10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2012

OR

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

132 East High Street, Box 688, Jefferson City, Missouri 65102

(Address of principal executive offices) (Zip Code)

(573) 761-6100

(Registrant’s telephone number, including area code)

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

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

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

Common Stock, par value $1.00 per share

(Title of Class)

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

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  ¨    No  x

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  x    No  ¨

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  x    No  ¨

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.    x

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	¨	Accelerated filer	¨
Non-accelerated filer	x  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

The aggregate market value of the 4,041,468 shares of voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the $9.23 closing price of such common equity on June 29, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, was $37,302,749. Aggregate market value excludes an aggregate of 797,646 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 April 1, 2013, the registrant had 5,000,972 shares of common stock, par value $1.00 per share, issued and 4,839,114 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference into the indicated parts of this report: (1) 2012 Annual Report to Shareholders—Part II and (2) definitive Proxy Statement for the 2013 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A—Part III.

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

The 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 the 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, the 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, the 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, the Company acquired all of the issued and outstanding capital stock of Bank 10, a Missouri state bank.

On December 1, 2006, the 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. The 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 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.

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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, 2012, Hawthorn and its subsidiaries had approximately 313 full-time and 64 part-time employees. None of its employees is presently represented by any union or collective bargaining group, and the Company considers its employee relations to be satisfactory.

Competition

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

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

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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. Hawthorn also is subject to a number of restrictions and requirements imposed by the Sarbanes-Oxley Act of 2002 relating to internal controls over financial reporting, disclosure controls and procedures, loans to directors or executive officers of the Hawthorn and its subsidiaries, the preparation and certification of the Hawthorn’s consolidated financial statements, the duties of Hawthorn’s audit committee, relations with and functions performed by Hawthorn’s independent auditors, and various accounting and corporate governance matters.

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

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

• securities underwriting, dealing and market making;

• sponsoring mutual funds and investment companies;

• insurance underwriting and insurance agency activities;

• merchant banking; and

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

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

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

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

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

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

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

• merging or consolidating with another bank holding company.

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

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

On December 31, 2012, Hawthorn was in compliance with all of the FRB’s capital adequacy guidelines. Hawthorn’s capital ratios on December 31, 2012 are shown below:

Leverage Ratio (3% minimum requirement)	Tier 1 Risk-Based Capital Ratio (4% minimum requirement)	Total Risk-Based Capital Ratio (8% minimum requirement)
10.37%	13.58%	16.83%

Basel I, Basel II and Basel III Accords. The current risk-based capital guidelines that apply to us and our subsidiary bank are based on the 1988 capital accord, referred to as Basel I, of the International Basel Committee on Banking Supervision (which we refer to as the “Basel Committee”), a committee of central banks and bank supervisors, as implemented by federal bank regulators. In 2008, the bank regulatory agencies began to phase-in capital standards based on a second capital accord issued by the Basel Committee, referred to as Basel II, for large or “core” international banks (generally defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more). Because we do not anticipate controlling any large or “core” international bank in the foreseeable future, Basel II will not apply to us.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III. When fully phased-in on January 1, 2019, Basel III increases the minimum tier 1 common equity ratio to 4.5%, net of regulatory deductions, and introduces a capital conservation buffer of an additional

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2.5% of common equity to risk-weighted assets, raising the target minimum tier 1 common equity ratio to at least 7.0%. Basel III increases the minimum tier 1 capital ratio to 8.5% inclusive of the capital conservation buffer, increases the minimum total capital ratio to 10.5% inclusive of the capital conservation buffer and introduces a countercyclical capital buffer of up to 2.5% of common equity or other fully loss absorbing capital for periods of excess credit growth. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a tier 1 common equity ratio above the minimum but below the conservation buffer may face constraints on dividends, equity repurchases and compensation based on the amount of such shortfall.

Basel III introduces a non-risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and new liquidity standards. The phase-in of the new rules is to commence on January 1, 2013, with the phase-in of the capital conservation buffer commencing on January 1, 2016 and the rules to be fully phased-in by January 1, 2019.

In November 2010, Basel III was endorsed by the Group of Twenty (G-20) Finance Ministers and Central Bank Governors and is subject to individual adoption by member nations, including the United States. On December 16, 2010, the Basel Committee issued the text of the Basel III rules, which presents the details of global regulatory standards on bank capital adequacy and liquidity agreed by the Basel Committee and endorsed by the G-20 leaders. In June 2012, the federal banking agencies released proposed changes to the current capital adequacy standards in light of Basel III and capital changes required by the Dodd-Frank Act. On November 9, 2012, the federal banking agencies released joint guidance advising that, in light of the volume of comments received and the wide range of views expressed during the comment period, the proposed rules would not become effective on January 1, 2013, as originally proposed. It is unknown when the federal banking agencies will release final regulations. However, if finalized as proposed in the U.S., Basel III would lead to higher capital requirements and more restrictive leverage and liquidity ratios. The ultimate impact of new capital and liquidity standards on us and our bank subsidiary is currently being reviewed and will depend on a number of factors, including completion of the rulemaking process and final implementation by U.S. banking regulators. We cannot determine the ultimate effect that potential legislation, or subsequent regulations, if enacted, would have upon our earnings or financial position.

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. The Dodd-Frank Act codified the requirement that holding companies, such as the Company, serve as a source of financial strength for their subsidiary depository institutions, by providing financial assistance to its insured depository institution subsidiaries in the event of financial distress. Under the source of strength requirement imposed by the FRB and codified in the Dodd-Frank Act, the Company could be required to provide financial assistance to the Bank should it experience financial distress. 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. The regulators may require these and other actions in support of controlled banks even if such action is not in the best interests of the bank holding company or its stockholders.

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

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

Regulation Applicable to our Bank

General. Hawthorn Bank, a Missouri state non-member depository trust company, is subject to the regulation of the Missouri Division of Finance and the FDIC. The FDIC is empowered to issue cease and desist orders against our Bank if it determines that any activities of our Bank represent unsafe and unsound banking practices or violations of law. In addition, the FDIC has the power to impose civil money penalties 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 classify an insured financial institution in one of the following five categories, depending upon the amount of its regulatory capital:

• “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 capital ratio);

• “adequately capitalized” if it has a total Tier 1 leverage ratio of 4% or greater (or a Tier 1 leverage ratio of 3% or greater, if the bank has a Capital adequacy, Asset quality, Management, Liquidity, and Sensitivity to market risk (CAMELS) rating of 1), a Tier 1 risk-based capital ratio of 4% or greater, and a total risk-based capital ratio of 8% or greater;

• “undercapitalized” if it has a total Tier 1 leverage ratio that is less than 4% (or a Tier 1 leverage ratio that is less than 3%, if the bank has a CAMELS rating of 1), a Tier 1 risk-based capital ratio that is less than 4% or a total risk-based capital ratio that is less than 8%;

• “significantly undercapitalized” if it has a total Tier 1 leverage ratio that is less than 3%, a Tier 1 risk-based capital ratio that is less than 3% or a total risk-based ratio that is less than 6%; and

• “critically undercapitalized” if it has a Tier 1 leverage ratio that is equal to or less than 2%.

The federal regulatory agencies are required to take prompt corrective action against undercapitalized financial institutions. On December 31, 2012, 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, 2012 are shown on the following chart.

Leverage Ratio (5% minimum requirement)	Tier 1 Risk-Based Capital Ratio (6% minimum requirement)	Total Risk-Based Capital Ratio (10% minimum requirement)
10.60%	13.87%	15.12%

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. The maximum amount that a Missouri state-chartered bank may lend to any one person or

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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. The Company’s primary source of funds is dividends from our Bank, and 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. 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). If we are not current in the payment of quarterly dividends on the Series A preferred stock, we cannot pay dividends on our common stock.

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

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. It also creates the Consumer Financial Protection Bureau, which will overtake supervision of most providers of consumer financial products and services, and will be empowered to declare acts or practices related to the delivery of a consumer financial product or service to be “unfair, deceptive or abusive.” This law will continue to change banking regulation and the operating environment of Hawthorn in substantial and unpredictable ways. These changes 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.

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

• conducting open market operations in United States government securities;

• changing the discount rates of borrowings of depository institutions;

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

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

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

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

Available Information

The address of our principal executive offices is 132 East High Street, Box 688, Jefferson City, Missouri 65102 and our telephone number at this location is (573) 761-6100. 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 the Company’s results of operations, financial condition or business and that could cause them to differ materially from the 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, the 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 necessarily the only ones that the 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 earn on loans and investment securities may decrease more rapidly than the amount of interest our Bank has to pay on deposits and other interest-bearing liabilities. This would result in a decrease in the profitability of Hawthorn and its banking subsidiary.

Changes in the level or structure of interest rates also affect

• our Bank’s ability to originate loans,

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

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

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

• our Bank’s ability to obtain deposits.

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

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

Our Provision For Probable Loan Losses May Need To Be Increased. Hawthorn’s banking subsidiary makes a provision for loan losses based upon management’s estimate of probable losses in the loan portfolio and its consideration of prevailing economic conditions. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and

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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 the first quarter of 2013. 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 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

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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.

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 scope of 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.

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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, 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. We are prohibited from repurchasing any common, junior preferred or pari passu shares if we are in arrears on the dividends payable to the Treasury on the preferred stock.

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

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

Such competition for loans comes principally from:

•   other commercial banks	•   mortgage banking companies
•   savings banks	•   finance companies
•   savings and loan associations	•   credit unions
Competition for deposits comes principally from:
•   other commercial banks	•   brokerage firms
•   savings banks	•   insurance companies
•   savings and loan associations	•   money market mutual funds
•   credit unions	•   mutual funds (such as corporate and government securities funds)

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

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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 the 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 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.

The Short-Term and Long-Term Impact of the New Regulatory Capital Standards and the Forthcoming New Capital Rules for U.S. Banks is Uncertain. On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement on a strengthened set of capital requirements for internationally active banking organizations in the United States and around the world, known as Basel III. Basel III increases the requirements for minimum common equity, minimum tier 1 capital, and minimum total capital, to be phased in over time until fully phased in by January 1, 2019. Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the FRB. The leverage and risk-based capital ratios of these entities may

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not be lower than the leverage and risk-based capital ratios for insured depository institutions. In particular, bank holding companies, many of which have long relied on trust preferred securities as a component of their regulatory capital, will no longer be permitted to count trust preferred securities toward their tier 1 capital. In June 2012, the FRB, OCC and FDIC released proposed rules which would implement the Basel III and Dodd-Frank Act capital requirements. On November 9, 2012, the federal banking agencies released joint guidance advising that, in light of the volume of comments received and the wide range of views expressed during the comment period, the proposed rules would not become effective on January 1, 2013, as originally proposed. While the proposed capital requirements would result in generally higher regulatory capital standards, it is uncertain as to exactly how the new standards will ultimately be applied to us and our subsidiary bank and their impact on us or the Bank.

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	•   Internet-based banking
•   data processing	•   telebanking
•   automation	•   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 the 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 the Company; and (ii) changes in accounting policies and practices.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

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

On January 1, 2013, our principal offices were relocated from Lee’s Summit, Missouri to Hawthorn Bank’s main facility located at 132 East High Street, Jefferson City, Missouri 65102.

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

Location	Approximate Square Footage			Owned or Leased			Net Book Value at December 31, 2012 (in thousands)
8127 East 171st Street, Belton, MO		13,000			Owned		$	2,064
4675 Gretna Road, Branson, MO		11,000			Owned		$	1,485
1000 West Buchanan Street, California, MO		2,270			Owned		$	408
102 North Second Street, Clinton, MO		11,524			Owned		$	1,580
1400 East Ohio Street, Clinton, MO		13,551			Owned		$	3,201
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		$	22
1110 Club Village Drive, Columbia, MO		5,000			Owned		$	1,624
29 South 9th St, Columbia, MO (inside the Paramount Building)		560			Leased	(2)		N/A
115 South 2nd Street, Drexel, MO		4,000			Owned		$	229
100 Plaza Drive, Harrisonville, MO		4,000			Owned		$	551
17430 East 39th Street, Independence, MO		4,070			Owned		$	707
220 West White Oak, Independence, MO		1,800			Owned		$	83
132 East High Street, Jefferson City, MO		34,800			Owned		$	3,298
3701 West Truman Blvd, Jefferson City, MO		21,000			Owned		$	384
211 West Dunklin Street, Jefferson City, MO		2,400			Owned		$	0
800 Eastland Drive, Jefferson City, MO		4,100			Owned		$	730
3600 Amazonas Drive, Jefferson City, MO		26,000			Owned		$	2,736
300 S.W . Longview Blvd, Lee’s Summit, MO		11,700			Owned		$	2,199
335 Chestnut, Osceola, MO		1,580			Owned		$	63
500 North Mott Drive, # 103C, Raymore, MO (in the Foxwood Springs Seniors Center)		462			Leased	(3)	$	N/A
595 VFW Memorial Drive, St. Robert, MO		2,236			Owned		$	29
321 West Battlefield, Springfield, MO		12,500	(4)		Owned		$	605
200 West Main Street, Warsaw, MO		8,900			Owned		$	166
1891 Commercial Drive, Warsaw, MO		11,000			Owned		$	1,745
125 South Main, Windsor, MO		3,600			Owned		$	266
5 Victory lane, Suite 203, Liberty, MO		1075			Leased	(5)		N/A

(1) The term of this lease began in January 1999 and ends in January 2014.

(2) The term of this lease began on December 2012 and ends in November 2014.

(3) The term of this lease can be terminated at any time upon thirty days notice.

(4) Of the 12,500 square feet of space, 6,600 square feet of space is leased to a non-affiliate.

(5) The term of this lease began in May 2012 and ends in April 2014.

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 the Company’s consolidated financial statements.

Item 4. Mine Safety Disclosures.

Not applicable

EXECUTIVE OFFICERS OF THE REGISTRANT

Executive officers of the 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 the Company.

Name	Age		Position
David T. Turner		56	Chairman, Chief Executive Officer, President and Director
W. Bruce Phelps		62	Senior Vice President and Chief Financial Officer
Kathleen L. Bruegenhemke		47	Senior Vice President and Secretary

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

David T. Turner has served as a director of the Company and of Hawthorn Bank (or of its constituent predecessors) since January 1997. He has served as president of the Company since March 2002 and as chairman and chief executive officer of the 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 the Company from June 1998 through March 2002 and as senior vice president of the 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.

W. Bruce Phelps has served as Senior Vice President and Chief Financial Officer of the Company since January 2012 and Senior Vice President and Chief Financial Officer of Hawthorn Bank since January 2012. Prior to joining the Company, he served as Controller of Pulaski Bank from 2009 until January 2012. Previously Mr. Phelps served as Principal of WBP Consulting in providing financial consulting and support services for clients in the St. Louis area, and as Chief Financial Officer for Champion Bank, St. Louis, Missouri.

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

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

PART II

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

Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item, other than that referred to below, is incorporated herein by reference to the information under the caption “Market Price of and Dividends on Equity Securities and Related Matters” in the Company’s 2012 Annual Report to Shareholders.

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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 the Company or certain affiliated purchasers of shares of our common stock during the fourth quarter of the year ended December 31, 2012:

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs *
October 1-31, 2012		—		—		—	$	333,038
November 1-30, 2012		—		—		—	$	333,038
December 1-31, 2012		—		—		—	$	333,038
Total		—		—		—	$	333,038

* On August 22, 2001, the Company announced that our Board of Directors authorized the purchase, through open market transactions, of up to $2,000,000 market value of the 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, the Company announced that our board of directors authorized an additional $2,000,000 for the purchase of the 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, 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.

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 the Company’s 2012 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 the Company’s 2012 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 the 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.

18

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.

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

The 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, 2012, the rate shock scenario models indicated that annual net interest income could change by as much as (22.5)% to 30.3% should interest rates rise or fall within 400 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 the Company’s 2012 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 the Company’s 2012 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 the Company’s 2012 Annual Report to Shareholders.

19

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.

The 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, 2012. 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.

Internal Controls Over Financial Reporting.

Management’s Report on Internal Control Over Financial Reporting.

The 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, as of December 31, 2012, 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, 2012, the Company’s internal control over financial reporting, is effective based on the criteria established in Internal Control—Integrated Framework.

Management’s assessment of the effectiveness of internal control over financial reporting, as of December 31, 2012, 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 the Company’s internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2012 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, 2012, 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.

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We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control 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. 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, 2012, 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, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated April 1, 2013 expressed an unqualified opinion on those consolidated financial statements.

/s / KPMG LLP

St. Louis, Missouri

April 1, 2013

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 the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Code of Ethics

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

Item 11. Executive Compensation.

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

(i) the information under the caption “Executive Compensation and Related Matters” in the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

22

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 the Company’s definitive Proxy Statement for its 2013 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Securities Authorized For Issuance Under Equity Compensation Plans

The 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, 2012:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance  under equity compensation plans (excluding securities reflected in column (a))
	(a)			(b)		(c)
Equity compensation plans approved by security holders		215,343	*	$	24.68		763,630	**
Equity compensation plans not approved by security holders		-0-			-0-		-0-
Total		_215,343	*	$	24.68		763,630	**

* Consists of shares reserved for issuance pursuant to outstanding stock option grants under the Company’s incentive stock option plan.

** Consists of 295,686 shares available for future issuance under the Company’s incentive stock option plan and 467,944 shares available for future issuance under the 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 the Company’s definitive Proxy Statement for its 2013 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii) the information under the caption “Item 1: Election of Directors—What is the structure of our board and how often are directors elected?” in the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 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 the Company’s definitive Proxy Statement for its 2013 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

23

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 the Company and reports of the Company’s independent auditors, included in our Annual Report to Shareholders for the year ended December 31, 2012 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, 2012 and 2011.

Consolidated Statements of Operations for the years ended December 31, 2012, 2011, and 2010.

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, 2011, and 2010.

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011, and 2010.

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010.

Notes to the 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 the Company (filed as Exhibit 3.1 to the Company’s current report on Form 8-K on August 9, 2007 and incorporated herein by reference).
3.1.1	Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008, dated December 17, 2008 (filed as Exhibit 3.1 to the Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the Company’s current report on Form 8-K on November 1, 2007 and incorporated herein by reference).
4.1	Specimen certificate representing shares of the Company’s $1.00 par value Common Stock (filed as Exhibit 4 to the 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 the Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
4.3	Warrant to purchase shares of the Company’s $1.00 par value Common Stock, dated December 19, 2008 (filed as Exhibit 4.1 to the 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).*

24

10.2	Form of Change of Control Agreement and schedule of parties thereto (filed as Exhibit 10.2 to the 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 the Company and the United States Department of the Treasury, including the Securities Purchase Agreement — Standard Terms (filed as Exhibit 10.1 to the Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
10.4	Form of Waiver of the Company’s Senior Executive Officers (filed as Exhibit 10.2 to the Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).*
10.5	Form of Letter Agreement between certain of the Company’s Senior Executive Officers and the Company (filed as Exhibit 10.3 to the Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).*
13	The Company’s 2012 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 the Company (filed as Exhibit 14 to the 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 the 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.
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”)
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)

* 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.

25

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: April 1, 2013	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 W. Bruce Phelps, 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
April 1, 2013	/s/ David T. Turner David T. Turner, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
April 1, 2013	/s/ W. Bruce Phelps W. Bruce Phelps, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
April 1, 2013	/s/ Charles G. Dudenhoeffer, Jr. Charles G. Dudenhoeffer, Jr., Director
April 1, 2013	/s/ Philip D. Freeman Philip D. Freeman, Director
April 1, 2013	/s/ Kevin L. Riley Kevin L. Riley, Director
April 1, 2013	/s/ James E. Smith James E. Smith, Director
April 1, 2013	/s/ Gus S. Wetzel, II Gus S. Wetzel, II, Director

26

EXHIBIT INDEX

Exhibit No.	Description	Page No.
13	The Company’s 2012 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”).
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL).*

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

27

EX-13

Exhibit 13

2012

ANNUAL REPORT

TO

SHAREHOLDERS

HAWTHORN BANCSHARES, INC.

Lee’s Summit, Missouri

April 1, 2013

Dear Investors:

Hawthorn Bancshares, like the general banking sector, is recovering slowly. Income levels, while positive, have not been restored to pre-recession levels; but I am pleased to report that a recovery, albeit slow, is nonetheless occurring.

For 2012, Hawthorn reported a net profit of $2.8 million compared to $2.9 million for 2011. Despite a slightly lower net profit, income available to common shareholders improved for 2012 to $1.0 million compared to $0.9 million for 2011 due to our $12 million partial repayment of debt associated with the U.S. Treasury’s Capital Purchase Program (commonly called TARP). On a per share basis, this equates to a net profit of $0.21 per common share for 2012 compared to $0.18 for 2011.

Looking at our net interest margin from a historical perspective, net interest income has consistently exceeded $40 million since 2009 while asset levels trended slightly lower. Essentially, Hawthorn’s core operations remain strong as our net interest margin continues to fair well in comparison to our peers. With the historically low rate environment and growing competition for quality loans, the entire banking industry is experiencing margin pressure and while Hawthorn is experiencing some compression, the margin for 2012 remained healthy. On a tax equivalent basis, Hawthorn’s net interest margin for 2012 was 3.83% compared to 3.92% for 2011 but exceeded our peer group’s margin for 2012 of 3.69%. The lower net interest margin for 2012 was primarily the result of reduced earning asset yields, while the volume of earning assets remained relatively steady.

Non-interest income for 2012 was $9.7 million compared to $9.2 million for 2011. The increase is primarily the result of a $1.0 million increase in the gain on sales of mortgage loans due to higher real estate refinancing activity experienced during 2012 which was partially offset by a $0.5 million decrease in real estate servicing income related to changes in the fair value of mortgage servicing rights. Non-interest expense for 2012 was $38.7 million compared to $36.8 million for 2011. The largest contributors to the increase were salary and benefit expenses related to opening a lending center in Liberty, Missouri and additional support staff.

Non-performing loans decreased $14.3 million to 4.65% of total loans at December 31, 2012, from 6.37% at December 31, 2011. During the year, net charge-offs were $7.9 million compared to $12.3 million for 2011. The allowance for loan losses at December 31, 2012 was $14.8 million, or 1.75% of outstanding loans, and 37.7% of non-performing loans compared to December 31, 2011, where the allowance for loan losses was $13.8 million, or 1.64% of outstanding loans, and 25.7% of non-performing loans. As we evaluate our loan portfolio, we are not seeing the same level of significant deterioration in our customers’ circumstances that we have seen in the recent past. A significant portion of our reserves is allocated to loans of customers who are working through their financial problems but have seen deterioration in the value of their collateral.

On May 9, 2012, a $12 million partial repayment was made on the U.S. Treasury’s Capital Purchase Program (commonly call TARP) funds of $30.3 million. Plans are underway to repay without the need to raise additional capital the remaining $18.3 million debt prior to the December 2013 time frame when the interest rate on the TARP funds increases from 5% to 9%. At December 31, 2012, Hawthorn’s capital measurements exceeded regulatory “well-managed” thresholds despite slight reductions related to the aforementioned $12 million partial repayment. It is anticipated that the capital levels will continue to exceed “well-managed” levels even after repaying the remaining debt.

I am certainly not pleased with a 0.24% return on average assets and a 1.40% return on average common equity. We can, and will, do better! As a shareholder, director and executive officer, I am committed to maintaining strong asset quality, improving earnings performance, sustaining sound and proper capital levels and paying regular dividends. I am confident that our Company’s 2013 profitability will improve as repayment of the Company’s debt occurs and further strengthening in asset quality is achieved.

Sincerely,
	David T. Turner,
	Chairman & Chief Executive Officer

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 the Company, Hawthorn Bancshares, Inc., 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 loans and other assets,

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

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

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

• changes may occur in the securities markets.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, was enacted on July 21, 2010. Provisions of the Act address many issues including, but not limited to, capital, interchange fees, compliance and risk management, debit card overdraft fees, the establishment of a new consumer regulator, healthcare, incentive compensation, expanded disclosures and corporate governance. While many of the new regulations under the Act are expected to primarily impact financial institutions with assets greater than $10 billion, the Company expects these new regulations could reduce the revenues and increase the expenses in the future. Management is currently assessing the impact of the Act and of the regulations anticipated to be promulgated under the Act.

We have described under the caption “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2012, 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 statements, which speak only as of the date they were made.

2

HAWTHORN BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Through the branch network of its subsidiary bank, the Company 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. The Company also provides a wide range of lending services, including real estate, commercial, installment, and other consumer loans. Other financial services that the Company provides include automated teller machines, trust services, credit-related insurance, and safe-deposit boxes. The geographic areas in which we provide products and services include the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri.

The 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. The Company also derives income from trust, brokerage, credit card and mortgage banking activities and service charge income.

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

The success of the Company’s growth strategy depends primarily on the ability of the 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. The Company’s financial performance also depends, in part, on the 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 the Company’s growth strategy depends on the ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.

Hawthorn Bank (the Bank), the Company’s 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, the Bank provides trust services.

The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the 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. The Company is subject to supervision and examination by the Federal Reserve Board.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for the Company as of and for each of the years in the five-years ended December 31, 2012. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company, including the related notes, presented elsewhere herein.

(In thousands, except per share data)	2012			2011			2010			2009			2008
Income Statement Data
Interest income	$	49,114		$	53,469		$	58,739		$	63,562		$	69,715
Interest expense		7,905			10,853			15,753			22,974			31,599
Net interest income		41,209			42,616			42,986			40,588			38,116
Provision for loan losses		8,900			11,523			15,255			8,354			8,211
Net interest income after provision for loan losses		32,309			31,093			27,731			32,234			29,905
Non-interest income		9,700			9,200			10,481			10,702			9,294
Gain on sale of investment securities		26			0			0			606			3
Total non-interest income		9,726			9,200			10,481			11,308			9,297
Non-interest expense		38,667			36,845			44,851			36,730			75,975
Income (loss) before income taxes		3,368			3,448			(6,639	)		6,812			(36,773	)
Income tax expense (benefit)		546			591			(3,087	)		1,856			(6,146	)
Net income (loss)		2,822			2,857			(3,552	)		4,956			(30,627	)
Less: preferred stock dividends		1,125			1,513			1,513			1,517			50
and accretion of discount on preferred stock		659			476			476			477			16
Net income (loss) available to common shareholders	$	1,038		$	868		$	(5,541	)	$	2,962		$	(30,693	)
Dividends on Common Stock
Declared	$	949		$	913		$	1,136		$	2,270		$	3,486
Paid		940			904			1,385			2,666			3,486
Ratio of total dividends declared to net income		33.63	%		105.18	%		NM			76.64	%		NM
Per Share Data
Basic earnings (loss) per common share	$	0.21		$	0.18		$	(1.15	)	$	0.61		$	(6.31	)
Diluted earnings (loss) per common share		0.21			0.18			(1.15	)		0.61			(6.31	)
Basic weighted average shares of common stock outstanding		4,839,114			4,839,114			4,839,114			4,839,114			4,861,630
Diluted weighted average shares of common stock outstanding		4,839,114			4,839,114			4,839,114			4,839,114			4,861,630

NM—not meaningful

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(In thousands)	2012			2011			2010			2009			2008
Balance Sheet Data (at year end)
Total assets	$	1,181,606		$	1,171,161		$	1,200,172		$	1,236,471		$	1,279,699
Loans		846,984			842,931			898,472			991,614			1,009,104
Investment securities		200,246			213,806			178,978			152,927			149,401
Total deposits		991,275			958,224			946,663			956,323			955,296
Subordinated notes		49,486			49,486			49,486			49,486			49,486
Federal Home Loan Bank advances		20,126			28,410			66,986			79,317			129,057
Common stockholders’ equity		74,243			73,258			72,647			79,406			78,530
Total stockholders’ equity		92,220			102,576			101,488			107,771			106,418
Balance Sheet Data (average balances)
Total assets	$	1,176,384		$	1,187,410		$	1,236,841		$	1,258,381		$	1,251,496
Loans		843,022			865,214			949,457			1,002,830			963,252
Investment securities		220,832			209,077			165,213			151,907			156,870
Total deposits		971,767			957,965			967,970			977,826			914,218
Subordinated notes		49,486			49,486			49,486			49,486			49,486
Federal Home Loan Bank advances		27,961			42,230			70,456			78,626			124,025
Common stockholders’ equity		74,245			75,390			80,735			79,828			112,307
Total stockholders’ equity		96,176			104,455			109,323			107,938			113,375
Key Ratios
Earnings Ratios
Return (loss) on average total assets		0.24	%		0.24	%		(0.29	)%		0.39	%		(2.45	)%
Return (loss) on average common stockholders’ equity		1.40			1.15			(6.86	)		3.71			(27.33	)
Efficiency ratio (3)		75.90			71.11			83.89			71.61			160.25
Asset Quality Ratios
Allowance for loan losses to loans		1.75	%		1.64	%		1.62	%		1.49	%		1.26	%
Nonperforming loans to loans (1)		4.65			6.37			6.27			4.27			2.46
Allowance for loan losses to nonperforming loans (1)		37.70			25.73			25.87			34.94			50.94
Nonperforming assets to loans and foreclosed assets (2)		7.23			8.11			7.71			5.08			3.21
Net loan charge-offs to average loans		0.93			1.42			1.63			0.62			0.50
Capital Ratios
Average stockholders’ equity to average total assets		8.18	%		8.80	%		8.84	%		8.58	%		9.06	%
Period-end common stockholders’ equity to period-end assets period-end assets		6.28			6.26			6.05			6.42			6.14
Period-end stockholders’ equity to period-end assets		7.80			8.76			8.46			8.72			8.32
Total risk-based capital ratio		16.83			18.03			17.05			16.49			16.01
Tier 1 risk-based capital ratio		13.58			15.16			14.25			14.01			13.55
Leverage ratio		10.37			11.52			11.00			11.35			10.80

(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 percentage of revenue. Total revenue includes net interest income and non-interest income.

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CRITICAL ACCOUNTING POLICIES

The following accounting policies are considered most critical to the understanding of the 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 the critical accounting policies on the business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect the reported and expected financial results.

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the 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 the business operations is provided in Note 1 to the 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 have been recognized in the Company’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 the 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 it is expected to realize the deferred tax asset. In addition, the Company is subject to the continuous examination of its 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.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral comprises 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 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 the property.

