
Interest and dividends received from subsidiaries	$	247,842		$	8,188,422		$	8,086,795
Other		—			—			1,308,622
Total revenue		247,842			8,188,422			9,395,417
Expenses
Interest on subordinated notes		2,446,742			3,046,238			3,617,254
Other		3,057,108			3,564,043			3,692,462
Total expenses		5,503,850			6,610,281			7,309,716
(Loss) income before income tax benefit and equity in undistributed income of subsidiaries		(5,256,008	)		1,578,141			2,085,701
Income tax benefit		1,918,880			1,980,100			1,908,564
Equity in undistributed income (loss) of subsidiaries		8,292,885			(34,185,597	)		3,805,711
Net income (loss)	$	4,955,757		$	(30,627,356	)	$	7,799,976

68

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Condensed Statements of Cash Flows

	2009			2008			2007
Cash flows from operating activities:
Net income (loss)	$	4,955,757		$	(30,627,356	)	$	7,799,976
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		3,404			5,242			3,276
Equity in undistributed (income) losses of subsidiaries		(8,292,885	)		34,185,596			(3,805,711	)
Stock based compensation expense		130,459			231,761			264,881
Other, net		10,862			(181,859	)		973,726
Net cash (used in) provided by operating activities		(3,192,403	)		3,613,384			5,236,148
Cash flows from investing activities:
Purchase of premise and equipment		(3,052	)		—			(16,382	)
Proceeds from sale premise and equipment		500			—			—
Investment in subsidiary		(8,000,000	)		(10,000,000	)		—
Net cash used in investing activities		(8,002,552	)		(10,000,000	)		(16,382	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock and warrant		—			30,255,000			—
Proceeds from issuance of treasury stock		—			—			100,427
Purchase of treasury stock		—			(802,445	)		(145,300	)
Cash dividends paid — preferred stock		(1,369,879	)		—			—
Cash dividends paid — common stock		(2,665,557	)		(3,486,415	)		(3,503,575	)
Net cash (used in) provided by financing activities		(4,035,436	)		25,966,140			(3,548,448	)
Net increase (decrease) in cash and due from banks		(15,230,391	)		19,579,524			1,671,318
Cash and due from banks at beginning of year		29,968,196			10,388,672			8,717,354
Cash and due from banks at end of year	$	14,737,805		$	29,968,196		$	10,388,672

During 2007, the Company changed the name of Citizen Union State Bank to Hawthorn Bank, and combined Osage Valley Bank, Bank 10 and Exchange National Bank into Hawthorn Bank. Concurrent with each combination, the underlying bank charters were sold to unrelated third parties for cash. Included in other income for 2007 is a gain from the sales of charters aggregating $1,200,000.

69

Hawthorn Bancshares, Inc.
and subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(17) Disclosures About Financial Instruments

The Company issues financial instruments with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At December 31, 2009, no amounts have been accrued for any estimated losses for these financial instruments.

The contractual amount of off-balance-sheet financial instruments as of December 31, 2009 and 2008 is as follows:

	2009		2008
Commitments to extend credit	$	131,592,651		143,936,230
Standby letters of credit		2,799,828		5,417,161

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Of the total commitments to extend credit at December 31, 2009, approximately $47,625,000 represents fixed-rate loan commitments. Of the total commitments to extend credit at December 31, 2008, approximately $63,584,000 represents fixed-rate loan commitments. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining term of standby letters of credit range from one month to ten years at December 31, 2009.

