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, 2010

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 None Name of Each Exchange on Which Registered 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 o	Non-accelerated filer þ	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o Noþ

The aggregate market value of the 3,703,667 shares of voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the $12.05 closing price of such common equity on June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was $44,629,182. Aggregate market value excludes an aggregate of 770,366 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 14, 2011, the registrant had 4,635,891 shares of common stock, par value $1.00 per share, issued and 4,474,033 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the following documents are incorporated by reference into the indicated parts of this report: (1) 2010 Annual Report to Shareholders — Part II and (2) definitive Proxy Statement for the 2011 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-13
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.

     Real Estate Holdings of Missouri, LLC. Real Estate Holdings of Missouri, LLC, was formed in March 2010 in order to purchase from Hawthorn Bank and hold parcels of foreclosed real property located in and around Kansas City, Missouri. The purpose for acquiring this foreclosed real estate in Real Estate Holdings of Missouri, LLC is to allow for the orderly, and potentially more expeditious, disposition of these assets and strengthen Hawthorn Bank’s financial position.

Employees

     As of December 31, 2010, Hawthorn and its subsidiaries had approximately 309 full-time and 63 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

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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.

     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 fourth largest (in terms of deposits) of the thirteen banks within Cole county, the largest (in terms of deposits) of the eight banks within Henry county, the third largest (in terms of deposits) of the seventeen 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

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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 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

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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%.

     On December 31, 2010, Hawthorn was in compliance with all of the FRB’s capital adequacy guidelines. Hawthorn’s capital ratios on December 31, 2010 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)
11.00%	14.25%	17.05%

     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. The Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010, a subset of the Dodd-Frank Act discussed below, permits banks to acquire and establish de novo branches in other states if a state bank in that other state would be permitted to establish the branch.

     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

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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 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, 2010, 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, 2010 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)
9.99%	12.93%	14.18%

     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

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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.

     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. 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. In July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which enacted substantial changes to the legal framework of the entire financial services industry. The Dodd-Frank Act mandates the passage of numerous rules and regulations by various regulatory agencies over the next few years. This law will change banking regulation and the operating environment of Hawthorn in substantial and unpredictable ways. It 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 the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its business.

     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.

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     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 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.

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     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, the amount of interest our Bank earns 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,

• 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

10

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 through 2009 and 2010 and in the first quarter of 2011. 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 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

11

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.

     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. 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.

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     On July 21, 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act restructures the regulation of depository institutions and contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as that which occurred in 2008-2009. Included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The full impact of The Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

     The FDIC’s Changes in the Calculation of Deposit Insurance Premiums and Ability to Levy Special Assessments Could Increase Our Non-Interest Expense And May Reduce Our Profitability. The range of base assessment rates currently varies 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. However, the Dodd-Frank Act requires the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments. On February 9, 2011, the FDIC adopted a final rule that defines the assessment base as the average consolidated total assets during the assessment period minus the average tangible equity of the insured depository institution during the assessment period. The FDIC also imposed a new assessment rate scale. Under the new system, banks will pay assessments at a rate between 5 and 35 basis points per assets minus tangible equity, depending upon an institution’s risk category (the final rule also includes progressively lower assessment rate schedules when the FDIC’s reserve ratio reaches certain levels). The rulemaking changes the current assessment rate schedule so the schedule will result in the collection of assessment revenue that is approximately the same as generated under the current rate schedule and current assessment base. Nearly all banks with assets less than $10 billion will pay smaller deposit insurance assessments as a result of the new rule. The majority of the changes in the FDIC’s final rule become effective on April 1, 2011.

     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 change in the calculation methodology for deposit insurance premiums and the possible emergency special assessments could 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. Bank dividends are the principal source of funds for payment of dividends by our Company to our shareholders. Our Bank is subject to regulations which require the maintenance of

13

minimum capital requirements. As a result of our Bank paying out dividends to us in excess of its 2010 earnings, our Bank’s unappropriated retained earnings balance at December 31, 2010 was negative. As a result, our Bank must obtain regulatory approval prior to paying dividends to our Company until such time as the unappropriated retained earnings balance is restored to a positive balance. There can be no assurance that such approval will be obtained for the payment of dividends at levels previously paid by our Bank, if at all, and there can be no assurance that our Bank’s unappropriated retained earnings balance will be restored to a positive balance.

     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.

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

14

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, 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.

     In July 2010, President Barack Obama signed into law the Dodd-Frank Act, which enacted substantial changes to the legal framework of the entire financial services industry. The Dodd-Frank Act mandates the passage of numerous rules and regulations by various regulatory agencies over the next few years. This legislation will change banking regulation and the operating environment of Hawthorn in substantial and unpredictable ways. It 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 the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its 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

15

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 David Turner, Chairman, CEO, and President and the other executive officers. These individuals are expected to continue to perform their services. However, the loss of the services of Mr. 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 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.

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

						Net Book Value at
	Approximate					December 31,
	Square			Owned or		2010
Location	Footage			Leased		(in thousands)
8127 East 171st Street, Belton, MO		13,000		Owned		$	2,274
4675 Gretna Road, Branson, MO		11,000		Owned		$	1,585
1000 West Buchanan Street, California, MO		2,270		Owned		$	437
102 North Second Street, Clinton, MO		11,524		Owned		$	1,674
1400 East Ohio Street, Clinton, MO		13,551		Owned		$	3,388
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		$	25
1110 Club Village Drive, Columbia, MO		5,000		Owned		$	1,712
115 South 2nd Street, Drexel, MO		4,000		Owned		$	266
100 Plaza Drive, Harrisonville, MO		4,000		Owned		$	307
17430 East 39th Street, Independence, MO		4,070		Owned		$	739
220 West White Oak, Independence, MO		1,800		Owned		$	96
132 East High Street, Jefferson City, MO		34,800		Owned		$	3,642
3701 West Truman Blvd, Jefferson City, MO		21,000		Owned		$	335
211 West Dunklin Street, Jefferson City, MO		2,400		Owned		$	10
800 Eastland Drive, Jefferson City, MO		4,100		Owned		$	800
3600 Amazonas Drive, Jefferson City, MO		26,000		Owned		$	1,128
300 S.W. Longview Blvd, Lee’s Summit, MO		11,700		Owned		$	2,364
335 Chestnut, Osceola, MO		1,580		Owned		$	65
500 North Mott Drive, # 105B, Raymore, MO (in the Foxwood Springs Seniors Center)		462		Leased	(1)		N/A
595 VFW Memorial Drive, St. Robert, MO		2,236		Owned		$	33
321 West Battlefield, Springfield, MO		12,500	(3)	Owned		$	659
200 West Main Street, Warsaw, MO		8,900		Owned		$	165
1891 Commercial Drive, Warsaw, MO		11,000		Owned		$	1,854
125 South Main, Windsor, MO		3,600		Owned		$	305

(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.

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Item 3. Legal Proceedings.

     The information required by this Item is set forth in Note 17, Commitments and Contingencies, in our Company’s consolidated financial statements.

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
David T. Turner		54	Chairman, Chief Executive Officer, President and Director
Richard G. Rose		59	Chief Financial Officer
Kathleen L. Bruegenhemke		45	Senior Vice President and Secretary

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

     David T. Turner has served as a director of our Company and of Hawthorn Bank (or of its constituent predecessors) since January 1997. He has served as president of our Company since March 2002 and as chairman and chief executive officer of our Company since January 2011. He also currently serves as chairman, chief executive officer and president of Hawthorn Bank. Mr. Turner has served as vice chairman of our Company from June 1998 through March 2002 and as senior vice president of our Company from 1993 until June 1998. He 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.

     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.

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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 2010 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, 2010:

							(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, 2010		—		—		—	$	333,038
November 1-30, 2010		—		—		—	$	333,038
December 1-31, 2010		—		—		—	$	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.

Recent Issuance of Securities

     None.

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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 information under the caption “Selected Consolidated Financial Data” in our Company’s 2010 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 2010 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, 2010, the rate shock scenario models indicated that annual net interest income could change by as much as (18.4)% to 22.2% 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 2010 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 2010 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 2010 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, 2010. 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 effective 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, including controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C), as of December 31, 2010, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based upon its assessment, management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting, including controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C), is effective based on the criteria established in Internal Control—Integrated Framework.

     Management’s assessment of the effectiveness of internal control over financial reporting, including controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C), as of December 31, 2010, 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, 2010 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, 2010, 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

22

design and operating effectiveness of internal control 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 generally accepted accounting principles. Because management’s assessment and our audit were conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9 C). 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 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, 2010, 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, 2010 and 2009, 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, 2010, and our report dated March 30, 2011 expressed an unqualified opinion on those consolidated financial statements.

/s / KPMG LLP
St. Louis, Missouri
March 30, 2011

Item 9B. Other Information.

     None.

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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 2011 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 2011 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 2011 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;
(v)	the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Company’s definitive Proxy Statement for its 2011 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 2011 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 2011 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:

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(i)	the information under the caption “Executive Compensation and Related Matters” in our Company’s definitive Proxy Statement for its 2011 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 2011 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 2011 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 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

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, 2010:

							Number of securities remaining
	Number of securities to be			Weighted-average exercise			available for future issuance under
	issued upon exercise of			price of outstanding			equity compensation plans
	outstanding options,			options, warrants and			(excluding securities reflected in
Plan category	warrants and rights			rights			column (a))
	(a)			(b)			(c)
Equity compensation plans approved by security holders		250,491	*	$	25.42			654,612	**
Equity compensation plans not approved by security holders		-0	-		-0	-		-0	-
Total		250,491	*	$	25.42			654,612	**

*	Consists of shares reserved for issuance pursuant to outstanding stock option grants under our Company’s incentive stock option plan.
**	Consists of 221,972 shares available for future issuance under our Company’s incentive stock option plan and 432,640 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 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

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(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 2011 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 2011 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 2011 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:

     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, 2010 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, 2010 and 2009.
	Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008.
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008.
	Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008.
	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).

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Exhibit No.	Description
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	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).*
10.2	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).*
10.3	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).
10.4	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).*
10.5	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).*
13	Our Company’s 2010 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 (filed as Exhibit 21 to our Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference).
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.

27

Exhibit No.	Description
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.
(c)	Financial Statement Schedules.
	See financial statement schedules identified above under Item 15(a)2, if any.

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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 30, 2011	By	/s/ David T. Turner
		David T. Turner, Chairman of the Board,
		President and Chief Executive Officer

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David T. Turner 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 30, 2011	/s/ David T. Turner
	David T. Turner, Chairman of the Board, President
	and Chief Executive Officer (Principal Executive Officer)
March 30, 2011	/s/ Richard G. Rose
	Richard G. Rose, Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)
March 30, 2011	/s/ Charles G. Dudenhoeffer, Jr.
	Charles G. Dudenhoeffer, Jr., Director
March 30, 2011	/s/ Philip D. Freeman
	Philip D. Freeman, Director
March 30, 2011	/s/ Kevin L. Riley
	Kevin L. Riley, Director
March 30, 2011	/s/ James E. Smith
	James E. Smith, Director
March 30, 2011	/s/ Gus S. Wetzel, II
	Gus S. Wetzel, II, Director

29

EXHIBIT INDEX

Exhibit No.	Description	Page No.
13	Our Company’s 2010 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).
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-13

Exhibit 13

2010

ANNUAL REPORT

TO

SHAREHOLDERS

HAWTHORN BANCSHARES, INC.

Lee’s Summit, Missouri

March 30, 2011

Dear Investors:

For 2010, our company reported a net loss available to common shareholders of $5.5 million compared to a net profit of $3.0 million for 2009. On a per share basis, this equates to a net loss of $1.24 per common share.

The net loss for 2010 was driven primarily by expenses related to adjusting our other real estate owned properties to fair value based on current appraisals and increased provision for loan losses to address continued deteriorating asset quality within the existing portfolio (increases in non-accrual loans, charge-offs, and foreclosures) particularly within the real estate construction and real estate mortgage segments of the portfolio. Other real estate expenses (which included impairment valuation write-downs) and loan loss provisions for 2010 increased over 2009 by $8.6 million and $6.9 million, respectively.

It is difficult to overcome such downward pressure on earnings; but the core performance of Hawthorn remains strong and has even improved in recent years due to 2010’s net interest margin increasing to 3.78% from 2009’s margin of 3.50%. I am pleased with our core growth and the work staff has done to enhance margin dollars. Our success in this area has allowed us to absorb the negative financial impact of the recession to a large extent.

With over 30 years of banking experience, I recognize that the sustainability of a bank is centered on asset quality, capital strength and liquidity. Asset quality has been our biggest challenge during the last couple of years. Hawthorn’s level of non-performing loans increased to 6.27% of total loans at year-end 2010, up from 4.27% at year-end 2009 and this is clearly not acceptable. The economic downturn and elevated unemployment rates in our market areas have impaired the ability for some of our customers to make payments in accordance with contractual terms. As such, Hawthorn has taken an active approach to obtain current appraisals so that market valuations can be used in determining probable loan losses. Although I’m disappointed by the increased credit losses and the elevated level of non-performing loans, we are working diligently to limit losses, as well as identify and resolve credit issues in a timely manner. These efforts are evidenced in the increased volume of foreclosures and gross loan charge-offs realized during 2010. Loans taken into foreclosure (other real estate owned) during 2010 totaled $23.7 million and gross charge-offs were $16.2 million during the same period. Comparatively, transfers to other real estate during 2009 totaled $7.0 million and gross charge-offs were $6.8 million.

Hawthorn’s total risk-based capital was 17.05% at year end 2010 and our leverage capital was 11.00% for the same period. As such, Hawthorn is classified as a well-capitalized bank by regulatory definition. We are disappointed that 2010 earnings were not positive; however, lowering the dividend rate and restricting asset growth enabled our capital levels to remain strong. In 2008, we participated in the U.S. Treasury’s Capital Purchase Program (commonly called TARP) which added $30.3 million in additional capital to the company. As of December 31, 2010, inclusion of the TARP funds in Hawthorn’s capital structure increased total risk-based capital from 13.95% to 17.05%. While Hawthorn would continue to exceed regulatory “well-capitalized” levels if the TARP funds were repaid, more evidence supporting an economic recovery is needed before it would be prudent to eliminate the capital cushion provided by the TARP program.

With liquid assets totaling $208 million, Hawthorn has a strong liquidity position.

As I take over the role as chairman and chief executive officer of Hawthorn, I want to emphasize that Hawthorn has a solid future. With strong core earnings, Hawthorn is fundamentally strong and as the economy rebounds, we anticipate loan loss provisions and other real estate expenses will return to pre-recessionary levels.

Sincerely,

David T. Turner
Chairman, Chief Executive Officer,
and President

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, 2010, 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 soft loan demand in the communities within which we operate 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, 2010. 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)	2010			2009			2008			2007			2006
Interest income	$	58,739		$	63,562		$	69,715		$	74,207		$	71,423
Interest expense		15,753			22,974			31,599			37,175			32,766
Net interest income		42,986			40,588			38,116			37,032			38,657
Provision for loan losses		15,255			8,354			8,211			1,154			1,326
Net interest income after provision for loan losses		27,731			32,234			29,905			35,878			37,331
Non-interest income		10,481			10,702			9,294			10,223			8,618
Security gains (losses), net		—			606			3			(2	)		(18	)
Total non-interest income		10,481			11,308			9,297			10,221			8,600
Non-interest expense		44,851			36,730			75,975			35,054			30,148
Income (loss) before income taxes		(6,639	)		6,812			(36,773	)		11,045			15,783
Income tax (benefit) expense		(3,087	)		1,856			(6,146	)		3,245			4,908
Net (loss) income		(3,552	)		4,956			(30,627	)		7,800			10,875
Less: preferred stock dividends		1,513			1,517			50			—			—
and accretion of discount on preferred stock		476			477			16			—			—
Net (loss) income available to common shareholders	$	(5,541	)	$	2,962		$	(30,693	)	$	7,800		$	10,875
Dividends on Common Stock
Declared	$	1,136		$	2,270		$	3,486		$	3,504		$	3,503
Paid		1,385			2,666			3,486			3,504			3,503
Ratio of total dividends declared to net income		N.M.			76.64	%		N.M.			44.92	%		32.21	%
Per Share Data
Basic (loss) earnings per common share	$	(1.24	)	$	0.66		$	(6.83	)	$	1.73		$	2.41
Diluted (loss) earnings per common share		(1.24	)		0.66			(6.83	)		1.71			2.39
Basic weighted average shares of common stock outstanding		4,474,033			4,474,033			4,494,856			4,511,975			4,510,107
Diluted weighted average shares of common stock outstanding		4,474,033			4,474,033			4,494,856			4,551,139			4,544,577

N.M. — not meaningful

5

(In thousands, except per share data)	2010			2009			2008			2007			2006
Balance Sheet Data (at period end)
Total assets	$	1,200,172		$	1,236,471		$	1,279,699		$	1,195,804		$	1,142,712
Loans		898,472			991,614			1,009,104			911,278			812,312
Investment securities		178,978			152,927			149,401			151,742			183,566
Total deposits		946,663			956,323			955,296			921,257			899,865
Subordinated notes		49,486			49,486			49,486			49,486			49,486
Other borrowed money		66,986			79,317			129,057			77,915			47,368
Common stockholders’ equity		72,647			79,406			78,530			111,199			104,945
Total stockholders’ equity		101,488			107,771			106,418			111,199			104,945
Balance Sheet Data (average balances)
Total assets	$	1,236,841		$	1,258,381		$	1,251,496		$	1,156,500		$	1,146,150
Loans		949,458			1,002,830			963,252			848,771			824,706
Investment securities		165,213			151,907			156,870			171,179			182,902
Total deposits		967,970			977,826			914,218			921,257			899,865
Subordinated notes		49,486			49,486			49,486			49,486			49,486
Other borrowed money		70,456			78,626			124,025			53,626			56,757
Common stockholders’ equity		80,735			79,828			112,307			108,052			100,821
Total stockholders’ equity		109,323			107,938			113,375			108,052			100,821
Key Ratios
Earnings Ratios
(Loss) return on average total assets		(0.29	)%		0.39	%		(2.45	)%		0.67	%		0.95	%
(Loss) return on average common stockholders’ equity		(6.86	)		3.71			(27.33	)		7.22			10.79
Efficiency ratio (3)		83.89			71.61			160.25			74.18			63.80
Asset Quality Ratios
Allowance for loan losses to loans		1.62			1.49			1.26			1.02			1.11
Nonperforming loans to loans (1)		6.27			4.27			2.46			0.67			0.62
Allowance for loan losses to nonperforming loans (1)		25.87			34.94			50.94			152.54			177.95
Nonperforming assets to loans and foreclosed assets (2)		7.71			5.08			3.21			0.92			0.96
Net loan charge-offs to average loans		1.63			0.62			0.50			0.10			0.17
Capital Ratios
Average stockholders’ equity to average total assets		8.84	%		8.58	%		9.06	%		9.34	%		8.80	%
Period-end common stockholders’ equity to period-end assets		6.05			6.42			6.14			9.30			9.18
Period-end stockholders’ equity to period-end assets		8.46			8.72			8.32			9.30			9.18
Total risk-based capital ratio		17.05			16.49			16.01			13.24			13.84
Tier 1 risk-based capital ratio		14.25			14.01			13.55			11.08			11.28
Leverage ratio		11.00			11.35			10.80			9.12			8.77

(1)	Nonperforming loans consist of nonaccrual loans, troubled debt restructurings, 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 to our Company’s 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. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on our business operations is provided in Note 1 to our Company’s consolidated financial statements and is also discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of the Company.