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RESULTS OF OPERATIONS ANALYSIS

The 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, the 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
(In thousands)	2012		2011		2010			‘12-’11			‘11-’10			‘12-’11			‘11-’10
Net interest income	$	41,209	$	42,616	$	42,986		$	(1,407	)	$	(370	)		(3.3	)%		(0.9	)%
Provision for loan losses		8,900		11,523		15,255			(2,623	)		(3,732	)		(22.8	)		(24.5	)
Noninterest income		9,700		9,200		10,481			500			(1,281	)		5.4			(12.2	)
Investment securities gains, net		26		—		—			26			—			NM			NM
Total noninterest income		9,726		9,200		10,481			526			(1,281	)		5.7			(12.2	)
Noninterest expense		38,667		36,845		44,851			1,822			(8,006	)		4.9			(17.9	)
Income (loss) before income taxes		3,368		3,448		(6,639	)		(80	)		10,087			2.3			(151.9	)
Income tax expense (benefit)		546		591		(3,087	)		(45	)		3,678			7.6			(119.1	)
Net income (loss)	$	2,822	$	2,857	$	(3,552	)	$	(35	)	$	6,409			(1.2	)%		(180.4	)%
Less: preferred dividends		1,125		1,513		1,513			(388	)		—			(25.6	)		—
and accretion of discount		659		476		476			183			—			38.4			—
Net income (loss) available to common shareholders	$	1,038	$	868	$	(5,541	)	$	170		$	6,409			19.6	%		115.7	%

The Company’s consolidated net income of $2,822,000 for the year ended December 31, 2012 decreased $35,000 compared to consolidated net income of $2,857,000 for the year ended December 31, 2011. The Company recorded preferred stock dividends and accretion on preferred stock of $1,784,000 for the year ended December 31, 2012, resulting in $1,038,000 of net income available for common shareholders compared to $868,000 of net income available for common shareholders for the year ended December 31, 2011. Diluted earnings per share increased from $0.18 per common share for the year ended December 31, 2011 to $0.21 per common share for the year ended December 31, 2012. On May 9, 2012, the Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program. Related to these shares was an additional $300,000 of accretion that was recognized at the time of the redemption. The Company’s net interest income, on a tax equivalent basis, decreased $1,466,000, or 3.4%, to $41,759,000 for the year ended December 31, 2012 compared to $43,225,000 for year ended December 31, 2011. This decrease was primarily due to a 9 basis point decrease in the net interest margin from 3.92% for 2011 to 3.83% for 2012 and a year over year decrease in average earning assets of $15.3 million, or 1.4%. The provision for loan losses decreased $2,623,000, or 22.8%, from the year ended December 31, 2011 to December 31, 2012 due to reduced levels of nonperforming assets and lower net charge-offs in 2012 compared to 2011. Total noninterest income increased $526,000, or 5.7%, for the year ended December 31, 2012 compared to December 31, 2011 primarily due to a $1.0 million increase in gain on sales of mortgage loans partially offset by a $0.5 million decrease in mortgage servicing income related to changes in the fair value of mortgage servicing rights. Noninterest expense increased $1,822,000, or 4.9%, from the year ended December 31, 2011 to 2012. Included in this increase was a $1,183,000 increase in salaries and employee benefits and a $400,000 increase in processing expense. The $45,000 decrease in income tax expense includes a $371,000 immaterial correction of a prior period error. For the year ended December 31, 2012, the return on average assets was 0.24%, the return on average common stockholders’ equity was 1.40%, and the efficiency ratio was 75.9%.

The Company’s consolidated net income of $2,857,000 for the year ended December 31, 2011 increased $6,409,000 compared to a net loss of ($3,552,000) for the year ended December 31, 2010. The Company recorded preferred stock dividends and accretion on preferred stock of $1,989,000 for the year ended December 31, 2011, resulting in $868,000 of net income available for common shareholders compared to a net loss of ($5,541,000) for the year ended December 31, 2010. Diluted earnings per share increased from ($1.15) per common share to $0.18 per common share. The Company’s net interest income, on a tax equivalent basis, decreased $432,000, or 1.0%, to $43,225,000 for the year ended December 31, 2011 compared to $43,657,000 for the year ended December 31, 2010 primarily due to a $54.1 million decrease in average earning

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assets offset by a 14 basis point improvement in the net interest margin from 3.78% in 2010 to 3.92% in 2011. The provision for loan losses decreased $3,732,000, or 24.5%, from December 31, 2010 to December 31, 2011. Other real estate expenses and impairment losses incurred on foreclosed properties decreased from $9,804,000 for the year ended December 31, 2010 to $2,736,000 for the year ended December 31, 2011. The Company had recorded a $6,158,000 valuation allowance for other real estate owned during the fourth quarter of 2010 that had significantly increased noninterest expense. The Company’s net interest income, on a tax equivalent basis, decreased $432,000, or 1.0%, to $43,225,000 for the year ended December 31, 2011 compared to $43,657,000 for the year ended December 31, 2010 primarily due to a $54,149,000 decrease in average earning assets. For the year ended December 31, 2011, the return on average assets was 0.24%, the return on average common stockholders’ equity was 1.15%, and the efficiency ratio was 71.1%.

Total assets at December 31, 2012 were $1,181,606,000, compared to $1,171,161,000 at December 31, 2011, an increase of $10,445,000, or 0.9%. On July 1, 2012, the Company distributed a four percent stock dividend for the fourth consecutive year to common shareholders of record at the close of business on June 15, 2012. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect the stock dividend.

Net Interest Income

Net interest income is the largest source of revenue resulting from the 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, 2012.

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	2012								2011								2010
(In thousands)	Average Balance			Interest Income/ Expense(1)		Rate Earned/ Paid(1)			Average Balance			Interest Income/ Expense(1)		Rate Earned/ Paid(1)			Average Balance			Interest Income/ Expense(1)		Rate Earned/ Paid(1)
ASSETS
Loans: (2) (4)
Commercial	$	127,035		$	6,621		5.20	%	$	127,572		$	6,952		5.45	%	$	139,679		$	7,739		5.54	%
Real estate construction— residential		21,471			1,196		5.56			30,171			1,704		5.65			37,954			1,959		5.16
Real estate construction— commercial		43,224			1,872		4.32			50,374			2,255		4.48			75,207			2,904		3.86
Real estate mortgage— residential		219,045			11,719		5.30			203,587			11,619		5.71			221,545			12,672		5.72
Real estate mortgage— commercial		404,462			20,856		5.14			423,682			22,884		5.40			440,285			25,309		5.75
Consumer		27,785			1,798		6.45			29,828			2,057		6.90			34,787			2,626		7.55
Total loans	$	843,022		$	44,062		5.21	%	$	865,214		$	47,471		5.49	%	$	949,457		$	53,209		5.60	%
Investment securities: (3)
U.S. treasury	$	2,048		$	33		1.61	%	$	1,754		$	29		1.65	%	$	790		$	15		1.90	%
Government sponsored enterprises		70,787			998		1.41			63,089			1,240		1.97			47,914			1,242		2.59
Asset backed securities		113,749			3,025		2.65			111,859			3,551		3.17			83,237			2,918		3.51
State and municipal		34,248			1,398		4.07			32,375			1,573		4.86			33,272			1,764		5.30
Total investment securities	$	220,832		$	5,454		2.46	%	$	209,077		$	6,393		3.06	%	$	165,213		$	5,939		3.59	%
Restricted investments		4,287			102		2.37			5,091			156		3.06			6,356			176		2.77
Federal funds sold		48			—		—			117			—		—			187			—		—
Interest bearing deposits in other financial institutions		18,207			46		0.25			22,245			58		0.26			34,680			86		0.25
Total interest earning assets	$	1,086,396		$	49,664		4.56	%	$	1,101,744		$	54,078		4.91	%	$	1,155,893		$	59,410		5.14	%
All other assets		105,129								99,216								94,802
Allowance for loan losses		(15,141	)							(13,550	)							(13,854	)
Total assets	$	1,176,384							$	1,187,410							$	1,236,841
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts	$	181,422		$	636		0.35	%	$	175,347		$	911		0.52	%	$	167,303		$	960		0.57	%
Savings		66,569			74		0.11			60,582			125		0.21			52,605			131		0.25
Money market		153,388			436		0.28			153,672			608		0.40			167,240			1,080		0.65
Time deposits of $100,000 and over		129,165			1,111		0.86			131,175			1,663		1.27			130,493			2,485		1.90
Other time deposits		277,337			3,715		1.34			291,842			5,124		1.76			318,891			7,211		2.26
Total time deposits	$	807,881		$	5,972		0.74	%	$	812,618		$	8,431		1.04	%	$	836,532		$	11,867		1.42	%
Federal funds purchased and securities sold under agreements to repurchase		23,280			21		0.09			27,636			47		0.17			32,723			75		0.23
Subordinated notes		49,486			1,381		2.78			49,486			1,301		2.63			49,486			1,526		3.08
Federal Home Loan Bank Advances		27,961			531		1.89			42,230			1,074		2.54			70,456			2,285		3.24
Total borrowings	$	100,727		$	1,933		1.91	%	$	119,352		$	2,422		2.03	%	$	152,665		$	3,886		2.55	%
Total interest bearing liabilities	$	908,608		$	7,905		0.87	%	$	931,970		$	10,853		1.16	%	$	989,197		$	15,753		1.59	%
Demand deposits		163,886								145,347								131,438
Other liabilities		7,714								5,638								6,883
Total liabilities		1,080,208								1,082,955								1,127,518
Stockholders’ equity		96,176								104,455								109,323
Total liabilities and stockholders’ equity	$	1,176,384							$	1,187,410							$	1,236,841
Net interest income (FTE)					41,759								43,225								43,657
Net interest spread							3.69	%							3.75	%							3.55	%
Net interest margin							3.83	%							3.92	%							3.78	%

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(1) Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $550,000, $610,000 and $671,000 for the years ended December 31, 2012, 2011 and 2010, 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.

Comparison of the Years ended December 31, 2012 and 2011

Financial results for the year ended December 31, 2012 compared to the year ended December 31, 2011 reflected a decrease in net interest income, on a tax equivalent basis, of $1,466,000, or 3.4%. Average interest-earning assets decreased $15,348,000, or 1.4%, to $1,086,396,000 for the year ended December 31, 2012 compared to $1,101,744,000 for the year ended December 31, 2011 and average interest bearing liabilities decreased $23,362,000, or 2.5%, to $908,608,000 for the year ended December 31, 2012 compared to $931,970,000 for the year ended December 31, 2011.

Average loans outstanding decreased $22,192,000 or 2.6% to $843,022,000 for the year ended December 31, 2012 compared to $865,214,000 for the year ended December 31, 2011. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio. Average investment securities and federal funds sold increased $11,686,000, or 5.6% to $220,880,000 for the year ended December 31, 2012 compared to $209,194,000 for the year ended December 31, 2011. Average interest bearing deposits in other financial institutions decreased $4,038,000 to $18,207,000 for the year ended December 31, 2012 compared to $22,245,000 for the year ended December 31, 2011. See the Liquidity Management section for further discussion.

Average time deposits decreased $4,737,000, or 0.6%, to $807,881,000 for the year ended December 31, 2012 compared to $812,618,000 for the year ended December 31, 2011. Average borrowings on Federal Home Loan Bank advances decreased $14,269,000 to $27,961,000 for the year ended December 31, 2012 compared to $42,230,000 for the year ended December 31, 2011. See the Liquidity Management section for further discussion.

Comparison of the Years ended December 31, 2011 and 2010

Financial results for the year ended December 31, 2011 compared to the year ended December 31, 2010 included a decrease in net interest income, on a tax equivalent basis, of $432,000, or 1.0%. Average interest-earning assets decreased $54,149,000, or 4.7% to $1,101,744,000 at December 31, 2011 compared to $1,155,893,000 at December 31, 2010 and average interest bearing liabilities decreased $57,227,000, or 5.8%, to $931,970,000 at December 31, 2011 compared to $989,197,000 at December 31, 2010.

Average loans outstanding decreased $84,243,000 or 8.9% to $865,214,000 at December 31, 2011 compared to $949,457,000 at December 31, 2010. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio. Average investment securities and federal funds sold increased $43,794,000 or 26.5% to $209,194,000 at December 31, 2011 compared to $165,400,000 at December 31, 2010. Average interest bearing deposits in other financial institutions decreased $12,435,000 to $22,245,000 at December 31, 2011 compared to $34,680,000 at December 31, 2010. See the Liquidity Management section for further discussion.

Average time deposits decreased $23,914,000 to $812,618,000 at December 31, 2011 compared to $836,532,000 at December 31, 2010. Average borrowings decreased $33,313,000 to $119,352,000 at December 31, 2011 compared to $152,665,000 at December 31, 2010. The decrease in average borrowings primarily reflects a net decrease in Federal Home Loan Bank advances. See the Liquidity Management section for further discussion.

10

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, 2012, compared to December 31, 2011 and for the years ended December 31, 2011 compared to December 31, 2010. 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.

	2012									2011
				Change due to									Change due to
	Total			Average			Average			Total			Average			Average
(In thousands)	Change			Volume			Rate			Change			Volume			Rate
Interest income on a fully taxable equivalent basis: (1)
Loans: (2) (4)
Commercial	$	(331	)	$	(29	)	$	(302	)	$	(787	)	$	(662	)	$	(125	)
Real estate construction—residential		(508	)		(485	)		(23	)		(255	)		(428	)		173
Real estate construction—commercial		(383	)		(312	)		(71	)		(649	)		(1,062	)		413
Real estate mortgage—residential		100			852			(752	)		(1,053	)		(1,025	)		(28	)
Real estate mortgage—commercial		(2,028	)		(1,014	)		(1,014	)		(2,425	)		(932	)		(1,493	)
Consumer		(259	)		(136	)		(123	)		(569	)		(354	)		(215	)
Investment securities: (3)
U.S. treasury		4			5			(1	)		14			15			(1	)
Government sponsored entities		(242	)		138			(380	)		(2	)		339			(341	)
Asset backed securities		(526	)		59			(585	)		633			929			(296	)
State and municipal		(175	)		87			(262	)		(191	)		(47	)		(144	)
Restricted investments		(54	)		(23	)		(31	)		(20	)		(37	)		17
Federal funds sold		—			—			—			—			—			—
Interest bearing deposits in other financial institutions		(12	)		(11	)		(1	)		(28	)		(32	)		4
Total interest income		(4,414	)		(869	)		(3,545	)		(5,332	)		(3,296	)		(2,036	)
Interest expense:
NOW accounts		(276	)		31			(307	)		(49	)		45			(94	)
Savings		(51	)		11			(62	)		(6	)		18			(24	)
Money market		(172	)		(1	)		(171	)		(472	)		(82	)		(390	)
Time deposits of $100,000 and over		(552	)		(25	)		(527	)		(822	)		13			(835	)
Other time deposits		(1,408	)		(245	)		(1,163	)		(2,087	)		(574	)		(1,513	)
Federal funds purchased and securities sold under agreements to repurchase		(26	)		(6	)		(20	)		(28	)		(11	)		(17	)
Subordinated notes		80			—			80			(225	)		—			(225	)
Federal Home Loan Bank advances		(543	)		(310	)		(233	)		(1,211	)		(787	)		(424	)
Total interest expense		(2,948	)		(545	)		(2,403	)		(4,900	)		(1,378	)		(3,522	)
Net interest income on a fully taxable equivalent basis	$	(1,466	)	$	(324	)	$	(1,142	)	$	(432	)	$	(1,918	)	$	1,486

(1) Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $550,000, $610,000 and $671,000 for the years ended December 31, 2012, 2011 and 2010, 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.

Net interest income on a fully taxable equivalent basis decreased $1,466,000, or 3.4%, to $41,759,000 for the year ended December 31, 2012 compared to $43,225,000 for the year ended December 31, 2011, and followed a $432,000, or 1.0%, decrease for the year ended December 31, 2011 compared to the year ended December 31, 2010. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.83% for the year ended December 31, 2012 compared to 3.92% for the year ended December 31, 2011, and increased compared to 3.78% for the

11

year ended December 31, 2010. The decrease in net interest income was primarily the result of lower interest income earned on loans due to lower average balances and lower average rates. The Company’s net interest spread decreased to 3.69% for the year ended December 31, 2012 from 3.75% for the year ended December 31, 2011, and increased compared to 3.55% for the year ended December 31, 2010. While the Company was able to decrease the rates paid on interest bearing liabilities to 0.87% for the year ended December 31, 2012 from 1.16% for the year ended 2011, and 1.59% for the year ended 2010, this decrease was partially offset by the decrease in the rates earned on interest earning assets to 4.56% for the year ended December 31, 2012 from 4.91% in 2011, and 5.14% in 2010. Interest expense incurred on deposits and other borrowings decreased $2,948,000 from the year ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $4,900,000 from the year ended December 31, 2011 compared to the year ended December 31, 2010. Effective January 1, 2012, the Company recorded a $368,000 credit to interest expense on time deposits for imputed interest calculated on capitalized interest not accounted for during the time period of 2004 through 2011 on the construction of the Company’s new bank buildings. This is considered a correction of an immaterial prior period error. Without this credit to interest expense, rates paid on interest bearing liabilities would have been approximately 0.91% for the year ended December 31, 2012.

Non-interest Income and Expense

Non-interest income for the years ended December 31, 2012, 2011 and 2010 was as follows:

										$ Change						% Change
(In thousands)	2012			2011			2010			‘12-’11			‘11-’10			‘12-’11			‘11-’10
Non-interest Income
Service charges on deposit accounts	$	5,439		$	5,566		$	5,554		$	(127	)	$	12			(2.3	)%		0.2	%
Trust department income		893			898			803			(5	)		95			(0.6	)		11.8
Gain on sales of mortgage loans, net		2,669			1,649			2,493			1,020			(844	)		61.9			(33.9	)
Gain on sale of investment securities		26			0			0			26			0			NM			NM
Other		699			1,087			1,631			(388	)		(544	)		(35.7	)		(33.4	)
Total non-interest income	$	9,726		$	9,200		$	10,481		$	526		$	(1,281	)		5.7	%		(12.2	)%
Non-interest income as a % of total revenue *		19.1	%		17.8	%		19.6	%
Total revenue per full time equivalent employee	$	147.6		$	153.8		$	157.3

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

NM—not meaningful

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50 Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to beginning retained earnings, as further described in Note 6 to the consolidated financial statements. As such, effective January 1, 2012, the change in the fair value of mortgage servicing rights is recognized in earnings as other noninterest income for the period in which the change occurs.

Years Ended December 31, 2012 and 2011

Noninterest income increased $526,000 or 5.7% to $9,726,000 for the year ended December 31, 2012 compared to $9,200,000 for the year ended December 31, 2011. The increase was primarily the result of a $1,020,000 increase on gain on sales of mortgage loans, net partially offset by a $453,000 decrease in the real estate servicing income recorded in other noninterest income. As a result of the changes in fair value during the year ended December 31, 2012, $878,000 was earned in real estate service fees, $122,000 was recorded in real estate servicing income due to changes in model inputs and assumptions, and ($915,000) was recorded due to other changes in fair value resulting from customer payments and passage of time. This is in comparison to the year ended December 31, 2011 in which $863,000 was earned in real estate servicing fees and $808,000 of MSR amortization was recorded. The Company’s loans sold increased from $75,000,000 for the year ended December 31, 2011 to $100,000,000 for the year ended December 31, 2012. As mentioned above, due to low interest rates, an increase in refinancing activity impacted both the volume of loans sold and gains recognized. The Company was servicing $310,000,000 of mortgage loans at December 31, 2012 compared to $307,000,000 at December 31, 2011. During 2012, the Company received $790,000 from proceeds on sales of available-for-sale debt securities and recognized a $26,000 gain on sale.

12

Years Ended December 31, 2011 and 2010

Noninterest income decreased $1,281,000 or 12.2% to $9,200,000 for 2011 compared to $10,481,000 for 2010. The decrease was primarily the result of an $844,000 decrease in the gains on sales of mortgage loans and a $544,000 decrease in other income. The Company’s loans sold decreased from $107,000,000 for 2010 to $75,000,000 for 2011. A decrease in refinancing activity impacted both the volume of loans sold and gains recognized. The Company was servicing $307,000,000 of mortgage loans at December 31, 2011 compared to $298,000,000 at December 31, 2010. The decrease in other noninterest income was primarily due to a $268,000 refund of prior year’s processing fees received in 2010 and a $139,000 decrease in credit card income. The Company had no sales of debt securities during 2011 or 2010.

Non-interest expense for the years ended December 31, 2012, 2011, and 2010 was as follows:

										$ Change						% Change
(In thousands)	2012			2011			2010			‘12-’11			‘11-’10			‘12-’11			‘11-’10
Non-interest Expense
Salaries	$	14,368		$	13,760		$	13,904		$	608		$	(144	)		4.4	%		(1.0	)%
Employee benefits		4,797			4,222			3,995			575			227			13.6			5.7
Occupancy expense, net		2,598			2,701			2,532			(103	)		169			(3.8	)		6.7
Furniture and equipment expense		1,840			2,019			1,997			(179	)		22			(8.9	)		1.1
FDIC insurance assessment		993			1,107			1,651			(114	)		(544	)		(10.3	)		(32.9	)
Legal, examination, and professional fees		1,189			1,332			1,441			(143	)		(109	)		(10.7	)		(7.6	)
Advertising and promotion		1,083			1,103			1,256			(20	)		(153	)		(1.8	)		(12.2	)
Postage, printing, and supplies		1,144			1,158			1,201			(14	)		(43	)		(1.2	)		(3.6	)
Processing expense		3,593			3,193			3,353			400			(160	)		12.5			(4.8	)
Other real estate expense		2,937			2,736			9,804			201			(7,068	)		7.3			(72.1	)
Other		4,125			3,514			3,717			611			(203	)		17.4			(5.5	)
Total non-interest expense	$	38,667		$	36,845		$	44,851		$	1,822		$	(8,006	)		4.9	%		(17.9	)%
Efficiency ratio		75.9	%		71.1	%		83.9	%
Salaries and benefits as a %of total non-interest expense		49.6	%		48.8	%		39.9	%
Number of full-timeequivalent employees		345			337			340

Total noninterest expense increased $1,822,000, or 4.9%, to $38,667,000 for the year ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $8,006,000, or 17.9%, to $36,845,000 for the year ended December 31, 2011, compared to $44,851,000 for the year ended December 31, 2010.

Salary expense increased $608,000, or 4.4%, for the year ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $144,000, or 4.4%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The number of full-time equivalent employees increased from 337 at December 31, 2011 to 345 at December 31, 2012 partly due to opening a new lending location in Liberty, Missouri in May of 2012 as well as hiring additional support personnel in loan operations departments.

Employee benefits increased $575,000, or 13.6%, for the year ended December 31, 2012 compared to the year ended December 31, 2011, and increased $227,000, or 5.7%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The increase in the year ended 2012 over 2011 included a $95,000 increase in medical insurance premiums, a $68,000 increase in other employee benefits, and a $382,000 increase in estimated profit sharing and pension expense accruals. The increase in the year ended 2011 over 2010 included a $132,000 increase in medical insurance premiums, a $15,000 increase in estimated profit sharing and pension accruals, and a $88,000 increase in other employee benefits.

Federal Deposit Insurance Corporation (FDIC) insurance assessment decreased $114,000, or 10.3%, for the year ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $544,000, or 32.9%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The decrease in FDIC insurance assessments was due to amendments made by the FDIC effective for the third quarter of 2011 to implement revisions to the Federal Deposit Insurance Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The years ending after September 30, 2011 reflect a new assessment base using assets and tier one capital in the assessment calculation.

13

Legal, examination, and professional fees decreased $143,000, or 10.7%, for the year ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $109,000, or 7.6%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The decrease in 2012 over 2011 was primarily a result of a decrease in consulting fees for a human resource best practices and profitability-consulting project completed during 2011. The decrease in 2011 over 2010 was primarily the due to a $200,000 expense accrual made during the fourth quarter of 2010 representing the Company’s estimated obligation in a suit filed against Hawthorn Bank found in favor of the plaintive.

Other real estate expense increased $201,000, or 7.3%, to $2,937,000 for the year ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $7,068,000, or 72.1%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The expense provision for other real estate owned was $713,000 for the year ended 2012 compared to $1,252,000 for the year ended December 31, 2011, and $6,158,000 for the year ended December 31, 2010. The significant change in the expense provision from the years ended 2010 to 2012, primarily related to one foreclosed commercial real estate construction property. During the year ended December 31, 2010, the Company recorded a $5,663,000 provision and related valuation allowance related to this property reflecting its current appraised value. During the year ended December 31, 2012, real estate values improved and comparable sales occurred which led to an increased current appraised value that allowed the Company to recover $3,908,000 of the valuation allowance. This recovery partially offset current year expense provisions for other real estate owned of $4,621,000, primarily attributable to eight properties where significant write-downs were required to reflect current appraised values. Expenses incurred to maintain foreclosed properties were $2,251,000 for the year ended 2012 compared to $1,289,000 for the year ended 2011, and $1,471,000 for the year ended December 31, 2010. The increases in other real estate expenses were primarily due to related operating costs of additional acquired properties.

Other noninterest expense increased $611,000, or 17.4%, for the year ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $203,000, or 5.5%, for the year ended December 31, 2011 compared the year ended December 31, 2010. The increase from the year ended December 31, 2012 over the year ended December 31, 2011 year was primarily due to $309,000 of property donations to charitable organizations that were in other real estate owned.

Fourth Quarter Results for 2012

Comparing fourth quarter 2012 to third quarter 2012

The Company’s net income available to common shareholders’ of $1,900,000 for the fourth quarter ended December 31, 2012 increased $3,772,000, compared to a net loss of ($1,872,000) for the third quarter ended September 30, 2012. Net interest income decreased to $10,100,000 from $10,122,000 over the same period. This decrease was primarily the result of a decrease in average interest earning assets from $1,074,849,000 for the third quarter ended September 30, 2012 to $1,068,741,000 for the fourth quarter ended December 31, 2012.

The fourth quarter 2012 provision for loan losses of $1,000,000 was $3,700,000 less than third quarter 2012’s provision of $4,700,000. This decrease was primarily due to a $1,842,000 decrease in specific reserves from $5,862,000 at September 30, 2012 to $4,020,000 at December 31, 2012, that was based on management’s determination of probable losses identified during the review of impaired loans.

Noninterest income of $2,633,000 for fourth quarter 2012 decreased $47,000 from third quarter 2012’s noninterest income of $2,680,000. This decrease was primarily the result of a $139,000 decrease in other noninterest income partially offset by a $117,000 increase in gains on sales of mortgages to $896,000 for the fourth quarter of 2012 from $779,000 in the third quarter of 2012. Other noninterest income included a $60,000 net decrease in the fair value of MSR’s during the fourth quarter compared to a net increase of $12,000 during the third quarter of 2012.

Noninterest expense of $8,711,000 for fourth quarter 2012 decreased by $1,667,000 from third quarter 2012’s noninterest expense of $10,378,000. This decrease primarily resulted from a $2,233,000 decrease in other real estate expenses from $1,787,000 for the three months ended September 30, 2012 to ($446,000) for the three months ended December 31, 2012. The decrease primarily resulted from a $2,189,000 decrease to the provision for the valuation allowance for other real estate owned. A current appraisal supported a partial recovery of $3,908,000 of a $5,663,000 provision on a commercial real estate construction property taken in 2010. This recovery partially offset the fourth quarter expense provisions for other real estate owned of $2,800,000, primarily attributable to four properties where significant write-downs were required to reflect current appraised values.

14

Comparing fourth quarter 2012 to fourth quarter 2011

The Company’s net income available to common shareholders’ of $1,900,000 for the fourth quarter ended December 31, 2012 increased $3,422,000 compared to a net loss of ($1,522,000) for the fourth quarter ended December 31, 2011. Net interest income decreased to $10,100,000 from $10,549,000 over the same period. This decrease was primarily the result of a decrease in average interest earning assets from $1,081,924,000 for the fourth quarter ended December 31, 2011 to $1,068,741,000 for the fourth quarter ended December 31, 2012.

The fourth quarter 2012 provision for loan losses of $1,000,000 was $4,880,000 lower than fourth quarter 2011’s provision of $5,880,000 and was based upon management’s determination of the loan loss reserve required to cover probable losses in the loan portfolio at year-end.

Noninterest income of $2,633,000 for fourth quarter 2012 increased $21,000 from fourth quarter 2011’s noninterest income of $2,612,000. This increase was primarily the result of gains on sales of mortgage loans that increased $141,000 to $896,000 for the fourth quarter of 2012 from $755,000 in the fourth quarter of 2011. The Company’s loans sold were $30,255,000 for three months ended December 31, 2012 compared to $31,491,000 for the three months ended December 31, 2011.

Noninterest expense of $8,711,000 for fourth quarter 2012 decreased by $823,000 from fourth quarter 2011’s noninterest expense of $9,534,000. This decrease primarily resulted from a $1,617,000 decrease in other real estate expenses from $1,171,000 for the three months ended December 31, 2011 to $(446,000) for the three months ended December 31, 2012. The decrease primarily resulted from a $1,699,000 decrease to the provision for the valuation allowance for other real estate owned. A current appraisal supported a partial recovery of $3,908,000 of a $5,663,000 provision on a commercial real estate construction property taken in 2010.

Income taxes

Income taxes as a percentage of earnings (loss) before income taxes as reported in the consolidated financial statements were 16.2% for the years ended December 31, 2012 compared to 17.2% for the year ended December 31, 2011, and 46.5% for the year ended December 31, 2010. Excluding an immaterial correction of a prior period error of $371,000, and prior year return to provision adjustments, income taxes as a percentage of earnings before income taxes were 26.3% in comparison to 17.2% for the years ended December 31, 2012 and 2011, respectively. At December 31, 2010, total accrued interest was $31,000 and total interest expense recognized for the year ended December 31, 2010 was $24,000. At December 31, 2011, the Company released $28,000 of interest accrued related to the release of $221,000 of uncertain tax provisions, and as of December 31, 2012, the Company had not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions.

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 70.4% of total assets as of December 31, 2012 compared to 70.8% as of December 31, 2011.

Lending activities are conducted pursuant to an established loan policy approved by the Bank’s board of directors. The Bank’s credit review process comprises of regional loan committees with established loan approval limits. In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and comprises of senior managers of the Bank.

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

(In thousands)	2012		2011		2010		2009		2008
Commercial, financial, and agricultural	$	130,040	$	128,555	$	151,399	$	153,386	$	151,488
Real estate construction—residential		22,177		30,201		38,841		49,623		0
Real estate construction—commercial		43,486		47,697		77,937		80,016		147,432
Real estate mortgage—residential		221,223		203,454		232,332		235,834		210,458
Real estate mortgage—commercial		405,092		402,960		453,975		456,696		365,094
Installment loans to individuals		24,966		30,063		37,130		33,548		36,806
Total loans	$	846,984	$	842,930	$	991,614	$	1,009,103	$	911,278

15

The Company’s loan portfolio increased $4,054,000 from December 31, 2011 to December 31, 2012. During the year ended December 31, 2012 there were no significant increases in loan demand. The Company did experience an increase in refinancing during this time period due to low interest rates available for real estate mortgage residential properties. Also, during the first quarter of 2012 approximately $10,000,000 of real estate construction – residential loans were reclassified to real estate mortgage – residential loans due to the completion of the construction phase.