70

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

     A summary of the carrying amounts and fair values of the Company’s financial instruments at December 31, 2009 and 2008 is as follows:

	2009				2008
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
Assets:
Loans	$	976,817,458	$	984,305,000	$	996,436,986	$	1,000,594,000
Investment in debt securities		152,926,685		152,926,685		149,400,929		149,400,929
Federal fund sold and securities purchased under agreements to resell		89,752		89,752		104,393		104,393
Cash and due from banks		24,575,943		24,575,943		53,723,075		53,723,075
Mortgage servicing rights		2,020,964		2,904,000		1,171,225		2,455,000
Accrued interest receivable		6,625,557		6,625,557		7,476,093		7,476,093
	$	1,163,056,359	$	1,171,426,937	$	1,208,312,701	$	1,213,753,490
Liabilities:
Deposits:
Demand	$	135,017,639	$	135,017,639	$	125,245,200	$	125,245,200
NOW		139,623,577		139,623,577		123,288,896		123,288,896
Savings		47,637,148		47,637,148		43,370,172		43,370,172
Money market		167,023,279		167,023,279		175,967,634		175,967,634
Time		467,021,154		478,011,000		487,424,487		494,427,000
Federal funds purchased and securities sold under agreements to repurchase		36,645,434		36,645,434		29,138,623		29,138,623
Subordinated notes		49,486,000		18,329,000		49,486,000		35,180,000
Other borrowings		79,317,302		80,557,000		129,057,483		130,454,000
Accrued interest payable		2,438,121		2,438,121		3,847,415		3,847,415
	$	1,124,209,654	$	1,105,282,198	$	1,166,825,910	$	1,160,918,940

71

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as real estate, installment and other consumer, commercial, and bankers’ acceptances. Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories.

The fair value of loans is estimated based on present values using applicable risk-adjusted spreads to the U. S. Treasury curve to approximate current interest rates applicable to each category of such financial instruments. No adjustment was made to the interest rates for changes in credit risk of performing loans where there are no known credit concerns. Management segregates loans in appropriate risk categories. Management believes that the risk factor embedded in the interest rates along with the allowance for loan losses applicable to the performing loan portfolio results in a fair valuation of such loans. The fair values of impaired loans are generally based on market prices for similar assets determined through independent appraisals or discounted values of independent appraisals and brokers’ opinions of value. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

Investment in Debt and Equity Securities

Fair values are based on quoted market prices or dealer quotes.

Federal Funds Sold, Cash, and Due from Banks

For federal funds sold, cash, and due from banks, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of contractual cash flows utilizing servicing rate, constant prepayment rate, servicing cost, and discount rate factors.

Accrued Interest Receivable and Payable

For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments.

Deposits

The fair value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

72

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

Securities Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury

For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

Other Borrowings

The fair value of other borrowings, which include subordinated notes and Federal Home Loan borrowings, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.

Commitments to Extend Credit and Standby Letters of Credit

The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms, which are competitive in the markets in which it operates.

The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.

(18) Litigation

Various legal claims have arisen in the normal course of business, which, in the opinion of management of the Company, will not result in any material liability to the Company.

73

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(19) Quarterly Financial Information

Year Ended December 31, 2009 (unaudited)

										Year
	First		Second		Third		Fourth			to
(In thousands except per share data)	quarter		quarter		quarter		quarter			Date
Interest income	$	16,034	$	16,061	$	15,910	$	15,557		$	63,562
Interest expense		6,504		6,043		5,474		4,953			22,974
Net interest income		9,530		10,018		10,436		10,604			40,588
Provision for loan losses		1,750		1,404		1,250		3,950			8,354
Noninterest income		2,765		2,807		2,601		3,135			11,308
Noninterest expense		8,995		9,661		9,040		9,034			36,730
Income taxes		494		555		840		(33	)		1,856
Net income	$	1,056	$	1,205	$	1,907	$	788		$	4,956
Preferred stock dividends		493		502		497		502			1,994
Net income available to common stockholders	$	563	$	703	$	1,410	$	286		$	2,962
Net income per share:
Basic earnings per share	$	0.13	$	0.16	$	0.33	$	0.07		$	0.69
Diluted earnings per share		0.13		0.16		0.33		0.07			0.69

Year Ended December 31, 2008 (unaudited)