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. Given the sensitivity of the Company’s financial performance to changes in net interest margins and increasing reserves associated with loan losses and other real estate owned, sustained negative financial performance could provide sufficient negative evidence to necessitate a deferred tax asset valuation allowance. 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 $24,000 and $53,000 in 2010 and 2009, respectively. As of December 31, 2010 and 2009, total accrued interest was $31,000 and $94,000, 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 using straight line 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

7

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.

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 initially recorded as held for sale at the lower of the loan balance or fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. 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. The write-downs are recorded as other real estate expense. The Company establishes a valuation allowance related to other real estate owned on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the “cost” of a parcel of other real estate.

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)	2010			2009		2008			’10-’09			’09-’08			’10-’09			’09-’08
Net interest income	$	42,986		$	40,588	$	38,116		$	2,398		$	2,472			5.9	%		6.5	%
Provision for loan losses		15,255			8,354		8,211			6,901			143			82.6			1.7
Noninterest income		10,481			10,702		9,294			(221	)		1,408			(2.1	)		15.1
Investment securities gains (losses), net		—			606		3			(606	)		603		NM				20,100.0
Noninterest expense		44,851			36,730		75,975			8,121			(39,245	)		22.1			(51.7	)
(Loss) income before income taxes		(6,639	)		6,812		(36,773	)		(13,451	)		43,585			197.5			(118.5	)
Income tax (benefit) expense		(3,087	)		1,856		(6,146	)		(4,943	)		8,002			266.3			(130.2	)
Net (loss) income	$	(3,552	)	$	4,956	$	(30,627	)	$	(8,508	)	$	35,583			171.7	%		(116.2	)%
Less: preferred dividends		1,513			1,517		50			(4	)		1,467			—			—
and accretion of discount		476			477		16			(1	)		461			—			—
Net (loss) income available to common shareholders	$	(5,541	)	$	2,962	$	(30,693	)	$	(8,503	)	$	33,655			287.1	%		(109.7	)%

     Our Company’s consolidated net loss of ($3,552,000) for the year ended December 31, 2010 decreased $8,508,000 compared to net income of $4,956,000 for the year ended December 31, 2009. Our Company recorded preferred stock dividends and accretion on preferred stock of $1,989,000 for the year ended December 31, 2010, resulting in a ($5,541,000) net loss available for common shareholders compared to net income of $2,962,000 for the year ended December 31, 2009. Diluted earnings per share decreased from $0.66 per common share to ($1.24) per common share. Results for the year ended December 31, 2010 were negatively impacted by the $15,255,000 provision for loan losses compared to $8,354,000 for the same time period in 2009. Our Company also recorded a $6,158,000 valuation allowance for other real estate owned during the fourth quarter that significantly increased noninterest expense. For the year ended December 31, 2010, the return on average assets was (0.29)%, the return on average stockholders’ equity was (6.86)%, and the efficiency ratio was 83.9%. Net interest margin increased from 3.50% to 3.78%. Net interest income, on a tax equivalent basis, increased $2,317,000, or 8.0%, from 2009 to 2010.

     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

8

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 compared to a net loss of $(30,693,000) for the year ended December 31, 2008. Diluted earnings per share increased from $(6.83) per common share to $0.66 per common share. 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 insurance assessments of $2,519,000 during 2009 in comparison to $204,000 during 2008. For the year ended December 31, 2009, 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%. Net interest margin increased 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, 2010 were $1,200,172,000, compared to $1,236,471,000 at December 31, 2009, a decrease of $36,298,000, or 2.9%. On July 1, 2010, our Company distributed a four percent stock dividend for the second consecutive year to common shareholders of record at the close of business May 19, 2010. For all periods presented, share information, including basic and diluted earnings (loss) per share, have been adjusted retroactively to reflect the change.

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 years ended December 31, 2009 and 2008. 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 6 to our Company’s consolidated financial statements.

							$ Change			% Change
(Dollars in thousands)	2009			2008			’09-’08			’09-’08
Non-interest expense (GAAP)	$	36,730		$	75,975		$	(39,245	)		(0.5	)%
Goodwill impairment		—			(40,324	)		40,324			N.M
Non-interest expense (non-GAAP)		36,730			35,651			1,079			3.0
Net (loss) income (GAAP)	$	4,956		$	(30,627	)	$	35,583			(116.2	)%
Goodwill impairment, net of tax effect		—			33,211			(33,211	)		N.M
Less: preferred dividends		1,517			50			1,467			N.M
and accretion of discount		477			16			461			N.M
Net income available to common shareholders (non-GAAP)	$	2,962		$	2,518		$	444			17.6	%
GAAP basis:
Basic earnings (loss) per share	$	0.66		$	(6.83	)	$	7.49			(109.7	)%
Diluted earnings (loss) per share		0.66			(6.83	)		7.49			(109.7	)
Return (loss) on average assets		0.39	%		(2.45	)%
Return (loss) on average common equity		3.71	%		(27.33	)%
Efficiency ratio		71.61	%		160.25	%
Non-GAAP basis:
Basic earnings per share	$	0.66		$	0.56		$	0.10			17.9	%
Diluted earnings per share		0.66			0.56			0.10			17.9
Return on average assets		0.39	%		0.20	%
Return on average common equity		3.71	%		2.24	%
Efficiency ratio		71.61	%		75.20	%

9

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 $0.66 in 2009 compared to $0.56 in 2008. 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 0.39% in 2009, and return on average common equity decreased from 2.24% in 2008 to 3.71% in 2009. The efficiency ratio was 71.6% in 2009 compared with 75.2% in 2008.

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, 2010.

10

(Dollars In thousands)	2010								2009								2008
				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)
Commercial	$	139,679		$	7,739		5.54	%	$	149,695		$	8,151		5.45	%	$	151,342		$	9,468		6.26	%
Real estate construction - residential		37,954			1,959		5.16			36,630			2,137		5.83			—			—		—
Real estate construction - commercial		75,207			2,904		3.86			64,548			3,610		5.59			—			—		—
Real estate mortgage — residential		221,545			12,672		5.72			222,798			14,197		6.37			223,093			9,560		4.29
Real estate mortgage — commercial		440,285			25,309		5.75			494,703			26,813		5.42			556,343			41,132		7.39
Consumer		34,787			2,626		7.55			34,456			2,606		7.56			32,474			2,606		8.02
Investment in securities: (3)
U.S. treasury		790			15		1.9			—			—		—			—			—		—
Government sponsored enterprises		47,914			1,242		2.59			47,958			1,800		3.75			75,514			3,268		4.33
Asset backed securities		83,237			2,918		3.51			64,133			2,617		4.08			35,326			1,649		4.67
State and municipal		33,272			1,764		5.30			39,816			2,166		5.44			46,030			2,503		5.44
Restricted Investments		6,356			176		2.77			8,817			164		1.86			8,440			316		3.74
Federal funds sold		187			—		—			309			—		—			2,925			60		2.05
Interest bearing deposits in other financial institutions		34,680			86		0.25			18,807			53		0.28			8,738			24		0.27
Total interest earning assets		1,155,893			59,410		5.14			1,182,670			64,314		5.44			1,140,225			70,586		6.19
All other assets		94,802								89,108								121,373
Allowance for loan losses		(13,854	)							(13,397	)							(10,102	)
Total assets	$	1,236,841							$	1,258,381							$	1,251,496
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts	$	167,303		$	960		0.57	%	$	138,456		$	1,131		0.82	%	$	117,487		$	1,317		1.12	%
Savings		52,605			131		0.25			46,464			139		0.30			44,253			226		0.51
Money market		167,240			1,080		0.65			175,894			1,747		0.99			168,418			3,340		1.98
Time deposits of $100,000 and over		130,493			2,485		1.90			140,502			3,862		2.75			142,713			5,698		3.99
Other time deposits		318,891			7,211		2.26			351,597			10,543		3.00			319,919			12,872		4.02
Total time deposits		836,532			11,867		1.42			852,913			17,422		2.04			792,790			23,453		2.96
Federal funds purchased and securities sold under agreements to repurchase		32,723			75		0.23			33,923			88		0.26			41,633			869		2.09
Subordinated notes		49,486			1,526		3.08			49,486			2,447		4.94			49,486			3,046		6.16
Other borrowed money		70,456			2,285		3.24			78,626			3,017		3.84			124,025			4,231		3.41
Total interest bearing liabilities		989,197			15,753		1.59			1,014,948			22,974		2.26			1,007,934			31,599		3.14
Demand deposits		131,438								124,913								121,428
Other liabilities		6,883								10,582								8,759
Total liabilities		1,127,518								1,150,443								1,138,121
Stockholders’ equity		109,323								107,938								113,375
Total liabilities and stockholders’ equity	$	1,236,841							$	1,258,381							$	1,251,496
Net interest income (FTE)				$	43,657							$	41,340							$	38,987
Net interest spread							3.55	%							3.18	%							3.05	%
Net interest margin							3.78	%							3.50	%							3.42	%

(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 $671,000, $751,000 and $871,000 for the years ended December 31, 2010, 2009 and 2008, 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.

11

Comparison of Years ended December 31, 2010 and 2009

     Financial results for 2010 compared to 2009 included an increase in net interest income, on a tax equivalent basis, of $2,317,000, or 8.0%. Average interest-earning assets decreased $26,777,000, or 2.3% to $1,155,893,000 at December 31, 2010 compared to $1,182,670,000 at December 31, 2009 and average interest bearing liabilities decreased $25,751,000, or 2.5%, to $989,197,000 at December 31, 2010 compared to $1,014,948,000 at December 31, 2009.

     Average loans outstanding decreased $53,372,000 or 5.3% to $949,458,000 for 2010 compared to $1,002,830,000 for 2009. See the “Lending and Credit Management” section of this discussion for further discussion of changes in the composition of our lending portfolio.

The following is a summary of the changes in average loan balance by major class within our Company’s loan portfolio:

					$			%
					Change			Change
(Dollars in thousands)	2010		2009		’10-’09			’10-’09
Average loans:
Commercial	$	139,679	$	149,695	$	(10,016	)		(6.7	)%
Real estate construction — residential		37,954		42,307		(4,353	)		(10.3	)
Real estate construction — commercial		75,207		74,969		238			0.3
Real estate mortgage — residential		221,545		238,012		(16,467	)		(6.9	)
Real estate mortgage — commercial		440,285		463,391		(23,106	)		(5.0	)
Consumer		34,788		34,456		332			1.0
Total	$	949,458	$	1,002,830	$	(53,372	)		(5.3	)%

     Average investment securities and federal funds sold decreased $13,184,000 or 8.7% to $165,400,000 for 2010 compared to $152,216,000 for 2009. Average interest bearing deposits in other financial institutions increased $15,873,000 to $34,680,000 at December 31, 2010 compared to $18,807,000 at December 31, 2009. See the Liquidity Management section below for further discussion.

     The overall decrease in average interest bearing liabilities was due to a decrease in time deposits and other borrowed money. Average time deposits decreased $16,381,000, or 1.9%, to $836,532,000 at December 31, 2010 compared to $852,913,000 at December 31, 2009. Average other borrowed money decreased $8,170,000 or 10.4% to $70,456,000 for 2010 compared to $78,626,000 for 2009. The decrease in 2010 reflects a net decrease in Federal Home Loan Bank advances.

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 class within our Company’s loan portfolio:

					$			%
					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	%

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     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.

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, 2010, compared to December 31, 2009 and for the years ended December 31, 2009 compared to December 31, 2008. 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.

	2010									2009
				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)	$	(4,305	)	$	(3,063	)	$	(1,242	)	$	(5,252	)	$	2,579		$	(7,831	)
Investment securities:
U.S. treasury		15			—			15			—			—			—
Government sponsored entities		(558	)		(2	)		(556	)		(1,468	)		(1,077	)		(391	)
Asset backed securities		301			705			(404	)		968			1,198			(230	)
State and municipal(2)		(402	)		(348	)		(54	)		(337	)		(338	)		1
Restricted Investments		12			(54	)		66			(152	)		13			(165	)
Federal funds sold		—			—			—			(60	)		—			(60	)
Interest bearing deposits in other financial institutions		33			40			(7	)		29			29			—
Total interest income		(4,904	)		(2,722	)		(2,182	)		(6,272	)		2,404			(8,676	)
Interest expense:
NOW accounts		(171	)		207			(378	)		(186	)		210			(396	)
Savings		(8	)		17			(25	)		(87	)		10			(97	)
Money market		(667	)		(82	)		(585	)		(1,593	)		142			(1,735	)
Time deposits of 100,000 and over		(1,377	)		(259	)		(1,118	)		(1,836	)		(87	)		(1,749	)
Other time deposits		(3,332	)		(915	)		(2,417	)		(2,329	)		1,184			(3,513	)
Federal funds purchased and securities sold under agreements to repurchase		(13	)		(3	)		(10	)		(781	)		(136	)		(645	)
Subordinated notes		(921	)		—			(921	)		(599	)		—			(599	)
Other borrowed money		(732	)		(294	)		(438	)		(1,214	)		(1,693	)		479
Total interest expense		(7,221	)		(1,329	)		(5,892	)		(8,625	)		(370	)		(8,255	)
Net interest income on a fully taxable equivalent basis	$	2,317		$	(1,393	)	$	3,710		$	2,353		$	2,774		$	(421	)

(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 $671,000, $751,000 and $871,000 for the years ended December 31, 2010, 2009 and 2008, respectively.

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(2)	Non-accruing loans are included in the average amounts outstanding.
(3)	Fees and costs on loans are included in interest income.

     Net interest income on a fully taxable equivalent basis increased $2,317,000, or 5.6%, to $43,657,000 for 2010 compared to $41,340,000 for 2009 and followed a $2,353,000, or 6.0%, increase for 2009 compared to 2008. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased from 3.42% for 2008 to 3.50% for 2009, and increased to 3.78% for 2010. Our Company’s net interest spread increased to 3.55% in 2010 from 3.18% in 2009 and 3.05% in 2008.

     While our Company was able to decrease the rate paid on interest bearing liabilities to 1.59% in 2010 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 5.14% in 2010.