The State’s economy as a whole has exhibited recent improvement from the recessionary lows of 2010 and 2011 but continues to be considered weak. State government spending has remained relatively constant over the last year but below pre-recession levels which hurts our central region. Branson, while having good holiday weekends, is still struggling. Nationally, unemployment has improved over the last year but remains high at 7.8% while Missouri’s unemployment rate is better at 6.6%. The stock market has exhibited recent strength having set record high levels for the Dow Jones Industrial Average however there is growing concern that these levels cannot be maintained unless the economy begins to grow more than the recent 1.0% - 1.5% quarterly averages. The US FHFA House Price Index for December 2012 indicates house prices nationwide have increased 5.5% over the last four quarters but remain 12.9% below the 2007 peak. For Missouri, the HPI data indicates prices have increased 4.7% over the last four quarters but remain 8.1% below the 2007 peak. The house price index for Jefferson City indicates a year over year price change of 1.76%, Columbia’s change was 1.37%, Kansas City declined by 1.25% and Springfield increased by 0.61%. Borrowing rates have also remained depressed over the last 36 month analysis period. We anticipate moderate improvement in the next several quarters over the 12-quarter analysis period but growth will remain slow and the economy will continue a modest recovery. Management continues to focus on the improvement of asset quality by tightening underwriting standards and focusing on lending to credit worthy borrowers with the capacity to service their 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 the Company.

The Company extends credit to its local community market through traditional real estate mortgage products. The Company does not participate in extending credit to sub-prime residential real estate markets. The Company does not lend funds for the type of transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets that would have been included in nonaccrual, past due, or restructured loans if such assets were loans.

The contractual maturities of loan categories at December 31, 2012, and the composition of those loans between fixed rate and floating rate loans are as follows:

	Principal Payments Due
			Over One		Over
	One Year		Year Through		Five
(In thousands)	Or Less		Five Years		Years		Total
Commercial, financial, and agricultural	$	80,994	$	44,995	$	4,051	$	130,040
Real estate construction—residential		20,954		1,223		—		22,177
Real estate construction—commercial		31,080		11,972		434		43,486
Real estate mortgage—residential		59,979		86,119		75,125		221,223
Real estate mortgage—commercial		143,840		246,507		14,745		405,092
Installment loans to individuals		10,151		13,657		1,158		24,966
Total loans net of unearned income	$	346,998	$	404,473	$	95,513	$	846,984
Loans with fixed rates		278,050		361,259		25,641		664,950
Loans with floating rates		68,948		43,214		69,872		182,034
Total loans net of unearned income	$	346,998	$	404,473	$	95,513	$	846,984

The 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 the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. For the year ended December 31, 2012, the Company sold approximately $100,000,000 of loans to investors compared to $75,000,000 for the year ended December 31, 2011. At December 31, 2012, the Company was servicing approximately $310,000,000 of loans sold to the secondary market compared to $307,000,000 at December 31, 2010.

16

Real estate mortgage loans retained in the Company’s portfolio generally include provisions for rate adjustments at one to five 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.

Risk Elements of the Loan Portfolio

Management, the 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 are reviewed. In addition, all other loans are reviewed on a sample basis. The senior loan committee reviews and reports to the board of directors, on a monthly basis, 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, specific reserves are estimated 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 necessary by management to provide for probable losses inherent in the loan portfolio.

Nonperforming Assets

The following table summarizes nonperforming assets at the dates indicated:

(In thousands)	2012			2011			2010			2009			2008
Nonaccrual loans:
Commercial, financial, and agricultural	$	1,335		$	2,068		$	3,532		$	2,067		$	2,071
Real estate construction—residential		2,497			1,147			3,586			2,678			2,775
Real estate construction—commercial		7,762			7,867			10,067			9,277			7,572
Real estate mortgage—residential		5,330			4,153			5,672			6,692			4,345
Real estate mortgage—commercial		13,938			31,000			27,604			13,161			3,505
Installment loans to individuals		219			168			126			279			119
Total	$	31,081		$	46,403		$	50,587		$	34,154		$	20,387
Loans contractually past—due 90 days or more and still accruing:
Commercial, financial, and agricultural	$	0		$	0		$	0		$	2		$	140
Real estate construction—residential		0			0			0			0			0
Real estate construction—commercial		0			8			0			0			52
Real estate mortgage—residential		0			9			0			0			0
Real estate mortgage—commercial		0			36			0			0			547
Installment loans to individuals		6			1			33			0			4
Total	$	6		$	54		$	33		$	2		$	743
Troubled debt restructurings—accruing		8,282			7,217			5,683			8,191			3,736
Total nonperforming loans		39,369			53,674			56,303			42,347			24,866
Other real estate owned		23,124			15,741			13,393			8,452			7,828
Repossessions		468			279			616			39			0
Total nonperforming assets	$	62,961		$	69,694		$	70,312		$	50,838		$	32,694
Loans	$	846,984		$	842,930		$	898,472		$	991,614		$	1,009,103
Allowance for loan losses to loans		1.75	%		1.64	%		1.62	%		1.49	%		1.26	%
Nonperforming loans to loans		4.65	%		6.37	%		6.27	%		4.27	%		2.46	%
Allowance for loan losses to nonperforming loans		37.70	%		25.73	%		25.87	%		34.94	%		50.94	%
Nonperforming assets to loans and foreclosed assets		7.23	%		8.11	%		7.71	%		5.08	%		3.21	%

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Total nonperforming assets decreased $6,733,000, or 9.7%, from December 31, 2011 to December 31, 2012. As detailed below, this decrease included a decrease of $15,322,000, or 33.0%, in nonaccrual loans partially offset by incresases of $1,065,000, or 14.8%, in accruing TDR’s and $7,572,000, or 47.3%, in other real estate owned and repossessions.

Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and troubled debt restructurings (TDRs) totaled $39,369,000 or 4.65% of total loans at December 31, 2012 compared to $53,674,000 or 6.37% of total loans at December 31, 2011.

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 due 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 collectability 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 $1,198,000 and $1,952,000 for the years ended December 31, 2012 and 2011, respectively.

As of December 31, 2012 and 2011, approximately $17,556,000 and $11,673,000, respectively, of loans not included in the nonperforming asset table were identified 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. Even though borrowers are experiencing moderate cash flow problems as well as some deterioration in collateral value. Management believes the general allowance was sufficient to cover the risks and probable losses related to such loans at December 31, 2012 and 2011, respectively.

Total non-accrual loans at December 31, 2012 decreased $15,322,000 from December 31, 2011. This decrease primarily consisted of a $17,062,000 decrease in real estate mortgage – commercial non-accrual loans. This decrease was partially offset by a $1,350,000 net increase in real estate construction – residential loans, and a $1,177,000 net increase in real estate mortgage—residential non-accrual loans. The overall decrease in nonaccrual loans primarily resulted from the foreclosure of six commercial real estate loans with balances totaling $14,769,000 at December 31, 2011 that had been in nonaccrual status. The increase in real estate construction – residential loans, and real estate mortgage residential loans resulted primarily from three significant loan relationships with balances totaling $3,336,000 at December 31, 2012 that were put on non-accrual status during the year. At December 31, 2012, real estate mortgage – commercial non-accrual loans made up 45% of total non-accrual loans compared to 67% at December 31, 2011.

Loans past due 90 days and still accruing interest decreased $48,000 from $54,000 at December 31, 2011 to $6,000 at December 31, 2012. Foreclosed real estate and other repossessions increased $7,572,000 from $16,020,000 at December 31, 2011 to $23,592,000 at December 31, 2012 primarily due to real estate mortgage – commercial foreclosures. During the year ended 2012, $16,869,000 of nonaccrual loans, net of charge-offs taken, moved to foreclosed assets. Real estate values improved during the year and the Company was able to sell several properties with proceeds totaling $8,571,000 that partially offset the additional properties acquired. Also, during the year the Company had recorded a net $713,000 additional provision to the valuation allowance that included a $3,908,000 recovery as a result of a current appraised value. See Note 3 for additional information.

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The following table summarizes the Company’s TDRs at the dates indicated:

	December 31, 2012						December 31, 2011
(In thousands)	Number of contracts		Recorded Investment		Specific Reserves		Number of contracts		Recorded Investment		Specific Reserves
TDRs—Accrual
Commercial, financial and agricultural		12	$	2,820	$	104		9	$	2,360	$	120
Real estate mortgage—residential		3		440		94		20		2,416		61
Real estate mortgage—commercial		6		5,022		111		3		2,441		0
Total TDRs—Accrual		21	$	8,282	$	309		32	$	7,217	$	181
TDRs—Non-accrual
Commercial, financial and agricultural		2	$	201	$	14		2	$	84	$	52
Real estate construction—commercial		5		5,693		468		8		6,227		321
Real estate mortgage—residential		9		1,177		142		9		1,278		108
Real estate mortgage—commercial		12		6,966		611		15		17,359		860
Consumer		2		44		0		0		0		0
Total TDRs—Non-accrual		30	$	14,081	$	1,235		34	$	24,948	$	1,341
Total TDRs		51	$	22,363	$	1,544		66	$	32,165	$	1,522

At December 31, 2012, loans classified as TDRs totaled $22,363,000, of which $14,081,000 were on non-accrual status and $8,282,000 were on accrual status. At December 31, 2011, loans classified as TDRs totaled $32,165,000, of which $24,948,000 were on non-accrual status and $7,217,000 were on accrual status. The $9,802,000 decrease from December 31, 2011 consisted primarily of two commercial real estate mortgage nonaccrual loans with balances totaling approximately $8,360,000 at December 31, 2011, that went to foreclosure during the year ended December 31, 2012. These commercial foreclosures consisted of two hotels in the Branson Area and a church in the Lee’s Summit area. The church was sold during the fourth quarter of 2012 and the hotels are going to auction during the second quarter of 2013. The decrease in TDRs classified as real estate – mortgage residential accruing loans primarily related to one loan relationship consisting of fourteen loans that were consolidated into one new loan at a market rate meeting all the qualifications to be removed from the TDR classification.

Provision and Allowance for Loan Losses

As mentioned above, the Company is continuing to recover from the deterioration of collateral values during the prior and current economic conditions. Current appraisals are being obtained and management has adjusted the provision to reflect the amounts determined necessary to maintain the allowance for loan losses at a level necessary to cover probable losses in the loan portfolio. The allowance for loan losses increased to $14,842,000 or 1.75% of loans outstanding at December 31, 2012 compared to $13,809,000 or 1.64% of loans outstanding at December 31, 2011.

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

(In thousands)	2012			2011		2010		2009		2008
Analysis of allowance for loan losses:
Balance beginning of year	$	13,809		$	14,565	$	14,797	$	12,667	$	9,282
Net charge-offs (recoveries):
Commercial, financial, and agricultural		1,599			1,964		1,750		1,191		3,418
Real estate construction—residential		(67	)		1,793		903		1,007		458
Real estate construction—commercial		(23	)		262		4,534		450		188
Real estate mortgage—residential		819			1,775		4,306		2,612		416
Real estate mortgage—commercial		5,218			6,317		3,812		724		35
Installment loans to individuals		321			168		182		240		311
Net charge-offs		7,867			12,279		15,487		6,224		4,826
Provision for loan losses		8,900			11,523		15,255		8,354		8,211
Balance end of year	$	14,842		$	13,809	$	14,565	$	14,797	$	12,667

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Provision

The provision for loan losses decreased to $8,900,000 for the year ended December 31, 2012 compared to $11,523,000 for the year ended December 31, 2011, and $15,255,000 for the year ended December 31, 2010. The Company’s net loan charge-offs were $7,867,000, or 0.93% of average loans, for the year ended December 31, 2012 compared to net loan charge-offs of $12,279,000, or 1.42% of average loans, for the year ended December 31, 2011, and $15,487,000, or 1.63% of average loans, for the year ended December 31, 2010. Net charge-offs continued to include significant write-downs of approximately $6,700,000 during the year ended December 31, 2012 on properties going to foreclosure to reflect declines in current collateral values. Real estate mortgage—commercial net charge-offs represented 66% of total net charge-offs during the year ended December 31, 2012 and primarily related to three significant commercial loan relationships that went to foreclosure. One of these foreclosures consisted of two hotels in the Branson area for which a $1,745,000 charge off was taken to value the property according to its current appraised value determined during the third quarter of 2012. Although net charge offs have decreased from the year ended December 31, 2010 to the year ended December 31, 2012, the provision for loan losses remains significant due to the level of specific reserves on loans individually evaluated for impairment and the historical loss rate based on the Company’s last thirty-six months of charge off experience. Specific reserves were $4,020,000 at December 31, 2012 compared to $3,748,000 at December 31, 2011, and $6,376,000 at December 31, 2010.

Allowance for loan losses

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

(In thousands)	2012			2011			2010			2009			2008
Allocation of allowance for loan losses at end of year:
Commercial, financial, and agricultural	$	1,937		$	1,804		$	2,931		$	2,773		$	1,712
Real estate construction—residential		732			1,188			2,067			348			0
Real estate construction—commercial		1,711			1,562			1,339			1,740			2,490
Real estate mortgage—residential		3,387			3,251			3,922			3,488			557
Real estate mortgage—commercial		6,834			5,734			3,458			4,693			6,014
Installment loans to individuals		239			267			231			380			391
Unallocated		2			3			617			1,375			1,503
Total	$	14,842		$	13,809		$	14,565		$	14,797		$	12,667
Percent of categories to total loans:
Commercial, financial, and agricultural		15.4	%		15.3	%		14.6	%		15.3	%		15.2	%
Real estate construction—residential		2.6			3.6			3.5			3.9			4.9
Real estate construction—commercial		5.1			5.7			6.2			7.9			7.9
Real estate mortgage—residential		26.1			24.1			23.2			23.4			23.4
Real estate mortgage—commercial		47.8			47.8			48.9			45.8			45.3
Installment loans to individuals		3.0			3.5			3.6			3.7			3.3
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

The Company’s allowance for loan losses increased $1,033,000 from December 31, 2011 to December 31, 2012. The overall increase primarily consisted of a $1,100,000 increase in the allocation for real estate mortgage – commercial loans that was partially offset by a $456,000 decrease in real estate construction – residential loans. The ratio of the allowance for loan losses to nonperforming loans was 37.7% at December 31, 2012 compared to 25.73% at December 31, 2011.

The following table is a summary of the general and specific allocations of the allowance for loan losses for the years ended as indicated:

(In thousands)	2012		2011		2010		2009		2008
Allocation of allowance for loan losses:
Individually evaluated for impairment—specific reserves	$	4,020	$	3,748	$	6,376	$	6,415	$	3,837
Collectively evaluated for impairment—general reserves		10,822		10,061		8,189		8,382		8,830
Total	$	14,842	$	13,809	$	14,565	$	14,797	$	12,667

The specific reserve component applies to loans evaluated individually for impairment. 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

20

December 31, 2012, $4,020,000 of the Company’s allowance for loan losses was allocated to impaired loans totaling approximately $39,363,000 compared to $3,748,000 of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $53,620,000 at December 31, 2011. Management determined that $14,733,000, or 37%, of total impaired loans required no reserve allocation at December 31, 2012 compared to $23,223,000, or 43%, at December 31, 2011 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying percentages to pools of loans by asset type. Loans not individually evaluated are aggregated based on similar risk characteristics. Historical loss rates for each risk group, which is updated quarterly, are quantified using all recorded loan charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent three year economic environment. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. The Company’s methodology includes factors that allow management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

Prior to 2011, the historical loss percentage for non-impaired loans was based on a blend between industry standards and the Company’s five year loss experience, and the unallocated portion of the allowance was based on management’s evaluation of conditions that were not directly reflected in the determination of the specific reserve component and the incurred loss component.

The specific and general reserve allocations represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses comprises of specific and general allocations, the entire allowance is available to absorb any credit losses.

Investment Portfolio

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

Held-to-Maturity—includes investments in debt securities that the 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 that the Company has no present plans to sell in the near-term but may be sold in the future under different circumstances). The 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.

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

At December 31, 2012, the investment portfolio classified as available-for-sale represented 18.3% 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:

(In thousands)	2012		2011
U.S. Treasury	$	2,030	$	2,054
Government sponsored enterprises		55,180		70,314
Asset-backed securities		107,872		107,329
Obligations of states and political subdivisions		35,164		34,109
Total available for sale debt securities	$	200,246	$	213,806

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As of December 31, 2012, the maturity of debt securities in the investment portfolio was as follows:

	One Year			Over One Through			Over Five Through			Over						Weighted Average
(In thousands)	Or Less			Five Years			Ten Years			Ten Years			Total			Yield (1)
U.S. Treasury	$	1,017		$	1,013		$	—		$	—		$	2,030			1.63	%
Government sponsored enterprises		590			52,571			2,019			—			55,180			1.34
Asset-backed securities(2)		5,023			95,995			6,854			—			107,872			2.69
States and political subdivisions (3)		2,345			11,570			19,321			1,928			35,164			4.15
Total available-for-sale debt securities	$	8,975		$	161,149		$	28,194		$	1,928		$	200,246			2.54	%
Weighted average yield (1)		3.07	%		2.38	%		3.34	%		4.67	%		2.54	%

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, 2012 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, 2012 $105,000 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, 2012, $2,278,000 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 a $1,486,000 equity investment in the Company’s unconsolidated Exchange Statutory Trusts. (See Note 8 to the Company’s consolidated financials for further explanation on the Exchange Statutory Trusts.)

(In thousands)	2012		2011
Federal Home Loan Bank of Des Moines stock	$	2,278	$	2,738
Midwest Independent Bank stock		151		151
Federal Agricultural Mortgage Corporation stock		10		10
Investment in unconsolidated trusts		1,486		1,486
Total non-marketable investment securities	$	3,925	$	4,385

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 the 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.

The Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for the 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 the Company’s liquidity.

The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company’s most liquid assets comprise of available for sale investment securities, federal funds sold, and excess reserves held at the Federal Reserve. Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes.

22

The fair value of the available for sale investment portfolio was $200,246,000 at December 31, 2012 and included an unrealized net gain of $5,353,000. The portfolio includes projected maturities and mortgage backed securities pay-downs of approximately $22,850,000 over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s deposit base.

(In thousands)	2012		2011
Federal funds sold	$	—	$	75
Federal Reserve Bank—excess reserves		27,857		19,997
Available for sale investment securities		200,246		213,806
Total	$	228,103	$	233,878

The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes required by law. At December 31, 2012 and 2011, respectively, the Company’s unpledged securities in the available for sale portfolio totaled approximately $53,804,000 and $41,359,000, respectively.

Total investment securities pledged for these purposes were as follows:

(In thousands)	2012		2011
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	2,390	$	1,819
Repurchase agreements		28,888		29,656
Other deposits		115,164		140,972
Total pledged, at fair value	$	146,442	$	172,447

Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At December 31, 2012, such deposits totaled $597,973,000 and represented 60.3% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships. Time deposits and certificates of deposit of $100,000 and over totaled $393,302,000 at December 31, 2012. These accounts are normally considered more volatile and higher costing representing 39.7% of total deposits at December 31, 2012.

Core deposits at December 31, 2012 and 2011 were as follows:

(In thousands)	2012		2011
Core deposit base:
Non-interest bearing demand	$	192,271	$	159,187
Interest checking		178,121		169,452
Savings and money market		227,581		215,147
Total	$	597,973	$	543,786

Other components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As of December 31, 2012, under agreements with these unaffiliated banks, the Bank may borrow up to $15,000,000 in federal funds on an unsecured basis and $5,135,000 on a secured basis. There was no federal funds purchased outstanding at December 31, 2012. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio. At December 31, 2012, there was $21,058,000 in repurchase agreements. The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window; although no such borrowings were outstanding at December 31, 2012. 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, 2012, the Bank had $20,126,000 in outstanding borrowings with the FHLB. In addition, the Company has $49,486,000 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

23

Borrowings outstanding at December 31, 2012 and 2011 were as follows:

(In thousands)	2012		2011
Borrowings:
Securities sold under agreements to repurchase	$	21,058	$	24,516
Federal Home Loan Bank advances		20,126		28,410
Subordinated notes		49,486		49,486
Total	$	90,670	$	102,412

The 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, the Company may draw advances against this collateral.

The following table reflects the advance equivalent of the assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as follows:

	2012										2011
(In thousands)	FHLB			Federal Reserve Bank		Federal Funds Purchased Lines		Total			FHLB			Federal Reserve Bank		Federal Funds Purchased Lines		Total
Advance equivalent	$	290,084		$	3,344	$	16,790	$	310,218		$	263,199		$	2,051	$	25,402	$	290,652
Advances outstanding		(20,126	)		0		0		(20,126	)		(43,657	)		0		0		(43,657	)
Letters of credit issued		0			0		0		0			(206	)		0		0		(206	)
Total available	$	269,958		$	3,344	$	16,790	$	290,092		$	219,336		$	2,051	$	25,402	$	246,789

At December 31, 2012, loans with a market value of $449,956,000 were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit. At December 31, 2012, investments with a market value of $5,826,000 were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Sources and Uses of Funds

Cash and cash equivalents were $58,877,000 at December 31, 2012 compared to $43,210,000 at December 31, 2011. The $15,877,000 increase resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the year ended December 31, 2012. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $14,875,000 for the year ended December 31, 2012.

Investing activities consisting mainly of purchases, sales and maturities of available for sale securities, and changes in the level of the loan portfolio, used total cash of $6,374,000. The cash outflow primarily consisted of $76,498,000 purchases of investment securities and a $26,499,000 increase in the loan portfolio. Partially offsetting this increase was $87,905,000 in proceeds from maturities, calls, and pay-downs of investment securities and $8,571,000 in proceeds from sales of other real estate owned and repossessions

Financing activities provided cash of $7,166,000, resulting primarily from a $33,084,000 net increase in demand deposits partially offset by $12,000,000 paid on the redemption of 12,000 shares of preferred stock, an $8,284,000 repayment of Federal Home Bank advances, and a $3,458,000 decrease in federal funds purchased and securities sold under agreements to repurchase. See Note 9 for further discussion. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2013.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company had $121,407,000 in unused loan commitments and standby letters of credit as of December 31, 2012. Although the Company’s current liquidity resources are adequate to fund this commitment level, we know that the nature of these commitments is such that the likelihood of such a funding demand is very low.

The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing liquidity needs primarily include funding its operating expenses and paying cash dividends to its common and preferred shareholders. For the years ended December 31, 2012 and 2011, respectively, the Company paid cash dividends to its common and preferred shareholders totaling $2,143,000 and $2,417,000. A large portion of

24

the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $4,500,000 and $5,000,000 to the Company for each of the years ended December 31, 2012 and 2011, respectively. At December 31, 2012 and December 31, 2011, the Company had cash and cash equivalents totaling $1,863,000 and $13,282,000, respectively.

Capital Management

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.

The Company exceeded all capital adequacy requirements as of December 31, for the years indicated:

	2012			2011			2010			2009			2008			Well - Capitalized Regulatory Guidelines
Risk-based capital ratios:
Total capital		16.83	%		18.03	%		17.05	%		16.49	%		16.01	%		10.00	%
Tier I capital		13.58			15.16			14.25			14.01			13.55			6.00
Leverage ratio		10.37			11.52			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, 2012 are as follows:

	Payments due by Period
(In thousands)	Total		Less than 1 Year		1-3 Years		3-5 Years		Over 5 Years
Time deposits	$	393,302	$	280,477	$	88,702	$	24,123	$	—
Other borrowed money		20,126		10,126		—		—		10,000

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

The 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, 2012 are as follows:

	Amount of Commitment Expiration per Period
(In thousands)	Total		Less than 1 Year		1-3 Years		3-5 Years		Over 5 Years
Unused loan commitments	$	118,412	$	90,560	$	13,003	$	4,921	$	9,928
Standby letters of credit		2,995		2,944		26		25		—

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.

25

Quantitative and Qualitative Disclosures about Market Risk

Interest Sensitivity

Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through transactions other than trading activities. The Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the Company’s Asset/Liability Committee and approved by the board of directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to specific points on the yield curve. At December 31, 2012, the rate shock scenario models indicated that annual net interest income could change by as much as (22.5)% to 30.3% should interest rates rise or fall, respectively, 400 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 believes this is an acceptable level of risk.

The following table represents estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of December 31, 2012. Significant assumptions used for this table included: loans will repay at historic repayment rates; certain interest-bearing demand accounts are interest sensitive due to immediate repricing, and fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table.

(In thousands)	Year 1			Year 2		Year 3			Year 4		Year 5		Over 5 Years or No stated Maturity		Total
ASSETS
Investment securities	$	22,850		$	56,723	$	50,643		$	31,330	$	13,646	$	25,054	$	200,246
Interest-bearing deposits		27,857			—		—			—		—		—		27,857
Other restricted investments		3,925			—		—			—		—		—		3,925
Loans		411,402			155,682		101,646			39,727		110,375		28,152		846,984
Total	$	466,034		$	212,405	$	152,289		$	71,057	$	124,021	$	53,206	$	1,079,012
LIABILITIES
Savings, now deposits	$	—		$	—	$	167,077		$	—	$	—	$	—	$	167,077
Rewards checking, super now, and money market deposits		238,624			—		—			—		—		—		238,624
Time deposits		280,477			65,220		23,482			11,984		12,139		—		393,302
Federal funds purchased and securities sold under agreements to repurchase		21,058			—		—			—		—		—		21,058
Subordinated notes		49,486			—		—			—		—		—		49,486
Federal Home Loan Bank advances		20,126			—		—			—		—		—		20,126
Total	$	609,771		$	65,220	$	190,559		$	11,984	$	12,139	$	—	$	889,673
Interest-sensitivity GAP
Periodic GAP	$	(143,737	)	$	147,185	$	(38,270	)	$	59,073	$	111,882	$	53,206	$	189,339
Cumulative GAP	$	(143,737	)	$	3,448	$	(34,822	)	$	24,251	$	136,133	$	189,339	$	189,339
Ratio of interest-earning assets to interest-bearing liabilities
Periodic GAP		0.76			3.26		0.80			5.93		10.22		NM		1.21
Cumulative GAP		0.76			1.01		0.96			1.03		1.15		1.21		1.21

26

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 the Company’s operations for the year ended December 31, 2012.

Impact of New Accounting Standards

Balance Sheet In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU is a joint requirement by the FASB and International Accounting Standards Board to enhance current disclosures and increase comparability of GAAP and International Financial Reporting Standards (IFRS) financial statements. Under the ASU, an entity will be required to disclose both gross and net information about instruments and transactions eligible for offset in the balance sheet, as well as instruments and transactions subject to an agreement similar to a master netting agreement. ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities was issued in January 2013, and amended ASU 2011-11 to specifically include only derivatives accounted under Topic 815, repurchase and reverse purchase agreements, and securities and borrowing and lending transactions that are either offset or subject to an enforceable master netting arrangement. Both ASUs are effective for annual and interim periods beginning January 1, 2013. Their adoption is not expected to have a significant effect on the Company’s financial statements.

Other Comprehensive Income In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments of ASU No. 2013-02 require an entity to present, either in the income statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU is effective for annual and interim periods beginning January 1, 2013. Adoption of the ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

27

CONSOLIDATED FINANCIAL STATEMENTS

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

	Page
Report of Independent Registered Public Accounting Firm	29
Consolidated Balance Sheets as of December 31, 2012 and 2011	30
Consolidated Statements of Operations for each of the years ended December 31, 2012, 2011, and 2010	31
Consolidated Statements of Comprehensive Income (Loss) for each of the years ended December 31, 2012, 2011, and 2010	32
Consolidated Statements of Stockholders’ Equity for each of the years ended December 31, 2012, 2011, and 2010	33
Consolidated Statements of Cash Flows for each of the years ended December 31, 2012, 2011, and 2010	34-35
Notes to the Consolidated Financial Statements	36

28

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, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. 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, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, 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, 2012, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 1, 2013 expressed an unqualified opinion on the effectiveness of Hawthorn Bancshares, Inc.’s internal control over financial reporting.

/s/ KPMG LLP

St. Louis, Missouri

April 1, 2013

29

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	December 31,
	2012			2011
	(In thousands, except per share amounts)
ASSETS
Loans	$	846,984		$	842,930
Allowances for loan losses		(14,842	)		(13,809	)
Net loans		832,142			829,121
Investment in available-for-sale securities, at fair value		200,246			213,806
Federal funds sold and securities purchased under agreements to resell		0			75
Cash and due from banks		58,877			43,135
Premises and equipment—net		37,021			37,953
Other real estate owned and repossessed assets—net		23,592			16,020
Accrued interest receivable		5,190			5,341
Mortgage servicing rights		2,549			2,308
Intangible assets—net		135			543
Cash surrender value—life insurance		2,136			2,064
Other assets		19,718			20,795
Total assets	$	1,181,606		$	1,171,161
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand	$	192,271		$	159,187
Savings, interest checking and money market		405,702			384,599
Time deposits $100,000 and over		120,777			139,504
Other time deposits		272,525			274,934
Total deposits		991,275			958,224
Federal funds purchased and securities sold under agreements to repurchase		21,058			24,516
Subordinated notes		49,486			49,486
Federal Home Loan Bank advances		20,126			28,410
Accrued interest payable		909			1,054
Other liabilities		6,532			6,895
Total liabilities	$	1,089,386		$	1,068,585
Stockholders’ equity:
Preferred stock, $0.01 par value per share, 1,000,000 shares authorized;
Issued 18,255 shares and 30,255 shares, respectively, $1,000 per share liquidation value, net of discount		17,977			29,318
Common stock, $1 par value, authorized 15,000,000 shares; Issued 5,000,972 and 4,814,852 shares, respectively		5,001			4,815
Surplus		31,816			30,266
Retained earnings		39,118			40,354
Accumulated other comprehensive income, net of tax		1,825			1,340
Treasury stock; 161,858 shares, at cost		(3,517	)		(3,517	)
Total stockholders’ equity		92,220			102,576
Total liabilities and stockholders’ equity	$	1,181,606		$	1,171,161
See accompanying notes to the consolidated financial statements.

30

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

	Years Ended December 31,
(In thousands, except per share amounts)	2012		2011		2010
INTEREST INCOME
Interest and fees on loans	$	43,957	$	47,361	$	53,089
Interest on debt securities:
Taxable		4,100		4,864		4,214
Nontaxable		909		1,029		1,174
Interest on federal funds sold and securities purchased under agreements to resell		0		1		0
Interest on interest-bearing deposits		46		58		86
Dividends on other securities		102		156		176
Total interest income		49,114		53,469		58,739
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		1,146		1,645		2,171
Time deposit accounts $100,000 and over		1,111		1,663		2,485
Other time deposits		3,715		5,123		7,211
Interest on federal funds purchased and securities sold under agreements to repurchase		21		47		75
Interest on subordinated notes		1,381		1,301		1,526
Interest on Federal Home Loan Bank advances		531		1,074		2,285
Total interest expense		7,905		10,853		15,753
Net interest income		41,209		42,616		42,986
Provision for loan losses		8,900		11,523		15,255
Net interest income after provision for loan losses		32,309		31,093		27,731
NON-INTEREST INCOME
Service charges on deposit accounts		5,439		5,566		5,554
Trust department income		893		898		803
Gain on sale of mortgage loans, net		2,669		1,649		2,493
Gain on sale of investment securities		26		0		0
Other		699		1,087		1,631
Total non-interest income		9,726		9,200		10,481
NON-INTEREST EXPENSE
Salaries and employee benefits		19,165		17,982		17,899
Occupancy expense, net		2,598		2,701		2,532
Furniture and equipment expense		1,840		2,019		1,997
FDIC insurance assessment		993		1,107		1,651
Legal, examination, and professional fees		1,189		1,332		1,441
Advertising and promotion		1,083		1,103		1,256
Postage, printing, and supplies		1,144		1,158		1,201
Processing expense		3,593		3,193		3,353
Other real estate expense, net		2,937		2,736		9,804
Other		4,125		3,514		3,717
Total non-interest expense		38,667		36,845		44,851
Income (loss) before income taxes		3,368		3,448		(6,639	)
Income tax expense (benefit)		546		591		(3,087	)
Net income (loss)		2,822		2,857		(3,552	)
Preferred stock dividends		1,125		1,513		1,513
Accretion of discount on preferred stock		659		476		476
Net income (loss) available to common shareholders	$	1,038	$	868	$	(5,541	)
Basic earnings (loss) per share	$	0.21	$	0.18	$	(1.15	)
Diluted earnings (loss) per share	$	0.21	$	0.18	$	(1.15	)

See accompanying notes to the consolidated financial statements.