										Year
	First		Second		Third		Fourth			to
(In thousands except per share data)	quarter		quarter		quarter		quarter			Date
Interest income	$	18,425	$	17,121	$	17,430	$	16,739		$	69,715
Interest expense		8,881		7,605		7,575		7,538			31,599
Net interest income		9,544		9,516		9,855		9,201			38,116
Provision for loan losses		1,650		1,300		1,000		4,261			8,211
Noninterest income		2,368		2,322		2,321		2,286			9,297
Noninterest expense		8,644		8,626		8,382		50,323			75,975
Income taxes (benefit)		531		595		780		(8,052	)		(6,146	)
Net income (loss)	$	1,087	$	1,317	$	2,014	$	(35,045	)	$	(30,627	)
Preferred stock dividends		—		—		—		66			66
Net income (loss) available to common stockholders	$	1,087	$	1,317	$	2,014	$	(35,111	)	$	(30,693	)
Net income (loss) per share — revised for stock dividend:
Basic earnings (loss) per share	$	0.25	$	0.30	$	0.47	$	(8.16	)	$	(7.10	)
Diluted earnings (loss) per share		0.25		0.30		0.47		(8.16	)		(7.10	)

74

MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS

     Market Price. Our Company’s common stock trades on Nasdaq’s global select market under the stock symbol of “HWBK.” Prior to our June 2007 name change, our stock symbol was “EXJF”. The following table sets forth the range of high and low bid prices of our Company’s common stock by quarter for each quarter in 2009 and 2008 in which the stock was traded.

2009	High		Low
First Quarter		11.30		11.30
Second Quarter		9.90		9.90
Third Quarter		9.75		9.38
Fourth Quarter		9.65		9.40

2008	High		Low
First Quarter		29.50		23.78
Second Quarter		28.15		23.75
Third Quarter		26.48		19.27
Fourth Quarter		24.39		14.00

     Shares Outstanding. As of March 3, 2010, our Company had issued 4,463,813 shares of common stock, of which 4,301,955 shares were outstanding. The outstanding shares were held of record by approximately 1,483 shareholders. In addition to common stock, our Company has 30,255 shares of cumulative, perpetual preferred stock outstanding. The preferred shares were issued pursuant to the U.S. Treasury’s Capital Purchase Program (or CPP).

     Dividends. The following table sets forth information on dividends paid by our Company in 2009 and 2008.

	Dividends
Month Paid	Per Share
January, 2009	$	0.21
April, 2009		0.21
July, 2009		0.11
October, 2009		0.11
Total for 2009	$	0.64
January, 2008	$	0.21
April, 2008		0.21
July, 2008		0.21
October, 2008		0.21
Total for 2008	$	0.84

     Our Board of Directors intends that our Company will continue to pay quarterly dividends. The actual amount of quarterly dividends and the payment, as well as the amount, of any special dividend ultimately will depend on the payment of sufficient dividends by our subsidiary Bank to our Company. The payment by our Bank of dividends to our Company will depend upon such factors as our Bank’s financial condition, results of operations and current and anticipated cash needs, including capital requirements. As discussed in Note 6 to our consolidated financial statements, the Bank will be required to receive regulatory approval prior to paying dividends to our Company until such time as the Bank’s unappropriated retained earnings balance is restored to a positive balance. In addition to the above limitations, our ability to pay dividends on our common stock is limited by our participation in the Treasury’s Capital Purchase Program (or CPP). Prior to December 19, 2011, unless we have redeemed the Series A preferred stock issued to the U.S. Treasury in the CPP or the U.S. Treasury has transferred the Series A preferred stock to a third party, we must receive the consent of the U.S. Treasury before we can pay quarterly dividends on our common stock of more than $0.20 per share. Furthermore, if we are not current in the payment of quarterly dividends on the Series A preferred stock, we can not pay dividends on our common stock.