Non-interest Income and Expense

Non-interest income for the years ended December 31, 2010, 2009, and 2008 were as follows:

										$ Change						% Change
(Dollars in thousands)	2010			2009			2008			’10-’09			’09-’08			’10-’09			’09-’08
Non-interest Income
Service charges on deposit accounts	$	5,554		$	5,864		$	6,164		$	(310	)	$	(300	)		(5.3	)%		(4.9	)%
Trust department income		803			815			827			(12	)		(12	)		(1.5	)		(1.5	)
Gain on sales of mortgage loans		2,493			2,974			973			(481	)		2,001			(16.2	)		205.7
Other		1,631			1,049			1,330			582			(281	)		55.5			(21.1	)
Total non-interest income	$	10,481		$	10,702		$	9,294		$	(221	)	$	1,408			(2.1	)%		15.1	%
Investment securities gains (losses), net	$	—		$	606		$	3		$	(606	)	$	603			(100.0	)%		NM	%
Non-interest income as a % of total revenue *		19.6	%		20.9	%		19.6	%
Total revenue per full time equivalent employee	$	157.3		$	147.4		$	137.8

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

Years Ended December 31, 2010 and 2009

     Noninterest income decreased $221,000 or 2.1% to $10,481,000 for 2010 compared to $10,702,000 for 2009. The decrease was primarily the result of a $481,000 decrease in the gains on sales of mortgage loans and a $310,000 decrease in service charges on deposit accounts. Although refinancing activity substantially increased during the last half of 2010, our Company experienced more refinancing activity throughout 2009, impacting both volumes of loans sold and gains recognized. Our Company was servicing $298,325,000 of mortgage loans at December 31, 2010 compared to $269,475,000 at December 31, 2009. The decrease in noninterest income was partially offset by an increase in other income that included a $268,000 refund of prior year’s processing fees and a $227,000 increase in credit card income, of which $167,000 was due to a nonmaterial correction. Our Company recognized $606,000 in gain on sales and calls of debt securities during 2009. Our Company had no sales of debt securities during 2010.

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.

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Non-interest expense for the years ended December 31, 2010, 2009, and 2008 were as follows:

										$ Change						% Change
(Dollars in thousands)	2010			2009			2008			’10-’09			’09-’08			’10-’09			’09-’08
Non-interest Expense
Salaries	$	13,904		$	13,253		$	14,099		$	651		$	(846	)		4.9	%		(6.0	)%
Employee benefits		3,995			4,204			4,151			(209	)		53			(5.0	)		1.3
Goodwill impairment		—			—			40,324			0			N.M			N.M			N.M
Occupancy expense, net		2,532			2,335			2,440			197			(105	)		8.4			(4.3	)
Furniture and equipment expense		1,997			2,286			2,437			(289	)		(151	)		(12.6	)		(6.2	)
FDIC insurance assessment		1,651			2,519			204			(868	)		2,315			(34.5	)		1,134.8
Legal, examination, and professional fees		1,441			1,222			1,145			219			77			17.9			6.7
Advertising and promotion		1,256			1,272			1,166			(16	)		106			(1.3	)		9.1
Postage, printing, and supplies		1,201			1,168			1,221			33			(53	)		2.8			(4.3	)
Processing expense		3,353			3,420			3,102			(67	)		318			(2.0	)		10.3
Other real estate expense		9,804			1,189			862			8,615			327			724.6			37.9
Other		3,717			3,862			4,824			(145	)		(962	)		(3.8	)		(19.9	)
Total non-interest expense	$	44,851		$	36,730		$	75,975		$	8,121		$	1,079			22.1	%		1.4	%
Efficiency ratio*		83.9	%		71.6	%		75.2	%
Salaries and benefits as a % of total non-interest expense *		39.9	%		47.5	%		51.2	%
Number of full-time equivalent employees		340			348			344

* Goodwill impairment not included in ratio calculation

Years Ended December 31, 2010 and 2009

     Noninterest expense increased $8,121,000, or 22.1%, to $44,851,000 for 2010 compared to $36,730,000 for 2009. Other real estate expense increased $8,615,000, or 724.6%, legal, examination, and professional fees increased $219,000, or 17.9%, partially offset by a decrease in Federal Deposit Insurance Corporation (FDIC) insurance assessment of $868,000, or 34.5%. The increase in other real estate expense reflects expenses incurred related to the increase in our Company’s foreclosed property during 2010. $6,158,000 of this expense was incurred during the fourth quarter when our Company recorded a provision to the valuation allowance for other real estate owned based on current appraisals received on two commercial real estate properties. The increase in legal, examination, and professional fees primarily resulted in an increase in accrued expenses representing our Company’s estimated obligation in a suit filed against Hawthorn Bank found in favor of the customer. See Note 17 Commitments and Contingencies for further explanation in the consolidated financial statements. The decrease in the FDIC insurance assessment is a result of a decrease in the estimated expense accrued during 2010 in comparison to 2009 and an increase in special assessments during 2009.

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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Fourth Quarter Results for 2010

     Comparing fourth quarter 2010 to third quarter 2010:

     Our Company’s net loss of ($6,251,000) for the fourth quarter ended December 31, 2010 decreased $7,674,000, compared to net income of $1,423,000 for the third quarter ended September 30, 2010. Net interest income decreased to $10,702,000 from $10,859,000 over the same period. This decrease was primarily the result of a decrease in interest earning assets from $1,146,000 for the third quarter ended September 30, 2010 to $1,132,000 for the fourth quarter ended December 31, 2010.

     The fourth quarter 2010 provision for loan losses of $8,150,000 was $5,700,000 higher than third quarter 2010’s provision of $2,450,000 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 and receipt of current appraisals.

     Noninterest income of $3,115,000 for fourth quarter 2010 increased $205,000 from third quarter 2010’s noninterest income of $2,910,000. This increase was a result of $268,000 refund of prior year’s processing fees.

     Noninterest expense of $16,035,000 for fourth quarter 2010 increased by $6,670,000 from third quarter 2010’s noninterest expense of $9,365,000. $6,158,000 of this increase was incurred when our Company recorded a provision to the valuation allowance for other real estate owned based on current appraisals received on two commercial real estate properties. In addition, $275,000 of this increase resulted from an increase in accrued expenses for our Company’s estimated obligation in a lawsuit filed against our Bank found in favor of the customer. See Note 17 Commitments and Contingencies in the consolidated financial statements for further explanation.

     Comparing fourth quarter 2010 to fourth quarter 2009:

     Our Company’s net loss of ($6,251,000) for the fourth quarter ended December 31, 2010 decreased $7,039,000, compared to net income of $788,000 for same period in 2009. Net interest income of $10,702,000 increased $97,000 in the fourth quarter of 2010 compared to the fourth quarter of 2009 due to an increase in net interest margin to 3.81% for 2010 compared to 3.66% for the same period of 2009. This increase was partially offset by a decrease in average earning assets of $36,589,000 in the fourth quarter of 2010 compared to the fourth quarter of 2009.

     The fourth quarter 2010 provision for loan losses of $8,150,000 was $4,200,000 more than the fourth quarter 2009 provision of $3,950,000 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 and receipt of current appraisals.

     Noninterest income of $3,115,000 for fourth quarter 2010 increased by $586,000 from noninterest income of $2,529,000 for fourth quarter 2009. $424,000 of the increase reflects gains on sales of mortgage loans due to increased refinancing activity. Our Company also received a $268,000 refund of prior year’s processing fees during the fourth quarter of 2010.

     Noninterest expense of $16,035,000 for fourth quarter 2010 increased $7,000,000 from fourth quarter 2009 noninterest expense of $9,034,000. $6,158,000 of this increase was incurred when our Company recorded a provision to the valuation allowance for other real estate owned based on current appraisals received on two commercial real estate properties.

Income taxes (benefit)

     Income taxes as a percentage of earnings (loss) before income taxes as reported in the consolidated financial statements were 46.5% for 2010, compared to 27.3% for 2009, and 16.7% for 2008. The increase in the effective tax rate for 2010 in comparison to 2009 is primarily the result of tax exempt income and other tax benefits increasing the overall income tax benefit related to the pre-tax loss. As a result, these calculated tax benefits increase the statutory tax rate in a year where our Company has a pre-tax loss versus a decrease the statutory tax rate in years with positive pre-tax income. 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.

16

Lending and Credit Management

     Interest earned on the loan portfolio is a primary source of interest income for our Company. Net loans represented 73.7% of total assets as of December 31, 2010 compared to 79.0% as of December 31, 2009.

     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.

A summary of loans, by major class within our Company’s loan portfolio as of the dates indicated are as follows:

	Balance at December 31,
(In thousands)	2010		2009		2008		2007		2006
	Amount		Amount		Amount		Amount		Amount
Commercial, financial, and agricultural	$	131,382	$	151,399	$	153,386	$	151,488	$	145,697
Real estate construction — residential		31,834		38,841		49,623		—		—
Real estate construction — commercial		56,053		77,937		80,016		147,432		150,891
Real estate mortgage — residential		207,835		232,332		235,834		210,458		182,366
Real estate mortgage — commercial		439,069		453,975		456,696		365,094		296,488
Installment loans to individuals		32,132		36,966		33,404		36,738		36,966
Deferred fees and costs, net		167		164		144		68		(96	)
Total loans	$	898,472	$	991,614	$	1,009,103	$	911,278	$	812,312

     Our Company’s loan portfolio decreased $93,142,000, or 9.4% from 2009 to 2010. This decrease was primarily a result of a decrease in commercial loans of $20,017,000, or 13.2%, a decrease in real estate mortgage — residential loans of $24,498,000, or 10.5%, a decrease in real estate mortgage — commercial loans of $14,907,000, or 3.3%, and a decrease in real estate construction — commercial loans of $21,884,000, or 28.1%. The decrease in commercial loans and real estate mortgage loans primarily reflects the payoff of four large commercial credits and three large real estate mortgage loans. The decrease in individual consumer loans reflects the payoff of one large consumer loan which was secured by a Bank certificate of deposit. Also contributing to the decrease in total loans were gross charge-offs of $16,190,000 and $23,677,000 of assets transferred from loans to other real estate owned and repossessed assets.

     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. 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 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. Where appropriate, management actively works with existing borrowers to modify loan terms and conditions in order to assist the borrowers in servicing their debt obligations to our Company. The decrease in lending activities in the real estate construction market also reflects the slowdown 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.

     Our Company does not participate in extending credit to sub-prime residential real estate markets. Our Company extends credit to its local community market through traditional real estate mortgage products.

17

     The contractual maturities of loan categories at December 31, 2010, 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	$	86,228	$	42,831	$	2,323	$	131,382
Real estate construction — residential		22,171		9,663		—		31,834
Real estate construction — commercial		45,560		9,496		997		56,053
Real estate mortgage — residential		52,116		95,434		60,284		207,834
Real estate mortgage — commercial		170,156		255,072		13,841		439,069
Installment loans to individuals		13,798		17,943		559		32,300
Total loans net of unearned income	$	390,029	$	430,439	$	78,004	$	898,472
Loans with fixed rates		312,342		378,727		57,036		748,105
Loans with floating rates		77,687		51,712		20,968		150,367
Total loans net of unearned income	$	390,029	$	430,439	$	78,004	$	898,472

     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, 2010 our Company was servicing approximately $298,325,000 of loans sold to the secondary market.

     Real estate 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.

     Management along with senior loan committee, and internal loan review, formally review 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. In addition, loans below the above scope are reviewed on a sample basis. 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 which loans should be considered impaired. Management follows the guidance provided in the FASB’s 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 be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, allowances are estimated based on the fair value as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management informed of potential 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.

Provision and Allowance for Loan Losses

     The provision for loan losses increased $6,901,000 or 82.6% to $15,255,000 for 2010 compared to $8,354,000 for 2009 and followed a $143,000 or 1.7% increase for 2009 compared to 2008.

     The current economy has contributed to the deterioration of collateral values. The economic downturn and elevated unemployment rates in our market area have impaired the ability for certain of our customers to make payments on our loans in accordance with contractual terms. The increase in the provision can be primarily attributed to loan losses for six loan relationships. Five of the commercial real estate relationships have been or are in the process of being resolved through our Company’s foreclosure process. Three of the relationships involve commercial businesses that were unable to survive during the economic downturn. Two of the relationships involve undeveloped development projects which were unable to meet debt service requirements. The last significant loss resulted from a non-owner occupied single and multi-family housing development which was adversely affected by low occupancy rates. During 2010, our Company

18

realized full or partial charge offs on 346 loans totaling $16,190,000 of which 40% results from the aforementioned six commercial and commercial real estate relationships.

     Our Company has taken an active approach to obtain current appraisals and has adjusted the provision to reflect the amounts management determined necessary to maintain the allowance for loan losses at a level adequate to cover probable losses in the loan portfolio. Due to charge offs taken during 2010, the allowance for loan losses decreased to $14,565,000 or 1.6% of loans outstanding at December 31, 2010 compared to $14,797,000 or 1.5% of loans outstanding at December 31, 2009, and $12,667,000 or 1.3% of loans outstanding at December 31, 2008.

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

						Years Ended December 31,
(Dollars in thousands)	2010		2009			2008			2007			2006
Analysis of allowance for loan losses:
Balance beginning of year	$	14,797	$	12,667		$	9,282		$	9,015		$	9,085
Charge-offs:
Commercial, financial, and agricultural		1,903		1,404			3,571			524			809
Real estate construction — residential		933		1,012			492			—			—
Real estate construction — commercial		4,556		450			189			56			84
Real estate mortgage — residential		4,534		2,673			417			413			—
Real estate mortgage — commercial		3,841		728			115			—			474
Installment loans to individuals		423		534			656			314			484
Total charge-offs		16,190		6,801			5,440			1,307			1,851
Recoveries:
Commercial, financial, and agricultural		153		213			153			141			206
Real estate construction — residential		30		5			34			—			—
Real estate construction — commercial		22		—			1			11			13
Real estate mortgage — residential		228		61			1			96			—
Real estate mortgage — commercial		29		4			80			14			91
Installment loans to individuals		241		294			345			158			145
Total recoveries		703		577			614			420			455
Net charge-offs		15,487		6,224			4,826			887			1,396
Provision for loan losses		15,255		8,354			8,211			1,154			1,326
Balance at end of year	$	14,565	$	14,797		$	12,667		$	9,282		$	9,015
Loans outstanding:
Average	$	949,458	$	1,002,829		$	963,252		$	848,772		$	824,706
End of period		898,472		991,614			1,009,104			911,278			812,312
Allowance for loan losses to loans outstanding:
Average	%	1.53		1.48	%		1.32	%		1.09	%		1.09	%
End of period		1.62		1.49			1.26			1.02			1.11
Net charge-offs to average loans outstanding		1.63		0.62			0.50			0.10			0.17

     As shown in the table above, our Company experienced net loan charge-offs of $15,487,000 during 2010 compared to $6,224,000 in 2009 and $4,826,000 in 2008. Net charge offs on commercial, financial, and agricultural loans increased $559,000 from December 31, 2009 to December 31, 2010 compared to a $2,277,000 decrease from December 31, 2008 to December 31, 2009. The increase for 2010 was primarily due to three write-downs taken on two loans to reflect current collateral values. Net charge offs on real estate construction — commercial properties loans increased $4,084,000 from December 31, 2009 to December 31, 2010 compared to a $262,000 increase from December 31, 2008 to December 31, 2009. The increase for 2010 was primarily due to write-downs taken on various loans to reflect current collateral values. Net charge offs on real estate mortgage — residential properties increased $1,694,000 from December 31, 2009 to December 31, 2010 compared to a $2,196,000 increase from December 31, 2008 to December 31, 2009. The increase for 2010 was primarily due to write-downs taken on foreclosed properties, from two significant customer relationships, to reflect current collateral values. Net charge offs on real estate mortgage — commercial properties increased $3,088,000 from December 31, 2009 to December 31, 2010 compared to a $689,000 increase from December 31, 2008 to December 31, 2009. The increase for 2010 was primarily due to write-downs taken on various loans to reflect current collateral values. The ratio of annualized total net loan charge-offs to total average loans was 1.63% at December 31, 2010 compared to 0.62% at December 31, 2009, and 0.50% at December 31, 2008.

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Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and restructured loans totaled $56,302,000 or 6.27% of total loans at December 31, 2010 compared to $42,347,000 or 4.27% of total loans at December 31, 2009.

The following table summarizes our Company’s nonperforming assets at the dates indicated:

							Years Ended December 31,
(Dollars in thousands)	2010			2009			2008			2007			2006
Nonaccrual loans:
Commercial, financial, and agricultural	$	3,532		$	2,067		$	2,071		$	2,332		$	2,258
Real estate construction — residential		3,586			2,678			2,775			—			—
Real estate construction — commercial		10,067			9,277			7,572			866			1,657
Real estate mortgage — residential		5,672			6,692			4,345			658			644
Real estate mortgage — commercial		27,604			13,161			3,505			651			237
Installment loans to individuals		126			279			119			32			73
Total nonaccrual loans		50,587			34,154			20,387			4,539			4,869
Loans contractually past — due 90 days or more and still accruing:
Commercial, financial, and agricultural		8			2			140			265			5
Real estate construction — residential		—			—			—			—			—
Real estate construction — commercial		—			—			52			158			—
Real estate mortgage — residential		—			—						864			170
Real estate mortgage — commercial		24			—			547			189			—
Installment loans to individuals		—			—			4			70			22
Total loans contractually past -due 90 days or more and still accruing		32			2			743			1,546			197
Troubled debt restructurings — accruing		5,683			8,191			3,736			—			—
Total nonperforming loans		56,302			42,347			24,866			6,085			5,066
Other real estate		13,393			8,452			7,828			2,337			2,720
Repossessions		616			39			—			—			15
Total nonperforming assets	$	70,311		$	50,838		$	32,694		$	8,422		$	7,801
Loans	$	898,472		$	991,614		$	1,009,103		$	911,278		$	812,313
Allowance for loan losses to loans		1.62	%		1.49	%		1.26	%		1.02	%		1.11	%
Nonperforming loans to loans		6.27	%		4.27	%		2.46	%		0.67	%		0.62	%
Allowance for loan losses to nonperforming loans		25.87	%		34.94	%		50.94	%		152.54	%		177.95	%
Nonperforming assets to loans and foreclosed assets		7.71	%		5.08	%		3.21	%		0.92	%		0.96	%

     It is our Company’s policy to discontinue the accrual of interest income on loans when management believes that the borrower’s financial condition, after consideration of business conditions and collection efforts, is such that the collection of interest is doubtful, or upon which principal or interest has been in default for a period of 90 days or more and the asset is not 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 on a cash basis. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was approximately $2,529,000, $1,568,000 and $1,522,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Approximately $22,000, $158,000 and $239,000 was actually recorded as interest income on such loans for the year ended December 31, 2010, 2009 and 2008, respectively.