31

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

	Years Ended December 31,
(In thousands)	2012			2011			2010
Net income (loss)	$	2,822		$	2,857		$	(3,552	)
Other comprehensive income (loss), net of tax
Unrealized (loss) gain on investment securities available-for-sale, net of tax		(123	)		2,380			(389	)
Adjustment for gain on sales of investment securities, net of tax		(16	)		0			0
Defined benefit pension plans:
Net gain (loss) arising during the year, net of tax		547			(1,830	)		171
Amortization of prior service cost included in net periodic pension cost, net of tax		77			48			48
Total other comprehensive income (loss)		485			598			(170	)
Total comprehensive income (loss)	$	3,307		$	3,455		$	(3,722	)

See accompanying notes to the consolidated financial statements.

32

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

											Accumulated						Total
											Other						Stock -
	Preferred			Common				Retained			Comprehensive			Treasury			holders’
(In thousands)	Stock			Stock		Surplus		Earnings			Income			Stock			Equity
Balance, December 31, 2009	$	28,365		$	4,464	$	26,971	$	50,576		$	912		$	(3,517	)	$	107,771
Net loss		0			0		0		(3,552	)		0			0			(3,552	)
Other comprehensive income		0			0		0		0			(170	)		0			(170	)
Stock based compensation expense		0			0		87		0			0			0			87
Accretion of preferred stock discount		476			0		0		(476	)		0			0			0
Stock dividend		0			172		1,871		(2,043	)		0			0			0
Cash dividends declared, preferred stock		0			0		0		(1,513	)		0			0			(1,513	)
Cash dividends declared, common stock		0			0		0		(1,135	)		0			0			(1,135	)
Balance, December 31, 2010	$	28,841		$	4,636	$	28,929	$	41,857		$	742		$	(3,517	)	$	101,488
Net income		0			0		0		2,857			0			0			2,857
Other comprehensive income		0			0		0		0			598			0			598
Stock based compensation expense		0			0		58		0			0			0			58
Accretion of preferred stock discount		477			0		0		(477	)		0			0			0
Stock dividend		0			179		1,279		(1,458	)		0			0			0
Cash dividends declared, preferred stock		0			0		0		(1,513	)		0			0			(1,513	)
Cash dividends declared, common stock		0			0		0		(912	)		0			0			(912	)
Balance, December 31, 2011	$	29,318		$	4,815	$	30,266	$	40,354		$	1,340		$	(3,517	)	$	102,576
Cumulative effect of change in accounting principle		0			0		0		460			0			0			460
Balance, January 1, 2012	$	29,318		$	4,815	$	30,266	$	40,814		$	1,340		$	(3,517	)	$	103,036
Net income		0			0		0		2,822			0			0			2,822
Other comprehensive income		0			0		0		0			485			0			485
Stock based compensation expense		0			0		29		0			0			0			29
Accretion of preferred stock discount		659			0		0		(659	)		0			0			0
Redemption of 12,000 shares of preferred stock		(12,000	)		0		0		0			0			0			(12,000	)
Stock dividend		0			186		1,521		(1,707	)		0			0			0
Cash dividends declared, preferred stock		0			0		0		(1,203	)		0			0			(1,203	)
Cash dividends declared, common stock		0			0		0		(949	)		0			0			(949	)
Balance, December 31, 2012	$	17,977		$	5,001	$	31,816	$	39,118		$	1,825		$	(3,517	)	$	92,220

See accompanying notes to the consolidated financial statements.

33

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Years Ended December 31,
(In thousands)	2012			2011			2010
Cash flows from operating activities:
Net income (loss)	$	2,822		$	2,857		$	(3,552	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		8,900			11,523			15,255
Depreciation expense		1,858			1,940			1,964
Net amortization of investment securities, premiums, and discounts		1,161			837			698
Amortization of intangible assets		408			1,243			1,360
Stock based compensation expense		29			58			87
Change in fair value of mortgage servicing rights		1,331			0			0
Gain on sale of investment securities		(26	)		0			0
(Gain) loss on sales and dispositions of premises and equipment		(79	)		(13	)		60
(Gain) loss on sales and dispositions of other real estate owned and repossessions		(317	)		206			2,311
Provision for other real estate owned		713			1,252			6,158
Decrease in accrued interest receivable		151			393			892
Increase in cash surrender value—life insurance		(72	)		(62	)		(72	)
Decrease in other assets		949			252			1,203
(Increase) decrease in income tax receivable		(644	)		1,008			(1,328	)
Decrease in accrued interest payable		(145	)		(437	)		(946	)
Increase (decrease) in other liabilities		253			(104	)		30
Origination of mortgage loans for sale		(99,420	)		(73,272	)		(104,002	)
Proceeds from the sale of mortgage loans		99,797			74,983			106,548
Gain on sale of mortgage loans, net		(2,669	)		(1,649	)		(2,493	)
(Increase) decrease in net deferred tax asset		(214	)		462			(2,299	)
Other, net		89			(645	)		(453	)
Net cash provided by operating activities		14,875			20,832			21,456
Cash flows from investing activities:
Net (increase) decrease in loans		(26,499	)		32,298			53,926
Purchase of available-for-sale debt securities		(76,498	)		(122,871	)		(189,082	)
Proceeds from maturities of available-for-sale debt securities		42,735			36,923			114,899
Proceeds from calls of available-for-sale debt securities		45,170			54,185			46,795
Proceeds from sales of available-for-sale debt securities		790			0			0
Proceeds from sales of FHLB stock		460			1,757			1,004
Purchase of FHLB stock		0			0			(392	)
Purchases of premises and equipment		(1,375	)		(3,393	)		(549	)
Proceeds from sales of premises and equipment		272			47			34
Proceeds from sales of other real estate owned and repossessions		8,571			7,435			9,689
Net cash (used) provided by investing activities		(6,374	)		6,381			36,324
Cash flows from financing activities:
Net increase in demand deposits		33,084			21,438			2,732
Net increase in interest-bearing transaction accounts		21,103			5,461			24,854
Net decrease in time deposits		(21,136	)		(15,337	)		(37,246	)
Net decrease in federal funds purchased and securities sold under agreements to repurchase		(3,458	)		(5,552	)		(6,577	)
Proceeds from Federal Home Loan Bank advances		0			0			10,000
Repayment of Federal Home Loan Bank advances		(8,284	)		(38,576	)		(22,331	)
Redemption of 12,000 shares of preferred stock		(12,000	)		0			0
Cash dividends paid—preferred stock		(1,203	)		(1,513	)		(1,513	)
Cash dividends paid—common stock		(940	)		(904	)		(1,385	)
Net cash provided (used) by financing activities		7,166			(34,983	)		(31,466	)
Net increase (decrease) in cash and cash equivalents		15,667			(7,770	)		26,314
Cash and cash equivalents, beginning of year		43,210			50,980			24,666
Cash and cash equivalents, end of year	$	58,877		$	43,210		$	50,980

See accompanying notes to the consolidated financial statements.

34

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued)

	Years Ended December 31,
(In thousands)	2012		2011		2010
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	8,420	$	11,290	$	16,699
Income taxes	$	1,591	$	665	$	800
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans	$	16,869	$	10,903	$	23,677

See accompanying notes to the consolidated financial statements.

35

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(1) Summary of Significant Accounting Policies

Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), 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 accompanying consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

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 that the Company has the intent and ability to hold for the foreseeable future or maturity are held for investment at their stated 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. Loans that are contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection. 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 on a cash basis. 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 TDRs in the impaired and non-performing asset totals. TDRs are measured for impairment loss by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows.

36

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

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 market. These long-term, fixed rate loans are typically classified as held for sale upon origination based on management’s intent to sell. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. At December 31, 2012 there were $2,292,000 mortgage loans that were held for sale in comparison to no loans held for sale at December 31, 2011.

Mortgage loan servicing fees earned on loans sold are reported as other noninterest 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 Company maintains an allowance for loan losses to absorb probable loan losses in the Company’s loan portfolio. 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. Provisions for loan losses are charged to income and credited to the allowance in an amount necessary to maintain an appropriate allowance given the risks identified in the portfolio. Once the fair value for a collateral dependent loan has been determined, any impaired amount is typically charged off as a confirmed loss unless the loan has other income streams to support repayment. For impaired loans individually evaluated for impairment, which have other income streams to support repayment, a specific reserve is established for the amount determined to be impaired. The allowance for loan losses consists of a specific reserve component for loans that are individually evaluated for impairment and an incurred loss component, or general reserves for loans that are collectively evaluated for impairment based on assigned risk ratings and historical loan loss experience for each loan type. The allowance is based upon management’s estimates of probable losses inherent in the loan portfolio.

In determining the allowance and the related provision for loan losses, the Company establishes valuation allowances based upon probable losses identified during the review of impaired loans. Management follows the guidance provided in 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, to determine specific reserves as further discussed below.

Loans not individually evaluated are aggregated based on similar risk characteristics. Historical loss rates for each risk group, which is updated quarterly, are quantified using all recorded loan charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent three year economic environment. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. The Company’s methodology includes factors that allow management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

37

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

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.

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 that 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 (loss), net of taxes, as 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 (loss) net of taxes.

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 is recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings based on the specific identification method for determining the cost of securities sold.

Capital Stock of the Federal Home Loan Bank

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

Premises and Equipment

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

38

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Intangible Assets

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50 Accounting for Servicing Financial Assets. Consistent with ASC 860-50-35-3d, an entity may make an irrevocable decision to subsequently measure a class of servicing assets and servicing liabilities at fair value at the beginning of any fiscal year. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, net of tax in the amount of $281,868, which was recorded as an increase to beginning retained earnings, as further described in Note 6 to the consolidated financial statements. As such, effective January 1, 2012, the change in the fair value of mortgage servicing rights is recognized in earnings in the period for which the change occurs. The newly adopted accounting principle is preferable in the circumstances because the fair value measurement method will produce financial information and results more directly aligned with the performance of mortgage servicing rights.

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. During the years ended December 31, 2011 and 2010, mortgage servicing rights (MSRs) were 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.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral comprises 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 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.

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.

39

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

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 the 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 more likely than not. In addition, the Company is subject to the continuous examination of its 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. At December 31, 2010, total accrued interest was $31,000 and total interest expense recognized for the year ended December 31, 2010 was $24,000. At December 31, 2011, the Company released $28,000 of interest accrued related to the release of $221,000 of uncertain tax provisions, and as of December 31, 2012, the Company had not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions.

Trust Department

Property held by the Bank in a 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 short-term federal funds sold and securities sold or purchased under agreements to resell, interest earning deposits with banks, cash, and due from banks with original maturities of three months or less.

Stock-Based Compensation

The Company’s stock-based employee compensation plan is described in Note 11, 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.

40

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

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 comprehensive income (loss).

Reclassifications

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

The following represents significant new accounting principles adopted in 2012:

Repurchase Agreements In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-03, Reconsideration of Effective Control for Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The provisions of ASU No. 2011-03 modify the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The Company adopted the provisions of ASU No. 2011-03 prospectively for transactions or modifications of existing transactions that occurred on or after January 1, 2012. The Company accounted for all of its repurchase agreements as collateralized financing arrangements prior to the adoption of ASU No. 2011-03 and the adoption had no impact on the Company’s consolidated financial statements.

Fair Value Measurements In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs), to substantially converge the guidance in U.S. GAAP and IFRS on fair value measurements and disclosures. The provisions of ASU No. 2011-04 result in a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and IFRS. The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The Company adopted the provisions of ASU No. 2011-04 effective January 1, 2012. The fair value measurement provisions of ASU No. 2011-04 had no impact on the Company’s consolidated financial statements. See Notes 11 and 12 to the consolidated financial statements for the enhanced disclosures required by ASU No. 2011-04.

41

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Other Comprehensive Income In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements. The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Under either method, entities are required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. ASU No. 2011-05 also eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is effective for periods beginning January 1, 2012 and requires retrospective application. ASU No. 2011-05 was effective for the Company’s interim reporting period beginning on or after January 1, 2012. The Company has chosen to present net income and other comprehensive income in two consecutive statements in the accompanying consolidated financial statements.

Stock Dividend On July 1, 2012, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2012. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

(2) Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at December 31, 2012 and 2011 is as follows:

(in thousands)	2012		2011
Commercial, financial, and agricultural	$	130,040	$	128,555
Real estate construction—residential		22,177		30,201
Real estate construction—commercial		43,486		47,697
Real estate mortgage—residential		221,223		203,454
Real estate mortgage—commercial		405,092		402,960
Installment and other consumer		24,966		30,063
Total loans	$	846,984	$	842,930

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. At December 31, 2012, loans with a carrying value of $457,000,000 were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

42

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following is a summary of loans to directors and executive officers or to entities in which such individuals had a beneficial interest of the Company, are summarized as follows:

(in thousands)
Balance at December 31, 2011	$	3,161
New loans		9,791
Amounts collected		(1,937	)
Balance at December 31, 2012	$	11,015

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.

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Allowance for loan losses

The following is a summary of the allowance for loan losses for the years ended December 31, 2012, 2011, and 2010:

(in thousands)	Commercial, Financial, & Agricultural			Real Estate Construction - Residential			Real Estate Construction - Commercial			Real Estate Mortgage - Residential			Real Estate Mortgage - Commercial			Installment Loans to Individuals			Un - allocated			Total
Balance at December 31, 2009	$	2,773		$	348		$	1,740		$	3,488		$	4,693		$	380		$	1,375		$	14,797
Additions:
Provision for loan losses		1,908			2,622			4,133			4,740			2,577			32			(758	)		15,254
Deductions:
Loans charged off		1,903			933			4,556			4,534			3,841			422			0			16,189
Less recoveries on loans		(153	)		(30	)		(22	)		(228	)		(29	)		(241	)		0			(703	)
Net loans charged off		1,750			903			4,534			4,306			3,812			181			0			15,486
Balance at December 31, 2010	$	2,931		$	2,067		$	1,339		$	3,922		$	3,458		$	231		$	617		$	14,565
Additions:
Provision for loan losses		837			914			485			1,104			8,593			204			(614	)		11,523
Deductions:
Loans charged off		2,157			1,858			512			1,883			6,420			376			0			13,206
Less recoveries on loans		(193	)		(65	)		(250	)		(108	)		(103	)		(208	)		0			(927	)
Net loans charged off		1,964			1,793			262			1,775			6,317			168			0			12,279
Balance at December 31, 2011	$	1,804		$	1,188		$	1,562		$	3,251		$	5,734		$	267		$	3		$	13,809
Additions:
Provision for loan losses		1,732			(523	)		126			955			6,318			293			(1	)		8,900
Deductions:
Loans charged off		1,760			0			0			977			5,466			586			0			8,789
Less recoveries on loans		(161	)		(67	)		(23	)		(158	)		(248	)		(265	)		0			(922	)
Net loans charged off		1,599			(67	)		(23	)		819			5,218			321			0			7,867
Balance at December 31, 2012	$	1,937		$	732		$	1,711		$	3,387		$	6,834		$	239		$	2		$	14,842

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following table provides the balance in the allowance for loan losses at December 31, 2012 and 2011, 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.

(in thousands)	Commercial, Financial,  and Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage  - Residential		Real Estate Mortgage - Commercial		Installment Loans to Individuals		Unallocated		Total
December 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	213	$	125	$	542	$	1,069	$	2,071	$	0	$	0	$	4,020
Collectively evaluated for impairment		1,724		607		1,169		2,318		4,763		239		2		10,822
Total	$	1,937	$	732	$	1,711	$	3,387	$	6,834	$	239	$	2	$	14,842
Loans outstanding:
Individually evaluated for impairment	$	4,157	$	2,496	$	7,762	$	5,771	$	18,959	$	44	$	0	$	39,189
Collectively evaluated for impairment		125,883		19,681		35,724		215,452		386,133		24,922		0		807,795
Total	$	130,040	$	22,177	$	43,486	$	221,223	$	405,092	$	24,966	$	0	$	846,984
December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	239	$	167	$	380	$	653	$	2,309	$	0	$	0	$	3,748
Collectively evaluated for impairment		1,565		1,021		1,182		2,598		3,425		267		3		10,061
Total	$	1,804	$	1,188	$	1,562	$	3,251	$	5,734	$	267	$	3	$	13,809
Loans outstanding:
Individually evaluated for impairment	$	4,428	$	1,147	$	7,867	$	6,569	$	33,440	$	0	$	0	$	53,451
Collectively evaluated for impairment		124,127		29,054		39,830		196,885		369,520		30,063		0		789,479
Total	$	128,555	$	30,201	$	47,697	$	203,454	$	402,960	$	30,063	$	0	$	842,930

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.

Impaired loans

Impaired loans totaled $39,363,000 and $53,620,000 at December 31, 2012 and 2011 respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings.

The categories of impaired loans at December 31, 2012 and 2011 are as follows:

(in thousands)	2012		2011
Non-accrual loans	$	31,081	$	46,403
Troubled debt restructurings continuing to accrue interest		8,282		7,217
Total impaired loans	$	39,363	$	53,620

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following tables provide additional information about impaired loans at December 31, 2012 and 2011, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided:

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
At December 31, 2012
With no related allowance recorded:
Commercial, financial and agricultural	$	3,272	$	4,009	$	0
Real estate—construction residential		2,307		2,339		0
Real estate—construction commercial		1,879		2,102		0
Real estate—residential		1,939		2,393		0
Real estate—commercial		5,162		5,565		0
Consumer		174		186		0
Total	$	14,733	$	16,594	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	885	$	898	$	213
Real estate—construction residential		189		189		125
Real estate—construction commercial		5,883		6,011		542
Real estate—residential		3,832		3,999		1,069
Real estate—commercial		13,797		14,167		2,071
Consumer		44		44		0
Total	$	24,630	$	25,308	$	4,020
Total impaired loans	$	39,363	$	41,902	$	4,020
At December 31, 2011
With no related allowance recorded:
Commercial, financial and agricultural	$	3,546	$	3,625	$	0
Real estate—construction residential		584		788		0
Real estate—construction commercial		1,459		1,756		0
Real estate—residential		2,315		2,654		0
Real estate—commercial		15,151		21,190		0
Consumer		168		177		0
Total	$	23,223	$	30,190	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	882	$	904	$	239
Real estate—construction residential		563		563		167
Real estate—construction commercial		6,409		6,448		380
Real estate—residential		4,254		4,265		653
Real estate—commercial		18,289		18,780		2,309
Total	$	30,397	$	30,960	$	3,748
Total impaired loans	$	53,620	$	61,150	$	3,748

46

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2012 and 2011:

	2012				2011
(in thousands)	Average Recorded Investment		Interest Recognized For the Period Ended		Average Recorded Investment		Interest Recognized For the Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	4,157	$	93	$	3,510	$	52
Real estate—construction residential		1,137		7		1,273		0
Real estate—construction commercial		1,692		0		3,568		0
Real estate—residential		3,169		50		3,596		26
Real estate—commercial		12,198		124		18,270		73
Consumer		170		1		190		4
Total	$	22,523	$	275	$	30,407	$	155
With an allowance recorded:
Commercial, financial and agricultural	$	776	$	29	$	655	$	17
Real estate—construction residential		189		0		47		0
Real estate—construction commercial		6,087		0		5,805		0
Real estate—residential		2,604		11		3,203		113
Real estate—commercial		11,271		99		12,724		0
Consumer		2		0		0		0
Total	$	20,929	$	139	$	22,434	$	130
Total impaired loans	$	43,452	$	414	$	52,841	$	285

The specific reserve component of the Company’s allowance for loan losses at December 31, 2012 and 2011 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 $275,000 and $155,000, for the years ended December 31, 2012 and 2011, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported. Contractual interest due on loans in non-accrual status was $1,198,000 at December 31, 2012 compared to $1,952,000 at December 31, 2011. Interest income recognized on loans in non-accrual status was $11,000 for the year ended December 31, 2011. During the year ended December 31, 2012 there was no significant interest recognized on loans in non-accrual status.

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due.

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following table provides aging information for the Company’s past due and non-accrual loans at December 31, 2012 and 2011.

(in thousands)	Current or Less Than 30 Days Past Due		30-89 Days Past Due		90 Days Past Due And Still Accruing		Non-Accrual		Total
December 31, 2012
Commercial, Financial, and Agricultural	$	126,884	$	1,821	$	0	$	1,335	$	130,040
Real Estate Construction—Residential		19,390		290		0		2,497		22,177
Real Estate Construction—Commercial		35,117		607		0		7,762		43,486
Real Estate Mortgage—Residential		213,694		2,199		0		5,330		221,223
Real Estate Mortgage—Commercial		390,032		1,122		0		13,938		405,092
Installment and Other Consumer		24,221		520		6		219		24,966
Total	$	809,338	$	6,559	$	6	$	31,081	$	846,984
December 31, 2011
Commercial, Financial, and Agricultural	$	126,244	$	243	$	0	$	2,068	$	128,555
Real Estate Construction—Residential		29,054		0		0		1,147		30,201
Real Estate Construction—Commercial		39,822		0		8		7,867		47,697
Real Estate Mortgage—Residential		195,779		3,513		9		4,153		203,454
Real Estate Mortgage—Commercial		371,000		924		36		31,000		402,960
Installment and Other Consumer		29,282		612		1		168		30,063
Total	$	791,181	$	5,292	$	54	$	46,403	$	842,930

Credit Quality

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. Loans are placed on watch status when (1) one or more weaknesses that 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 by 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. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. 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) payment of 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 collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.

48

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage  - Residential		Real Estate Mortgage - Commercial		Installment and other Consumer		Total
At December 31, 2012
Watch	$	14,814	$	4,580	$	6,459	$	26,063	$	29,753	$	672	$	82,341
Substandard		6,485		396		2,035		5,472		11,027		423		25,838
Non-accrual		1,335		2,497		7,762		5,330		13,938		219		31,081
Total	$	22,634	$	7,473	$	16,256	$	36,865	$	54,718	$	1,314	$	139,260
At December 31, 2011
Watch	$	22,206	$	9,644	$	9,338	$	13,231	$	24,392	$	557	$	79,368
Substandard		4,142		842		1,189		4,269		8,004		444		18,890
Non-accrual		2,068		1,147		7,867		4,153		31,000		168		46,403
Total	$	28,416	$	11,633	$	18,394	$	21,653	$	63,396	$	1,169	$	144,661

Troubled Debt Restructurings

At December 31, 2012, loans classified as troubled debt restructurings (TDRs) totaled $22,363,000, of which $14,081,000 was on non-accrual status and $8,282,000 was on accrual status. At December 31, 2011, loans classified as TDRs totaled $32,165,000, of which $24,948,000 was on non-accrual status and $7,217,000 was on accrual status. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $1,544,000 and $1,522,000 were allocated to the allowance for loan losses at December 31, 2012 and 2011, respectively.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2012 and 2011:

	2012						2011
	Recorded Investment (1)						Recorded Investment (1)
(in thousands)	Number of Contracts		Pre - Modification		Post - Modification		Number of Contracts		Pre - Modification		Post - Modification
Troubled Debt Restructurings
Commercial, financial and agricultural		4	$	637	$	613		9	$	3,500	$	3,486
Real estate construction—commercial		1		43		41		8		6,616		6,227
Real estate mortgage—residential		5		657		657		7		1,157		1,010
Real estate mortgage—commercial		2		645		644		9		9,553		9,215
Consumer		2		44		44		0		0		0
Total		14	$	2,026	$	1,999		33	$	20,826	$	19,938

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon during the period ended are not reported.

The Company’s portfolio of loans classified as TDRs include concessions such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, charged-off, or the collateral for the loan is foreclosed and sold. The Company considers a loan in TDR status in default when the borrower’s payment according to the modified terms is at least 90 days past due or has defaulted due to expiration of the loan’s maturity date. During the year ended December 31, 2012, fourteen loans meeting the TDR criteria were modified. There was one loan modified as a TDR that defaulted during the year ended December 31, 2012, and within twelve months of their modification date. No loans modified as a TDR during the year ended December 31, 2011 defaulted.

49

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(3) Real Estate and Other Assets Acquired in Settlement of Loans

(in thousands)	2012			2011
Commercial	$	329		$	17
Real estate construction—residential		112			307
Real estate construction—commercial		13,392			13,650
Real estate mortgage—residential		1,227			2,121
Real estate mortgage—commercial		14,201			6,623
Repossessed assets		468			279
Total	$	29,729		$	22,997
Less valuation allowance for other real estate owned		(6,137	)		(6,977	)
Total other real estate owned and repossessed assets	$	23,592		$	16,020

Balance at December 31, 2010	$	20,168
Additions		10,903
Proceeds from sales		(7,435	)
Charge-offs against the valuation allowance for other real estate owned		(433	)
Net gain on sales		(206	)
Balance at December 31, 2011	$	22,997
Additions		16,869
Proceeds from sales		(8,571	)
Charge-offs against the valuation allowance for other real estate owned, net		(1,883	)
Net gain on sales		317
Total other real estate owned and repossessed assets	$	29,729
Less valuation allowance for other real estate owned		(6,137	)
Balance at December 31, 2012	$	23,592

During the years ended December 31, 2012 and 2011, net charge-offs against the allowance for loan losses at the time of foreclosure were approximately $6,705,000 and $8,248,000, respectively.

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2012, 2011 and 2010, respectively, is summarized as follows:

(in thousands)	2012			2011			2010
Balance, beginning of year	$	6,977		$	6,158		$	0
Provision for other real estate owned		713			1,252			6,158
Charge-offs		(1,553	)		(433	)		0
Balance, end of year	$	6,137		$	6,977		$	6,158

The significant change in the expense provision from the years ended 2010 to 2012, primarily related to one foreclosed commercial real estate construction property. During the year ended December 31, 2010, the Company recorded a $5,663,000 provision and related valuation allowance related to this property reflecting its current appraised value. During the year ended December 31, 2012, real estate values improved and comparable sales occurred which led to an increased current appraised value that allowed the Company to recover $3,908,000 of this valuation allowance. This recovery partially offset current year expense provisions for other real estate owned of $4,621,000, primarily attributable to eight properties where significant write-downs were required to reflect current appraises values. These amounts are reflected in other real estate expense in the consolidated statements of operations.

(4) Investment Securities

A summary of investment securities by major category, at fair value, consisted of the following at December 31, 2012 and 2011, respectively.

(in thousands)	2012		2011
U.S. Treasury	$	2,030	$	2,054
Government sponsored enterprises		55,180		70,314
Asset-backed securities		107,872		107,329
Obligations of states and political subdivisions		35,164		34,109
Total available for sale securities	$	200,246	$	213,806

All of the 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. The Company does not invest in subprime originated mortgage-backed or collateralized debt obligation instruments.

Investment securities that are classified as restricted equity securities primarily consist of Federal Home Loan Bank stock and the Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of $3,925,000 and $4,385,000 as of December 31, 2012 and 2011, respectively.

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2012 and 2011 are as follows:

(in thousands)	Amortized cost			Gross unrealized gains		Gross unrealized losses		Fair value
December 31, 2012
U.S. Treasury	$	2,000		$	30	$	0	$	2,030
Government sponsored enterprises		54,327			853		0		55,180
Asset-backed securities		104,607			3,276		11		107,872
Obligations of states and political subdivisions		33,959			1,222		17		35,164
Total available for sale securities	$	194,893		$	5,381	$	28	$	200,246
Weighted average yield at end of period		2.54	%
December 31, 2011
U.S. Treasury	$	2,000		$	54	$	0	$	2,054
Government sponsored enterprises		69,703			629		18		70,314
Asset-backed securities		103,806			3,547		24		107,329
Obligations of states and political subdivisions		32,716			1,394		1		34,109
Total available for sale securities	$	208,225		$	5,624	$	43	$	213,806
Weighted average yield at end of period		2.89	%

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2012, 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
(in thousands)	cost		value
Due in one year or less	$	3,919	$	3,951
Due after one year through five years		63,985		65,154
Due after five years through ten years		20,478		21,340
Due after ten years		1,904		1,929
Total		90,286		92,374
Asset-backed securities		104,607		107,872
Total available for sale securities	$	194,893	$	200,246

Debt securities with carrying values aggregating approximately $146,442,000 and $172,447,000 at December 31, 2012 and 2011, 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 the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

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, 2012 and 2011, were as follows:

	Less than 12 months					12 months or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses		Value		Losses
At December 31, 2012
Government sponsored enterprises	$	1,044	$	0		$	0	$	0	$	1,044	$	0
Asset-backed securities		4,729		(11	)		0		0		4,729		(11	)
Obligations of states and political subdivisions		2,114		(17	)		150		0		2,264		(17	)
Total	$	7,887	$	(28	)	$	150	$	0	$	8,037	$	(28	)
(in thousands)
At December 31, 2011
Government sponsored enterprises	$	13,250	$	(18	)	$	0	$	0	$	13,250	$	(18	)
Asset-backed securities		4,591		(24	)		0		0		4,591		(24	)
Obligations of states and political subdivisions		229		(1	)		150		0		379		(1	)
Total	$	18,070	$	(43	)	$	150	$	0	$	18,220	$	(43	)

The total available for sale portfolio consisted of approximately 380 securities at December 31, 2012. The portfolio included 14 securities, having an aggregate fair value of $8,037,000 that were in a loss position at December 31, 2012. Securities identified as temporarily impaired which have been in a loss position for 12 months or longer totaled $150,000 at fair value. The $98 unrealized loss included in other comprehensive income at December 31, 2012 was caused by interest rate fluctuations. The total available for sale portfolio consisted of approximately 365 securities at December 31, 2011. The portfolio included 20 securities, having an aggregate fair value of $18,220,000 that were in a loss position at December 31, 2011. Securities identified as temporarily impaired which have been in a loss position for 12 months or longer totaled $150,000 at fair value. The $294 unrealized loss included in other comprehensive income at December 31, 2011 was caused by interest rate fluctuations. 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 at December 31, 2012 and 2011, respectively.