75

     Stock Performance Graph. The following performance graph shows a comparison of cumulative total returns for our Company, the Nasdaq Stock Market (U.S. Companies), and a peer index of financial institutions having total assets of between $1 billion and $5 billion for the period from December 31, 2004, through December 31, 2009. The cumulative total return on investment for each of the periods for our Company, the Nasdaq Stock Market (U.S. Companies) and the peer index is based on the stock price or index at January 1, 2004. The performance graph assumes that the value of an investment in our common stock and each index was $100 at December 31, 2004 and that all dividends were reinvested. The information presented in the performance graph is historical in nature and is not intended to represent or guarantee future returns.

     The comparison of cumulative total returns presented in the above graph was plotted using the following index values and common stock price values:

	12/31/04		12/31/05		12/31/06		12/31/07		12/31/08		12/31/09
Hawthorn Bancshares, Inc.	$	100.00	$	105.21	$	115.47	$	94.18	$	67.44	$	40.83
Nasdaq Composite (U.S. Companies)	$	100.00	$	101.37	$	111.03	$	121.92	$	72.90	$	104.31
Index of financial institutions ($1 billion to $5 billion)	$	100.00	$	98.29	$	113.74	$	82.85	$	68.72	$	49.26

76

DIRECTORS AND EXECUTIVE OFFICERS OF OUR COMPANY

Name	Position with Our Company	Position with Subsidiary Bank	Principal Occupation
James E. Smith	Chairman, Chief Executive Officer and Director-Class I	Chairman, Chief Executive Officer, and Director of Hawthorn Bank	Position with Hawthorn Bancshares and Hawthorn Bank
David T. Turner	President and Director-Class III	President of East Region and Director of Hawthorn Bank	Position with Hawthorn Bancshares and Hawthorn Bank
Charles G. Dudenhoeffer, Jr.	Director-Class II	Director of Hawthorn Bank	Retired
Philip D. Freeman	Director-Class I	Director of Hawthorn Bank	Owner/Manager, Freeman Mortuary, Jefferson City, Missouri
Kevin L. Riley	Director-Class III	Director of Hawthorn Bank	Co-owner, Riley Chevrolet, Inc. and Riley Toyota, Scion, Cadillac, Inc., Jefferson City, Missouri
Gus S. Wetzel, II	Director-Class II	Director of Hawthorn Bank	Physician, Wetzel Clinic, Clinton, Missouri
Richard G. Rose	Chief Financial Officer	Senior Vice President and Chief Financial Officer of Hawthorn Bank	Position with Hawthorn Bancshares and Hawthorn Bank
Kathleen L. Bruegenhemke	Senior Vice President, Chief Risk Officer and Corporate Secretary	Senior Vice President and Chief Risk Officer	Position with Hawthorn Bancshares and Hawthorn Bank

ANNUAL REPORT ON FORM 10-K

A copy of our Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2010 annual meeting of shareholders upon written request to Kathleen L. Bruegenhemke, Secretary, Hawthorn Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101. Our Company will provide a copy of any exhibit to the Form 10-K to any such person upon written request and the payment of our Company’s reasonable expenses in furnishing such exhibits.

77

EX-21

Exhibit 21

LIST OF SUBSIDIARIES

Name of Subsidiary	Jurisdiction of Organization
Union State Bancshares, Inc.	Missouri
Hawthorn Bank	Missouri
Hawthorn Real Estate, LLC	Missouri (limited liability company)
Real Estate Holdings of Missouri, LLC	Missouri (limited liability company)
Jefferson City IHC, LLC	Missouri (limited liability company)
Exchange National Statutory Trust I	Connecticut
Exchange National Statutory Trust II	Delaware

1

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Hawthorn Bancshares, Inc.:

We consent to the incorporation by reference in the registration statement (No. 333-68388) on Form S-8 of Hawthorn Bancshares, Inc. of our reports dated March 15, 2010, with respect to the consolidated balance sheets of Hawthorn Bancshares, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009, and the effectiveness of internal control over financial reporting as of December 31, 2009, which reports appear in the December 31, 2009 annual report on Form 10-K of Hawthorn Bancshares, Inc.