     Total non-accrual loans at year end 2010 increased $16,433,000 over 2009. The increase resulted mainly from an increase of $14,443,000 in real estate mortgage — commercial non-accrual loans. The increase primarily represents five commercial customers with balances totaling $17,694,000 which was partially offset by charge-offs and foreclosures.

     Loans past due 90 days and still accruing interest increased $30,000 from December 31, 2009 to December 31, 2010. Foreclosed real estate and other repossessions increased $5,518,000 to $14,009,000 from December 31, 2009 to December 31, 2010.

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     At December 31, 2010, loans classified as troubled debt restructurings (TDR) totaled $22,080,000, of which $16,397,000 was on non-accrual status and $5,683,000 was on accrual status. At December 31, 2009, loans classified as TDR totaled $11,233,000, of which $3,042,000 was on non-accrual status and $8,191,000 was 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.

(Dollars in thousands)	2010						2009
	Number of		Recorded		Specific		Number of		Recorded		Specific
Accruing TDRs	contracts		Investment		Reserves		contracts		Investment		Reserves
Commercial, financial and agricultural		3	$	128	$	20		3	$	264	$	64
Real estate construction — commercial		1		1,716		95		—		—		—
Real estate mortgage- residential		20		2,364		82		18		2,004		22
Real estate mortgage — commercial		4		1,475		14		4		5,923		897
		28	$	5,683	$	211	$	25	$	8,191	$	983

	2010						2009
	Number of		Recorded		Specific		Number of		Recorded		Specific
TDRs - Non-accruals	contracts		Investment		Reserves		contracts		Investment		Reserves
Commercial, financial and agricultural		5	$	871.00	$	76.00		2	$	141.00	$	—
Real estate construction — commercial		2		1,210		—		—		—		—
Real estate mortgage- residential		6		1,092		67		1		199		—
Real estate mortgage — commercial		5		13,224		1,005		7		2,702		—
		18	$	16,397	$	1,148	$	10	$	3,042	$	—
Total TDRs		46	$	22,080	$	1,359		35	$	11,233	$	983

     The ratio of nonperforming loans to loans increased from 2.46% at year end 2008 to 4.27% at year end 2009 and to 6.27% at year end 2010. 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.

     The increase in the levels of charge offs has contributed to the decrease in the ratio of allowance for loan losses to nonperforming loans from 50.94% at December 31, 2008 to 34.94% at December 31, 2009, and to 25.87% at December 31, 2010. The majority of our nonperforming loans are secured by real estate collateral. While our nonperforming loans have trended upward since 2008, the underlying collateral coverage for nonperforming loans supports the likelihood of collection of our principal, and therefore, we do not generally estimate a proportionate upward trend in losses. 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, 2010 is sufficient to cover probable losses in the nonperforming loans.

     The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2010, $6,376,000 of our Company’s allowance for loan losses was allocated to impaired loans totaling approximately $56,271,000 compared to $6,415,000 of our Company’s allowance for loan losses allocated to impaired loans totaling approximately $73,867,000 at December 31, 2009. Based upon detailed analysis of all impaired loans, management has determined that $26,038,000, or 46%, of impaired loans require no reserve allocation at December 31, 2010 compared to $47,572,000, or 64%, at December 31, 2009. Management believes the excess value in the collateral was sufficient at December 31, 2010 and 2009, and these loans did not require additional reserves.

     In addition to non-accrual loans and TDRs at December 31, 2009 included in the table above, which were considered impaired, management had identified additional loans totaling approximately $31,522,000 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. At December 31, 2010 there were no additional loans considered impaired that were not included in either non-accrual loans or TDRs.

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     As of December 31, 2010 and 2009 approximately $19,239,000 and $15,944,000, respectively, of loans not included in the nonaccrual table above or identified by management as being impaired were classified by management as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. The $3,295,000 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.

     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 asset-specific reserves, and reserves based on expected loss estimates.

     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 determined by applying percentages to pools of loans by asset type. These percentages are determined by using 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 qualitative 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.

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)	2010			2009			2008			2007			2006
Allocation of allowance for loan losses at end of period:
Commercial, financial, and agricultural	$	2,931		$	2,773		$	1,712		$	3,762		$	3,114
Real estate construction — residential		2,067			348			—			—			—
Real estate construction — commercial		1,339			1,740			2,490			590			755
Real estate mortgage — residential		3,922			3,488			557			381			820
Real estate mortgage — commercial		3,458			4,693			6,014			3,492			2,706
Installment loans to individuals		231			380			391			419			529
Unallocated		617			1,375			1,503			638			1,091
Total	$	14,565		$	14,797		$	12,667		$	9,282		$	9,015
Percent of categories to total loans:
Commercial, financial, and agricultural		14.6	%		15.3	%		15.2	%		16.6	%		17.9	%
Real estate construction — residential		3.5			3.9			4.9			—			—
Real estate construction — commercial		6.2			7.9			7.9			16.2			18.6
Real estate mortgage — residential		23.2			23.4			23.4			23.1			22.5
Real estate mortgage — commercial		48.9			45.8			45.3			40.1			36.5
Installment loans to individuals		3.6			3.7			3.3			4.0			4.5
Total		100.0			100.0			100.0			100.0			100.0

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The following table is a summary of the general and specific allocations within the allowance for loan losses:

	December 31,		December 31,
(Dollars in thousands)	2010		2009
Allocation of allowance for loan losses:
Specific reserve allocation for impaired loans	$	6,376	$	6,415
General reserve allocation for all other non-impaired loans		8,189		8,382
Total	$	14,565	$	14,797

     Management has established procedures that result in specific allowance allocations for any estimated incurred loss. For loans not considered impaired, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.

     The specific reserve component of our allowance for loan losses at December 31, 2010 was determined by using fair values of the underlying collateral through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. The general reserve component of our allowance for loan losses at December 31, 2010 was determined by calculating historical loss percentages for various loan categories over the previous ten quarters. Management determined that the previous ten quarters were reflective of the loss characteristics of our Company’s loan portfolio during the recent economic downturn. These historical loss percentages were then applied to the various categories of loans to determine an expected loss requirement for the current portfolio. At December 31, 2010, the specific reserve component decreased $39,000 due to a comparable decrease in the volume of impaired loans. During the same period, the general reserve component declined from $8,382,000 at December 31, 2009 to $8,189,000 at December 31, 2010 due to usage of a historical loss experience more reflective of our Company’s loss characteristics. Prior to 2010, the historical loss percentage for non-impaired loans was based on a blend between industry standards and our Company’s five year loss experience.

     At December 31, 2010, management allocated $13,948,000 of the $14,565,000 total allowance for loan losses to specific loans and loan categories and $617,000 was unallocated. This is compared to $13,422,000 of the $14,797,000 total allowance for loan losses allocated to specific loans and loan categories and $1,375,000 that was unallocated at December 31, 2009. The decrease in the portion of the allowance for loan losses related to non asset-specific reserves is the result of management analyzing and assessing this portion of the allowance for loan losses on a more detailed level by homogeneous loan categories for loans not considered impaired. Such analysis measured reserve requirements based on historical loss experiences of loans in those individual categories and therefore provided a more robust reserve methodology. Such reserve methodology considers the loss experience for certain types of loans and loan grades for the past ten quarters. Given the enhancements to the methodology for historical loss experience, the unallocated reserves for certain qualitative factors have been reduced accordingly.

     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 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

23

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, all debt securities are classified as available-for-sale.

     At December 31, 2010, our investment portfolio classified as available-for-sale represented 14.9% 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 for the periods presented:

	December 31,
(In thousands)	2010		2009
U.S. treasury	$	1,028	$	—
Government sponsored enterprises		53,342		44,381
Asset-backed securities		90,176		69,435
Obligations of states and political subdivisions		34,432		39,111
Total available for sale debt securities		178,978		152,927

As of December 31, 2010, 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)
U.S. treasury	$	—		$	1,028		$	—		$	—		$	1,028			2.01	%
Government sponsored enterprises		802			51,592			948			—			53,342			2.17
Asset-backed (2)		458			73,500			16,218			—			90,176			3.47
States and political subdivisions (3)		2,753			11,745			15,286			4,648			34,432			5.09
Total available-for-sale debt securities	$	4,013		$	137,865		$	32,452		$	4,648		$	178,978			3.37	%
Weighted average yield (1)		5.19	%		3.16	%		3.89	%		5.09	%		3.37	%

(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, 2010 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, 2010, $159,000 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, 2010, $4,495,000 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. (See Note 8 to our Company’s consolidated financials for further explanation on the Exchange National Trusts.)

	December 31,
(In thousands)	2010		2009
Federal Home Loan Bank of Des Moines Stock	$	4,495	$	5,107
Federal Reserve Bank Stock		—		—
Midwest Independent Bank Stock		151		151
Federal Agricultural Mortgage Corporation		10		10
Investment in unconsolidated trusts		1,486		1,486
Total non-marketable investment securities		6,142		6,754

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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 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)	2010		2009
Federal funds sold	$	126	$	90
Federal Reserve — excess reserves		29,286		2,216
Available for sale investments securities		178,978		152,927
Total	$	208,390	$	155,233

     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 $178,978,000 at December 31, 2010 and included an unrealized net gain of $1,680,000. The portfolio includes maturities of approximately $4,012,000 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, 2010, total investment securities pledged for these purposes were as follows:

(dollars in thousands)	2010
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	3,262
Repurchase agreements		45,929
Other Deposits		98,908
Total pledged, at fair value	$	148,099

     At December 31, 2010, our Company’s unpledged securities in the available for sale portfolio totaled approximately $30,879,000.

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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, 2010, such deposits totaled $516,887,000 and represented 54.6% 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 $429,776,000 at December 31, 2010. These accounts are normally considered more volatile and higher costing representing 45.4% of total deposits at December 31, 2010.

(dollars in thousands)	2010		2009
Core deposit base:
Non-interest bearing demand	$	137,750	$	135,018
Interest checking		160,225		139,624
Savings and money market		218,912		214,660
Total	$	516,887	$	489,302

     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)	2010		2009
Borrowings:
Federal funds purchased	$	—	$	4,980
Securities sold under agreements to repurchase		30,068		31,665
FHLB advances		66,986		79,317
Subordinated notes		49,486		49,486
Total	$	146,540	$	160,468

     Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which our Company maintains approved credit lines. As of December 31, 2010, under agreements with these unaffiliated banks, the Bank may borrow up to $35,000,000 in federal funds on an unsecured basis and $8,500,000 on a secured basis. There were no federal funds purchased outstanding at December 31, 2010. 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, 2010 there was $30,068,000 in repurchase agreements. 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, 2010, the Bank had $66,986,000 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, 2010:

	December 31, 2010
				Federal
(dollars in thousands)	FHLB			Reserve		Other
Collateral value pledged	$	271,302		$	3,262	$	7,079
Advances outstanding		(66,986	)		—		—
Letters of credit issued		(96	)		—		—
Total	$	204,220		$	3,262	$	7,079

26

Sources and Uses of Funds

     Cash and cash equivalents were $50,980,000 at December 31, 2010 compared to $24,666,000 at December 31, 2009. The $26,666,000 increase 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, 2010. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $21,456,000 during the year ended 2010. 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 $36,324,000. The cash inflow primarily consisted of a $53,926,000 decrease in the loan portfolio, $161,694,000 in proceeds from maturities, calls, and pay-downs of investment securities, $9,689,000 in proceeds from sales of other real estate owned and repossessions, partially offset by $189,082,000 purchases of investment securities.

     Financing activities used total cash of $31,466,000, resulting primarily from a $12,331,000 net repayment of FHLB advances, a decrease of $6,577,000 of federal funds purchased and securities sold under agreements to repurchase, and a net $12,392,00 decrease in time deposits and interest-bearing transaction accounts. 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)	2010		2009		2008
Purchases of treasury stock	$	—	$	—	$	802
Cash dividends – preferred		1,513		1,370		—
Cash dividends – common		1,385		2,665		3,486
Total	$	2,898	$	4,035	$	4,288

     Our Company’s liquidity depends primarily on the dividends paid to it as the sole shareholder of our subsidiary Bank. As discussed in Note 14 to our Company’s 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 had $97,561,000 in unused loan commitments and standby letters of credit as of December 31, 2010. 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 265,471 shares of common stock to the U.S. Department of Treasury in exchange for $30,255,000. See Note 12 to our Company’s 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, 2010 and 2009,respectively, the Company paid cash dividends to its common and preferred shareholders totaling $2,898,000 and $4,035,000. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. See Note 14 to our Company’s consolidated financial statements. At December 31, 2010 and 2009, the Company had cash and cash equivalents totaling $12,449,000 and $14,738,000 respectively.

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,

27

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
	2010			2009			2008			Guidelines
Risk-based capital ratios:
Total capital		17.05	%		16.49	%		16.01	%		10.00	%
Tier I capital		14.25			14.01			13.55			6.00
Leverage ratio		11.00			11.35			10.80			5.00

Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements

The required payments of time deposits and other borrowed money, not including interest, at December 31, 2010 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	$	429,775	$	304,222	$	113,195	$	5,196	$	7,162
Other borrowed money		66,986		38,576		18,410		—		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, 2010 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	$	94,115	$	73,630	$	9,654	$	3,575	$	7,256
Standby letters of credit		3,446		2,808		619		19		—

     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 standard gap report subject to different rate shock scenarios. At December 31, 2010, the rate shock scenario models indicated that annual net interest income could change by as much as (18.4)% to 22.2% should interest rates rise or fall, respectively, 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, 2010. 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

28

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	$	3,722		$	3,099		$	13,730		$	18,385		$	29,357	$	110,685	$	178,978
Interest-bearing deposits		29,562			—			—			—			—		—		29,562
Other restricted investments		6,142			—			—			—			—		—		6,142
Federal funds sold and securities purchased under agreements to resell		126			—			—			—			—		—		126
Loans		471,312			167,751			168,538			43,417			18,092		29,362		898,472
Total	$	510,864		$	170,850		$	182,268		$	61,802		$	47,449	$	140,047	$	1,113,280
LIABILITIES
Savings, Now deposits	$	—		$	—		$	145,697		$	—		$	—	$	—	$	145,697
Rewards checking, Super Now, money market deposits		233,529														—		233,529
Time deposits		304,132			58,227			54,968			5,196			7,163		—		429,686
Federal funds purchased and securities sold under agreements to repurchase		30,068			—			—			—			—		—		30,068
Subordinated notes		49,486			—			—			—			—		—		49,486
Other borrowed money		48,582			8,301			10,103			—			—		—		66,986
Total	$	665,797		$	66,528		$	210,768		$	5,196		$	7,163	$	—	$	955,452
Interest-sensitivity GAP
Periodic GAP	$	(154,933	)	$	104,322		$	(28,500	)	$	56,606		$	40,286	$	140,047	$	157,828
Cumulative GAP	$	(154,933	)	$	(50,611	)	$	(79,111	)	$	(22,505	)	$	17,781	$	157,828	$	157,828
Ratio of interest-earnings assets to interest-bearing liabilities
Periodic GAP		0.77			2.57			0.86			11.89			6.62		NM		1.17
Cumulative GAP		0.77			0.93			0.92			0.98			1.02		1.17		1.17

Impact of New Accounting Standards

     In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 which amends ASC Topic 820, Fair Value Measurements and Disclosures. This update will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This is effective for financial statements issued for interim and annual periods ending after December 15, 2009. The disclosures required by this update are reported in the notes to our Company’s consolidated financial statements.

     In February 2010, the FASB issued ASU No. 2010-10 which amends ASC Topic 810, Consolidation. The objective of this update is to defer the effective date of the amendments to the consolidation requirements made by FASB Statement 167 to a reporting entity’s interest in certain types of entities and clarify other aspects of the Statement 167 amendments. As a result of the deferral, a reporting entity will not be required to apply the Statement 167 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity that meets the criteria to qualify for deferral. However, the amendments in this Update do not defer the disclosure requirements in the Statement 167 amendments to Topic 810. This is effective for financial statements issued for the first annual period beginning after November 15, 2009,

29

and for interim periods with the first annual reporting period. The disclosures required by this new update did not have a material effect in the notes to our Company’s consolidated financial statements.

     In July 2010, the FASB issued ASU No. 2010-20 — Receivables (ASC Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires expanded credit risk disclosures intended to provide investors with greater transparency regarding the allowance for credit losses and the credit quality of financing receivables. Under this ASU, companies are required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information, credit quality indicators, changes in the allowance for credit losses, and the nature and extent of troubled debt restructurings and their effect on the allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class based on the level of disaggregation that management uses when assessing its allowance for credit losses and managing its credit exposure. The disclosures as of the end of a reporting period are effective for annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for annual reporting periods beginning on or after December 15, 2010. The disclosures required by this update are reported in the notes to our Company’s consolidated financial statements.