The table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings as follows:

(in thousands)	2012		2011		2010
Proceeds from sales of available for sales securities	$	790	$	0	$	0
Gains realized on sales		26		0		0
Losses realized on sales		0		0		0
Other-than-temporary impairment recognized		0		0		0
Investment securities gains	$	26	$	0	$	0

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(5) Premises and Equipment

A summary of premises and equipment at December 31, 2012 and 2011 is as follows:

(in thousands)	2012		2011
Land and land improvements	$	10,073	$	10,121
Buildings and improvements		34,174		33,652
Furniture and equipment		12,250		12,013
Construction in progress		155		277
Total		56,594		56,063
Less accumulated depreciation		19,631		18,110
Premises and equipment, net	$	37,021	$	37,953

Depreciation expense for the years ended December 31, 2012, 2011, and 2010 is as follows:

(in thousands)	2012		2011		2010
Depreciation expense	$	1,858	$	1,940	$	1,964

(6) Intangible Assets

Core Deposit Intangible Asset

A summary of amortizable intangible assets at December 31, 2012 and 2011 is as follows:

	2012							2011
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
(in thousands)	Amount		Amortization			Amount		Amount		Amortization			Amount
Core deposit intangible	$	4,795	$	(4,660	)	$	135	$	4,795	$	(4,252	)	$	543

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, 2012 for the next five years:

(in thousands)	Core Deposit Intangible Asset
2013	$	135
2014		0
2015		0
2016		0
2017		0

54

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Changes in the net carrying amount of core deposit intangible assets for the years ended December 31, 2012, 2011, and 2010 is as follows:

(in thousands)	2012			2011			2010
Balance at beginning of year	$	543		$	978		$	1,504
Additions		0			0			0
Amortization		(408	)		(435	)		(526	)
Balance at end of year	$	135		$	543		$	978

Mortgage Servicing Rights

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights is recognized in earnings in noninterest income in the period in which the change occurs and no amortization will be recognized on mortgage servicing rights going forward. For the years ended December 31, 2011 and 2010, MSRs were amortized over the shorter of 7 years or the life of the loan and periodically reviewed for impairment. At December 31, 2011 and 2010, no temporary impairment was recognized.

At December 31, 2012 and 2011, respectively, the Company serviced mortgage loans for others totaling $310,587,000 and $307,016,000, respectively. Mortgage loan servicing fees earned on loans sold were $878,000, $863,000, and $927,000 for the years ended December 31, 2012, 2011, and 2010, respectively, and are reported as other noninterest income.

The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2012, 2011, and 2010 as follows:

(in thousands)	2012			2011			2010
Balance at beginning of year	$	2,308		$	2,356		$	2,021
Re-measurement to fair value upon election to measure servicing rights at fair value		742			0			0
Originated mortgage servicing rights		830			760			1,169
Changes in fair value:
Due to change in model inputs and assumptions (1)		122			0			0
Other changes in fair value (2)		(1,453	)		0			0
Amortization		0			(808	)		(834	)
Balance at end of year	$	2,549		$	2,308		$	2,356

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

(2) Other changes in fair value reflect changes due to customer payments and passage of time. This also includes a one time adjustment of a $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years. If the aforementioned was corrected as of December 31, 2011, the balance at the beginning of the period would have been $1,770,000.

55

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following key data and assumptions were used in estimating the fair value of the Company’s mortgage servicing rights as of the years ended December 31, 2012 and 2011:

	2012			2011
Weighted-Average Constant Prepayment Rate		18.60	%		20.86	%
Weighted-Average Note Rate		4.22	%		4.64	%
Weighted-Average Discount Rate		7.99	%		7.99	%
Weighted-Average Contractual Life (in years)		20.00			23.00

(7) Deposits

The scheduled maturities of total time deposits as of the years ended December 31, 2012 and 2011 are as follows:

(in thousands)	2012		2011
Due within:
One year	$	280,477	$	266,516
Two years		65,220		93,209
Three years		23,482		34,730
Four years		11,984		8,811
Five years		12,139		11,172
Thereafter		0		0
Total	$	393,302	$	414,438

At December 31, 2012 and 2011, the Company had certificates and other time deposits in denominations of $100,000 or more which mature as follows:

(in thousands)	2012		2011
Due within:
Three months or less	$	37,166	$	52,274
Over three months through six months		18,690		16,017
Over six months through twelve months		33,265		32,291
Over twelve months		31,656		38,922
Total	$	120,777	$	139,504

The Federal Reserve Bank required the Bank to maintain cash or balances of $1,367,000 and $1,335,000 at December 31, 2012 and 2011, respectively, to satisfy reserve requirements.

Average compensating balances held at correspondent banks were $1,595,000 and $489,000 at December 31, 2012 and 2011, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks.

56

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(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:

(in thousands)	Year End Weighted Rate			Average Weighted Rate			Average Balance Outstanding		Maximum Outstanding at any Month End		Balance at December 31,
2012
Federal funds purchased		0.0	%		0.6	%	$	412	$	345	$	0
Short-term repurchase agreements		0.1			0.1			22,867		24,734		21,058
Total											$	21,058
2011
Federal funds purchased		0.0	%		0.3	%	$	2	$	0	$	0
Short-term repurchase agreements		0.1			0.2			27,634		30,227		24,516
Total											$	24,516

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 Bank’s investment portfolio.

Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $15,000,000 on an unsecured basis and $5,135,000 on a secured basis at December 31, 2012.

Subordinated Notes and Other Borrowings

Other borrowings of the Company consisted of the following:

		2012							2011
(in thousands)	Borrower	Maturity Date		Year End Balance		Year End Weighted Rate			Year End Balance		Year End Weighted Rate
FHLB advances	The Bank		2013	$	10,126		1.5	%	$	8,284		1.6	%
			2014		0		na			10,126		1.5	%
			2015		0		na			0		na
			2016		0		na			0		na
			2017-18		10,000		2.5	%		10,000		2.5	%
Total Bank				$	20,126				$	28,410
Subordinated notes	The Company		2034	$	25,774		3.0	%	$	25,774		3.3	%
			2035		23,712		2.1	%		23,712		2.4	%
Total Company				$	49,486				$	49,486

The Bank 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 FHLB 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 $20,126,000 includes $10,000,000 which the FHLB may call for early payment within the next year. Based upon the collateral pledged to the FHLB at December 31, 2012, the Bank could borrow up to an additional $269,958,000 under the agreement.

57

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

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 (2.14% at December 31, 2012). 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, 2012). 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.

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, 2012 and 2011 was $49,486,000, respectively. 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 tax expense (benefit) for the years ended December 31, 2012, 2011, and 2010 are as follows:

(in thousands)	2012			2011			2010
Current:
Federal	$	651		$	374		$	(837	)
State		156			(214	)		80
Total current		807			160			(757	)
Deferred:
Federal		(197	)		386			(2,091	)
State		(64	)		45			(239	)
Total deferred		(261	)		431			(2,330	)
Total income tax expense (benefit)	$	546		$	591		$	(3,087	)

58

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Applicable income tax (benefit) expense for financial reporting purposes differs from the amount computed by applying the statutory Federal income tax rate for the reasons noted in the table for the years ended December 31, 2012, 2011, and 2010 are as follows:

	2012						2011						2010
(in thousands)	Amount			%			Amount			%			Amount			%
Income (loss) before provision for income tax expense (benefit)	$	3,368					$	3,448					$	(6,639	)
Tax at statutory Federal income tax rate	$	1,145			34.00	%	$	1,172			34.00	%	$	(2,257	)		34.00	%
Tax-exempt income		(380	)		(11.27	)		(404	)		(11.72	)		(445	)		6.70
State income tax, net of Federal tax benefit		61			1.81			(111	)		(3.23	)		(105	)		1.58
Release of prior year over accrual		(371	)		(11.01	)		0			0.00			0			0.00
Other, net		91			2.70			(66	)		(1.91	)		(280	)		4.22
Provision for income tax expense (benefit)	$	546			16.23	%	$	591			17.14	%	$	(3,087	)		46.50	%

The components of deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are as follows:

(in thousands)	2012		2011
Deferred tax assets:
Allowance for loan losses	$	5,640	$	5,248
Impairment of other real estate owned		2,774		2,734
Goodwill		2,483		2,831
Deferred taxes on pension		997		1,380
Nonaccrual loan interest		940		1,033
Core deposit intangible		904		883
Pension		450		276
Deferred compensation		36		27
Other		449		549
Total deferred tax assets	$	14,673	$	14,961
Deferred tax liabilities:
Available-for-sale securities	$	2,088	$	2,177
Premises and equipment		958		960
Mortgage servicing rights		908		791
Assets held for sale		110		109
FHLB stock dividend		100		100
Other		1		2
Total deferred tax liabilities		4,165		4,139
Net deferred tax asset	$	10,508	$	10,822

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, 2012 and, therefore, did not establish a valuation reserve.

59

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

At December 31, 2012, 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. As a result of the lapse of the statue of limitations for the 2007 tax year, the Company recognized $340,351 of gross unrecognized tax benefits and $30,969 of accrued interest. This resulted in a decrease in the effective tax rate for the year ended December 31, 2011 compared to December 31, 2010. As of December 31, 2012 and 2011, respectively, the Company did not have any uncertain tax provisions.

A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:

	2012		2011			2010
Unrecognized tax benefits as of January 1,	$	0	$	340,351		$	562,076
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during prior years		0		0			0
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during year		0		0			0
The amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities		0		0			0
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations		0		(340,351	)		(221,725	)
Unrecognized tax benefits as of December 31,	$	0	$	0		$	340,351

(10) Employee Benefit Plans

Employee benefits charged to operating expenses are summarized in the table below for the years ended December 31, as indicated.

(in thousands)	2012		2011		2010
Payroll taxes	$	1,127	$	1,098	$	1,105
Medical plans		1,772		1,676		1,545
401k match		298		291		319
Pension plan		1,224		907		864
Profit-sharing		58		0		0
Other		318		250		162
Total employee benefits	$	4,797	$	4,222	$	3,995

The Company’s profit-sharing plan includes 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 periods shown. In addition, employees were able to make additional tax-deferred contributions.

60

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Pension

The Company 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 $766,000 of contributions to the defined benefit plan through April 1, 2013, of which $238,000 relates to the 2011 plan year and $528,000 relates to the 2012 plan year. The minimum required contribution for the 2013 plan year is estimated to be $665,000. The Company has not determined whether it will make any contributions other than the minimum required funding contribution for 2013.

Obligations and Funded Status at December 31

(in thousands)	2012			2011
Change in projected benefit obligation:
Balance, January 1	$	14,217		$	10,655
Service cost		1,168			931
Interest cost		667			604
Actuarial (gain) loss		(458	)		2,240
Benefits paid		(252	)		(213	)
Balance, December 31	$	15,342		$	14,217
Change in plan assets:
Fair value, January 1	$	10,034		$	9,296
Actual gain (loss) return on plan assets		1,193			(54	)
Employer contribution		766			1,005
Expenses paid		(34	)		0
Benefits paid		(252	)		(213	)
Fair value, December 31	$	11,707		$	10,034
Funded status at end of year	$	(3,635	)	$	(4,183	)
Accumulated benefit obligation	$	12,564		$	10,762

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, as indicated:

(in thousands)	2012			2011			2010
Service cost—benefits earned during the year	$	1,168		$	931		$	844
Interest costs on projected benefit obligations		668			604			556
Expected return on plan assets		(776	)		(706	)		(614	)
Expected administrative expenses		40			0			0
Amortization of prior service cost		78			78			78
Amortization of unrecognized net loss		46			0			0
Net periodic pension expense	$	1,224		$	907		$	864

61

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at December 31, 2012 and 2011 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

(in thousands)	2012			2011
Prior service costs	$	(600	)	$	(679	)
Net accumulated actuarial net loss		(1,849	)		(2,777	)
Accumulated other comprehensive loss		(2,449	)		(3,456	)
Net periodic benefit cost in excess of cumulative employer contributions		(1,185	)		(727	)
Net amount recognized at December 31, balance sheet	$	(3,634	)	$	(4,183	)
Net gain (loss) arising during period	$	881		$	(3,001	)
Prior service cost amortization		79			79
Amortization of net actuarial loss		46			0
Total recognized in other comprehensive income (loss)	$	1,006		$	(2,922	)
Total recognized in net periodic pension cost and other comprehensive income (loss)	$	218		$	3,829

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 2013 is $79,000. During 2013, $30,000 is the estimated amount of actuarial loss subject to amortization into net periodic pension cost.

Assumptions utilized to determine benefit obligations as of December 31, 2012, 2011 and 2010 and to determine pension expense for the years then ended are as follows:

	2012			2011			2010
Determination of benefit obligation at year end:
Discount rate		4.25	%		4.75	%		5.75	%
Annual rate of compensation increase		3.61	%		4.50	%		4.50	%
Determination of pension expense for year ended:
Discount rate for the service cost		4.75	%		5.75	%		5.75	%
Annual rate of compensation increase		3.61	%		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 2012 pension expense was 7.0%. 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: 11.4% in 2012, 0.1% in 2011, 12.4% in 2010, 22.0% in 2009, and (32.6)% in 2008. 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 decrease in discount rates used in the actuarial calculation of plan income, the Company expects to incur $1,144,000 of expense in 2013 compared to $1,224,000 in 2012.

62

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

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, 2012 and 2011 by asset category are as follows:

	Fair Value Measurements
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Cash equivalents	$	485	$	485	$	0	$	0
Equity securities:
U.S. large-cap (a)		4,335		4,335		0		0
U.S. mid-cap (b)		575		575		0		0
U.S. small-cap (c)		635		635		0		0
International (d)		1,670		1,670		0		0
Real estate (e)		395		395		0		0
Commodities (f)		370		370		0		0
Fixed income securities:
U.S. gov’t agency obligations (g)		2,726		0		2,726		0
Corporate investment grade (g)		416		0		416		0
Corporate non-investment grade (g)		100		0		100		0
Total	$	11,707	$	8,465	$	3,242	$	0
December 31, 2011
Cash equivalents	$	1,791	$	1,791	$	0	$	0
Equity securities:
U.S. large-cap (a)		3,821		3,821		0		0
U.S. mid-cap (b)		502		502		0		0
U.S. small-cap (c)		595		595		0		0
International (d)		1,278		1,278		0		0
Real estate (e)		203		203		0		0
Commodities (f)		198		198		0		0
Fixed income securities:
U.S. gov’t agency obligations (g)		841		0		841		0
Corporate investment grade (g)		653		0		653		0
Corporate non-investment grade (g)		152		0		152		0
Total	$	10,034	$	8,388	$	1,646	$	0

(a) This category comprises of low-cost equity index funds not actively managed that track the S&P 500.

(b) This category comprises of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.

(c) This is comprises 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 comprises of low-cost real estate index exchange traded funds.

(f) This category comprises of exchange traded funds investing in agricultural and energy commodities.

(g) This category comprises of individual bonds.

63

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following future benefit payments are expected to be paid:

Year	Pension benefits
(in thousands)
2013	$	336
2014		428
2015		452
2016		462
2017		561
2018 to 2022		3,712

(11) Stock Compensation

The Company’s stock option plan provides for the grant of options to purchase up to 526,435 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 options issued in 2008 to acquire 11,133 shares that vested immediately.

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

										Weighted average
	Number of shares									exercise price
	December 31									December 31
	2012			2011			2010			2012		2011		2010
Outstanding, beginning of year		270,634			270,835			310,263		$	23.51	$	23.50	$	22.29
Granted		0			0			0			0.00		0.00		0.00
Exercised		0			0			0			0.00		0.00		0.00
Forfeited		0			0			0			0.00		0.00		0.00
Expired		(55,291	)		(201	)		(39,428	)		18.92		17.96		13.96
Outstanding, end of year		215,343			270,634			270,835		$	24.68	$	23.51	$	23.50
Exercisable, end of year		197,713			242,970			226,100		$	24.76	$	23.59	$	23.58

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2012.

Options outstanding at December 31, 2012 had a weighted average remaining contractual life of approximately 3.0 years and no intrinsic value. Options outstanding at December 31, 2011 had a remaining contractual life of approximately 3.5 years and no intrinsic value. No stock options were granted during the years presented above.

Options exercisable at December 31, 2012 had a weighted average remaining contractual life of approximately 2.8 years and no intrinsic value. Options exercisable at December 31, 2011 had a weighted average remaining contractual life of approximately 3.3 years and no intrinsic value. No stock options were exercised during the years presented above.

Total stock-based compensation expense for the years ended December 31, 2012, 2011, and 2010 was $29,000, $58,000, and $87,000, respectively. As of December 31, 2012, the total unrecognized compensation expense related to non-vested stock awards was $68,000 and the related weighted average period over which it is expected to be recognized is approximately 2 years.

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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(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 was designed to attract broad participation by banking institutions to help stabilize the financial system by encouraging lending.

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 287,133 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. On May 9, 2012, the Company redeemed 12,000 shares of preferred stock from the U.S. Department of Treasury by repaying $12,000,000 of the $30,255,000 CPP funds along with $140,000 of accrued and unpaid dividends on the shares redeemed. Related to these shares was an additional $300,000 of accretion that was recognized at the time of the redemption. The allocated carrying values of the senior preferred stock and common stock warrant at December 31, 2012 were $17,977,000 and $2,382,000, respectively.

The preferred shares remaining outstanding of 18,255 carry a 5% cumulative dividend through December 2013 and 9% thereafter if not redeemed. The Company intends to redeem the remaining shares by December 2013. 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 nine or more quarterly periods, whether or not consecutive. Under such circumstances, the Treasury will be entitled to vote to elect two directors to the board until all unpaid dividends have been paid or declared and set apart for payment. The Company is prohibited from paying any dividends with respect to shares of common stock unless all accrued and unpaid dividends are paid in full on the senior preferred stock for all past dividend periods. The Treasury Department may also transfer the senior preferred stock to a third party at any time.

The common stock warrant is exercisable immediately with a ten year term, in whole or in part, at an exercise price of $15.81 per share. The preferred stock and warrant are classified as stockholders’ equity in the consolidated balance sheets and qualify, for regulatory capital purposes, as Tier I capital. For the year ended December 31, 2012, the Company had declared and paid $1,203,000 of dividends and amortized $659,000 of accretion of the discount on preferred stock.

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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(13) Earnings per Share

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

	2012		2011		2010
Basic earnings (loss) per common share:
Net income (loss)	$	2,821,969	$	2,857,270	$	(3,551,740	)
Less:
Preferred stock dividends		1,124,417		1,512,750		1,512,750
Accretion of discount on preferred stock		659,244		476,474		476,474
Net income (loss) available to common shareholders	$	1,038,308	$	868,046	$	(5,540,964	)
Basic earnings (loss) per share	$	0.21	$	0.18	$	(1.15	)
Diluted earnings (loss) per common share:
Net income (loss)	$	2,821,969	$	2,857,270	$	(3,551,740	)
Less:
Preferred stock dividends		1,124,417		1,512,750		1,512,750
Accretion of discount on preferred stock		659,244		476,474		476,474
Net income (loss) available to common shareholders	$	1,038,308	$	868,046	$	(5,540,964	)
Average shares outstanding		4,839,114		4,839,114		4,839,114
Effect of dilutive stock options		0		0		0
Average shares outstanding including dilutive stock options		4,839,114		4,839,114		4,839,114
Diluted earnings (loss) per share	$	0.21	$	0.18	$	(1.15	)

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 years ended December 31, 2012, 2011 and 2010 were not included in the respective computations of diluted earnings 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.

	2012		2011		2010
Anti-dilutive shares—option shares		215,343		270,634		270,835
Anti-dilutive shares—warrant shares		287,133		287,133		287,133
Total anti-dilutive shares		502,476		557,767		557,968

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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(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, 2012 and 2011, the Company and the Bank met all capital adequacy requirements.

As of December 31, 2012, 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.

						Minimum					Well-Capitalized
	Actual					Capital Requirements					Capital Requirements
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Total capital (to risk-weighted assets):
Company	$	148,889		16.83	%	$	70,759		8.00	%		N.A.		N.A.	%
Bank		131,126		15.12			69,375		8.00		$	86,715		10.00
Tier I capital (to risk-weighted assets):
Company	$	120,138		13.58	%	$	35,380		4.00	%		N.A.		N.A.	%
Bank		120,243		13.87			34,686		4.00		$	52,029		6.00
Tier I capital (to adjusted average assets):
Company	$	120,138		10.37	%	$	34,762		3.00	%	$	N.A.		N.A.	%
Bank		120,243		10.60			34,037		3.00			56,729		5.00
(in thousands)
December 31, 2011
Total capital (to risk-weighted assets):
Company	$	159,768		18.03	%	$	70,905		8.00	%	$	N.A.		N.A.	%
Bank		130,398		15.00			69,567		8.00			86,959		10.00
Tier I capital (to risk-weighted assets):
Company	$	134,391		15.16	%	$	35,453		4.00	%	$	N.A.		N.A.	%
Bank		119,498		13.74			34,784		4.00			52,175		6.00
Tier I capital (to adjusted average assets):
Company	$	134,391		11.52	%	$	34,993		3.00	%	$	N.A.		N.A.	%
Bank		119,498		10.45			34,309		3.00			57,181		5.00

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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(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, 2012 and 2011, respectively, there were no transfers into or out of Levels 1-3.

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 have 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

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers 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. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.

Mortgage servicing rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3.

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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

			Fair Value Measurements
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Assets:
U.S. treasury	$	2,030	$	2,030	$	0	$	0
Government sponsored enterprises		55,180		0		55,180		0
Asset-backed securities		107,872		0		107,872		0
Obligations of states and political subdivisions		35,164		0		35,164		0
Mortgage servicing rights		2,549		0		0		2,549
Total	$	202,795	$	2,030	$	198,216	$	2,549
December 31, 2011
Assets:
U.S. treasury	$	2,054	$	2,054	$	0	$	0
Government sponsored enterprises		70,314		0		70,314		0
Asset-backed securities		107,329		0		107,329		0
Obligations of states and political subdivisions		34,109		0		34,109		0
Total	$	213,806	$	2,054	$	211,752	$	0

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

(in thousands)	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Mortgage Servicing Rights
Balance at December 31, 2011	$	0
Transfer into level 3		3,050
Total gains or losses (realized/unrealized):
Included in earnings		(1,331	)
Included in other comprehensive income		0
Purchases		0
Sales		0
Issues		830
Settlements		0
Balance at December 31, 2012	$	2,549

Total gains for the years ended included in earnings attributable to the change in unrealized gains or losses related to assets still held were $2,216,000 and $1,705,000 at December 31, 2012 and 2011, respectively.

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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

	Quantitative Information about Level 3 Fair Value Measurements
	Valuation Technique	Unobservable Inputs	Input Value
			2012			2011
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate		18.60	%		20.86	%
		Weighted average discount rate		7.99	%		7.99	%

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, 2012, the Company identified $24.6 million in impaired loans that had specific allowances for losses aggregating $4.0 million. Related to these loans, there was $5.2 million in charge-offs recorded during the year ended December 31, 2012. As of December 31, 2011, the Company identified $30.4 million in impaired loans that had specific allowances for losses aggregating $3.7 million. Related to these loans, there was $11.3 million in charge-offs recorded during the year ended December 31, 2012.

Other Real Estate Owned and Repossessed Assets

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

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HAWTHORN BANCSHARES, INC.

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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

	Fair Value Measurements Using
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)*
December 31, 2012
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	672	$	0	$	0	$	672	$	(1,659	)
Real estate construction—residential		64		0		0		64		0
Real estate construction—commercial		5,341		0		0		5,341		0
Real estate mortgage—residential		2,763		0		0		2,763		(839	)
Real estate mortgage—commercial		11,726		0		0		11,726		(2,716	)
Consumer		44		0		0		44		0
Total	$	20,610	$	0	$	0	$	20,610	$	(5,214	)
Other real estate owned and repossessed assets	$	23,592	$	0	$	0	$	23,592	$	(4,378	)
December 31, 2011
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	643	$	0	$	0	$	643	$	(2,136	)
Real estate construction—residential		396		0		0		396		(1,557	)
Real estate construction—commercial		6,029		0		0		6,029		(279	)
Real estate mortgage—residential		3,601		0		0		3,601		(1,509	)
Real estate mortgage—commercial		15,980		0		0		15,980		(5,842	)
Total	$	26,649	$	0	$	0	$	26,649	$	(11,323	)
Other real estate owned and repossessed assets	$	16,020	$	0	$	0	$	16,020	$	(2,112	)

* 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 values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans could be made to borrowers with similar credit ratings and for the same remaining maturities. 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.

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.

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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Federal Home Loan Bank (FHLB) Stock

Ownership of equity securities of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.

Federal Funds Sold, Cash, and Due from Banks

The carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell classified as short-term generally mature in 90 days or less.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.

Cash Surrender Value –Life Insurance

The fair value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

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.

Subordinated Notes and Other Borrowings

The fair value of subordinated notes and other 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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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

A summary of the carrying amounts and fair values of the Company’s financial instruments at December 31, 2012 and 2011 is as follows:

					December 31, 2012 Fair Value Measurements
	December 31, 2012				Quoted Prices in Active Markets for Identical		Other Observable		Net Significant Unobservable
(in thousands)	Carrying amount		Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Loans	$	832,142	$	834,824	$	0	$	0	$	834,824
Investment securities		200,246		200,246		2,030		198,216		0
FHLB stock		2,278		2,278		0		2,278		0
Cash and due from banks		58,877		58,877		58,877		0		0
Mortgage servicing rights		2,549		2,549		0		0		2,549
Cash surrender value—life insurance		2,136		2,136				2,136		0
Accrued interest receivable		5,190		5,190		5,190		0		0
	$	1,103,418	$	1,106,100	$	66,097	$	202,630	$	837,373
Liabilities:
Deposits:
Demand	$	192,271	$	192,271	$	192,271	$	0	$	0
NOW		178,121		178,121		178,121		0		0
Savings		69,997		69,997		69,997		0		0
Money market		157,584		157,584		157,584		0		0
Time		393,302		397,986		0		0		397,986
Federal funds purchased and securities sold under agreements to repurchase		21,058		21,058		21,058		0		0
Subordinated notes		49,486		13,154		0		13,154		0
Federal Home Loan Bank advances		20,126		20,651		0		20,651		0
Accrued interest payable		909		909		909		0		0
	$	1,082,854	$	1,051,731	$	619,940	$	33,805	$	397,986

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AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

					December 31, 2011
					Fair Value Measurements
	December 31, 2011				Quoted Prices in Active Markets for Identical		Other Observable		Net Significant Unobservable
(in thousands)	Carrying amount		Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Loans	$	829,121	$	830,077	$	0	$	0	$	830,077
Investment securities		213,806		213,806		2,054		211,752		0
FHLB stock		2,738		2,738		0		2,738		0
Federal fund sold and securities purchased under agreements to resell		75		75		75		0		0
Cash and due from banks		43,135		43,135		43,135		0		0
Mortgage servicing rights		2,308		2,512		0		0		2,512
Cash surrender value—life insurance		2,064		2,064				2,064		0
Accrued interest receivable		5,341		5,341		5,341		0		0
	$	1,098,588	$	1,099,748	$	50,605	$	216,554	$	832,589
Liabilities:
Deposits:
Demand	$	159,187	$	159,187	$	159,187	$	0	$	0
NOW		169,452		169,452		169,452		0		0
Savings		62,075		62,075		62,075		0		0
Money market		153,072		153,072		153,072		0		0
Time		414,438		421,687		0		0		421,687
Federal funds purchased and securities sold under agreements to repurchase		24,516		24,516		24,516		0		0
Subordinated notes		49,486		22,082		0		22,082		0
Federal Home Loan Bank advances		28,410		29,525		0		29,525		0
Accrued interest payable		1,054		1,054		1,054		0		0
	$	1,061,690	$	1,042,650	$	569,356	$	51,607	$	421,687

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is 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 that are competitive in the markets in which it operates.

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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Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(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, 2012, 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, 2012 and 2011, is as follows:

(in thousands)	2012		2011
Commitments to extend credit	$	118,412	$	117,171
Standby letters of credit		2,995		2,992

Commitments

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. 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 approximate remaining term of standby letters of credit range from one month to five years at December 31, 2012.

Pending Litigation

The Company and its subsidiaries are defendants in various legal actions incidental to the Company’s past and current business activities. Based on the Company’s analysis, and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably possible that these legal actions will materially adversely affect the Company’s consolidated financial condition or results of operations in the near term.

On November 18, 2010, a suit was filed against the Company and its subsidiary, 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 suit seeks forfeiture and refund of twice the amount of improper overdraft fees assessed and collected. The court has denied the Bank’s motion to dismiss the suit. At this 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 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 commitment to fund a loan request. A jury found in favor of the customer and awarded $630,000 in damages to the plaintiffs, including $200,000 in

75

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

punitive damages. The jury verdict was upheld at the appellate level. At December 31, 2012, the Company’s consolidated balance sheets included reserves for payment of the jury award as the Company is awaiting the Court’s determination as to the order in which proceeds will be applied. After insurance proceeds, the Company’s net loss for these jury awards is expected to be approximately $275,000.