/s/ KPMG LLP  

St. Louis, Missouri
March 15, 2009

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, James E. Smith, certify that:

     1. I have reviewed this report on Form 10-K of Hawthorn Bancshares, Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

1

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2010	/s/ James E. Smith
	James E. Smith
	Chairman of the Board and Chief Executive Officer

2

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Richard G. Rose, certify that:

     1. I have reviewed this report on Form 10-K of Hawthorn Bancshares, Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

1

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2010	/s/ Richard G. Rose
	Richard G. Rose
	Chief Financial Officer

2

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

     In connection with the Annual Report of Hawthorn Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, James E. Smith, Chairman of the Board and Chief Executive Officer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     (b) The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated: March 15, 2010
	/s/ James E. Smith
	James E. Smith
	Chairman of the Board and Chief Executive Officer

“A signed original of this written statement required by Section 906 has been provided to Hawthorn Bancshares, Inc. and will be retained by Hawthorn Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.”

1

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

     In connection with the Annual Report of Hawthorn Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, Richard G. Rose, Chief Financial Officer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     (b) The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated: March 15, 2010
	/s/ Richard G. Rose
	Richard G. Rose
	Chief Financial Officer

“A signed original of this written statement required by Section 906 has been provided to Hawthorn Bancshares, Inc. and will be retained by Hawthorn Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.”

1

EX-99.1

Exhibit 99.1

Hawthorn Bancshares, Inc.

Certification of Principal Executive Officer
Pursuant to Section 111(b)(4) of the
Emergency Economic Stabilization Act of 2008 (“EESA”)

I, James E. Smith, Chairman of the Board and Chief Executive Officer of Hawthorn Bancshares, Inc. (“Hawthorn”), certify, based on my knowledge, that:

(i)	The compensation committee of Hawthorn has discussed, reviewed, and evaluated with senior risk officers at least every six months beginning on September 14, 2009 and ending on December 31, 2009 (the “applicable period”) all senior executive officer (“SEO”) compensation plans, employee compensation plans and the risks these plans pose to Hawthorn;
(ii)	The compensation committee of Hawthorn has identified and limited during the applicable period the features in the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Hawthorn and has identified any features in the employee compensation plans that pose risks to Hawthorn and limited those features to ensure that Hawthorn is not unnecessarily exposed to risks;
(iii)	The compensation committee of Hawthorn has reviewed, at least every six months during the applicable period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Hawthorn to enhance the compensation of an employee, and has limited any such features;
(iv)	The compensation committee of Hawthorn will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;
(v)	The compensation committee of Hawthorn will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in:

1.	SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Hawthorn;
2.	Employee compensation plans that unnecessarily expose Hawthorn to risks; and
3.	Employee compensation plans that could encourage the manipulation of Hawthorn’s reported earnings to enhance the compensation of an employee;

(vi)	Hawthorn has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), to SEOs and its twenty next most highly compensated employees be subject to a recovery or “clawback” provision if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
(vii)	Hawthorn has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of the next five most highly compensated employees during the period beginning on June 15, 2009 and ending on December 31, 2009;
(viii)	Hawthorn has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during the period beginning on June 15, 2009 and ending on December 31, 2009;
(ix)	The board of directors of Hawthorn has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, has provided this policy to Treasury and its primary regulatory agency; Hawthorn and its employees have complied with this policy during the applicable period and any expenses that, pursuant to this policy, required the approval of the board of directors, a committee of the board of directors, an SEO or an executive officer with a similar level of responsibility, were properly approved;
(x)	Hawthorn will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during the period beginning January 1, 2009 and ending on December 31, 2009;
(xi)	Hawthorn will disclose the amount, nature and justification for the offering during the period beginning on June 15, 2009 and ending December 31, 2009, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in paragraph (viii);
(xii)	Hawthorn will disclose whether Hawthorn, the board of directors of Hawthorn or the compensation committee of Hawthorn has engaged during the period beginning on June 15, 2009 and ending December 31, 2009 a compensation consultant, including the services the compensation consultant or any affiliate of the compensation consultant provided during this period;
(xiii)	Hawthorn has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and

the next twenty most highly compensated employees during the period beginning on June 15, 2009 and ending December 31, 2009;