     In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was incorporated into ASC Topic 855 Subsequent Events (ASC 855). ASC 855 provides guidance on management’s assessment of subsequent events. The statement is not expected to significantly change practice because its guidance is similar to that in American Institute of Certified Public Accountants Professional Standards U.S. Auditing Standards Section 560, Subsequent Events, with some modifications. This statement became effective for our Company on June 15, 2009. The adoption of this statement did not have a material effect on our consolidated financial statements. In February 2010, the FASB issued ASU No. 2010-09 Subsequent Events — Amendments to Certain Recognition and Disclosure Requirements, which removed the requirements in ASC 855 for an SEC filer to disclose the date through which subsequent events have been evaluated for both issued and revised financial statements. This update became effective upon issuance for our Company and the adoption of this update did not have a material effect on our 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 became effective for the first 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. Our Company follows the requirements of the new guidance, which did not significantly impact our consolidated financial statements or the disclosures presented in our consolidated financial statements.

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, 2010.

30

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.		32
Consolidated Balance Sheets as of December 31, 2010 and 2009.		33
Consolidated Statements of Operations for each of the years ended December 31, 2010, 2009 and 2008.		34
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for each of the years ended December 31, 2010, 2009 and 2008.		35
Consolidated Statements of Cash Flows for each of the years ended December 31, 2010, 2009 and 2008.		36-37
Notes to Consolidated Financial Statements.		38

31

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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, 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, 2010, 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 30, 2011 expressed an unqualified opinion on the effectiveness of Hawthorn Bancshares Inc.’s internal control over financial reporting.

/s/ KPMG LLP
St. Louis, Missouri
March 30, 2011

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

	December 31,
	2010			2009
ASSETS
Loans	$	898,472,463		$	991,614,007
Allowances for loan losses		(14,564,867	)		(14,796,549	)
Net loans		883,907,596			976,817,458
Investment in available-for-sale securities, at fair value		178,977,550			152,926,685
Federal funds sold and securities purchased under agreements to resell		125,815			89,752
Cash and due from banks		50,853,985			24,575,943
Premises and equipment — net		36,980,503			38,623,293
Other real estate owned and repossessed assets — net		14,009,017			8,490,914
Accrued interest receivable		5,733,684			6,625,557
Mortgage servicing rights		2,355,990			2,020,964
Intangible assets — net		977,509			1,503,986
Cash surrender value — life insurance		2,001,965			1,929,910
Other assets		24,248,590			22,866,092
Total assets	$	1,200,172,204		$	1,236,470,554
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand	$	137,749,571		$	135,017,639
Savings, interest checking and money market		379,137,539			354,284,004
Time deposits $100,000 and over		124,566,760			137,860,435
Other time deposits		305,208,786			329,160,719
Total deposits		946,662,656			956,322,797
Federal funds purchased and securities sold under agreements to repurchase		30,068,453			36,645,434
Subordinated notes		49,486,000			49,486,000
Other borrowed money		66,985,978			79,317,302
Accrued interest payable		1,491,503			2,438,121
Other liabilities		3,989,303			4,489,617
Total liabilities		1,098,683,893			1,128,699,271
Stockholders’ equity:
Preferred stock, $1,000 par value Authorized and issued 30,255 shares		28,841,242			28,364,768
Common stock, $1 par value Authorized 15,000,000 shares; issued 4,635,891 and 4,463,813 shares respectively		4,635,891			4,463,813
Surplus		28,928,545			26,970,745
Retained earnings		41,857,302			50,576,551
Accumulated other comprehensive income, net of tax		742,149			912,224
Treasury stock; 161,858 shares, at cost		(3,516,818	)		(3,516,818	)
Total stockholders’ equity		101,488,311			107,771,283
Total liabilities and stockholders’ equity	$	1,200,172,204		$	1,236,470,554

See accompanying notes to consolidated financial statements.

33

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations

	Years ended December 31,
	2010			2009		2008
INTEREST INCOME
Interest and fees on loans	$	53,088,943		$	57,409,274	$	62,636,558
Interest on debt securities:
Taxable		4,214,192			4,495,259		4,989,794
Nontaxable		1,173,805			1,441,418		1,688,871
Interest on federal funds sold and securities purchased under agreements to resell		193			373		60,550
Interest on interest-bearing deposits		85,913			52,761		23,755
Dividends on other securities		175,634			163,533		315,685
Total interest income		58,738,680			63,562,618		69,715,213
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		2,170,718			3,017,488		4,883,042
Time deposit accounts $100,000 and over		2,484,929			3,862,075		5,698,073
Other time deposit accounts		7,211,251			10,542,476		12,871,957
Interest on federal funds purchased and securities sold under agreements to repurchase		75,402			88,573		868,528
Interest on subordinated notes		1,525,553			2,446,742		3,046,238
Interest on other borrowed money		2,284,649			3,016,872		4,231,062
Total interest expense		15,752,502			22,974,226		31,598,900
Net interest income		42,986,178			40,588,392		38,116,313
Provision for loan losses		15,255,000			8,354,000		8,211,000
Net interest income after provision for loan losses		27,731,178			32,234,392		29,905,313
NON-INTEREST INCOME
Service charges on deposit accounts		5,553,532			5,864,090		6,163,650
Trust department income		803,132			814,988		826,546
Gain on sale of mortgage loans, net		2,493,465			2,973,630		973,095
Other		1,630,589			1,049,441		1,330,760
Total non-interest income		10,480,718			10,702,149		9,294,051
INVESTMENT SECURITIES GAINS (LOSSES), NET		—			605,716		2,773
NON-INTEREST EXPENSE
Salaries and employee benefits		17,898,448			17,457,123		18,250,469
Goodwill impairment		—			—		40,323,775
Occupancy expense, net		2,531,847			2,335,496		2,440,082
Furniture and equipment expense		1,996,837			2,286,014		2,437,558
FDIC insurance assessment		1,651,052			2,518,743		204,131
Legal, examination, and professional fees		1,441,063			1,221,861		1,144,777
Advertising and promotion		1,256,302			1,272,046		1,165,559
Postage, printing, and supplies		1,201,072			1,168,290		1,220,938
Processing expense		3,353,354			3,419,939		3,101,562
Other real estate expense		9,803,809			1,188,972		862,474
Other		3,716,665			3,861,896		4,824,133
Total non-interest expense		44,850,449			36,730,380		75,975,458
(Loss) income before income taxes		(6,638,553	)		6,811,877		(36,773,321	)
Income tax (benefit) expense		(3,086,813	)		1,856,120		(6,145,965	)
Net (loss) income		(3,551,740	)		4,955,757		(30,627,356	)
Preferred stock dividends		1,512,750			1,516,952		50,425
Accretion of discount on preferred stock		476,474			476,474		15,665
Net (loss) income available to common shareholders	$	(5,540,964	)	$	2,962,331	$	(30,693,446	)
Basic (loss) earnings per share	$	(1.24	)	$	0.66	$	(6.83	)
Diluted (loss) earnings per share	$	(1.24	)	$	0.66	$	(6.83	)

See accompanying notes to consolidated financial statements.

34

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, 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 securities available-for-sale, net of tax		—		—		—		—			1,325,559			—			1,325,559
Adjustment on sales and calls of debt securities, net of tax		—		—		—		—			(1,692	)		—			(1,692	)
Defined benefit pension plans:
Net loss arising during 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 loss																	(350,985	)
Total comprehensive 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
Net income		—		—		—		4,955,757			—			—			4,955,757
Change in unrealized gain (loss) on securities:
Unrealized loss on debt securities available-for-sale, net of tax		—		—		—		—			(277,903	)		—			(277,903	)
Adjustment on sales and calls of debt 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
Net loss		—		—		—		(3,551,740	)		—			—			(3,551,740	)
Change in unrealized gain (loss) on securities:
Unrealized loss on debt securities available-for-sale, net of tax		—		—		—		—			(389,428	)		—			(389,428	)
Defined benefit pension plans:
Net gain arising during the year, net of tax		—		—		—		—			171,388			—			171,388
Amortization of prior service cost included in net periodic pension cost, net of tax		—		—		—		—			47,965			—			47,965
Total other comprehensive loss																	(170,075	)
Total comprehensive loss																	(3,721,815	)
Stock based compensation expense		—		—		87,310		—			—			—			87,310
Accretion of preferred stock discount		476,474		—		—		(476,474	)		—			—			—
Stock dividend		—		172,078		1,870,490		(2,042,568	)		—			—			—
Cash dividends declared, preferred stock								(1,512,750	)								(1,512,750	)
Cash dividends declared, common stock		—		—		—		(1,135,717	)		—			—			(1,135,717	)
Balance, December 31, 2010	$	28,841,242	$	4,635,891	$	28,928,545	$	41,857,302		$	742,149		$	(3,516,818	)	$	101,488,311

See accompanying notes to consolidated financial statements.

35

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

	Years ended December 31,
	2010			2009			2008
Cash flows from operating activities:
Net (loss) income	$	(3,551,740	)	$	4,955,757		$	(30,627,356	)
Adjustments to reconcile net income to net cash provided by operating activities:
Goodwill impairment		—			—			40,323,775
Provision for loan losses		15,255,000			8,354,000			8,211,000
Depreciation expense		1,963,842			2,044,257			2,158,740
Net amortization (accretion) of debt securities, premiums, and discounts		698,420			524,639			(15,372	)
Amortization of intangible assets		526,477			626,111			701,443
Stock based compensation expense		87,310			130,459			231,761
Loss on sales and dispositions of premises and equipment		59,716			137,209			49,830
Loss (gain) on sales and dispositions of other real estate owned and repossessions		2,310,734			(27,158	)		464,411
Provision for other real estate owned		6,158,433			—			—
Decrease in accrued interest receivable		891,873			850,536			1,288,103
Increase in cash surrender value -life insurance		(72,055	)		(77,008	)		(32,370	)
Increase in other assets		(124,729	)		(4,419,959	)		(2,007,842	)
Decrease in accrued interest payable		(946,618	)		(1,409,294	)		(876,550	)
Increase (decrease) in other liabilities		30,164			(730,764	)		(1,820,022	)
Loss on sales of debt securities		—			(605,716	)		(2,773	)
Origination of mortgage loans for sale		(104,001,793	)		(150,628,000	)		(54,892,543	)
Proceeds from the sale of mortgage loans		106,547,681			153,601,630			55,865,638
Gain on sale of mortgage loans, net		(2,493,465	)		(2,973,630	)		(973,095	)
Increase in net deferred tax asset		(2,298,860	)		(1,016,107	)		(6,493,604	)
Other, net		415,823			414,193			79,181
Net cash provided by operating activities		21,456,213			9,751,155			11,632,355
Cash flows from investing activities:
Net decrease (increase) in loans		53,925,733			4,283,403			(115,310,652	)
Purchase of available-for-sale debt securities		(189,081,925	)		(156,459,542	)		(280,670,587	)
Proceeds from maturities of available-for-sale debt securities		114,899,133			115,169,758			212,071,519
Proceeds from calls of available-for-sale debt securities		46,795,100			24,237,200			42,282,640
Proceeds from sales of available-for-sale debt securities		—			12,546,609			30,920,778
Purchase of FHLB stock		(392,300	)		—			(5,040,800	)
Proceeds from sales of FHLB stock		1,003,900			2,121,700			1,791,600
Purchases of premises and equipment		(549,285	)		(2,369,890	)		(1,034,021	)
Proceeds from sales of premises and equipment		34,528			632,165			51,450
Proceeds from sales of other real estate owned and repossessions		9,689,435			6,168,067			6,703,347
Net cash provided (used) in investing activities		36,324,319			6,329,470			(108,234,726	)
Cash flows from financing activities:
Net increase (decrease) in demand deposits		2,731,931			9,772,439			(13,110,320	)
Net increase in interest-bearing transaction accounts		24,853,535			11,657,302			13,405,039
Net (decrease) increase in time deposits		(37,245,608	)		(20,403,333	)		33,744,379
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(6,576,981	)		7,506,811			3,408,760
Proceeds from Federal Home Loan Bank advances		10,000,000			20,145,000			345,300,000
Repayment of Federal Home Loan Bank advances		(22,331,324	)		(69,885,181	)		(294,157,544	)
Proceeds from issuance of preferred stock and warrants		—			—			30,255,000
Purchase of treasury stock		—			—			(802,445	)
Cash dividends paid — preferred stock		(1,512,750	)		(1,369,879	)		—
Cash dividends paid — common stock		(1,385,230	)		(2,665,557	)		(3,486,415	)
Net cash (used) provided by financing activities		(31,466,427	)		(45,242,398	)		114,556,454
Net increase (decrease) in cash and cash equivalents		26,314,105			(29,161,773	)		17,954,083
Cash and cash equivalents, beginning of year		24,665,695			53,827,468			35,873,385
Cash and cash equivalents, end of year	$	50,979,800		$	24,665,695		$	53,827,468

36

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)

	Years ended December 31,
	2010		2009		2008
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	16,699,120	$	24,383,520	$	32,475,450
Income taxes	$	800,000	$	1,487,000	$	2,240,000
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans	$	23,676,706	$	6,982,125	$	12,658,929

See accompanying notes to consolidated financial statements.

37

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(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, values of 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, 2010, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on May 19, 2010. 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

In December of 2008 and March of 2010, the Company formed Hawthorn Real Estate, LLC, and Real Estate Holdings of Missouri, LLC, respectively, (the Real Estate Companies); both are wholly owned subsidiaries of the Company. The consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), and the Real Estate Companies. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans

Loans which the Company has the intent and ability to hold for the foreseeable future or maturity are held for investment 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. Loan origination fees and certain direct costs are deferred and recognized over the life of the loan as an adjustment to yield.

Non-Accrual Loans

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.

38

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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.

Restructured Loans

A modified or restructured loan is accounted for as a troubled debt restructuring (TDR) for any loans in which concessions are made to the borrower for economic or legal reasons that the Company would not otherwise consider and the borrower is experiencing financial difficulty. Once a loan has been classified as a TDR it remains a TDR for the life of the loan. The Company includes all accruing and non-accruing TDR’s in the impaired and non-performing asset totals. TDR’s are measured for impairment loss primarily by discounting the total expected future cash flows.

Impaired Loans

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. Included in impaired loans are all non-accrual loans and loans whose terms have been modified in a troubled debt restructuring. Impaired loans are individually evaluated for impairment based on fair values of the underlying collateral, obtained through independent appraisals or internal valuations for a collateral dependent loan, or by discounting the total expected future cash flows.

Loans Held for Sale

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 servicing retained without recourse, thereby eliminating the Company’s exposure to interest rate fluctuations. At December 31, 2010 and 2009, $62,000 and $114,000 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 amortization from mortgage servicing rights. Operational costs to service such loans are charged to expense as incurred.

Allowance/ Provision for Loan Losses

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

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 determined by applying percentages to pools of loans by asset type. These percentages are determined by using 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 incurred loss with respect to these qualitative 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 the Company’s key lending areas, credit quality trends (including trends in substandard loans

39

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

expected to result from existing conditions), collateral values, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department.

Management has established procedures that result in specific allowance allocations for any estimated incurred loss. For loans not considered impaired, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses. The specific reserve component of the Company’s allowance for loan losses at December 31, 2010 was measured by fair values of the underlying collateral through independent appraisals, internal evaluations, or by discounting the total expected future cash flows. The general reserve component of the Company’s allowance for loan losses at December 31, 2010 was determined by calculating historical loss percentages for various loan categories over the previous nine quarters. Management determined that the previous ten quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent two year economic downturn. These historical loss percentages were then applied to the various categories of loans to determine an expected loss requirement for the current portfolio. Prior to 2010, the historical loss percentage for non-impaired loans was based on a blend between industry standards and the Company’s five year loss experience.

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. The Company could experience credit losses that are different from the current estimates made by management.

Loans, or portions of loans, are charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. Once the fair value for a collateral dependent loan has been determined, any impaired amount is typically charged off unless the loan has other income streams to support repayment. For impaired loans which have other income streams to support repayment, a specific reserve is established for the amount determined to be impaired.

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 positive intent and ability 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, net of taxes, 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 more likely than not 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.

40

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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.

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 using straight line 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 initially recorded as held for sale at the lower of the loan balance or fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. 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. The write-downs are recorded as other real estate expense. The Company establishes a valuation allowance related to other real estate owned on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the “cost” of a parcel of other real estate.

41

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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 forwards 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 penalties and interest related to income taxes in income tax expense. Total interest expense recognized for the year ended 2010 and 2009 was $24,000 and $53,000, respectively. As of December 31, 2010 and 2009, total accrued interest was $31,000 and $94,000, respectively.

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.

42

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

Stock-Based Compensation

The Company’s stock-based employee compensation plan is described in Note 10, 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.