(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,
(in thousands)	2012		2011
Assets
Cash and due from bank subsidiaries	$	1,863	$	13,282
Investment in equity securities		1,486		1,486
Investment in subsidiaries		139,849		140,361
Premises and equipment		1		1
Deferred tax asset		1,424		1,611
Other assets		1,022		10
Total assets	$	145,645	$	156,751
Liabilities and Stockholders’ Equity
Subordinated notes	$	49,486	$	49,486
Other liabilities		3,939		4,689
Stockholders’ equity		92,220		102,576
Total liabilities and stockholders’ equity	$	145,645	$	156,751

Condensed Balance Sheets

	For the Years Ended December 31,
	2012		2011		2010
Income
Interest and dividends received from subsidiaries	$	4,596	$	5,192	$	4,405
Total income		4,596		5,192		4,405
Expenses
Interest on subordinated notes		1,381		1,301		1,526
Other		2,889		2,605		2,904
Total expenses		4,270		3,906		4,430
Income (loss) before income tax benefit and equity in undistributed income of subsidiaries		326		1,285		(25	)
Income tax benefit		2,257		1,368		1,450
Equity in undistributed income (loss) of subsidiaries		239		204		(4,977	)
Net income (loss)	$	2,822	$	2,857	$	(3,552	)

76

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Condensed Statements of Cash Flows

(in thousands)	2012			2011			2010
Cash flows from operating activities:
Net income (loss)	$	2,822		$	2,857		$	(3,552	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1			2			3
Equity in undistributed (income) losses of subsidiaries		(239	)		(204	)		4,977
Stock based compensation expense		29			58			87
(Increase) decrease in deferred tax asset		(148	)		(274	)		(38	)
Other, net		(813	)		(89	)		382
Net cash provided by operating activities		1,652			2,350			1,859
Cash flows from investing activities:
Investment in subsidiary		1,072			900			(1,250	)
Net cash provided by (used in) investing activities		1,072			900			(1,250	)
Cash flows from financing activities:
Redemption of 12,000 shares of preferred stock		(12,000	)		0			0
Cash dividends paid—preferred stock		(1,203	)		(1,513	)		(1,513	)
Cash dividends paid—common stock		(940	)		(904	)		(1,385	)
Net cash used in financing activities		(14,143	)		(2,417	)		(2,898	)
Net (decrease) increase in cash and due from banks		(11,419	)		833			(2,289	)
Cash and due from banks at beginning of year		13,282			12,449			14,738
Cash and due from banks at end of year	$	1,863		$	13,282		$	12,449

77

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(19) Quarterly Financial Information (Unaudited)

(In thousands except per share data)	First quarter		Second quarter		Third quarter			Fourth quarter			Year to Date
Year Ended December 31, 2012
Interest income	$	12,646	$	12,297	$	12,151		$	12,020		$	49,114
Interest expense		1,831		2,125		2,029			1,920			7,905
Net interest income		10,815		10,172		10,122			10,100			41,209
Provision for loan losses		1,700		1,500		4,700			1,000			8,900
Noninterest income		1,970		2,443		2,680			2,633			9,726
Noninterest expense		9,480		10,098		10,378			8,711			38,667
Income tax (benefit) expense		154		277		(704	)		819			546
Net income (loss)	$	1,451	$	740	$	(1,572	)	$	2,203		$	2,822
Preferred stock dividends		370		296		228			231			1,125
Accretion of discount on preferred stock		119		396		72			72			659
Net income (loss) available to common stockholders	$	962	$	48	$	(1,872	)	$	1,900		$	1,038
Net income (loss) per share:
Basic earnings (loss) per share	$	0.21	$	0.01	$	(0.39	)	$	0.39		$	0.21
Diluted earnings (loss) per share		0.21		0.01		(0.39	)		0.39			0.21
Year Ended December 31, 2011
Interest income	$	13,583	$	13,640	$	13,384		$	12,862		$	53,469
Interest expense		3,102		2,858		2,580			2,313			10,853
Net interest income		10,481		10,782		10,804			10,549			42,616
Provision for loan losses		1,750		1,883		2,010			5,880			11,523
Noninterest income		2,052		2,178		2,358			2,612			9,200
Noninterest expense		9,378		9,008		8,925			9,534			36,845
Income tax (benefit) expense		451		661		711			(1,232	)		591
Net income (loss)	$	954	$	1,408	$	1,516		$	(1,021	)	$	2,857
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	$	465	$	907	$	1,018		$	(1,522	)	$	868
Net income (loss) per share:
Basic earnings (loss) per share	$	0.10	$	0.19	$	0.21		$	(0.31	)	$	0.18
Diluted earnings (loss) per share		0.10		0.19		0.21			(0.31	)		0.18

78

MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS

Market Price

The 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 the Company’s common stock by quarter for each quarter in 2012 and 2011 in which the stock was traded.

	High		Low
2012
First Quarter	$	7.83	$	5.73
Second Quarter	$	9.97	$	6.92
Third Quarter	$	10.38	$	8.45
Fourth Quarter	$	9.25	$	7.04

2011
First Quarter	$	9.33	$	8.06
Second Quarter	$	8.89	$	7.29
Third Quarter	$	8.50	$	5.80
Fourth Quarter	$	8.10	$	5.50

Shares Outstanding.

As of February 28, 2013, the Company had issued 5,000,972 shares of common stock, of which 4,839,114 shares were outstanding. The outstanding shares were held of record by approximately 1,425 shareholders. The Company has a warrant outstanding for the purchase of 287,133 shares of common stock. In addition, the Company has 18,255 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 the Company in 2012 and 2011.

Month Paid	Dividends Paid Per Share
January, 2012	$	0.05
April, 2012		0.05
July, 2012		0.05
October, 2012		0.05
Total for 2012	$	0.20
January, 2011	$	0.05
April, 2011		0.05
July, 2011		0.05
October, 2011		0.05
Total for 2011	$	0.20

The board of directors intends that the 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 the subsidiary Bank to the Company. The payment by the Bank of dividends to the Company will depend upon such factors as the Bank’s financial condition, results of operations and current and anticipated cash needs, including capital requirements. In addition to the above limitations, the Company’s ability to

79

pay dividends on its common stock is limited by the Company’s participation in the Treasury’s Capital Purchase Program (or CPP). If the Company is not current in the payment of quarterly dividends on the Series A preferred stock issued to the U.S. Treasury in CPP, the Company cannot pay dividends on its common stock.

Stock Performance Graph

The following performance graph shows a comparison of cumulative total returns for the 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, 2007, through December 31, 2012. The cumulative total return on investment for each of the periods for the Company, the Nasdaq Stock Market (U.S. Companies) and the peer index is based on the stock price or index at December 31, 2007. The performance graph assumes that the value of an investment in the Company’s common stock and each index was $100 at December 31, 2007 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:

	12/31/07		12/31/08		12/31/09		12/31/10		12/31/11		12/31/12
Hawthorn Bancshares, Inc.	$	100.00	$	71.61	$	43.35	$	41.61	$	31.29	$	41.32
Nasdaq Composite (U.S. Companies)	$	100.00	$	60.02	$	87.24	$	103.08	$	102.26	$	120.42
Index of financial institutions ($1 billion to $5 billion)	$	100.00	$	82.94	$	59.45	$	67.39	$	61.46	$	75.78

80

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Name	Position with The Company	Position with Subsidiary Bank	Principal Occupation
David T. Turner	Chairman, Chief Executive Officer, President and Director-Class III	Chairman, Chief Executive Officer, President and Director	Position with Hawthorn Bancshares, Inc. and Hawthorn Bank
Charles G. Dudenhoeffer, Jr.	Director-Class II	Director	Retired
Philip D. Freeman	Director-Class I	Director	Owner/Manager, Freeman Mortuary, Jefferson City, Missouri
Kevin L. Riley	Director-Class III	Director	Co-owner, Riley Chevrolet, Buick, GMC Cadilac, and Riley Toyota Scion, Jefferson City, Missouri
James E. Smith	Director-Class I	Director	Retired
Gus S. Wetzel, II	Director-Class II	Director	Physician, Wetzel Clinic, Clinton, Missouri
W. Bruce Phelps	Chief Financial Officer	Senior Vice President and Chief Financial Officer	Position with Hawthorn Bancshares, Inc. 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, Inc. and Hawthorn Bank

ANNUAL REPORT ON FORM 10-K

A copy of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2013 annual meeting of shareholders upon written request to Kathleen L. Bruegenhemke, Corporate Secretary, Hawthorn Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101. The Company will provide a copy of any exhibit to the Form 10-K to any such person upon written request and the payment of the Company’s reasonable expenses in furnishing such exhibits.

81

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Hawthorn Bancshares, Inc.:

We consent to the incorporation by reference in the registration statement (No. 333-68388) on Form S-8 of Hawthorn Bancshares, Inc. of our reports dated April 1, 2013, with respect to the consolidated balance sheets of Hawthorn Bancshares, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and the effectiveness of internal control over financial reporting as of December 31, 2012, which reports appear in the December 31, 2012 annual report on Form 10-K of Hawthorn Bancshares, Inc.

/s/ KPMG LLP

St. Louis, Missouri

April 1, 2013

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(s) 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(s) 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

(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: April 1, 2013	/s/ David T. Turner
	David T. Turner
	Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, W. Bruce Phelps, 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(s) 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(s) 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

(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: April 1, 2013	/s/ W. Bruce Phelps
	W. Bruce Phelps
	Chief Financial Officer

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 period ended December 31, 2012 as filed with the Securities and Exchange Commission (the “Report”), I, David T. Turner, Chairman of the Board and Chief Executive Officer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(b) The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Date: April 1, 2013	/s/ David T. Turner
	David T. Turner
	Chairman of the Board and Chief Executive Officer

“A signed original of this written statement required by Section 906 has been provided to Hawthorn Bancshares, Inc. and will be retained by Hawthorn Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.”

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 period ended December 31, 2012 as filed with the Securities and Exchange Commission (the “Report”), I, W. Bruce Phelps, 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.

Date: April 1, 2013	/s/ W. Bruce Phelps
	W. Bruce Phelps
	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.”

EX-99.1

Exhibit 99.1

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. has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, 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 has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Hawthorn 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 3 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	Date: April 1, 2013
David T. Turner, Chairman, CEO & President

EX-99.2

Exhibit 99.2

Certification for Years following First Fiscal Year

Hawthorn Bancshares, Inc.

UST #264

I, W. Bruce Phelps, certify, based on my knowledge, that:

(i) The compensation committee of Hawthorn Bancshares, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, 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 has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Hawthorn 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 3 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/ W. Bruce Phelps	Date: April 1, 2013
W. Bruce Phelps, Chief Financial Officer

XML

Earnings per Share (Tables)

12 Months Ended

Dec. 31, 2012

Earnings per Share [Abstract]

Earning per share - basic and diluted

	2012		2011		2010
Basic earnings (loss) per common share:
Net income (loss)	$	2,821,969	$	2,857,270	$	(3,551,740	)
Less:
Preferred stock dividends		1,124,417		1,512,750		1,512,750
Accretion of discount on preferred stock		659,244		476,474		476,474
Net income (loss) available to common shareholders	$	1,038,308	$	868,046	$	(5,540,964	)
Basic earnings (loss) per share	$	0.21	$	0.18	$	(1.15	)
Diluted earnings (loss) per common share:
Net income (loss)	$	2,821,969	$	2,857,270	$	(3,551,740	)
Less:
Preferred stock dividends		1,124,417		1,512,750		1,512,750
Accretion of discount on preferred stock		659,244		476,474		476,474
Net income (loss) available to common shareholders	$	1,038,308	$	868,046	$	(5,540,964	)
Average shares outstanding		4,839,114		4,839,114		4,839,114
Effect of dilutive stock options		0		0		0
Average shares outstanding including dilutive stock options		4,839,114		4,839,114		4,839,114
Diluted earnings (loss) per share	$	0.21	$	0.18	$	(1.15	)

Summary of anti-dilutive shares

	2012		2011		2010
Anti-dilutive shares—option shares		215,343		270,634		270,835
Anti-dilutive shares—warrant shares		287,133		287,133		287,133
Total anti-dilutive shares		502,476		557,767		557,968

XML

Condensed Financial Information of the Parent Company Only (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Cash flows from operating activities:
Net income (loss)	$ 2,203	$ (1,572)	$ 740	$ 1,451	$ (1,021)	$ 1,516	$ 1,408	$ 954	$ 2,822	$ 2,857	$ (3,552)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation									1,858	1,940	1,964
Stock based compensation expense									29	58	87
(Increase) decrease in net deferred tax asset									(214)	462	(2,299)
Other, net									89	(645)	(453)
Net cash provided by operating activities									14,875	20,832	21,456
Cash flows from investing activities:
Net cash provided by (used in) by investing activities									(6,374)	6,381	36,324
Cash flows from financing activities:
Redemption of 12,000 shares of preferred stock									(12,000)	0	0
Cash dividends paid - preferred stock									(1,203)	(1,513)	(1,513)
Cash dividends paid - common stock									(940)	(904)	(1,385)
Net cash used in financing activities									7,166	(34,983)	(31,466)
Net (decrease) increase in cash and due from banks									15,667	(7,770)	26,314
Cash and cash equivalents, beginning of year				43,210				50,980	43,210	50,980	24,666
Cash and cash equivalents, end of year	58,877				43,210				58,877	43,210	50,980
Parent Company [Member]
Cash flows from operating activities:
Net income (loss)									2,822	2,857	(3,552)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation									1	2	3
Equity in undistributed (income) losses of subsidiaries									(239)	(204)	4,977
Stock based compensation expense									29	58	87
(Increase) decrease in net deferred tax asset									(148)	(274)	(38)
Other, net									(813)	(89)	(382)
Net cash provided by operating activities									1,652	2,350	1,859
Cash flows from investing activities:
Investment in subsidiary									1,072	900	(1,250)
Net cash provided by (used in) by investing activities									1,072	900	(1,250)
Cash flows from financing activities:
Redemption of 12,000 shares of preferred stock									(12,000)	0	0
Cash dividends paid - preferred stock									(1,203)	(1,513)	(1,513)
Cash dividends paid - common stock									(940)	(904)	(1,385)
Net cash used in financing activities									(14,143)	(2,417)	(2,898)
Net (decrease) increase in cash and due from banks									(11,419)	833	(2,289)
Cash and cash equivalents, beginning of year				13,282				12,449	13,282	12,449	14,738
Cash and cash equivalents, end of year	$ 1,863				$ 13,282				$ 1,863	$ 13,282	$ 12,449

XML

Loans and Allowance for Loan Losses (Details 7) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Aging information of past due and non-accrual loans
Current or Less Than 30 Days Past Due	$ 809,338	$ 791,181
30 - 89 Days Past Due	6,559	5,292
90 Days Past Due And Still Accruing	6	54
Non-Accrual	31,081	46,403
Total	846,984	842,930
Commercial, Financial, and Agricultural [Member]
Aging information of past due and non-accrual loans
Current or Less Than 30 Days Past Due	126,884	126,244
30 - 89 Days Past Due	1,821	243
90 Days Past Due And Still Accruing	0	0
Non-Accrual	1,335	2,068
Total	130,040	128,555
Real Estate Construction - Residential [Member]
Aging information of past due and non-accrual loans
Current or Less Than 30 Days Past Due	19,390	29,054
30 - 89 Days Past Due	290	0
90 Days Past Due And Still Accruing	0	0
Non-Accrual	2,497	1,147
Total	22,177	30,201
Real Estate Construction - Commercial [Member]
Aging information of past due and non-accrual loans
Current or Less Than 30 Days Past Due	35,117	39,822
30 - 89 Days Past Due	607	0
90 Days Past Due And Still Accruing	0	8
Non-Accrual	7,762	7,867
Total	43,486	47,697
Real Estate Mortgage - Residential [Member]
Aging information of past due and non-accrual loans
Current or Less Than 30 Days Past Due	213,694	195,779
30 - 89 Days Past Due	2,199	3,513
90 Days Past Due And Still Accruing	0	9
Non-Accrual	5,330	4,153
Total	221,223	203,454
Real Estate Mortgage - Commercial [Member]
Aging information of past due and non-accrual loans
Current or Less Than 30 Days Past Due	390,032	371,000
30 - 89 Days Past Due	1,122	924
90 Days Past Due And Still Accruing	0	36
Non-Accrual	13,938	31,000
Total	405,092	402,960
Installment and Other Consumer [Member]
Aging information of past due and non-accrual loans
Current or Less Than 30 Days Past Due	24,221	29,282
30 - 89 Days Past Due	520	612
90 Days Past Due And Still Accruing	6	1
Non-Accrual	219	168
Total	$ 24,966	$ 30,063

XML

Loans and Allowance for Loan Losses (Details 1) (USD $) In Thousands, unless otherwise specified			12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012 Executive Officers and Directors [Member]
Summary of loans
Balance at December 31, 2011	$ 832,142	$ 829,121	$ 3,161
New loans			9,791
Amounts collected			(1,937)
Balance at December 31, 2012	$ 832,142	$ 829,121	$ 11,015

XML

Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Summary of amortizable intangible assets
Net Amount	$ 135	$ 543
Core deposit [Member]
Summary of amortizable intangible assets
Gross Carrying Amount	4,795	4,795
Accumulated Amortization	(4,660)	(4,252)
Net Amount	$ 135	$ 543	$ 978	$ 1,504

XML

Loans and Allowance for Loan Losses (Details 8) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	$ 139,260	$ 144,661
Commercial, Financial, and Agricultural [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	22,634	28,416
Real Estate Construction - Residential [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	7,473	11,633
Real Estate Construction - Commercial [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	16,256	18,394
Real Estate Mortgage - Residential [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	36,865	21,653
Real Estate Mortgage - Commercial [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	54,718	63,396
Installment and Other Consumer [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	1,314	1,169
Watch [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	82,341	79,368
Watch [Member] | Commercial, Financial, and Agricultural [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	14,814	22,206
Watch [Member] | Real Estate Construction - Residential [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	4,580	9,644
Watch [Member] | Real Estate Construction - Commercial [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	6,459	9,338
Watch [Member] | Real Estate Mortgage - Residential [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	26,063	13,231
Watch [Member] | Real Estate Mortgage - Commercial [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	29,753	24,392
Watch [Member] | Installment and Other Consumer [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	672	557
Substandard [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	25,838	18,890
Substandard [Member] | Commercial, Financial, and Agricultural [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	6,485	4,142
Substandard [Member] | Real Estate Construction - Residential [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	396	842
Substandard [Member] | Real Estate Construction - Commercial [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,035	1,189
Substandard [Member] | Real Estate Mortgage - Residential [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	5,472	4,269
Substandard [Member] | Real Estate Mortgage - Commercial [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	11,027	8,004
Substandard [Member] | Installment and Other Consumer [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	423	444
Non-accrual [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	31,081	46,403
Non-accrual [Member] | Commercial, Financial, and Agricultural [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	1,335	2,068
Non-accrual [Member] | Real Estate Construction - Residential [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,497	1,147
Non-accrual [Member] | Real Estate Construction - Commercial [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	7,762	7,867
Non-accrual [Member] | Real Estate Mortgage - Residential [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	5,330	4,153
Non-accrual [Member] | Real Estate Mortgage - Commercial [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	13,938	31,000
Non-accrual [Member] | Installment and Other Consumer [Member]
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	$ 219	$ 168

XML

Deposits (Details Textual) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Deposits (Textual) [Abstract]
Minimum cash required	$ 1,367,000	$ 1,335,000
Average compensating balances	$ 1,595,000	$ 489,000

XML

Fair Value Measurements (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Other real estate owned and repossessed assets	$ 23,592	$ 16,020
Total Gains (Losses) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Other real estate owned and repossessed assets	(4,378)	(2,112)
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Other real estate owned and repossessed assets	0	0
Other Observable Inputs (Level 2) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Other real estate owned and repossessed assets	0	0
Significant Unobservable Inputs (Level 3) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	834,824	830,077
Other real estate owned and repossessed assets	23,592	16,020
Impaired loans [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	20,610	26,649
Impaired loans [Member] | Total Gains (Losses) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	(5,214)	(11,323)
Impaired loans [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Other Observable Inputs (Level 2) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Significant Unobservable Inputs (Level 3) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	20,610	26,649
Impaired loans [Member] | Commercial, financial, and agricultural [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	672	643
Impaired loans [Member] | Commercial, financial, and agricultural [Member] | Total Gains (Losses) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	(1,659)	(2,136)
Impaired loans [Member] | Commercial, financial, and agricultural [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Commercial, financial, and agricultural [Member] | Other Observable Inputs (Level 2) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Commercial, financial, and agricultural [Member] | Significant Unobservable Inputs (Level 3) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	672	643
Impaired loans [Member] | Real estate construction - residential [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	64	396
Impaired loans [Member] | Real estate construction - residential [Member] | Total Gains (Losses) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	(1,557)
Impaired loans [Member] | Real estate construction - residential [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Real estate construction - residential [Member] | Other Observable Inputs (Level 2) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Real estate construction - residential [Member] | Significant Unobservable Inputs (Level 3) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	64	396
Impaired loans [Member] | Real estate construction - commercial [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	5,341	6,029
Impaired loans [Member] | Real estate construction - commercial [Member] | Total Gains (Losses) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	(279)
Impaired loans [Member] | Real estate construction - commercial [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Real estate construction - commercial [Member] | Other Observable Inputs (Level 2) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Real estate construction - commercial [Member] | Significant Unobservable Inputs (Level 3) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	5,341	6,029
Impaired loans [Member] | Real estate mortgage - residential [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	2,763	3,601
Impaired loans [Member] | Real estate mortgage - residential [Member] | Total Gains (Losses) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	(839)	(1,509)
Impaired loans [Member] | Real estate mortgage - residential [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Real estate mortgage - residential [Member] | Other Observable Inputs (Level 2) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Real estate mortgage - residential [Member] | Significant Unobservable Inputs (Level 3) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	2,763	3,601
Impaired loans [Member] | Real estate mortgage - commercial [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	11,726	15,980
Impaired loans [Member] | Real estate mortgage - commercial [Member] | Total Gains (Losses) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	(2,716)	(5,842)
Impaired loans [Member] | Real estate mortgage - commercial [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Real estate mortgage - commercial [Member] | Other Observable Inputs (Level 2) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0	0
Impaired loans [Member] | Real estate mortgage - commercial [Member] | Significant Unobservable Inputs (Level 3) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	11,726	15,980
Impaired loans [Member] | Consumer [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	44
Impaired loans [Member] | Consumer [Member] | Total Gains (Losses) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0
Impaired loans [Member] | Consumer [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0
Impaired loans [Member] | Consumer [Member] | Other Observable Inputs (Level 2) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	0
Impaired loans [Member] | Consumer [Member] | Significant Unobservable Inputs (Level 3) [Member]
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Loans	$ 44

XML

Summary of Significant Accounting Policies (Details Textual) (USD $)	12 Months Ended					12 Months Ended
	Dec. 31, 2012 Quarters	Dec. 31, 2010	Jul. 02, 2012	Dec. 31, 2011	Dec. 31, 2009	Dec. 31, 2011 Mortgage servicing rights [Member]	Dec. 31, 2010 Mortgage servicing rights [Member]	Dec. 31, 2012 Maximum [Member] Core deposit [Member]	Dec. 31, 2012 Maximum [Member] Buildings and improvements [Member]	Dec. 31, 2012 Maximum [Member] Furniture and equipment [Member]	Dec. 31, 2012 Minimum [Member] Core deposit [Member]	Dec. 31, 2012 Minimum [Member] Buildings and improvements [Member]	Dec. 31, 2012 Minimum [Member] Furniture and equipment [Member]
Summary of Significant Accounting Policies (Textual) [Abstract]
Estimated lives for premises and equipment									40 years	15 years		5 years	3 years
Estimated lives using straight line Method of amortized Intangibles						7 years	7 years	8 years			7 years
Summary of Significant Accounting Policies (Additional Textual) [Abstract]
Fair Value of Option resulted in cumulative effect	$ 459,890
Fair Value of Option, net of tax recorded as increase to retained earnings	281,868
Number of days past due loans as to principal or interest payments placed on non accrual	90 days
Number of quarters reflecting loss characteristics	12
Number of years for economic downturn	3 years
Mortgage loans that were held for sale	2,292,000			0
Basis points added to Federal Home Loan Bank	0.12%
Advances from the FHLB to the Bank	4.45%
Highest compensation before retirement in calculation of benefits years considered	10 years
Accrued interest	30,969	31,000		28,000
Unrecognized Tax liabilities in income tax expense	0	24,000
Net Interest expense	$ 0	$ 340,351		$ 221,000	$ 562,076
Original maturities of cash and cash equivalents	3 years
Special stock dividend to common shareholders paid			4.00%

XML

Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2012

Intangible Assets [Abstract]

Summary of amortizable intangible assets

	2012							2011
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
(in thousands)	Amount		Amortization			Amount		Amount		Amortization			Amount
Core deposit intangible	$	4,795	$	(4,660	)	$	135	$	4,795	$	(4,252	)	$	543

Estimated future amortization expense

(in thousands)	Core Deposit Intangible Asset
2013	$	135
2014		0
2015		0
2016		0
2017		0

Changes in the net carrying amount of core deposit intangible assets

(in thousands)	2012			2011			2010
Balance at beginning of year	$	543		$	978		$	1,504
Additions		0			0			0
Amortization		(408	)		(435	)		(526	)
Balance at end of year	$	135		$	543		$	978

Changes in mortgage servicing rights

(in thousands)	2012			2011			2010
Balance at beginning of year	$	2,308		$	2,356		$	2,021
Re-measurement to fair value upon election to measure servicing rights at fair value		742			0			0
Originated mortgage servicing rights		830			760			1,169
Changes in fair value:
Due to change in model inputs and assumptions (1)		122			0			0
Other changes in fair value (2)		(1,453	)		0			0
Amortization		0			(808	)		(834	)
Balance at end of year	$	2,549		$	2,308		$	2,356

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

(2) Other changes in fair value reflect changes due to customer payments and passage of time. This also includes a one time adjustment of a $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years. If the aforementioned was corrected as of December 31, 2011, the balance at the beginning of the period would have been $1,770,000.

Assumptions used in estimating the fair value of mortgage service rights

	2012			2011
Weighted-Average Constant Prepayment Rate		18.60	%		20.86	%
Weighted-Average Note Rate		4.22	%		4.64	%
Weighted-Average Discount Rate		7.99	%		7.99	%
Weighted-Average Contractual Life (in years)		20.00			23.00

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Borrowings (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Federal Funds Purchased and Securities Sold under Agreements to Repurchase (Repurchase Agreements)
Federal funds purchased, Year End Weighted Rate	0.00%	0.00%
Short-term repurchase agreements, Year End Weighted Rate	0.10%	0.10%
Federal funds purchased, Average Weighted Rate	0.60%	0.30%
Short-term repurchase agreements, Average Weighted Rate	0.10%	0.20%
Federal Funds Purchased, Average Balance Outstanding	$ 412	$ 2
Short-term repurchase agreements, Average Balance Outstanding	22,867	27,634
Federal funds purchased, Maximum Outstanding at any Month End	345	0
Short-term repurchase agreements, Maximum Outstanding at any Month End	24,734	30,227
Federal funds purchased, Balance at December 31	0	0
Short-term repurchase agreements, Balance at December 31	21,058	24,516
Total, Balance at December 31	$ 21,058	$ 24,516

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Intangible Assets (Details 3) (Mortgage Service Rights [Member], USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Mortgage Service Rights [Member]
Changes in mortgage servicing rights
Balance at beginning of year	$ 2,308	$ 2,356	$ 2,021
Re-measurement to fair value upon election to measure servicing rights at fair value	742	0	0
Originated mortgage servicing rights	830	760	1,169
Changes in fair value:
Due to change in model inputs and assumptions	122	0	0
Other changes in fair value	(1,453)	0	0
Amortization	0	(808)	(834)
Balance at end of year	$ 2,549	$ 2,308	$ 2,356

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Employee Benefit Plans (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Components of net pension cost
Service cost-benefits earned during the year	$ 1,168	$ 931
Interest costs on projected benefit obligations	667	604
Pension plans, defined benefit [Member]
Components of net pension cost
Service cost-benefits earned during the year	1,168	931	844
Interest costs on projected benefit obligations	668	604	556
Expected return on plan assets	(776)	(706)	(614)
Expected administrative expenses	40	0	0
Amortization of prior service cost	78	78	78
Amortization of unrecognized net loss	46	0	0
Net periodic pension expense	$ 1,224	$ 907	$ 864

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Loans and Allowance for Loan Losses (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012 Securities Loans	Dec. 31, 2011 Loans
Loans and Allowance for Loan Losses (Textual) [Abstract]
Loans carrying value pledged as collateral	$ 457,000,000
Total Impaired loans	39,363,000	53,620,000
Interest income recognized on impaired loans accrual status	275,000	155,000
Contractual interest due on loans in non-accrual basis	1,198,000	1,952,000
Interest income recognized on loans in non-accrual basis	414,000	285,000
Borrowers delinquent once payments	30 days
Period for payment of principal or interest	90 days
Loans classified as troubled debt restructurings	22,363,000	32,165,000
Troubled debt restructurings on non-accrual status	14,081,000	24,948,000
Troubled debt restructurings on accrual status	8,282,000	7,217,000
Reserves allocated to allowance for loan losses	$ 1,544,000	$ 1,522,000
Borrower's payment according to the modified terms	90 days
Loans meeting the TDR criteria	14
Number of defaulted loans modified as a TDR	1	0

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Commitments and Contingencies (Details Textual) (USD $)	1 Months Ended	3 Months Ended	12 Months Ended
	Dec. 31, 2009	Dec. 31, 2012	Dec. 31, 2012	Dec. 17, 2009
Commitments and Contingencies (Additional Textual) [Abstract]
Accrued estimated losses		0	0
Net loss for jury awards after insurance proceeds			275,000
Maximum [Member]
Commitments and Contingencies (Textual) [Abstract]
Remaining term of standby letters of credit			5 years
Minimum [Member]
Commitments and Contingencies (Textual) [Abstract]
Remaining term of standby letters of credit			1 month
Pending Litigation [Member]
Commitments and Contingencies (Textual) [Abstract]
Lawsuit filing date		November 18, 2010	December 17, 2009
Awarded in damages to the plaintiffs	630,000
Awarded in punitive damages				$ 200,000

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Deposits (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Due within:
One year	$ 280,477	$ 266,516
Two years	65,220	93,209
Three years	23,482	34,730
Four years	11,984	8,811
Five years	12,139	11,172
Thereafter	0	0
Total	$ 393,302	$ 414,438

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Income Taxes (Details Textual) (USD $)	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Income Taxes (Textual) [Abstract]
Retained earnings related to tax bad debt deductions	$ 2,931,503
Gross unrecognized tax benefits	0	221,000	340,351	562,076
Accrued interest	$ 30,969	$ 28,000	$ 31,000

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Borrowings (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Borrowing (Textual) [Abstract]
Federal Home Loan Bank advances	$ 20,126,000	$ 28,410,000
Borrowing (Additional Textual) [Abstract]
Borrowing federal funds on unsecured basis	15,000,000
Borrowing federal funds on secured basis	5,135,000
TPS mature date	Mar. 17, 2034
Investment in common interests in the trust	712,000
Purchaser in the private placement purchased in preferred interests	23,000,000
Deeply subordinated debentures	30 years
Subordinated notes	49,486,000	49,486,000
Company recorded the investments in the common securities issued by the Exchange Statutory Trusts	1,486,000
Subsidiary bank [Member]
Borrowing (Textual) [Abstract]
Federal Home Loan Bank advances	20,126,000
FHLB call for early payment	10,000,000
Maximum additional borrowing amount under agreement	269,958,000
Subsidiary bank [Member] | Maximum [Member]
Borrowing (Textual) [Abstract]
Percentage of outstanding mortgage loans secured under agreement	175.00%
Subsidiary bank [Member] | Minimum [Member]
Borrowing (Textual) [Abstract]
Percentage of outstanding mortgage loans secured under agreement	125.00%
Exchange Statutory Trust One [Member]
Borrowing (Textual) [Abstract]
Exchange Statutory Trust, Business trust	25,000,000
Percentage of floating rate	2.70%
Percentage of floating rate, reprices	3.00%
Exchange Statutory Trust Two [Member]
Borrowing (Textual) [Abstract]
Exchange Statutory Trust, Business trust	$ 23,000,000
Exchange Statutory Trust, Floating rate	30 years
Percentage of floating rate	1.83%
Percentage of floating rate, reprices	2.14%
TPS can be prepaid without penalty	5 years

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Employee Benefit Plans (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of employee benefits charged to operating expenses
Payroll taxes	$ 1,127	$ 1,098	$ 1,105
Medical plans	1,772	1,676	1,545
401k match	298	291	319
Pension plan	1,224	907	864
Profit-sharing	58	0	0
Other	318	250	162
Total employee benefits	$ 4,797	$ 4,222	$ 3,995

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Deposits (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Due within:
Three months or less	$ 37,166	$ 52,274
Over three months through six months	18,690	16,017
Over six months through twelve months	33,265	32,291
Over twelve months	31,656	38,922
Total	$ 120,777	$ 139,504

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Intangible Assets (Details 1) (Core Deposit Intangible Asset [Member], USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Core Deposit Intangible Asset [Member]
Estimated future amortization expense
2013	$ 135
2014	0
2015	0
2016	0
2017	$ 0

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

(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, 2012, 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, 2012 and 2011, is as follows:

(in thousands)	2012		2011
Commitments to extend credit	$	118,412	$	117,171
Standby letters of credit		2,995		2,992

Commitments

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. 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 approximate remaining term of standby letters of credit range from one month to five years at December 31, 2012.