(xiv)	Hawthorn has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Hawthorn and Treasury, including any amendments;
(xv)	Hawthorn has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified.

     I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for example, 18 USC 1001).

Date: March 15, 2010

/s/ James E Smith  

James E. Smith, Chairman of the Board and Chief 

Executive Officer 

EX-99.2

Exhibit 99.2

Hawthorn Bancshares, Inc.

Certification of Principal Financial Officer
Pursuant to Section 111(b)(4) of the
Emergency Economic Stabilization Act of 2008 (“EESA”)

I, Richard G. Rose, Chief Financial Officer of Hawthorn Bancshares, Inc. (“Hawthorn”), certify, based on my knowledge, that:

(i)	The compensation committee of Hawthorn has discussed, reviewed, and evaluated with senior risk officers at least every six months beginning on September 14, 2009 and ending on December 31, 2009 (the “applicable period”) all senior executive officer (“SEO”) compensation plans, employee compensation plans and the risks these plans pose to Hawthorn;
(ii)	The compensation committee of Hawthorn has identified and limited during the applicable period the features in the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Hawthorn and has identified any features in the employee compensation plans that pose risks to Hawthorn and limited those features to ensure that Hawthorn is not unnecessarily exposed to risks;
(iii)	The compensation committee of Hawthorn has reviewed, at least every six months during the applicable period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Hawthorn to enhance the compensation of an employee, and has limited any such features;
(iv)	The compensation committee of Hawthorn will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;
(v)	The compensation committee of Hawthorn will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in:

A.	SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Hawthorn;
B.	Employee compensation plans that unnecessarily expose Hawthorn to risks; and
C.	Employee compensation plans that could encourage the manipulation of Hawthorn’s reported earnings to enhance the compensation of an employee;

(vi)	Hawthorn has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), to SEOs and its twenty next most highly compensated employees be subject to a recovery or “clawback” provision if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
(vii)	Hawthorn has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of the next five most highly compensated employees during the period beginning on June 15, 2009 and ending on December 31, 2009;
(viii)	Hawthorn has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during the period beginning on June 15, 2009 and ending on December 31, 2009;
(ix)	The board of directors of Hawthorn has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, has provided this policy to Treasury and its primary regulatory agency; Hawthorn and its employees have complied with this policy during the applicable period and any expenses that, pursuant to this policy, required the approval of the board of directors, a committee of the board of directors, an SEO or an executive officer with a similar level of responsibility, were properly approved;
(x)	Hawthorn will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during the period beginning January 1, 2009 and ending on December 31, 2009;
(xi)	Hawthorn will disclose the amount, nature and justification for the offering during the period beginning on June 15, 2009 and ending December 31, 2009, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in paragraph (viii);
(xii)	Hawthorn will disclose whether Hawthorn, the board of directors of Hawthorn or the compensation committee of Hawthorn has engaged during the period beginning on June 15, 2009 and ending December 31, 2009 a compensation consultant, including the services the compensation consultant or any affiliate of the compensation consultant provided during this period;
(xiii)	Hawthorn has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and

the next twenty most highly compensated employees during the period beginning on June 15, 2009 and ending December 31, 2009;

(xiv)	Hawthorn has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Hawthorn and Treasury, including any amendments;
(xv)	Hawthorn has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified.

     I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for example, 18 USC 1001).

Date: March 15, 2010

/s/ Richard G Rose  

Richard G. Rose, Chief Financial Officer