Impact of New Accounting Standards

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 which amends ASC Topic 820, Fair Value Measurements and Disclosures. This update will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This is effective for financial statements issued for interim and annual periods ending after December 15, 2009. The disclosures required by this update are reported in the notes to the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-10 which amends ASC Topic 810, Consolidation. The objective of this update is to defer the effective date of the amendments to the consolidation requirements made by FASB Statement 167 to a reporting entity’s interest in certain types of entities and clarify other aspects of the Statement 167 amendments. As a result of the deferral, a reporting entity will not be required to apply the Statement 167 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity that meets the criteria to qualify for deferral. However, the amendments in this Update do not defer the disclosure requirements in the Statement 167 amendments to Topic 810. This is effective for financial statements issued for the first annual period beginning after November 15, 2009, and for interim periods with the first annual reporting period. The disclosures required by this new update did not have a material effect in the notes to the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20 — Receivables (ASC Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires expanded credit risk disclosures intended to provide investors with greater transparency regarding the allowance for credit losses and the credit quality of financing receivables. Under this ASU, companies are required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information, credit quality indicators, changes in the allowance for credit losses, and the nature and extent of troubled debt restructurings and their effect on the allowance for credit losses. Both new and existing disclosures

43

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

must be disaggregated by portfolio segment or class based on the level of disaggregation that management uses when assessing its allowance for credit losses and managing its credit exposure. The disclosures as of the end of a reporting period are effective for annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. The disclosures required by this update are reported in the notes to the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was incorporated into ASC Topic 855 Subsequent Events (ASC 855). ASC 855 provides guidance on management’s assessment of subsequent events. The statement is not expected to significantly change practice because its guidance is similar to that in American Institute of Certified Public Accountants Professional Standards U.S. Auditing Standards Section 560, Subsequent Events, with some modifications. This statement became effective for the Company on June 15, 2009. The adoption of this statement did not have a material effect on the financial statements. In February 2010, the FASB issued ASU No. 2010-09 Subsequent Events — Amendments to Certain Recognition and Disclosure Requirements, which removed the requirements in ASC 855 for an SEC filer to disclose the date through which subsequent events have been evaluated for both issued and revised consolidated financial statements. This update became effective upon issuance for the Company and the adoption of this update did not have a material effect on the 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 became effective for the first 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. The Company follows the requirements of the new guidance, which did not significantly impact 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 class within the Company’s loan portfolio, at December 31, 2010 and 2009 are as follows:

	2010		2009
Commercial, financial, and agricultural	$	131,382,467	$	151,399,300
Real estate construction – residential		31,834,174		38,840,664
Real estate construction – commercial		56,052,910		77,936,569
Real estate mortgage – residential		207,834,488		232,332,124
Real estate mortgage – commercial		439,068,622		453,975,271
Installment and other consumer		32,132,336		36,966,018
Unamortized loan origination fees and costs, net		167,466		164,061
Total loans	$	898,472,463	$	991,614,007

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.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

Following is a summary of activity in 2010 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, 2009	$	2,333,285
New loans		1,048,378
Amounts collected		(771,663	)
Balance at December 31, 2010	$	2,610,000

Allowance for loan losses

The following is a summary of the allowance for loan losses for 2010, 2009 and 2008 is as follows:

	Years Ended December 31,
	2010			2009			2008
Balance, beginning of year	$	14,796,549			12,666,546			9,281,848
Additions:
Provision for loan losses		15,255,000			8,354,000			8,211,000
Deductions:
Loans charged off		16,189,501			6,800,942			5,439,827
Less recoveries on loans		(702,819	)		(576,945	)		(613,525	)
Net loans charged off		15,486,682			6,223,997			4,826,302
Balance, end of year	$	14,564,867			14,796,549			12,666,546

The following table provides the balance in the allowance for loan losses at December 31, 2010, and the related loan balance by impairment methodology. Loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, troubled debt restructurings, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb credit losses.

			Real Estate		Real Estate		Installment and
At December 31, 2010	Commercial		Construction		Mortgage		other Consumer		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment		1,737,159		1,753,553		2,885,034		—		—		6,375,746
Collectively evaluated for impairment		1,193,566		1,652,352		4,495,133		231,359		616,711		8,189,121
Total		2,930,725		3,405,905		7,380,167		231,359		616,711		14,564,867
Loans outstanding:
Individually evaluated for impairment		3,659,857		15,368,803		37,116,025		—		—		56,144,685
Collectively evaluated for impairment		127,722,610		72,518,281		609,787,085		32,299,802		—		842,327,778
Total		131,382,467		87,887,084		646,903,110		32,299,802		—		898,472,463

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

Impaired loans

Impaired loans totaled $56,270,543 and $73,866,745 at December 31, 2010 and 2009 respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings. Prior to 2010, other impaired loans continuing to accrue interest consisted of certain loans classified as substandard. Restructured loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession.

The categories of impaired loans at December 31, 2010 and 2009 are as follows:

	2010		2009
Non-accrual loans	$	50,586,887	$	34,153,731
Other impaired loans continuing to accrue interest		—		31,522,027
Troubled debt restructurings continuing to accrue interest		5,683,656		8,190,987
Total impaired loans	$	56,270,543	$	73,866,745

At December 31, 2010, loans classified as troubled debt restructurings (TDR) totaled $22,080,000, of which $16,397,000 was on non-accrual status and $5,683,000 was on accrual status. At December 31, 2009, loans classified as TDR totaled $11,233,000, of which $3,042,000 was on non-accrual status and $8,191,000 was on accrual status.. Reserves allocated to troubled debt restructurings were $1,359,079 and $983,111 at December 31, 2010 and 2009.

Interest income recognized on loans in non-accrual status and contractual interest that would be recorded had the loans performed in accordance with their original contractual terms is as follows:

	2010		2009		2008
Contractual interest due on non-accrual loans	$	2,529,289	$	1,568,271	$	1,521,701
Interest income recognized on loans in non-accrual status		22,356		158,124		239,320
Net reduction in interest income	$	2,551,645	$	1,726,395	$	1,761,021

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

The specific reserve component of the Company’s allowance for loan losses at December 31, 2010 and 2009 was determined by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows. The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $662,348, $436,787, and $116,521, for the years ended December 31, 2010, 2009, and 2008, respectively. Average impaired loans as calculated on a monthly basis during the period were $63,751,587 and $39,049,298 at December 31, 2010, and 2009 respectively.

The following table provides additional information about impaired loans at December 31, 2010 and 2009, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided:

	At December 31, 2010
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial and Agricultural	$	441,861		629,296	$	—
Real estate — construction residential		1,769,622		2,355,936		—
Real estate — construction commercial		8,297,388		9,393,368		—
Real estate — residential		2,463,735		2,950,560		—
Real estate — commercial		12,939,973		14,869,833		—
Consumer		125,858		132,688		—
Total	$	26,038,437	$	30,331,681	$	—
With an allowance recorded:
Commercial, financial and Agricultural		3,217,995		3,260,009		1,737,159
Real estate — construction residential		1,816,276		1,848,593		1,552,406
Real estate — construction commercial		3,485,517		4,740,517		201,147
Real estate — residential		5,576,292		5,669,041		1,117,141
Real estate — commercial		16,136,025		16,215,862		1,767,893
Total	$	30,232,106	$	31,734,022	$	6,375,746
Total impaired loans	$	56,270,543	$	62,065,703	$	6,375,746

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

	At December 31, 2009
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial and Agricultural	$	300,964	$	319,624	$	—
Real estate — construction residential		1,034,816		1,044,975		—
Real estate — construction commercial		20,601,132		20,503,178		—
Real estate — residential		6,400,676		6,644,249		—
Real estate — commercial		18,950,865		18,966,554		—
Consumer		283,732		283,731		—
Total	$	47,572,185	$	47,762,311	$	—
With an allowance recorded:
Commercial, financial and Agricultural	$	2,651,009	$	2,449,627	$	1,403,798
Real estate — construction residential		1,733,491		2,299,565		309,000
Real estate — residential		9,268,616		9,445,808		1,745,553
Real estate — commercial		12,641,444		12,778,796		2,956,378
Total	$	26,294,560	$	26,973,796	$	6,414,729
Total impaired loans	$	73,866,745	$	74,736,107	$	6,414,729

Age Analysis of Past Due and Non-Accrual Loans

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
	Past Due		Past Due		Accruing		Non-Accrual		Total
Commercial, Financial, and Agricultural		127,315,586		534,865	$	—	$	3,532,016	$	131,382,467
Real Estate Construction — Residential		28,200,876		47,400		—		3,585,898		31,834,174
Real Estate Construction — Commercial		45,511,088		474,934		—		10,066,888		56,052,910
Real Estate Mortgage — Residential		199,386,784		2,775,654		—		5,672,050		207,834,488
Real Estate Mortgage — Commercial		409,906,845		1,557,599		—		27,604,178		439,068,622
Installment and Other Consumer		31,784,217		356,812		32,916		125,857		32,299,802
Total at December 31, 2010	$	842,105,396	$	5,747,264	$	32,916	$	50,586,887	$	898,472,463

It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the borrower’s financial condition, after consideration of business conditions and collection efforts, is such that the collection of interest is doubtful, or upon which principal or interest has been in default for a period of 90 days or more and the asset is not 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 on a cash basis.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

The following table provides information about the credit quality of the loan portfolio using the Company’s internal rating system reflecting management’s risk assessment. Recent reviews by the Company’s 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. Loans are placed on watch status when (1) one or more weaknesses which could jeopardize timely liquidation exits; or (2) the margin or liquidity of an asset is sufficiently tenuous that adverse trends could result in a collection problem. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the company may sustain some loss if the deficiencies are not corrected. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) upon which principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection.

			Real Estate		Real Estate		Installment and
At December 31, 2010	Commercial		Construction		Mortgage		other Consumer		Total
Watch		21,981,367		16,919,978		44,234,865		564,489		83,700,699
Substandard		2,840,703		5,000,571		17,058,382		441,514		25,341,170
Non-accrual		3,532,016		13,652,786		33,276,228		125,857		50,586,887
Total		28,354,086		35,573,335		94,569,475		1,131,860		159,628,756

(3) Investment Securities

A summary of investment securities by major category, at fair value, consisted of the following at December 31, 2010 and 2009.

	2010		2009
U.S. treasury	$	1,027,891	$	—
Government sponsored enterprises		53,341,551		44,380,798
Asset-backed securities		90,176,241		69,434,650
Obligations of states and political subdivisions		34,431,867		39,111,237
Total available for sale securities	$	178,977,550	$	152,926,685

All of our Company’s investment securities are classified as available for sale, as discussed in more detail below. Asset backed securities include agency mortgage-backed securities, which are guaranteed by government sponsored agencies such as the FHLMC, FNMA and GNMA. Our Company does not invest in subprime originated mortgage-backed or collateralized debt obligation instruments.

Investment securities which are classified as restricted equity securities primarily consist of Federal Home Loan Bank Stock and our Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of $6,141,950 and $6,753,550, as of December 31, 2010 and 2009 respectively.

49

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2010 and 2009 are as follows:

				Gross		Gross
	Amortized			unrealized		unrealized
	cost			gains		losses		Fair value
December 31, 2010
U.S Treasury	$	999,823		$	28,068	$	—	$	1,027,891
Government sponsored enterprises		53,516,545			327,051		502,045		53,341,551
Asset-backed securities		88,634,760			1,905,377		363,896		90,176,241
Obligations of states and political subdivisions		34,146,782			555,240		270,155		34,431,867
Total available for sale securities	$	177,297,910		$	2,815,736	$	1,136,096	$	178,977,550
Weighted average yield at end of period		3.37	%

				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	%

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2010, 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	$	3,522,221	$	3,554,697
Due after one year through five years		64,234,241		64,364,269
Due after five years through ten years		16,207,546		16,234,320
Due after ten years		4,699,142		4,648,023
		88,663,150		88,801,309
Asset-backed securities		88,634,760		90,176,241
Total	$	177,297,910	$	178,977,550

Debt securities with carrying values aggregating approximately $148,099,000 and $132,322,000 at December 31, 2010 and 2009, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

	2010		2009		2008
Proceeds from sales	$	—	$	12,546,609	$	30,920,778
Gains		—		605,716		2,733
Losses		—		—		—
Net gains (losses)	$	—	$	605,716	$	2,733

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, 2010 and 2009, were as follows:

	Less than 12 months					12 months or more						Total
										Number of
	Fair		Unrealized			Fair		Unrealized		Investment		Fair		Unrealized
At December 31, 2010	Value		Losses			Value		Losses		Positions		Value		Losses
Government sponsored enterprises	$	20,504,526	$	(502,045	)	$	—	$	—		19	$	20,504,526		(502,045	)
Asset-backed securities		21,177,793		(363,896	)		—		—		20		21,177,793	$	(363,896	)
Obligations of states and political subdivisions		8,038,946		(270,155	)		—		—		29		8,038,946		(270,155	)
	$	49,721,265	$	(1,136,096	)	$	—	$	—		68	$	49,721,265	$	(1,136,096	)

	Less than 12 months					12 months or more							Total
											Number of
	Fair		Unrealized			Fair		Unrealized			Investment		Fair		Unrealized
At December 31, 2009	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	)

Our Company’s available for sale portfolio consisted of approximately 333 securities at December 31, 2010. None of these securities had been in the loss position for 12 months or longer. The $1,136,000 unrealized loss included in other comprehensive income at December 31, 2010 was caused by interest rate increases. Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments were not considered other-than-temporarily impaired.

Our Company’s available for sale portfolio consisted of approximately 305 securities at December 31, 2009. One of these securities had been in the loss position for 12 months or longer. The $72 unrealized loss included in other comprehensive income at December 31, 2009 on this asset-backed security was caused by interest rate increases. Because the decline in fair value is attributable to changes in interest rates and not credit quality this investment was not considered other-than-temporarily impaired.

51

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(4) Premises and Equipment

     A summary of premises and equipment at December 31, 2010 and 2009 is as follows:

	2010		2009
Land and land improvements	$	10,324,154	$	9,837,854
Buildings and improvements		32,209,975		31,220,427
Furniture and equipment		10,992,544		10,734,460
Construction in progress		207,880		1,882,773
Total		53,734,553		53,675,514
Less accumulated depreciation		16,754,050		15,052,221
Net premises and equipment	$	36,980,503	$	38,623,293

     Depreciation expense for the past three years is as follows:

	For the Years Ended December 31,
	2010		2009		2008
Depreciation expense	$	1,963,842	$	2,044,257	$	2,158,740

(5) Real Estate Acquired in Settlement of Loans

	2010			2009
Commercial	$	67,421		$	146,250
Real estate mortgage — construction		13,229,199			5,059,924
Real estate mortgage		6,254,221			3,245,852
Total		19,550,841			8,452,026
Less valuation allowance for other real estate owned		(6,158,433	)		—
Total	$	13,392,408		$	8,452,026

Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2010, 2009, and 2008 is summarized as follows:

	2010		2009		2008
Balance, beginning of year	$	—	$	—	$	—
Provision for other real estate owned		6,158,433		—		—
Charge-offs		—		—		—
Balance, end of year	$	6,158,433	$	—	$	—

52

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(6) 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, 2010 and 2009 is as follows:

	For the Years Ended December 31,
	2010							2009
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
	Amount		Amortization			Amount		Amount		Amortization			Amount
Amortizable intangible assets:
Core deposit intangible	$	7,060,224	$	(6,082,715	)	$	977,509	$	7,060,224	$	(5,556,238	)	$	1,503,986
Mortgage servicing rights		3,067,368		(711,378	)		2,355,990		2,945,019		(924,055	)		2,020,964
Total intangible assets	$	10,127,592	$	(6,794,093	)	$	3,333,499	$	10,005,243	$	(6,480,293	)	$	3,524,950

Changes in the net carrying amount of other intangible assets for the years ended December 31, 2010 and 2009 are shown in the following table:

	Core Deposit			Mortgage
	Intangible			Servicing
	Asset			Rights
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
Additions		—			1,168,701
Amortization		(526,477	)		(833,675	)
Balance at December 31, 2010	$	977,509		$	2,355,990

Mortgage servicing rights (MSRs) are amortized over the shorter of 7 years or the life of the loan. They are periodically reviewed for impairment and if impairment is indicated, recorded at fair value. At December 31, 2010 and 2009, no temporary impairment was recognized. The fair value of MSRs is based on the present value of expected cash flows, as further discussed in Fair Value of Financial Instruments. Mortgage loans serviced for others totaled approximately $298,325,000 and $269,475,000 at December 31, 2010 and 2009, respectively. Included in other noninterest income were real estate servicing fees for the years ended December 31, 2010, 2009 and 2008 of $927,000, $888,290, and $776,000, respectively.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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, 2010 for the next five years:

	Core Deposit		Mortgage
	Intangible		Servicing
	Asset		Rights
2011	$	434,763	$	551,000
2012		408,062		448,000
2013		134,684		365,000
2014		—		297,000
2015		—		241,000

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	2010		2009		2008
Core deposit intangible asset	$	526,477	$	626,111	$	701,443
Mortgage servicing rights		833,675		916,093		641,040

(7) Deposits

The scheduled maturities of total time deposits are as follows:

	2010		2009
Due within:
One year	$	304,221,827	$	342,749,968
Two years		58,226,647		74,118,865
Three years		54,968,145		20,481,957
Four years		5,196,284		27,461,147
Five years		7,162,643		2,123,433
Thereafter		—		85,784
	$	429,775,546	$	467,021,154

54

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

At December 31, 2010 and 2009, our Company had certificates and other time deposits in denominations of $100,000 or more which mature as follows:

	2010		2009
Due within:
Three months or less	$	19,997,962	$	35,336,996
Over three months through six months		35,685,505		30,808,596
Over six months through twelve months		37,901,059		44,787,905
Over twelve months		30,982,234		26,926,938
	$	124,566,760	$	137,860,435

The Federal Reserve Bank required the Bank to maintain cash or balances of $23,564,000 and $22,096,000 at December 31, 2010 and 2009, respectively, to satisfy reserve requirements.