Pending Litigation

The Company and its subsidiaries are defendants in various legal actions incidental to the Company’s past and current business activities. Based on the Company’s analysis, and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably possible that these legal actions will materially adversely affect the Company’s consolidated financial condition or results of operations in the near term.

On November 18, 2010, a suit was filed against the Company and its subsidiary, 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 suit seeks forfeiture and refund of twice the amount of improper overdraft fees assessed and collected. The court has denied the Bank’s motion to dismiss the suit. At this 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 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 commitment to fund a loan request. A jury found in favor of the customer and awarded $630,000 in damages to the plaintiffs, including $200,000 in punitive damages. The jury verdict was upheld at the appellate level. At December 31, 2012, the Company’s consolidated balance sheets included reserves for payment of the jury award as the Company is awaiting the Court’s determination as to the order in which proceeds will be applied. After insurance proceeds, the Company’s net loss for these jury awards is expected to be approximately $275,000.

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Loans and Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Allowance for loan losses by impairment methodology
Individually evaluated for impairment	$ 4,020	$ 3,748
Collectively evaluated for impairment	10,822	10,061
Total	14,842	13,809
Individually evaluated for impairment	39,189	53,451
Collectively evaluated for impairment	807,795	789,479
Net loans	832,142	829,121
Commercial, Financial, and Agricultural [Member]
Allowance for loan losses by impairment methodology
Individually evaluated for impairment	213	239
Collectively evaluated for impairment	1,724	1,565
Total	1,937	1,804
Individually evaluated for impairment	4,157	4,428
Collectively evaluated for impairment	125,883	124,127
Net loans	130,040	128,555
Real Estate Construction - Residential [Member]
Allowance for loan losses by impairment methodology
Individually evaluated for impairment	125	167
Collectively evaluated for impairment	607	1,021
Total	732	1,188
Individually evaluated for impairment	2,496	1,147
Collectively evaluated for impairment	19,681	29,054
Net loans	22,177	30,201
Real Estate Construction - Commercial [Member]
Allowance for loan losses by impairment methodology
Individually evaluated for impairment	542	380
Collectively evaluated for impairment	1,169	1,182
Total	1,711	1,562
Individually evaluated for impairment	7,762	7,867
Collectively evaluated for impairment	35,724	39,830
Net loans	43,486	47,697
Real Estate Mortgage - Residential [Member]
Allowance for loan losses by impairment methodology
Individually evaluated for impairment	1,069	653
Collectively evaluated for impairment	2,318	2,598
Total	3,387	3,251
Individually evaluated for impairment	5,771	6,569
Collectively evaluated for impairment	215,452	196,885
Net loans	221,223	203,454
Real Estate Mortgage - Commercial [Member]
Allowance for loan losses by impairment methodology
Individually evaluated for impairment	2,071	2,309
Collectively evaluated for impairment	4,763	3,425
Total	6,834	5,734
Individually evaluated for impairment	18,959	33,440
Collectively evaluated for impairment	386,133	369,520
Net loans	405,092	402,960
Installment Loans to Individuals [Member]
Allowance for loan losses by impairment methodology
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	239	267
Total	239	267
Individually evaluated for impairment	44	0
Collectively evaluated for impairment	24,922	30,063
Net loans	24,966	30,063
Unallocated [Member]
Allowance for loan losses by impairment methodology
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	2	3
Total	2	3
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	0	0
Net loans	$ 0	$ 0

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Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value of Financial Instruments [Abstract]

Summary of the carrying amounts and fair values of financial instruments

					December 31, 2012 Fair Value Measurements
	December 31, 2012				Quoted Prices in Active Markets for Identical		Other Observable		Net Significant Unobservable
(in thousands)	Carrying amount		Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Loans	$	832,142	$	834,824	$	0	$	0	$	834,824
Investment securities		200,246		200,246		2,030		198,216		0
FHLB stock		2,278		2,278		0		2,278		0
Cash and due from banks		58,877		58,877		58,877		0		0
Mortgage servicing rights		2,549		2,549		0		0		2,549
Cash surrender value—life insurance		2,136		2,136				2,136		0
Accrued interest receivable		5,190		5,190		5,190		0		0
	$	1,103,418	$	1,106,100	$	66,097	$	202,630	$	837,373
Liabilities:
Deposits:
Demand	$	192,271	$	192,271	$	192,271	$	0	$	0
NOW		178,121		178,121		178,121		0		0
Savings		69,997		69,997		69,997		0		0
Money market		157,584		157,584		157,584		0		0
Time		393,302		397,986		0		0		397,986
Federal funds purchased and securities sold under agreements to repurchase		21,058		21,058		21,058		0		0
Subordinated notes		49,486		13,154		0		13,154		0
Federal Home Loan Bank advances		20,126		20,651		0		20,651		0
Accrued interest payable		909		909		909		0		0
	$	1,082,854	$	1,051,731	$	619,940	$	33,805	$	397,986

					December 31, 2011
					Fair Value Measurements
	December 31, 2011				Quoted Prices in Active Markets for Identical		Other Observable		Net Significant Unobservable
(in thousands)	Carrying amount		Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Loans	$	829,121	$	830,077	$	0	$	0	$	830,077
Investment securities		213,806		213,806		2,054		211,752		0
FHLB stock		2,738		2,738		0		2,738		0
Federal fund sold and securities purchased under agreements to resell		75		75		75		0		0
Cash and due from banks		43,135		43,135		43,135		0		0
Mortgage servicing rights		2,308		2,512		0		0		2,512
Cash surrender value—life insurance		2,064		2,064				2,064		0
Accrued interest receivable		5,341		5,341		5,341		0		0
	$	1,098,588	$	1,099,748	$	50,605	$	216,554	$	832,589
Liabilities:
Deposits:
Demand	$	159,187	$	159,187	$	159,187	$	0	$	0
NOW		169,452		169,452		169,452		0		0
Savings		62,075		62,075		62,075		0		0
Money market		153,072		153,072		153,072		0		0
Time		414,438		421,687		0		0		421,687
Federal funds purchased and securities sold under agreements to repurchase		24,516		24,516		24,516		0		0
Subordinated notes		49,486		22,082		0		22,082		0
Federal Home Loan Bank advances		28,410		29,525		0		29,525		0
Accrued interest payable		1,054		1,054		1,054		0		0
	$	1,061,690	$	1,042,650	$	569,356	$	51,607	$	421,687

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Intangible Assets (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Intangible Assets (Textual) [Abstract]
Temporary impairment recognized		$ 0	$ 0
Amortization period of MSRs		7 years	7 years
Intangible Assets (Additional Textual) [Abstract]
Cumulative effect of change in accounting principle	459,890
Amortization amount	0
Serviced mortgage loans for others	310,587,000	307,016,000
Mortgage loan servicing fees earned	878,000	863,000	927,000
Changes in fair value, one time adjustment	538,000
Servicing asset at fair value if prior period errors had rectified		$ 1,770,000

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Preferred Stock (Details) (USD $)	1 Months Ended	3 Months Ended								12 Months Ended
	May 31, 2012	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012 Person	Dec. 31, 2011	Dec. 31, 2010	Dec. 19, 2008
Preferred Stock (Textual) [Abstract]
Carrying values of the senior preferred stock		$ 17,977,000				$ 29,318,000				$ 17,977,000	$ 29,318,000
Dividend declared and paid										1,203,000	1,513,000	1,513,000
Amortized of accretion of the discount on preferred stock		72,000	72,000	396,000	119,000	119,000	119,000	119,000	119,000	659,000	476,000	476,000
Preferred stock (Additional Textual) [Abstract]
Preferred shares		18,255				30,255				18,255	30,255		30,255
Senior preferred stock, par value		$ 0.01				$ 0.01				$ 0.01	$ 0.01		$ 1,000
Warrant										10 years
Discount on the preferred stock										5 years
Redeemed preferred stock	12,000									12,000
Repaying to U.S. Department of Treasury	12,000,000
CPP funds	30,255,000
Accrued and unpaid dividends	140,000
Preferred Stock additional accretion										300,000
Cumulative dividend on the first five years										5.00%
Cumulative dividend thereafter										9.00%
Voting rights of preferred stock										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 nine 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.
Number of directors										2
Exercise price of warrant		15.81								15.81
Common Stock [Member]
Preferred Stock (Textual) [Abstract]
Common stock										287,133
Exchange value										30,255,000
Carrying values of the senior Common stock		2,382,000								2,382,000
Preferred Stock [Member]
Preferred Stock (Textual) [Abstract]
Carrying values of the senior preferred stock		17,977,000								17,977,000
Dividend declared and paid										1,203,000
Amortized of accretion of the discount on preferred stock										$ 659,000

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Employee Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2012

Employee Benefit Plans [Abstract]

Summary of employee benefits charged to operating expenses

(in thousands)	2012		2011		2010
Payroll taxes	$	1,127	$	1,098	$	1,105
Medical plans		1,772		1,676		1,545
401k match		298		291		319
Pension plan		1,224		907		864
Profit-sharing		58		0		0
Other		318		250		162
Total employee benefits	$	4,797	$	4,222	$	3,995

Obligations and Funded Status

(in thousands)	2012			2011
Change in projected benefit obligation:
Balance, January 1	$	14,217		$	10,655
Service cost		1,168			931
Interest cost		667			604
Actuarial (gain) loss		(458	)		2,240
Benefits paid		(252	)		(213	)
Balance, December 31	$	15,342		$	14,217
Change in plan assets:
Fair value, January 1	$	10,034		$	9,296
Actual gain (loss) return on plan assets		1,193			(54	)
Employer contribution		766			1,005
Expenses paid		(34	)		0
Benefits paid		(252	)		(213	)
Fair value, December 31	$	11,707		$	10,034
Funded status at end of year	$	(3,635	)	$	(4,183	)
Accumulated benefit obligation	$	12,564		$	10,762

Components of net pension cost

(in thousands)	2012			2011			2010
Service cost—benefits earned during the year	$	1,168		$	931		$	844
Interest costs on projected benefit obligations		668			604			556
Expected return on plan assets		(776	)		(706	)		(614	)
Expected administrative expenses		40			0			0
Amortization of prior service cost		78			78			78
Amortization of unrecognized net loss		46			0			0
Net periodic pension expense	$	1,224		$	907		$	864

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss)

(in thousands)	2012			2011
Prior service costs	$	(600	)	$	(679	)
Net accumulated actuarial net loss		(1,849	)		(2,777	)
Accumulated other comprehensive loss		(2,449	)		(3,456	)
Net periodic benefit cost in excess of cumulative employer contributions		(1,185	)		(727	)
Net amount recognized at December 31, balance sheet	$	(3,634	)	$	(4,183	)
Net gain (loss) arising during period	$	881		$	(3,001	)
Prior service cost amortization		79			79
Amortization of net actuarial loss		46			0
Total recognized in other comprehensive income (loss)	$	1,006		$	(2,922	)
Total recognized in net periodic pension cost and other comprehensive income (loss)	$	218		$	3,829

Assumptions utilized to determine benefit obligations and determination of Pension expense

	2012			2011			2010
Determination of benefit obligation at year end:
Discount rate		4.25	%		4.75	%		5.75	%
Annual rate of compensation increase		3.61	%		4.50	%		4.50	%
Determination of pension expense for year ended:
Discount rate for the service cost		4.75	%		5.75	%		5.75	%
Annual rate of compensation increase		3.61	%		4.50	%		4.50	%
Expected long-term rate of return on plan assets		7.00	%		7.00	%		7.00	%

Fair value of the pension plan assets by asset category

	Fair Value Measurements
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Cash equivalents	$	485	$	485	$	0	$	0
Equity securities:
U.S. large-cap (a)		4,335		4,335		0		0
U.S. mid-cap (b)		575		575		0		0
U.S. small-cap (c)		635		635		0		0
International (d)		1,670		1,670		0		0
Real estate (e)		395		395		0		0
Commodities (f)		370		370		0		0
Fixed income securities:
U.S. gov’t agency obligations (g)		2,726		0		2,726		0
Corporate investment grade (g)		416		0		416		0
Corporate non-investment grade (g)		100		0		100		0
Total	$	11,707	$	8,465	$	3,242	$	0
December 31, 2011
Cash equivalents	$	1,791	$	1,791	$	0	$	0
Equity securities:
U.S. large-cap (a)		3,821		3,821		0		0
U.S. mid-cap (b)		502		502		0		0
U.S. small-cap (c)		595		595		0		0
International (d)		1,278		1,278		0		0
Real estate (e)		203		203		0		0
Commodities (f)		198		198		0		0
Fixed income securities:
U.S. gov’t agency obligations (g)		841		0		841		0
Corporate investment grade (g)		653		0		653		0
Corporate non-investment grade (g)		152		0		152		0
Total	$	10,034	$	8,388	$	1,646	$	0

(a) This category comprises of low-cost equity index funds not actively managed that track the S&P 500.

(b) This category comprises of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.

(c) This is comprises 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 comprises of low-cost real estate index exchange traded funds.

(f) This category comprises of exchange traded funds investing in agricultural and energy commodities.

(g) This category comprises of individual bonds.

Future benefit payments expected to be paid

Year	Pension benefits
(in thousands)
2013	$	336
2014		428
2015		452
2016		462
2017		561
2018 to 2022		3,712

XML

Loans and Allowance for Loan Losses (Details 5) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	$ 14,733	$ 23,223
Recorded Investment, With an allowance recorded	24,630	30,397
Total impaired loans	39,363	53,620
Unpaid Principal Balance, With no related allowance recorded	16,594	30,190
Unpaid Principal Balance, With an allowance recorded	25,308	30,960
Total impaired loans, Unpaid Principal Balance	41,902	61,150
Related Allowance with no related allowance recorded	0	0
Related Allowance with allowance recorded	4,020	3,748
Average Recorded Investment, With no related allowance recorded	22,523	30,407
Average Recorded Investment, With an allowance recorded	20,929
Total impaired loans, Average Recorded Investment	43,452	52,841
Interest Recognized For the Period Ended, With no related allowance recorded	275	155
Interest Recognized For the Period Ended, With an allowance recorded	139
Total impaired loans, Interest Recognized For the Period Ended	414	285
Commercial, Financial, and Agricultural [Member]
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	3,272	3,546
Recorded Investment, With an allowance recorded	885	882
Unpaid Principal Balance, With no related allowance recorded	4,009	3,625
Unpaid Principal Balance, With an allowance recorded	898	904
Related Allowance with no related allowance recorded	0	0
Related Allowance with allowance recorded	213	239
Average Recorded Investment, With no related allowance recorded	4,157	3,510
Average Recorded Investment, With an allowance recorded	776	655
Interest Recognized For the Period Ended, With no related allowance recorded	93	52
Interest Recognized For the Period Ended, With an allowance recorded	29	17
Real estate construction - residential [Member]
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	2,307	584
Recorded Investment, With an allowance recorded	189	563
Unpaid Principal Balance, With no related allowance recorded	2,339	788
Unpaid Principal Balance, With an allowance recorded	189	563
Related Allowance with no related allowance recorded	0	0
Related Allowance with allowance recorded	125	167
Average Recorded Investment, With no related allowance recorded	1,137	1,273
Average Recorded Investment, With an allowance recorded	189	47
Interest Recognized For the Period Ended, With no related allowance recorded	7	0
Interest Recognized For the Period Ended, With an allowance recorded	0	0
Real estate construction - commercial [Member]
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	1,879	1,459
Recorded Investment, With an allowance recorded	5,883	6,409
Unpaid Principal Balance, With no related allowance recorded	2,102	1,756
Unpaid Principal Balance, With an allowance recorded	6,011	6,448
Related Allowance with no related allowance recorded	0	0
Related Allowance with allowance recorded	542	380
Average Recorded Investment, With no related allowance recorded	1,692	3,568
Average Recorded Investment, With an allowance recorded	6,087	5,805
Interest Recognized For the Period Ended, With no related allowance recorded	0	0
Interest Recognized For the Period Ended, With an allowance recorded	0	0
Real estate mortgage - residential [Member]
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	1,939	2,315
Recorded Investment, With an allowance recorded	3,832	4,254
Unpaid Principal Balance, With no related allowance recorded	2,393	2,654
Unpaid Principal Balance, With an allowance recorded	3,999	4,265
Related Allowance with no related allowance recorded	0	0
Related Allowance with allowance recorded	1,069	653
Average Recorded Investment, With no related allowance recorded	3,169	3,596
Average Recorded Investment, With an allowance recorded	2,604	3,203
Interest Recognized For the Period Ended, With no related allowance recorded	50	26
Interest Recognized For the Period Ended, With an allowance recorded	11	113
Real estate mortgage - commercial [Member]
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	5,162	15,151
Recorded Investment, With an allowance recorded	13,797	18,289
Unpaid Principal Balance, With no related allowance recorded	5,565	21,190
Unpaid Principal Balance, With an allowance recorded	14,167	18,780
Related Allowance with no related allowance recorded	0	0
Related Allowance with allowance recorded	2,071	2,309
Average Recorded Investment, With no related allowance recorded	12,198	18,270
Average Recorded Investment, With an allowance recorded	11,271	12,724
Interest Recognized For the Period Ended, With no related allowance recorded	124	73
Interest Recognized For the Period Ended, With an allowance recorded	99	0
Consumer [Member]
Additional information about impaired loans
Recorded Investment, With an allowance recorded	44
Unpaid Principal Balance, With an allowance recorded	44
Related Allowance with allowance recorded	0
Average Recorded Investment, With no related allowance recorded	170	190
Average Recorded Investment, With an allowance recorded	2	0
Interest Recognized For the Period Ended, With no related allowance recorded	1	4
Interest Recognized For the Period Ended, With an allowance recorded	0	0
Installment Loans to Individuals [Member]
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	174	168
Unpaid Principal Balance, With no related allowance recorded	186	177
Related Allowance with no related allowance recorded	0	0
Average Recorded Investment, With an allowance recorded		22,434
Interest Recognized For the Period Ended, With an allowance recorded		$ 130

XML

Investment Securities (Details Textual) (USD $)	Dec. 31, 2012 Securities Investment	Dec. 31, 2011 Investment Securities
Investment Securities (Textual) [Abstract]
Restricted investments	$ 3,925,000	$ 4,385,000
Debt securities with carrying values	146,442,000	172,447,000
Securities available for sale	380	365
Number of Investment Positions	14	20
Aggregate fair value of securities	8,037,000	18,220,000
Unrealized loss	0	0
Temporarily impaired	$ 150,000	$ 150,000

XML

Condensed Financial Information of the Parent Company Only (Details1) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Expenses
Interest on subordinated notes									$ 1,381	$ 1,301	$ 1,526
Other									4,125	3,514	3,717
Income (loss) before income tax benefit and equity in undistributed income of subsidiaries									3,368	3,448	(6,639)
Income tax benefit	819	(704)	277	154	(1,232)	711	661	451	546	591	(3,087)
Net income (loss)	2,203	(1,572)	740	1,451	(1,021)	1,516	1,408	954	2,822	2,857	(3,552)
Parent Company [Member]
Income
Interest and dividends received from subsidiaries									4,596	5,192	4,405
Total income									4,596	5,192	4,405
Expenses
Interest on subordinated notes									1,381	1,301	1,526
Other									2,889	2,605	2,904
Total expenses									4,270	3,906	4,430
Income (loss) before income tax benefit and equity in undistributed income of subsidiaries									326	1,285	(25)
Income tax benefit									2,257	1,368	1,450
Equity in undistributed income (loss) of subsidiaries									239	204	(4,977)
Net income (loss)									$ 2,822	$ 2,857	$ (3,552)

XML

Real Estate and Other Assets Acquired in Settlement of Loans (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Real Estate and Other Assets Acquired in Settlement of Loans (Additional Textual) [Abstract]
Provision for Real Estate Owned Valuation Allowance	$ 713,000	$ 1,252,000	$ 6,158,000
Real Estate and Other Assets Acquired in Settlement of Loans (Textual) [Abstract]
Net charge-offs against the allowance for loan losses at the time of foreclosure	6,705,000	8,248,000
Real Estate Construction - Commercial [Member]
Real Estate and Other Assets Acquired in Settlement of Loans (Additional Textual) [Abstract]
Provision for Real Estate Owned Valuation Allowance			5,663,000
Real estate owned valuation allowance provision recovered	3,908,000
Off set of other real state provision	$ 4,621,000

XML

Loans and Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of loans, by major class within Company's loan portfolio
Commercial, financial, and agricultural	$ 130,040	$ 128,555
Real estate construction - residential	22,177	30,201
Real estate construction - commercial	43,486	47,697
Real estate mortgage - residential	221,223	203,454
Real estate mortgage - commercial	405,092	402,960
Installment and other consumer	24,966	30,063
Total loans	$ 846,984	$ 842,930

XML

Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

(1) Summary of Significant Accounting Policies

Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), 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 accompanying consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

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 that the Company has the intent and ability to hold for the foreseeable future or maturity are held for investment at their stated 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. Loans that are contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection. 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 on a cash basis. 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 TDRs in the impaired and non-performing asset totals. TDRs are measured for impairment loss by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or 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 market. These long-term, fixed rate loans are typically classified as held for sale upon origination based on management’s intent to sell. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. At December 31, 2012 there were $2,292,000 mortgage loans that were held for sale in comparison to no loans held for sale at December 31, 2011.

Mortgage loan servicing fees earned on loans sold are reported as other noninterest 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 Company maintains an allowance for loan losses to absorb probable loan losses in the Company’s loan portfolio. 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. Provisions for loan losses are charged to income and credited to the allowance in an amount necessary to maintain an appropriate allowance given the risks identified in the portfolio. Once the fair value for a collateral dependent loan has been determined, any impaired amount is typically charged off as a confirmed loss unless the loan has other income streams to support repayment. For impaired loans individually evaluated for impairment, which have other income streams to support repayment, a specific reserve is established for the amount determined to be impaired. The allowance for loan losses consists of a specific reserve component for loans that are individually evaluated for impairment and an incurred loss component, or general reserves for loans that are collectively evaluated for impairment based on assigned risk ratings and historical loan loss experience for each loan type. The allowance is based upon management’s estimates of probable losses inherent in the loan portfolio.

In determining the allowance and the related provision for loan losses, the Company establishes valuation allowances based upon probable losses identified during the review of impaired loans. Management follows the guidance provided in 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, to determine specific reserves as further discussed below.

Loans not individually evaluated are aggregated based on similar risk characteristics. Historical loss rates for each risk group, which is updated quarterly, are quantified using all recorded loan charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent three year economic environment. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. The Company’s methodology includes factors that allow management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

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.

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 that 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 (loss), net of taxes, as 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 (loss) net of taxes.

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 is recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings based on the specific identification method for determining the cost of securities sold.

Capital Stock of the Federal Home Loan Bank

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

Premises and Equipment

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

Intangible Assets

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50 Accounting for Servicing Financial Assets. Consistent with ASC 860-50-35-3d, an entity may make an irrevocable decision to subsequently measure a class of servicing assets and servicing liabilities at fair value at the beginning of any fiscal year. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, net of tax in the amount of $281,868, which was recorded as an increase to beginning retained earnings, as further described in Note 6 to the consolidated financial statements. As such, effective January 1, 2012, the change in the fair value of mortgage servicing rights is recognized in earnings in the period for which the change occurs. The newly adopted accounting principle is preferable in the circumstances because the fair value measurement method will produce financial information and results more directly aligned with the performance of mortgage servicing rights.

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. During the years ended December 31, 2011 and 2010, mortgage servicing rights (MSRs) were 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.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral comprises 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 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.

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 the 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 more likely than not. In addition, the Company is subject to the continuous examination of its 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. At December 31, 2010, total accrued interest was $31,000 and total interest expense recognized for the year ended December 31, 2010 was $24,000. At December 31, 2011, the Company released $28,000 of interest accrued related to the release of $221,000 of uncertain tax provisions, and as of December 31, 2012, the Company had not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions.

Trust Department

Property held by the Bank in a 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 short-term federal funds sold and securities sold or purchased under agreements to resell, interest earning deposits with banks, cash, and due from banks with original maturities of three months or less.

Stock-Based Compensation

The Company’s stock-based employee compensation plan is described in Note 11, 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 comprehensive income (loss).

Reclassifications

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

The following represents significant new accounting principles adopted in 2012:

Repurchase Agreements In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-03, Reconsideration of Effective Control for Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The provisions of ASU No. 2011-03 modify the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The Company adopted the provisions of ASU No. 2011-03 prospectively for transactions or modifications of existing transactions that occurred on or after January 1, 2012. The Company accounted for all of its repurchase agreements as collateralized financing arrangements prior to the adoption of ASU No. 2011-03 and the adoption had no impact on the Company’s consolidated financial statements.

Fair Value Measurements In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs), to substantially converge the guidance in U.S. GAAP and IFRS on fair value measurements and disclosures. The provisions of ASU No. 2011-04 result in a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and IFRS. The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The Company adopted the provisions of ASU No. 2011-04 effective January 1, 2012. The fair value measurement provisions of ASU No. 2011-04 had no impact on the Company’s consolidated financial statements. See Notes 11 and 12 to the consolidated financial statements for the enhanced disclosures required by ASU No. 2011-04.

Other Comprehensive Income In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements. The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Under either method, entities are required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. ASU No. 2011-05 also eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is effective for periods beginning January 1, 2012 and requires retrospective application. ASU No. 2011-05 was effective for the Company’s interim reporting period beginning on or after January 1, 2012. The Company has chosen to present net income and other comprehensive income in two consecutive statements in the accompanying consolidated financial statements.

Stock Dividend On July 1, 2012, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2012. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

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Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of investment securities
Total available for sale securities	$ 200,246	$ 213,806
U.S. Treasury [Member]
Summary of investment securities
Total available for sale securities	2,030	2,054
Government sponsored enterprises [Member]
Summary of investment securities
Total available for sale securities	55,180	70,314
Asset-backed securities [Member]
Summary of investment securities
Total available for sale securities	107,872	107,329
Obligations of states and political subdivisions [Member]
Summary of investment securities
Total available for sale securities	$ 35,164	$ 34,109

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Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies [Abstract]

Contractual amount of off-balance-sheet financial instruments

(in thousands)	2012		2011
Commitments to extend credit	$	118,412	$	117,171
Standby letters of credit		2,995		2,992

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Loans and Allowance For Loan Losses (Tables)

12 Months Ended

Dec. 31, 2012

Accounts, Notes, Loans and Financing Receivable [Line Items]

Summary of loans, by major class within Company's loan portfolio

(in thousands)	2012		2011
Commercial, financial, and agricultural	$	130,040	$	128,555
Real estate construction—residential		22,177		30,201
Real estate construction—commercial		43,486		47,697
Real estate mortgage—residential		221,223		203,454
Real estate mortgage—commercial		405,092		402,960
Installment and other consumer		24,966		30,063
Total loans	$	846,984	$	842,930

Summary of the allowance for loan losses

(in thousands)	Commercial, Financial, & Agricultural			Real Estate Construction - Residential			Real Estate Construction - Commercial			Real Estate Mortgage - Residential			Real Estate Mortgage - Commercial			Installment Loans to Individuals			Un - allocated			Total
Balance at December 31, 2009	$	2,773		$	348		$	1,740		$	3,488		$	4,693		$	380		$	1,375		$	14,797
Additions:
Provision for loan losses		1,908			2,622			4,133			4,740			2,577			32			(758	)		15,254
Deductions:
Loans charged off		1,903			933			4,556			4,534			3,841			422			0			16,189
Less recoveries on loans		(153	)		(30	)		(22	)		(228	)		(29	)		(241	)		0			(703	)
Net loans charged off		1,750			903			4,534			4,306			3,812			181			0			15,486
Balance at December 31, 2010	$	2,931		$	2,067		$	1,339		$	3,922		$	3,458		$	231		$	617		$	14,565
Additions:
Provision for loan losses		837			914			485			1,104			8,593			204			(614	)		11,523
Deductions:
Loans charged off		2,157			1,858			512			1,883			6,420			376			0			13,206
Less recoveries on loans		(193	)		(65	)		(250	)		(108	)		(103	)		(208	)		0			(927	)
Net loans charged off		1,964			1,793			262			1,775			6,317			168			0			12,279
Balance at December 31, 2011	$	1,804		$	1,188		$	1,562		$	3,251		$	5,734		$	267		$	3		$	13,809
Additions:
Provision for loan losses		1,732			(523	)		126			955			6,318			293			(1	)		8,900
Deductions:
Loans charged off		1,760			0			0			977			5,466			586			0			8,789
Less recoveries on loans		(161	)		(67	)		(23	)		(158	)		(248	)		(265	)		0			(922	)
Net loans charged off		1,599			(67	)		(23	)		819			5,218			321			0			7,867
Balance at December 31, 2012	$	1,937		$	732		$	1,711		$	3,387		$	6,834		$	239		$	2		$	14,842

Allowance for loan losses by impairment methodology

(in thousands)	Commercial, Financial,  and Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage  - Residential		Real Estate Mortgage - Commercial		Installment Loans to Individuals		Unallocated		Total
December 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	213	$	125	$	542	$	1,069	$	2,071	$	0	$	0	$	4,020
Collectively evaluated for impairment		1,724		607		1,169		2,318		4,763		239		2		10,822
Total	$	1,937	$	732	$	1,711	$	3,387	$	6,834	$	239	$	2	$	14,842
Loans outstanding:
Individually evaluated for impairment	$	4,157	$	2,496	$	7,762	$	5,771	$	18,959	$	44	$	0	$	39,189
Collectively evaluated for impairment		125,883		19,681		35,724		215,452		386,133		24,922		0		807,795
Total	$	130,040	$	22,177	$	43,486	$	221,223	$	405,092	$	24,966	$	0	$	846,984
December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	239	$	167	$	380	$	653	$	2,309	$	0	$	0	$	3,748
Collectively evaluated for impairment		1,565		1,021		1,182		2,598		3,425		267		3		10,061
Total	$	1,804	$	1,188	$	1,562	$	3,251	$	5,734	$	267	$	3	$	13,809
Loans outstanding:
Individually evaluated for impairment	$	4,428	$	1,147	$	7,867	$	6,569	$	33,440	$	0	$	0	$	53,451
Collectively evaluated for impairment		124,127		29,054		39,830		196,885		369,520		30,063		0		789,479
Total	$	128,555	$	30,201	$	47,697	$	203,454	$	402,960	$	30,063	$	0	$	842,930