Average compensating balances held at correspondent banks were $667,000 and $760,000 at December 31, 2010 and 2009, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks.

(8) 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			Average		Maximum
	Weighted			Weighted			Balance		Outstanding at		Balance at
	Rate			Rate			Outstanding		any Month End		December 31,
2010
Federal funds purchased		—	%		1.0	%	$	425,805	$	—	$	—
Short-term repurchase agreements		0.2			0.2			32,297,375		38,239,420		30,068,453
Total												30,068,453
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

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 $35,300,000 on an unsecured basis and $8,500,000 on a secured basis at December 31, 2010.

55

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

Other Borrowings

Other borrowings of the Company consisted of the following at December 31, 2010:

				2010					2009
						Year End					Year End
		Maturity		Year End		Weighted			Year End		Weighted
	Borrower	Date		Balance		Rate			Balance		Rate
FHLB advances	Subsidiary bank		2010		—			na		22,331,324		4.6	%
			2011	$	38,575,989		3.6	%	$	38,575,989		3.6	%
			2012		8,283,528		1.6	%		8,283,528		1.6	%
			2013		10,126,461		1.6	%		126,461		4.1	%
			2014		—			na		—			na
			2015		—			na		—			na
			2016-18		10,000,000		2.5	%		10,000,000		2.5	%
Total					66,985,978					79,317,302
Subordinated notes	The Company		2034		25,774,000		3.0	%		25,774,000		3.0	%
			2035		23,712,000		2.1	%		23,712,000		6.3	%
Total				$	49,486,000				$	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 $66,986,000 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 $96,000 at December 31, 2010. Based upon the collateral pledged to the Federal Home Loan Bank of Des Moines at December 31, 2010, the Bank could borrow up to an additional $204,220,000 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 floating rate is equal to a three-month LIBOR rate plus 1.83% and reprices quarterly (2.13% at December 31, 2010). 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.

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 (3.00% at December 31, 2010). 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 if certain conditions are met.

56

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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, 2010 and 2009 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.

(9) Income Taxes

The composition of income (benefit) tax expense for 2010, 2009, and 2008 is as follows:

	2010			2009			2008
Current:
Federal	$	(836,846	)	$	2,131,373		$	1,236,327
State		79,556			354,072			—
Total current		(757,290	)		2,485,445			1,236,327
Deferred:
Federal		(2,090,598	)		(564,779	)		(6,625,134	)
State		(238,925	)		(64,546	)		(757,158	)
Total deferred		(2,329,523	)		(629,325	)		(7,382,292	)
Total income tax (benefit) expense	$	(3,086,813	)	$	1,856,120		$	(6,145,965	)

Applicable income tax (benefit) expense 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:

	2010						2009						2008
	Amount			%			Amount			%			Amount			%
Income (loss) before provision for income tax (benefit) expense	$	(6,638,553	)				$	6,811,877					$	(36,773,321	)
Tax at statutory Federal income tax rate	$	(2,257,108	)		34.00	%	$	2,316,038			34.00	%	$	(12,502,929	)		34.00	%
Goodwill impairment		—			—			—			—			7,112,827			(19.34	)
Tax-exempt income		(445,020	)		6.70			(508,002	)		(7.46	)		(570,506	)		1.55
State income tax, net of Federal tax benefit		(105,184	)		1.58			191,087			2.81			—			—
Other, net		(279,501	)		4.22			(143,003	)		(2.10	)		(185,357	)		0.50
Provision for income tax (benefit) expense	$	(3,086,813	)		46.50	%	$	1,856,120			27.25	%	$	(6,145,965	)		16.71	%

57

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

The components of deferred tax assets and deferred tax liabilities at December 31, 2010 and 2009 are as follows:

	2010		2009
Deferred tax assets:
Allowance for loan losses	$	5,680,298	$	5,770,654
Nonaccrual loan interest		1,208,665		710,918
Core deposit intangible		873,017		804,457
Goodwill		3,263,670		3,621,401
Impairment of other real estate owned		2,547,425		—
Deferred compensation		46,878		68,543
Other		687,834		795,133
Total deferred tax assets		14,307,787		11,771,106
Deferred tax liabilities:
Premises and equipment		999,943		756,632
Mortgage servicing rights		789,759		585,215
FHLB stock dividend		102,921		102,921
Available-for-sale securities		655,060		904,038
Pension		118,265		208,839
Other		6,345		16,230
Total deferred tax liabilities		2,672,293		2,573,875
Net deferred tax asset	$	11,635,494	$	9,197,231

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, 2010 and, therefore, has not established a valuation reserve.

At December 31, 2010, 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.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. At December 31, 2010, the Company had $221,000 of gross unrecognized tax benefits that if recognized would affect the effective tax rate. The Company believes that during 2011 it is reasonably possible that there would be a reduction of $221,000 in gross unrecognized tax benefits as a result of the lapse of statute of limitations for the 2007 tax year.

58

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

At December 31, 2010, total interest was approximately $32,000. A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:

	2010			2009			2008
Unrecognized tax benefits as of January 1,	$	562,076		$	748,942		$	956,577
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during prior years		—			—			—
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during year		—			—			—
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		(221,725	)		(186,866	)		(207,635	)
Unrecognized tax benefits as of December 31,	$	340,351		$	562,076		$	748,942

(10) Employee Benefit Plans

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

	2010		2009		2008
Payroll taxes	$	1,105,599	$	1,096,793	$	1,119,073
Medical plans		1,544,670		1,494,166		1,466,232
401k match		318,518		306,042		294,098
Pension plan		864,871		890,692		854,407
Profit-sharing		2		282,904		205,515
Other		161,210		133,803		211,501
Total employee benefits	$	3,994,870	$	4,204,400	$	4,150,826

In 2008, the Company’s profit-sharing plan was amended to include a matching 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 $554,000 contribution to the defined benefit plan in 2010, and the minimum required contribution for 2011 is estimated to be $997,000. The Company has not determined whether it will make any contributions other than the minimum required funding contribution for 2011.

59

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

     Obligations and Funded Status at December 31

	2010			2009
Change in projected benefit obligation:
Balance, January 1	$	9,400,952		$	8,420,847
Service cost		844,178			850,940
Interest cost		556,047			509,482
Actuarial loss (gain)		59,386			(151,710	)
Benefits paid		(205,383	)		(228,607	)
Balance, December 31		10,655,180			9,400,952
Change in plan assets:
Fair value, January 1		7,993,695			5,995,985
Actual gain (loss) return on plan assets		954,332			1,226,317
Employer contribution		554,000			1,000,000
Benefits paid		(205,382	)		(228,607	)
Fair value, December 31		9,296,645			7,993,695
Funded status at end of year	$	(1,358,535	)	$	(1,407,257	)
Accumulated benefit obligation	$	8,172,291		$	6,918,597

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, 2010, 2009 and 2008:

	2010			2009			2008
Service cost—benefits earned during the year	$	844,178		$	850,940		$	820,401
Interest costs on projected benefit obligations		556,047			509,482			452,524
Expected return on plan assets		(613,982	)		(539,283	)		(454,344	)
Amortization of prior service cost		78,628			78,628			78,628
Amortization of net gains		—			(9,075	)		(42,802	)
Net periodic pension expense	$	864,871		$	890,692		$	854,407

60

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at December 31, 2010 and 2009 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

	2010			2009
Prior service costs	$	(757,440	)	$	(836,068	)
Net accumulated actuarial net gain (loss)		223,639			(57,326	)
Accumulated other comprehensive loss		(533,801	)		(893,394	)
Cumulative employer contributions in excess of net periodic benefit cost		(824,734	)		(513,863	)
Net amount recognized at December 31, balance sheet	$	(1,358,535	)	$	(1,407,257	)
Net (gain) loss arising during period	$	(280,964	)	$	(838,744	)
Prior service cost amortization		(78,628	)		(78,628	)
Amortization of net actuarial gain / (loss)		—			9,075
Total recognized in other comprehensive income	$	(359,592	)	$	(908,297	)
Total recognized in net periodic pension cost and other comprehensive income	$	505,279		$	(17,605	)

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 2011 is $78,628. For 2011, there is no estimated amount of actuarial gain or loss subject to amortization into net periodic pension cost.

Assumptions utilized to determine benefit obligations as of December 31, 2010, 2009 and 2008 and to determine pension expense for the year then ended are as follows:

	2010			2009			2008
Determination of Benefit obligation at year end:
Discount rate		5.75	%		6.00	%		6.15	%
Annual rate of compensation increase		4.50	%		4.50	%		4.50	%
Determination of Pension expense for year ended:
Discount rate for the service cost		5.75	%		6.00	%		6.25	%
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 2010 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: 12.4% in 2010, 22.0% in 2009, (32.6)% in 2008, 7.4% in 2007, and 14.4% in 2006. 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 $893,000 expense in 2011 compared to $865,000 in 2010.

61

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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. The Company regularly reviews its policies on the investment mix and may make changes depending on economic conditions and perceived investment mix.

The fair value of the Company’s pension plan assets at December 31, 2010 and 2009 by asset category are as follows:

			Fair Value Measurements
			At December 31, 2010 Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
	Fair Value		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description	2010		(Level 1)		(Level 2)		(Level 3)
Cash equivalents	$	1,123,265	$	1,123,265	$	—	$	—
Equity securities:
U.S. large-cap (a)		3,364,627		3,364,627		—		—
U.S. mid-cap (b)		1,138,036		1,138,036		—		—
U.S. small-cap (c)		445,318		445,318		—		—
International (d)		1,276,752		1,276,752		—		—
Fixed income securities:
U.S. Govt Agency Obligations (e)		993,464		—		993,464		—
Corporate investment grade (e)		682,715		—		682,715		—
Corporate non-investment grade (e)		272,468		—		272,468		—
Total	$	9,296,645	$	7,347,998	$	1,948,647	$	—

(a)	This category is comprised of low-cost equity index funds not actively managed that track the S&P 500.
(b)	This category is comprised of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.
(c)	This is comprised of actively managed mutual funds.
(d)	44% of this category is comprised of low-cost equity index funds not actively managed that track the MSCI EAFE.
(e)	This category is comprised of individual bonds.

62

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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

The following future benefit payments are expected to be paid:

	Pension
Year	benefits
2011	$	309,352
2012		312,368
2013		319,389
2014		390,519
2015		403,134
2016 to 2020		2,401,519

(11) Stock Compensation

The Company’s stock option plan provides for the grant of options to purchase up to 486,720 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 10,294 options issued in 2008 to acquire shares that vested immediately.

63

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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

										Weighted average
	Number of shares									exercise price
	December 31									December 31
	2010			2009			2008			2010		2009		2008
Outstanding, beginning of year		286,948			288,493			262,694		$	24.11	$	24.13	$	25.17
Granted		—			—			40,578			—		—		19.42
Exercised		—			—			—			—		—		—
Forfeited		—			(1,545	)		(14,779	)		—		29.06		29.67
Expired		(36,457	)		—			—			15.10		—		—
Outstanding, end of year		250,491			286,948			288,493		$	25.42	$	24.11	$	24.13
Exercisable, end of year		209,159			224,309			197,550		$	25.50	$	23.75	$	23.30

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2010.

Options outstanding at December 31, 2010 had a weighted average remaining contractual life of approximately five years and no intrinsic value. Options outstanding at December 31, 2009 had a remaining contractual life of approximately five years and no intrinsic value. No stock options were granted during 2010 or 2009.

Options exercisable at December 31, 2010 had a weighted average remaining contractual life of approximately four years and no intrinsic value. Options exercisable at December 31, 2009 had a weighted average remaining contractual life of approximately four years and no intrinsic value. No stock options were exercised during 2010 or 2009.

Total stock-based compensation expense for the years ended December 31, 2010, 2009, and 2008 was $87,000, $130,000, and $232,000, respectively. As of December 31, 2010, the total unrecognized compensation expense related to non-vested stock awards was $156,000 and the related weighted average period over which it is expected to be recognized is approximately three years.

The weighted average grant-date fair values of stock options granted during 2008 and the weighted average significant assumptions used to determine those fair values, using the Black-Scholes option-pricing model, are as follows:

	2008
Fair value per share at grant date	$	4.42
Significant assumptions:
Risk-free interest rate at grant date		3.14	%
Expected annual rate of quarterly dividends		4.00
Expected stock price volatility		30
Expected life to exercise (years)		7.73

64

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(12) 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 265,471 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, 2010 were $28,841,000 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.

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:

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 common stock warrant is exercisable immediately with a ten year term, in whole or in part, at an exercise price of $17.10 per share. The preferred stock and warrant are classified as stockholders’ equity in the consolidated balance sheet and qualify, for regulatory capital purposes, as Tier I capital. For the year ended December 31, 2010, the Company had declared and paid $1,513,000 of dividends and amortized $476,000 of accretion of the discount on preferred stock.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(13) (Loss) earnings per Share

Basic (loss) earnings 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 (loss) earnings per share gives effect to all dilutive potential common shares that were outstanding during the year. The calculations of basic and diluted (loss) earnings per share are as follows:

	2010			2009		2008
Basic (loss) earnings per common share:
Net (loss) income	$	(3,551,740	)	$	4,955,757	$	(30,627,356	)
Less:
Preferred stock dividends		1,512,750			1,516,952		50,425
Accretion of discount on preferred stock		476,474			476,474		15,665
Net (loss) income available to common shareholders	$	(5,540,964	)	$	2,962,331	$	(30,693,446	)
Basic (loss) earnings per share	$	(1.24	)	$	0.66	$	(6.83	)
Diluted (loss) earnings per common share:
Net (loss) income	$	(3,551,740	)	$	4,955,757	$	(30,627,356	)
Less:
Preferred stock dividends		1,512,750			1,516,952		50,425
Accretion of discount on preferred stock		476,474			476,474		15,665
Net (loss) income available to common shareholders	$	(5,540,964	)	$	2,962,331	$	(30,693,446	)
Average shares outstanding		4,474,033			4,474,033		4,494,856
Effect of dilutive stock options		—			—		—
Average shares outstanding including dilutive stock options		4,474,033			4,474,033		4,494,856
Diluted (loss) earnings per share	$	(1.24	)	$	0.66	$	(6.83	)

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 2010, 2009, and 2008 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,
	2010		2009		2008
Anti-dilutive shares — option shares		250,491		286,948		288,492
Anti-dilutive shares — warrant shares		265,471		265,471		265,471

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(14) 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, 2010 and 2009, the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2010, 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.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

The actual and required capital amounts and ratios for the Company and the Bank as of December 31, 2010 and 2009 are as follows (dollars in thousands):

						Minimum					Well-Capitalized
	Actual					Capital requirements					Capital Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2010
Total capital (to risk-weighted assets):
Company	$	159,510		17.05	%	$	74,863		8.00	%		—		—
Hawthorn Bank		130,361		14.18			73,548		8.00		$	91,834		10.00	%
Tier I capital (to risk-weighted assets):
Company	$	133,349		14.25		$	37,431		4.00	%		—		—
Hawthorn Bank		118,837		12.93			36,774		4.00		$	55,161		6.00	%
Tier I capital (to adjusted average assets):
Company	$	133,349		11.00		$	36,360		3.00	%		—		—
Hawthorn Bank		118,837		9.99			35,685		3.00		$	59,475		5.00	%

						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	%

Bank dividends are the principal source of funds for payment of dividends by the Company to its stockholders. The Bank is subject to regulations which require the maintenance of minimum capital requirements. As a result of the Bank paying out dividends to the Company in excess of its 2010 earnings, the Bank’s unappropriated retained earnings balance at December 31, 2010 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.

(15) Fair Value Measurements

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. As of December 31, 2010 and 2009, there were no transfers into or out of Level 2.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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.

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.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

			Fair Value Measurements
			At December 31, 2010 Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
U.S. treasury	$	1,027,891	$	—	$	1,027,891	$	—
Government sponsored enterprises		53,341,551		—		53,341,551		—
Asset-backed securities		90,176,241		—		90,176,241		—
Obligations of states and political subdivisions		34,431,867		—		34,431,867		—
Total	$	178,977,550			$	178,977,550	$	—

			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)
Government sponsored enterprises	$	44,380,798	$	—	$	44,380,798	$	—
Asset-backed securities		69,434,650				69,434,650
Obligations of states and political subdivisions		39,111,237				39,111,237
Total	$	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. The net carrying value of impaired loans is generally based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of December 31, 2010, the Company identified $30.2 million in impaired loans that had specific allowances for losses aggregating $6.4 million. Related to these loans, there was $14.6 million in charge-offs recorded during 2010.

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

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

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 Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
	Fair Value		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs		Total Gains
Description	2010		(Level 1)		(Level 2)		(Level 3)		(Losses)*
Impaired loans:
Commercial, financial, & agricultural	$	1,480,836	$	—	$	—	$	1,480,836	$	(1,634,544	)
Real estate construction — residential		263,870		—		—		263,870		(863,399	)
Real estate construction — commercial		3,284,371		—		—		3,284,371		(4,496,156	)
Real estate mortgage — residential		4,459,151		—		—		4,459,151		(3,971,927	)
Real estate mortgage — commercial		14,368,132		—		—		14,368,132		(3,626,892	)
Total	$	23,856,360	$	—	$	—	$	23,856,360	$	(14,592,918	)
Other real estate owned and repossessed assets	$	14,009,017	$	—	$	—	$	14,009,017	$	(3,528,011	)

			Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
	Fair Value		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs		Total Gains
Description	2009		(Level 1)		(Level 2)		(Level 3)		(Losses)*
Impaired loans:
Commercial, financial, & agricultural	$	970,937	$	—	$	—	$	970,937	$	(1,043,465	)
Real estate construction — residential		1,776,267		—		—		1,776,267		(778,041	)
Real estate construction — commercial		272,106		—		—		272,106		(160,727	)
Real estate mortgage — residential		7,104,961		—		—		7,104,961		(1,914,530	)
Real estate mortgage — commercial		9,755,560		—		—		9,755,560		(323,522	)
Total	$	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	)

* Total gains (losses) reported for other real estate owned and repossessed assets includes charge offs, valuation write downs, and net losses taken during the periods reported.

(16) Fair Value of Financial Instruments

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

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. The net carrying amount of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

Investment Securities

A detailed description of the fair value measurement of the debt instruments in the available for sale sections of the investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities.

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.

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 subordinated notes and other borrowings, 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.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

A summary of the carrying amounts and fair values of the Company’s financial instruments at December 31, 2010 and 2009 is as follows:

	2010				2009
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
Assets:
Loans	$	883,907,596	$	889,291,000	$	976,817,458	$	984,305,000
Investment in debt securities		178,977,550		178,977,550		152,926,685		152,926,685
Federal fund sold and securities purchased under agreements to resell		125,815		125,815		89,752		89,752
Cash and due from banks		50,853,985		50,853,985		24,575,943		24,575,943
Mortgage servicing rights		2,355,990		3,027,000		2,020,964		2,904,000
Accrued interest receivable		5,733,684		5,733,684		6,625,557		6,625,557
	$	1,121,954,620	$	1,128,009,034	$	1,163,056,359	$	1,171,426,937
Liabilities:
Deposits:
Demand	$	137,749,571	$	137,749,571	$	135,017,639	$	135,017,639
NOW		160,225,356		160,225,356		139,623,577		139,623,577
Savings		54,722,129		54,722,129		47,637,148		47,637,148
Money market		164,190,054		164,190,054		167,023,279		167,023,279
Time		429,775,546		437,996,000		467,021,154		478,011,000
Federal funds purchased and securities sold under agreements to repurchase		30,068,453		30,068,453		36,645,434		36,645,434
Subordinated notes		49,486,000		21,105,000		49,486,000		18,329,000
Other borrowings		66,985,978		69,329,000		79,317,302		80,557,000
Accrued interest payable		1,491,503		1,491,503		2,438,121		2,438,121
	$	1,094,694,590	$	1,076,877,066	$	1,124,209,654	$	1,105,282,198

Off-Balance Sheet Financial Instruments

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. See Note 16 for further discussion.

Limitations

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.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(17) Commitments and Contingencies

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, 2010, 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, 2010 and 2009 is as follows:

	2010		2009
Commitments to extend credit	$	94,114,449		131,592,651
Standby letters of credit		3,446,527		2,799,828

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, approximately $28,810,000 and $47,625,000 represent fixed-rate loan commitments at December 31, 2010 and 2009, respectively. 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 five years at December 31, 2010.

The Company and its subsidiaries, are defendants in various legal actions incidental to the Company’s past and current business activities. At December 31, 2010 and 2009, the Company’s consolidated balance sheets included liabilities for these legal actions of $275,000 and $0, respectively. Based on the Company’s analysis, and considering the inherent uncertainties associated with litigation, we do not believe that it is reasonably possible that these legal actions will materially adversely affect the Company’s consolidated financial statements or results of operations in the near term.

On November 18, 2010, a suit was filed against Hawthorn Bank (the Bank) in the Circuit Court of Jackson County for the Eastern Division of Missouri state court by a customer alleging that the fees associated with the Bank’s automated overdraft program in connection with its debit card and ATM cards constitute unlawful interest in violation of Missouri’s usury laws. The suit seeks class-action status for Bank customers who have paid overdraft fees on their checking accounts. The Bank has filed for a motion to dismiss the suit. At this early stage of the litigation, it is not possible for management of the Bank to determine the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.

On December 17, 2009, a suit was filed against Hawthorn Bank (the Bank) in Circuit Court of Jackson County for the Eastern Division of Missouri state court by a customer alleging that the Bank had not followed through on its

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

commitment to fund a loan request. A jury found in favor of the customer and at December 31, 2010, the Company carried a liability of $275,000 representing its estimated obligation. The Company is currently evaluating the appeals process and the probable outcome is presently not determinable.

(18) 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,
	2010		2009
Assets
Cash and due from bank subsidiaries	$	12,448,772	$	14,737,805
Investment in equity securities		1,486,000		1,486,000
Investment in subsidiaries		138,677,199		142,793,737
Premises and equipment		3,662		6,103
Deferred tax asset		166,349		238,049
Other assets		21,430		26,034
Total assets	$	152,803,412	$	159,287,728
Liabilities and Stockholders’ Equity
Subordinated notes	$	49,486,000	$	49,486,000
Other liabilities		1,829,101		2,030,445
Stockholders’ equity		101,488,311		107,771,283
Total liabilities and stockholders’ equity	$	152,803,412	$	159,287,728

Condensed Statements of Operations

	For the Years Ended December 31,
	2010			2009			2008
Income
Interest and dividends received from subsidiaries	$	4,405,349		$	247,842		$	8,188,422
Total income		4,405,349			247,842			8,188,422
Expenses
Interest on subordinated notes		1,525,553			2,446,742			3,046,238
Other		2,904,355			3,057,108			3,564,043
Total expenses		4,429,908			5,503,850			6,610,281
(Loss) income before income tax benefit and equity in undistributed income of subsidiaries		(24,559	)		(5,256,008	)		1,578,141
Income tax benefit		1,449,929			1,918,880			1,980,100
Equity in undistributed (loss) income of subsidiaries		(4,977,110	)		8,292,885			(34,185,597	)
Net (loss) income	$	(3,551,740	)	$	4,955,757		$	(30,627,356	)

75

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

Condensed Statements of Cash Flows

	2010			2009			2008
Cash flows from operating activities:
Net (loss) income	$	(3,551,740	)	$	4,955,757		$	(30,627,356	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		2,441			3,404			5,242
Equity in undistributed (income) losses of subsidiaries		4,977,110			(8,292,885	)		34,185,596
Stock based compensation expense		87,310			130,459			231,761
(Increase) decrease in deferred tax asset		(37,876	)		120,281			303,126
Other, net		381,702			(109,419	)		(484,985	)
Net cash provided by (used in) operating activities		1,858,947			(3,192,403	)		3,613,384
Cash flows from investing activities:
Purchase of premise and equipment		—			(3,052	)		—
Proceeds from sale premise and equipment		—			500			—
Investment in subsidiary		(1,250,000	)		(8,000,000	)		(10,000,000	)
Net cash used in investing activities		(1,250,000	)		(8,002,552	)		(10,000,000	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock and warrant		—			—			30,255,000
Purchase of treasury stock		—			—			(802,445	)
Cash dividends paid — preferred stock		(1,512,750	)		(1,369,879	)		—
Cash dividends paid — common stock		(1,385,230	)		(2,665,557	)		(3,486,415	)
Net cash (used in) provided by financing activities		(2,897,980	)		(4,035,436	)		25,966,140
Net (decrease) increase in cash and due from banks		(2,289,033	)		(15,230,391	)		19,579,524
Cash and due from banks at beginning of year		14,737,805			29,968,196			10,388,672
Cash and due from banks at end of year	$	12,448,772		$	14,737,805		$	29,968,196

76

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(19) Quarterly Financial Information (Unaudited)

Year Ended December 31, 2010

										Year
	First		Second		Third		Fourth			to
(In thousands except per share data)	quarter		quarter		quarter		quarter			Date
Interest income	$	14,873	$	15,103	$	14,625	$	14,138		$	58,739
Interest expense		4,562		3,989		3,766		3,436			15,753
Net interest income		10,311		11,114		10,859		10,702			42,986
Provision for loan losses		2,505		2,150		2,450		8,150			15,255
Noninterest income		2,006		2,450		2,910		3,115			10,481
Noninterest expense		9,131		10,320		9,365		16,035			44,851
Income tax (benefit) expense		187		312		531		(4,117	)		(3,087	)
Net income (loss)	$	494	$	782	$	1,423	$	(6,251	)	$	(3,552	)
Preferred stock dividends		370		382		379		382			1,513
Accretion of discount on preferred stock		119		119		119		119			476
Net income (loss) available to common stockholders	$	5	$	281	$	925	$	(6,752	)	$	(5,541	)
Net income (loss) per share:
Basic earnings (loss) per share	$	—	$	0.06	$	0.21	$	(1.51	)	$	(1.24	)
Diluted earnings (loss) per share		—		0.06		0.21		(1.51	)		(1.24	)

Year Ended December 31, 2009

										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 tax (benefit) expense		494		555		840		(33	)		1,856
Net income	$	1,056	$	1,205	$	1,907	$	788		$	4,956
Preferred stock dividends		374		383		378		382			1,517
Accretion of discount on preferred stock		119		119		119		120			477
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	$	0.32	$	0.06		$	0.66
Diluted earnings per share		0.13		0.16		0.32		0.06			0.66

77

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.” 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 2010 and 2009 in which the stock was traded.

2010	High		Low
First Quarter		12.50		9.08
Second Quarter		13.20		11.06
Third Quarter		13.37		8.69
Fourth Quarter		10.21		8.26

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

     Shares Outstanding. As of March 14, 2011, our Company had issued 4,635,891 shares of common stock, of which 4,474,033 shares were outstanding. The outstanding shares were held of record by approximately 1,453 shareholders. Our Company has a warrant outstanding for the purchase of 265,471 shares of common stock. In addition, our Company has 30,255 shares of cumulative, perpetual preferred stock outstanding. The warrant and 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 2010 and 2009.

	Dividends
Month Paid	Per Share
January, 2010	$	0.11
April, 2010		0.11
July, 2010		0.05
October, 2010		0.05
Total for 2010	$	0.32
January, 2009	$	0.21
April, 2009		0.21
July, 2009		0.11
October, 2009		0.11
Total for 2009	$	0.64

     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 14 to our Company’s 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 cannot pay dividends on our common stock.

78

     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, 2005, through December 31, 2010. 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, 2005. The performance graph assumes that the value of an investment in our common stock and each index was $100 at December 31, 2005 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:

	12/31/05		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
Hawthorn Bancshares, Inc.	$	100.00	$	109.75	$	89.52	$	64.10	$	38.81	$	37.25
Nasdaq Composite (U.S. Companies)	$	100.00	$	110.39	$	122.15	$	73.32	$	106.57	$	125.91
Index of financial institutions ($1 billion to $5 billion)	$	100.00	$	115.72	$	84.29	$	69.91	$	50.11	$	56.81

79

DIRECTORS AND EXECUTIVE OFFICERS OF OUR COMPANY

Name	Position with Our Company	Position with Subsidiary Bank	Principal Occupation
David T. Turner	Chairman, Chief Executive Officer, President and Director -Class III	Chairman, Chief Executive Officer, Director of Hawthorn Bank, President 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, Buick, GMC Cadilac, and Riley Toyota Scion, Jefferson City, Missouri
James E. Smith	Director-Class I	Director of Hawthorn Bank	Retired
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, 2010, as filed with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2011 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.

80

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 report dated March 30, 2011, with respect to the consolidated balance sheets of Hawthorn Bancshares, Inc. as of December 31, 2010 and 2009, 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, 2010, and the effectiveness of internal control over financial reporting as of December 31, 2010, which reports appear in the December 31, 2010 annual report on Form 10-K of Hawthorn Bancshares, Inc.

/s/ KPMG LLP

St. Louis, Missouri
March 30, 2011

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, David T. Turner, 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 30, 2011	/s/ David T. Turner
	David T. Turner
	Chairman of the Board, President 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 30, 2011	/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, 2010 as filed with the Securities and Exchange Commission (the “Report”), I, David T. Turner, Chairman of the Board, President 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 30, 2011	/s/ David T. Turner
	David T. Turner
	Chairman of the Board, President 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, 2010 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 30, 2011

/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

Principal Executive Officer Certification for Years following First Fiscal Year

Hawthorn Bancshares, Inc.
UST #264

I, David T. Turner, certify, based on my knowledge, that:

(i) The compensation committee of Hawthorn Bancshares, Inc. discussed, reviewed, and evaluated with senior risk officers on February 10, 2010 and October 27, 2010, senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to Hawthorn Bancshares, Inc.;

(ii) The compensation committee of Hawthorn Bancshares, Inc. has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Hawthorn Bancshares, Inc. and has identified any features of the employee compensation plans that pose risks to Hawthorn Bancshares, Inc. and has limited those features to ensure that Hawthorn Bancshares, Inc. is not unnecessarily exposed to risks;

(iii) The compensation committee reviewed on February 10, 2010 and October 27, 2010, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Hawthorn Bancshares, Inc. to enhance the compensation of an employee, and has limited any such features;

(iv) The compensation committee of Hawthorn Bancshares, Inc. 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 Bancshares, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was 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 Bancshares, Inc.;

(B) Employee compensation plans that unnecessarily expose Hawthorn Bancshares, Inc. to risks; and

(C) Employee compensation plans that could encourage the manipulation of reported earnings of Hawthorn Bancshares, Inc. to enhance the compensation of an employee;

(vi) Hawthorn Bancshares, Inc. has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) Hawthorn Bancshares, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(viii) Hawthorn Bancshares, Inc. has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

(ix) Hawthorn Bancshares, Inc. and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required 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 Bancshares, Inc. 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 any part of the most recently completed fiscal year that was a TARP period;

(xi) Hawthorn Bancshares, Inc. will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) Hawthorn Bancshares, Inc. will disclose whether Hawthorn Bancshares, Inc., the board of directors of Hawthorn Bancshares, Inc., or the compensation committee of Hawthorn Bancshares, Inc. has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) Hawthorn Bancshares, Inc. 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 any part of the most recently completed fiscal year that was a TARP period;

(xiv) Hawthorn Bancshares, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Hawthorn Bancshares, Inc. and Treasury, including any amendments;

(xv) Hawthorn Bancshares, Inc. 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, 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; and

(xvi) 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.

/s/ David T. Turner   David T. Turner, Chairman, CEO & President Date: March 30, 2011 

EX-99.2

Exhibit 99.2

Principal Financial Officer Certification for Years following First Fiscal Year

Hawthorn Bancshares, Inc.
UST #264

I, Richard G. Rose, certify, based on my knowledge, that:

(i) The compensation committee of Hawthorn Bancshares, Inc. discussed, reviewed, and evaluated with senior risk officers on February 10, 2010 and October 27, 2010, senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to Hawthorn Bancshares, Inc.;

(ii) The compensation committee of Hawthorn Bancshares, Inc. has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Hawthorn Bancshares, Inc. and has identified any features of the employee compensation plans that pose risks to Hawthorn Bancshares, Inc. and has limited those features to ensure that Hawthorn Bancshares, Inc. is not unnecessarily exposed to risks;

(iii) The compensation committee reviewed on February 10, 2010 and October 27, 2010, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Hawthorn Bancshares, Inc. to enhance the compensation of an employee, and has limited any such features;

(iv) The compensation committee of Hawthorn Bancshares, Inc. 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 Bancshares, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was 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 Bancshares, Inc.;

(B) Employee compensation plans that unnecessarily expose Hawthorn Bancshares, Inc. to risks; and

(C) Employee compensation plans that could encourage the manipulation of reported earnings of Hawthorn Bancshares, Inc. to enhance the compensation of an employee;

(vi) Hawthorn Bancshares, Inc. has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) Hawthorn Bancshares, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(viii) Hawthorn Bancshares, Inc. has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

(ix) Hawthorn Bancshares, Inc. and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required 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 Bancshares, Inc. 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 any part of the most recently completed fiscal year that was a TARP period;

(xi) Hawthorn Bancshares, Inc. will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) Hawthorn Bancshares, Inc. will disclose whether Hawthorn Bancshares, Inc., the board of directors of Hawthorn Bancshares, Inc., or the compensation committee of Hawthorn Bancshares, Inc. has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) Hawthorn Bancshares, Inc. 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 any part of the most recently completed fiscal year that was a TARP period;

(xiv) Hawthorn Bancshares, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Hawthorn Bancshares, Inc. and Treasury, including any amendments;

(xv) Hawthorn Bancshares, Inc. 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, 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; and

(xvi) 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.

/s/ Richard G. Rose   Richard G. Rose, Chief Financial Officer Date: March 30, 2011