Categories of impaired loans

(in thousands)	2012		2011
Non-accrual loans	$	31,081	$	46,403
Troubled debt restructurings continuing to accrue interest		8,282		7,217
Total impaired loans	$	39,363	$	53,620

Additional information about impaired loans

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
At December 31, 2012
With no related allowance recorded:
Commercial, financial and agricultural	$	3,272	$	4,009	$	0
Real estate—construction residential		2,307		2,339		0
Real estate—construction commercial		1,879		2,102		0
Real estate—residential		1,939		2,393		0
Real estate—commercial		5,162		5,565		0
Consumer		174		186		0
Total	$	14,733	$	16,594	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	885	$	898	$	213
Real estate—construction residential		189		189		125
Real estate—construction commercial		5,883		6,011		542
Real estate—residential		3,832		3,999		1,069
Real estate—commercial		13,797		14,167		2,071
Consumer		44		44		0
Total	$	24,630	$	25,308	$	4,020
Total impaired loans	$	39,363	$	41,902	$	4,020
At December 31, 2011
With no related allowance recorded:
Commercial, financial and agricultural	$	3,546	$	3,625	$	0
Real estate—construction residential		584		788		0
Real estate—construction commercial		1,459		1,756		0
Real estate—residential		2,315		2,654		0
Real estate—commercial		15,151		21,190		0
Consumer		168		177		0
Total	$	23,223	$	30,190	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	882	$	904	$	239
Real estate—construction residential		563		563		167
Real estate—construction commercial		6,409		6,448		380
Real estate—residential		4,254		4,265		653
Real estate—commercial		18,289		18,780		2,309
Total	$	30,397	$	30,960	$	3,748
Total impaired loans	$	53,620	$	61,150	$	3,748

Average recorded investment and interest income recognized on impaired loans

	2012				2011
(in thousands)	Average Recorded Investment		Interest Recognized For the Period Ended		Average Recorded Investment		Interest Recognized For the Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	4,157	$	93	$	3,510	$	52
Real estate—construction residential		1,137		7		1,273		0
Real estate—construction commercial		1,692		0		3,568		0
Real estate—residential		3,169		50		3,596		26
Real estate—commercial		12,198		124		18,270		73
Consumer		170		1		190		4
Total	$	22,523	$	275	$	30,407	$	155
With an allowance recorded:
Commercial, financial and agricultural	$	776	$	29	$	655	$	17
Real estate—construction residential		189		0		47		0
Real estate—construction commercial		6,087		0		5,805		0
Real estate—residential		2,604		11		3,203		113
Real estate—commercial		11,271		99		12,724		0
Consumer		2		0		0		0
Total	$	20,929	$	139	$	22,434	$	130
Total impaired loans	$	43,452	$	414	$	52,841	$	285

Aging information of past due and non-accrual loans

(in thousands)	Current or Less Than 30 Days Past Due		30-89 Days Past Due		90 Days Past Due And Still Accruing		Non-Accrual		Total
December 31, 2012
Commercial, Financial, and Agricultural	$	126,884	$	1,821	$	0	$	1,335	$	130,040
Real Estate Construction—Residential		19,390		290		0		2,497		22,177
Real Estate Construction—Commercial		35,117		607		0		7,762		43,486
Real Estate Mortgage—Residential		213,694		2,199		0		5,330		221,223
Real Estate Mortgage—Commercial		390,032		1,122		0		13,938		405,092
Installment and Other Consumer		24,221		520		6		219		24,966
Total	$	809,338	$	6,559	$	6	$	31,081	$	846,984
December 31, 2011
Commercial, Financial, and Agricultural	$	126,244	$	243	$	0	$	2,068	$	128,555
Real Estate Construction—Residential		29,054		0		0		1,147		30,201
Real Estate Construction—Commercial		39,822		0		8		7,867		47,697
Real Estate Mortgage—Residential		195,779		3,513		9		4,153		203,454
Real Estate Mortgage—Commercial		371,000		924		36		31,000		402,960
Installment and Other Consumer		29,282		612		1		168		30,063
Total	$	791,181	$	5,292	$	54	$	46,403	$	842,930

Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment

(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage  - Residential		Real Estate Mortgage - Commercial		Installment and other Consumer		Total
At December 31, 2012
Watch	$	14,814	$	4,580	$	6,459	$	26,063	$	29,753	$	672	$	82,341
Substandard		6,485		396		2,035		5,472		11,027		423		25,838
Non-accrual		1,335		2,497		7,762		5,330		13,938		219		31,081
Total	$	22,634	$	7,473	$	16,256	$	36,865	$	54,718	$	1,314	$	139,260
At December 31, 2011
Watch	$	22,206	$	9,644	$	9,338	$	13,231	$	24,392	$	557	$	79,368
Substandard		4,142		842		1,189		4,269		8,004		444		18,890
Non-accrual		2,068		1,147		7,867		4,153		31,000		168		46,403
Total	$	28,416	$	11,633	$	18,394	$	21,653	$	63,396	$	1,169	$	144,661

Loans that were modified as TDRs

	2012						2011
	Recorded Investment (1)						Recorded Investment (1)
(in thousands)	Number of Contracts		Pre - Modification		Post - Modification		Number of Contracts		Pre - Modification		Post - Modification
Troubled Debt Restructurings
Commercial, financial and agricultural		4	$	637	$	613		9	$	3,500	$	3,486
Real estate construction—commercial		1		43		41		8		6,616		6,227
Real estate mortgage—residential		5		657		657		7		1,157		1,010
Real estate mortgage—commercial		2		645		644		9		9,553		9,215
Consumer		2		44		44		0		0		0
Total		14	$	2,026	$	1,999		33	$	20,826	$	19,938

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon during the period ended are not reported.

The Company’s portfolio of loans classified as TDRs include concessions such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, charged-off, or the collateral for the loan is foreclosed and sold. The Company considers a loan in TDR status in default when the borrower’s payment according to the modified terms is at least 90 days past due or has defaulted due to expiration of the loan’s maturity date. During the year ended December 31, 2012, fourteen loans meeting the TDR criteria were modified. There was one loan modified as a TDR that defaulted during the year ended December 31, 2012, and within twelve months of their modification date. No loans modified as a TDR during the year ended December 31, 2011 defaulted.

Executive Officers and Directors [Member]

Accounts, Notes, Loans and Financing Receivable [Line Items]

Summary of the allowance for loan losses

(in thousands)
Balance at December 31, 2011	$	3,161
New loans		9,791
Amounts collected		(1,937	)
Balance at December 31, 2012	$	11,015

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Summary of Significant Accounting Policies [Abstract]

Principles of Consolidation

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

Loans that the Company has the intent and ability to hold for the foreseeable future or maturity are held for investment at their stated 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. Loans that are contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection. 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 on a cash basis. 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 TDRs in the impaired and non-performing asset totals. TDRs are measured for impairment loss by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or 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 market. These long-term, fixed rate loans are typically classified as held for sale upon origination based on management’s intent to sell. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. At December 31, 2012 there were $2,292,000 mortgage loans that were held for sale in comparison to no loans held for sale at December 31, 2011.

Mortgage loan servicing fees earned on loans sold are reported as other noninterest 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

Allowance/ Provision for Loan Losses

The Company maintains an allowance for loan losses to absorb probable loan losses in the Company’s loan portfolio. 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. Provisions for loan losses are charged to income and credited to the allowance in an amount necessary to maintain an appropriate allowance given the risks identified in the portfolio. Once the fair value for a collateral dependent loan has been determined, any impaired amount is typically charged off as a confirmed loss unless the loan has other income streams to support repayment. For impaired loans individually evaluated for impairment, which have other income streams to support repayment, a specific reserve is established for the amount determined to be impaired. The allowance for loan losses consists of a specific reserve component for loans that are individually evaluated for impairment and an incurred loss component, or general reserves for loans that are collectively evaluated for impairment based on assigned risk ratings and historical loan loss experience for each loan type. The allowance is based upon management’s estimates of probable losses inherent in the loan portfolio.

In determining the allowance and the related provision for loan losses, the Company establishes valuation allowances based upon probable losses identified during the review of impaired loans. Management follows the guidance provided in 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, to determine specific reserves as further discussed below.

Loans not individually evaluated are aggregated based on similar risk characteristics. Historical loss rates for each risk group, which is updated quarterly, are quantified using all recorded loan charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent three year economic environment. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. The Company’s methodology includes factors that allow management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

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.

Investment in Debt and Equity Securities

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 that 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 (loss), net of taxes, as 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 (loss) net of taxes.

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 is recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings based on the specific identification method for determining the cost of securities sold.

Capital Stock of the Federal Home Loan Bank

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

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.

Intangible Assets

Intangible Assets

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50 Accounting for Servicing Financial Assets. Consistent with ASC 860-50-35-3d, an entity may make an irrevocable decision to subsequently measure a class of servicing assets and servicing liabilities at fair value at the beginning of any fiscal year. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, net of tax in the amount of $281,868, which was recorded as an increase to beginning retained earnings, as further described in Note 6 to the consolidated financial statements. As such, effective January 1, 2012, the change in the fair value of mortgage servicing rights is recognized in earnings in the period for which the change occurs. The newly adopted accounting principle is preferable in the circumstances because the fair value measurement method will produce financial information and results more directly aligned with the performance of mortgage servicing rights.

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. During the years ended December 31, 2011 and 2010, mortgage servicing rights (MSRs) were 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.

Other Real Estate Owned and Repossessed Assets

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral comprises 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 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.

Pension Plan

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

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 the 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 more likely than not. In addition, the Company is subject to the continuous examination of its 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. At December 31, 2010, total accrued interest was $31,000 and total interest expense recognized for the year ended December 31, 2010 was $24,000. At December 31, 2011, the Company released $28,000 of interest accrued related to the release of $221,000 of uncertain tax provisions, and as of December 31, 2012, the Company had not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions.

Trust Department

Trust Department

Property held by the Bank in a 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

Consolidated Statements of Cash Flows

For the purpose of the consolidated statements of cash flows, cash and cash equivalents consist of short-term federal funds sold and securities sold or purchased under agreements to resell, interest earning deposits with banks, cash, and due from banks with original maturities of three months or less.

Stock-Based Compensation

Stock-Based Compensation

The Company’s stock-based employee compensation plan is described in Note 11, 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

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

Comprehensive Income

The Company reports comprehensive income (loss) in the consolidated statements of comprehensive income (loss).

Reclassifications

Reclassifications

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

Repurchase Agreements

Repurchase Agreements In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-03, Reconsideration of Effective Control for Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The provisions of ASU No. 2011-03 modify the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The Company adopted the provisions of ASU No. 2011-03 prospectively for transactions or modifications of existing transactions that occurred on or after January 1, 2012. The Company accounted for all of its repurchase agreements as collateralized financing arrangements prior to the adoption of ASU No. 2011-03 and the adoption had no impact on the Company’s consolidated financial statements.

Fair Value Measurements

Fair Value Measurements In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs), to substantially converge the guidance in U.S. GAAP and IFRS on fair value measurements and disclosures. The provisions of ASU No. 2011-04 result in a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and IFRS. The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The Company adopted the provisions of ASU No. 2011-04 effective January 1, 2012. The fair value measurement provisions of ASU No. 2011-04 had no impact on the Company’s consolidated financial statements. See Notes 11 and 12 to the consolidated financial statements for the enhanced disclosures required by ASU No. 2011-04.

Other Comprehensive Income

Other Comprehensive Income In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements. The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Under either method, entities are required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. ASU No. 2011-05 also eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is effective for periods beginning January 1, 2012 and requires retrospective application. ASU No. 2011-05 was effective for the Company’s interim reporting period beginning on or after January 1, 2012. The Company has chosen to present net income and other comprehensive income in two consecutive statements in the accompanying consolidated financial statements.

Stock Dividend

Stock Dividend On July 1, 2012, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2012. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

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Capital Requirements (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
The Company [Member]
The actual and required capital amounts and ratios for the Company and the Bank
Total capital (to risk-weighted assets), Actual Amount	$ 148,889	$ 159,768
Total capital (to risk-weighted assets), Actual Ratio	16.83%	18.03%
Total capital (to risk-weighted assets), Minimum Capital requirements, Amount	70,759	70,905
Total capital (to risk-weighted assets), Minimum Capital requirements, Ratio	8.00%	8.00%
Tier I capital (to risk-weighted assets), Actual Amount	120,138	134,391
Tier I capital (to risk-weighted assets), Actual, Ratio	13.58%	15.16%
Tier I capital (to risk-weighted assets), Minimum Capital requirements, Amount	35,380	35,453
Tier I capital (to risk-weighted assets), Minimum Capital requirements, Ratio	4.00%	4.00%
Tier I Capital (to adjusted average assets), Actual Amount	120,138	134,391
Tier I Capital (to adjusted average assets), Actual Ratio	10.37%	11.52%
Tier I Capital (to adjusted average assets), Minimum Capital requirements, Amount	34,762	34,993
Tier I capital (to adjusted average assets), Minimum Capital requirements, Ratio	3.00%	3.00%
Bank [Member]
The actual and required capital amounts and ratios for the Company and the Bank
Total capital (to risk-weighted assets), Actual Amount	131,126	130,398
Total capital (to risk-weighted assets), Actual Ratio	15.12%	15.00%
Total capital (to risk-weighted assets), Minimum Capital requirements, Amount	69,375	69,567
Total capital (to risk-weighted assets), Minimum Capital requirements, Ratio	8.00%	8.00%
Total capital (to risk-weighted assets), Well-Capitalized Capital requirements, Amount	86,715	86,959
Total capital (to risk-weighted assets), Well-Capitalized Capital requirements, Ratio	10.00%	10.00%
Tier I capital (to risk-weighted assets), Actual Amount	120,243	119,498
Tier I capital (to risk-weighted assets), Actual, Ratio	13.87%	13.74%
Tier I capital (to risk-weighted assets), Minimum Capital requirements, Amount	34,686	34,784
Tier I capital (to risk-weighted assets), Minimum Capital requirements, Ratio	4.00%	4.00%
Tier I capital (to risk-weighted assets), Well-Capitalized Capital requirements, Amount	52,029	52,175
Tier I capital (to risk-weighted assets), Well-Capitalized Capital requirements, Ratio	6.00%	6.00%
Tier I Capital (to adjusted average assets), Actual Amount	120,243	119,498
Tier I Capital (to adjusted average assets), Actual Ratio	10.60%	10.45%
Tier I Capital (to adjusted average assets), Minimum Capital requirements, Amount	34,037	34,309
Tier I capital (to adjusted average assets), Minimum Capital requirements, Ratio	3.00%	3.00%
Tier I capital (to adjusted average assets), Well-Capitalized Capital requirements, Amount	$ 56,729	$ 57,181
Tier I capital (to adjusted average assets), Well-Capitalized Capital requirements, Ratio	5.00%	5.00%

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Loans and Allowance for Loan Losses (Details 9) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Loans that were modified as TDRs
Number of Contracts	$ 14	$ 33
Pre- Modification	2,026	20,826
Post- Modification	1,999	19,983
Commercial, financial, and agricultural [Member]
Loans that were modified as TDRs
Number of Contracts	4	9
Pre- Modification	637	3,500
Post- Modification	613	3,486
Real estate construction - commercial [Member]
Loans that were modified as TDRs
Number of Contracts	1	8
Pre- Modification	43	6,616
Post- Modification	41	6,227
Real Estate Mortgage - Residential [Member]
Loans that were modified as TDRs
Number of Contracts	5	7
Pre- Modification	657	1,157
Post- Modification	657	1,010
Real Estate Mortgage Commercial [Member]
Loans that were modified as TDRs
Number of Contracts	2	9
Pre- Modification	645	9,553
Post- Modification	644	9,215
Consumer [Member]
Loans that were modified as TDRs
Number of Contracts	2	0
Pre- Modification	44	0
Post- Modification	$ 44	$ 0

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Condensed Financial Information of the Parent Company Only (Tables)

12 Months Ended

Dec. 31, 2012

Condensed Financial Information of the Parent Company Only [Abstract]

Condensed Balance Sheets

	December 31,
(in thousands)	2012		2011
Assets
Cash and due from bank subsidiaries	$	1,863	$	13,282
Investment in equity securities		1,486		1,486
Investment in subsidiaries		139,849		140,361
Premises and equipment		1		1
Deferred tax asset		1,424		1,611
Other assets		1,022		10
Total assets	$	145,645	$	156,751
Liabilities and Stockholders’ Equity
Subordinated notes	$	49,486	$	49,486
Other liabilities		3,939		4,689
Stockholders’ equity		92,220		102,576
Total liabilities and stockholders’ equity	$	145,645	$	156,751

Condensed Statements of Operations

	For the Years Ended December 31,
	2012		2011		2010
Income
Interest and dividends received from subsidiaries	$	4,596	$	5,192	$	4,405
Total income		4,596		5,192		4,405
Expenses
Interest on subordinated notes		1,381		1,301		1,526
Other		2,889		2,605		2,904
Total expenses		4,270		3,906		4,430
Income (loss) before income tax benefit and equity in undistributed income of subsidiaries		326		1,285		(25	)
Income tax benefit		2,257		1,368		1,450
Equity in undistributed income (loss) of subsidiaries		239		204		(4,977	)
Net income (loss)	$	2,822	$	2,857	$	(3,552	)

Condensed Statements of Cash Flows

(in thousands)	2012			2011			2010
Cash flows from operating activities:
Net income (loss)	$	2,822		$	2,857		$	(3,552	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1			2			3
Equity in undistributed (income) losses of subsidiaries		(239	)		(204	)		4,977
Stock based compensation expense		29			58			87
(Increase) decrease in deferred tax asset		(148	)		(274	)		(38	)
Other, net		(813	)		(89	)		382
Net cash provided by operating activities		1,652			2,350			1,859
Cash flows from investing activities:
Investment in subsidiary		1,072			900			(1,250	)
Net cash provided by (used in) investing activities		1,072			900			(1,250	)
Cash flows from financing activities:
Redemption of 12,000 shares of preferred stock		(12,000	)		0			0
Cash dividends paid—preferred stock		(1,203	)		(1,513	)		(1,513	)
Cash dividends paid—common stock		(940	)		(904	)		(1,385	)
Net cash used in financing activities		(14,143	)		(2,417	)		(2,898	)
Net (decrease) increase in cash and due from banks		(11,419	)		833			(2,289	)
Cash and due from banks at beginning of year		13,282			12,449			14,738
Cash and due from banks at end of year	$	1,863		$	13,282		$	12,449

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Real Estate and Other Assets Acquired in Settlement of Loans (Tables)

12 Months Ended

Dec. 31, 2012

Real Estate and Other Assets Acquired in Settlement of Loans [Abstract]

Summary of real estate and other assets acquired in settlement of loans

(in thousands)	2012			2011
Commercial	$	329		$	17
Real estate construction—residential		112			307
Real estate construction—commercial		13,392			13,650
Real estate mortgage—residential		1,227			2,121
Real estate mortgage—commercial		14,201			6,623
Repossessed assets		468			279
Total	$	29,729		$	22,997
Less valuation allowance for other real estate owned		(6,137	)		(6,977	)
Total other real estate owned and repossessed assets	$	23,592		$	16,020

Schedule of real estate acquired in settlement of loans

Balance at December 31, 2010	$	20,168
Additions		10,903
Proceeds from sales		(7,435	)
Charge-offs against the valuation allowance for other real estate owned		(433	)
Net gain on sales		(206	)
Balance at December 31, 2011	$	22,997
Additions		16,869
Proceeds from sales		(8,571	)
Charge-offs against the valuation allowance for other real estate owned, net		(1,883	)
Net gain on sales		317
Total other real estate owned and repossessed assets	$	29,729
Less valuation allowance for other real estate owned		(6,137	)
Balance at December 31, 2012	$	23,592

Summary of activity in valuation allowance for other real estate owned in settlement of loans

(in thousands)	2012			2011			2010
Balance, beginning of year	$	6,977		$	6,158		$	0
Provision for other real estate owned		713			1,252			6,158
Charge-offs		(1,553	)		(433	)		0
Balance, end of year	$	6,137		$	6,977		$	6,158

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Investment Securities (Tables)

12 Months Ended

Dec. 31, 2012

Investment Securities [Abstract]

Summary of investment securities

(in thousands)	2012		2011
U.S. Treasury	$	2,030	$	2,054
Government sponsored enterprises		55,180		70,314
Asset-backed securities		107,872		107,329
Obligations of states and political subdivisions		35,164		34,109
Total available for sale securities	$	200,246	$	213,806

The amortized cost and fair value of debt securities

(in thousands)	Amortized cost			Gross unrealized gains		Gross unrealized losses		Fair value
December 31, 2012
U.S. Treasury	$	2,000		$	30	$	0	$	2,030
Government sponsored enterprises		54,327			853		0		55,180
Asset-backed securities		104,607			3,276		11		107,872
Obligations of states and political subdivisions		33,959			1,222		17		35,164
Total available for sale securities	$	194,893		$	5,381	$	28	$	200,246
Weighted average yield at end of period		2.54	%
December 31, 2011
U.S. Treasury	$	2,000		$	54	$	0	$	2,054
Government sponsored enterprises		69,703			629		18		70,314
Asset-backed securities		103,806			3,547		24		107,329
Obligations of states and political subdivisions		32,716			1,394		1		34,109
Total available for sale securities	$	208,225		$	5,624	$	43	$	213,806
Weighted average yield at end of period		2.89	%

Contractual maturity of amortized cost and fair value of debt securities

	Amortized		Fair
(in thousands)	cost		value
Due in one year or less	$	3,919	$	3,951
Due after one year through five years		63,985		65,154
Due after five years through ten years		20,478		21,340
Due after ten years		1,904		1,929
Total		90,286		92,374
Asset-backed securities		104,607		107,872
Total available for sale securities	$	194,893	$	200,246

Gross unrealized losses on debt securities and the fair value of the related securities

	Less than 12 months					12 months or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses		Value		Losses
At December 31, 2012
Government sponsored enterprises	$	1,044	$	0		$	0	$	0	$	1,044	$	0
Asset-backed securities		4,729		(11	)		0		0		4,729		(11	)
Obligations of states and political subdivisions		2,114		(17	)		150		0		2,264		(17	)
Total	$	7,887	$	(28	)	$	150	$	0	$	8,037	$	(28	)
(in thousands)
At December 31, 2011
Government sponsored enterprises	$	13,250	$	(18	)	$	0	$	0	$	13,250	$	(18	)
Asset-backed securities		4,591		(24	)		0		0		4,591		(24	)
Obligations of states and political subdivisions		229		(1	)		150		0		379		(1	)
Total	$	18,070	$	(43	)	$	150	$	0	$	18,220	$	(43	)

Available for sale securities proceeds and gross realized gain loss net

(in thousands)	2012		2011		2010
Proceeds from sales of available for sales securities	$	790	$	0	$	0
Gains realized on sales		26		0		0
Losses realized on sales		0		0		0
Other-than-temporary impairment recognized		0		0		0
Investment securities gains	$	26	$	0	$	0

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Cash flows from operating activities:
Net income (loss)	$ 2,822	$ 2,857	$ (3,552)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	8,900	11,523	15,255
Depreciation expense	1,858	1,940	1,964
Net amortization of investment securities, premiums, and discounts	1,161	837	698
Amortization of intangible assets	408	1,243	1,360
Stock based compensation expense	29	58	87
Change in fair value of mortgage servicing rights	1,331	0	0
Gain on sale of investment securities	(26)	0	0
(Gain) loss on sales and dispositions of premises and equipment	(79)	(13)	60
(Gain) loss on sales and dispositions of other real estate owned and repossessions	(317)	206	2,311
Provision for other real estate owned	713	1,252	6,158
Decrease in accrued interest receivable	151	393	892
Increase in cash surrender value - life insurance	(72)	(62)	(72)
Decrease in other assets	949	252	1,203
(Increase) decrease in income tax receivable	(644)	1,008	(1,328)
Decrease in accrued interest payable	(145)	(437)	(946)
Increase (decrease) in other liabilities	253	(104)	30
Origination of mortgage loans for sale	(99,420)	(73,272)	(104,002)
Proceeds from the sale of mortgage loans	99,797	74,983	106,548
Gain on sale of mortgage loans, net	(2,669)	(1,649)	(2,493)
(Increase) decrease in net deferred tax asset	(214)	462	(2,299)
Other, net	89	(645)	(453)
Net cash provided by operating activities	14,875	20,832	21,456
Cash flows from investing activities:
Net (increase) decrease in loans	(26,499)	32,298	53,926
Purchase of available-for-sale debt securities	(76,498)	(122,871)	(189,082)
Proceeds from maturities of available-for-sale debt securities	42,735	36,923	114,899
Proceeds from calls of available-for-sale debt securities	45,170	54,185	46,795
Proceeds from sales of available-for-sale debt securities	790	0	0
Proceeds from sales of FHLB stock	460	1,757	1,004
Purchase of FHLB stock	0	0	(392)
Purchases of premises and equipment	(1,375)	(3,393)	(549)
Proceeds from sales of premises and equipment	272	47	34
Proceeds from sales of other real estate owned and repossessions	8,571	7,435	9,689
Net cash (used) provided by investing activities	(6,374)	6,381	36,324
Cash flows from financing activities:
Net increase in demand deposits	33,084	21,438	2,732
Net increase in interest-bearing transaction accounts	21,103	5,461	24,854
Net decrease in time deposits	(21,136)	(15,337)	(37,246)
Net decrease in federal funds purchased and securities sold under agreements to repurchase	(3,458)	(5,552)	(6,577)
Proceeds from Federal Home Loan Bank advances	0	0	10,000
Repayment of Federal Home Loan Bank advances	(8,284)	(38,576)	(22,331)
Redemption of 12,000 shares of preferred stock	(12,000)	0	0
Cash dividends paid - preferred stock	(1,203)	(1,513)	(1,513)
Cash dividends paid - common stock	(940)	(904)	(1,385)
Net cash provided (used) by financing activities	7,166	(34,983)	(31,466)
Net increase (decrease) in cash and cash equivalents	15,667	(7,770)	26,314
Cash and cash equivalents, beginning of year	43,210	50,980	24,666
Cash and cash equivalents, end of year	58,877	43,210	50,980
Cash paid during the year for:
Interest	8,420	11,290	16,699
Income taxes	1,591	665	800
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans	$ 16,869	$ 10,903	$ 23,677

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Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2012

Premises and Equipment [Abstract]

Summary of premises and equipment

(in thousands)	2012		2011
Land and land improvements	$	10,073	$	10,121
Buildings and improvements		34,174		33,652
Furniture and equipment		12,250		12,013
Construction in progress		155		277
Total		56,594		56,063
Less accumulated depreciation		19,631		18,110
Premises and equipment, net	$	37,021	$	37,953

Depreciation expense

(in thousands)	2012		2011		2010
Depreciation expense	$	1,858	$	1,940	$	1,964

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Income Taxes (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Applicable income tax (benefit) expense for financial reporting purposes
Income (loss) before provision for income tax expense (benefit)	$ 3,368	$ 3,448	$ (6,639)
Tax at statutory Federal income tax rate	1,145	1,172	(2,257)
Tax at statutory Federal income tax rate, percentage	34.00%	34.00%	34.00%
Tax-exempt income	(380)	(404)	(445)
Tax-exempt income, percentage	(11.27%)	(11.72%)	6.70%
State income tax, net of Federal tax benefit	61	(111)	(105)
State income tax, net of Federal tax benefit, Percentage	1.81%	(3.23%)	1.58%
Release of prior year over accrual	(371)	0	0
Release of prior year over accrual, Percentage	(11.01%)	0.00%	0.00%
Other, net	91	(66)	(280)
Other net, Percentage	2.70%	(1.91%)	4.22%
Provision for income tax expense (benefit)	$ 546	$ 591	$ (3,087)
Provision for income tax expense (benefit), percentage	16.23%	17.14%	46.50%

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Capital Requirements (Tables)

12 Months Ended

Dec. 31, 2012

Deposits and Capital Requirements [Abstract]

The actual and required capital amounts and ratios for the Company and the Bank

						Minimum					Well-Capitalized
	Actual					Capital Requirements					Capital Requirements
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Total capital (to risk-weighted assets):
Company	$	148,889		16.83	%	$	70,759		8.00	%		N.A.		N.A.	%
Bank		131,126		15.12			69,375		8.00		$	86,715		10.00
Tier I capital (to risk-weighted assets):
Company	$	120,138		13.58	%	$	35,380		4.00	%		N.A.		N.A.	%
Bank		120,243		13.87			34,686		4.00		$	52,029		6.00
Tier I capital (to adjusted average assets):
Company	$	120,138		10.37	%	$	34,762		3.00	%	$	N.A.		N.A.	%
Bank		120,243		10.60			34,037		3.00			56,729		5.00
(in thousands)
December 31, 2011
Total capital (to risk-weighted assets):
Company	$	159,768		18.03	%	$	70,905		8.00	%	$	N.A.		N.A.	%
Bank		130,398		15.00			69,567		8.00			86,959		10.00
Tier I capital (to risk-weighted assets):
Company	$	134,391		15.16	%	$	35,453		4.00	%	$	N.A.		N.A.	%
Bank		119,498		13.74			34,784		4.00			52,175		6.00
Tier I capital (to adjusted average assets):
Company	$	134,391		11.52	%	$	34,993		3.00	%	$	N.A.		N.A.	%
Bank		119,498		10.45			34,309		3.00			57,181		5.00

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Loans and Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment, With no related allowance recorded	$ 22,523	$ 30,407
Average Recorded Investment, With an allowance recorded	20,929
Total impaired loans, Average Recorded Investment	43,452	52,841
Interest Recognized For the Period Ended, With no related allowance recorded	275	155
Interest Recognized For the Period Ended, With an allowance recorded	139
Total impaired loans, Interest Recognized For the Period Ended	414	285
Commercial, Financial, and Agricultural [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment, With no related allowance recorded	4,157	3,510
Average Recorded Investment, With an allowance recorded	776	655
Interest Recognized For the Period Ended, With no related allowance recorded	93	52
Interest Recognized For the Period Ended, With an allowance recorded	29	17
Real estate construction - residential [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment, With no related allowance recorded	1,137	1,273
Average Recorded Investment, With an allowance recorded	189	47
Interest Recognized For the Period Ended, With no related allowance recorded	7	0
Interest Recognized For the Period Ended, With an allowance recorded	0	0
Real estate construction - commercial [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment, With no related allowance recorded	1,692	3,568
Average Recorded Investment, With an allowance recorded	6,087	5,805
Interest Recognized For the Period Ended, With no related allowance recorded	0	0
Interest Recognized For the Period Ended, With an allowance recorded	0	0
Real estate mortgage - residential [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment, With no related allowance recorded	3,169	3,596
Average Recorded Investment, With an allowance recorded	2,604	3,203
Interest Recognized For the Period Ended, With no related allowance recorded	50	26
Interest Recognized For the Period Ended, With an allowance recorded	11	113
Real estate mortgage - commercial [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment, With no related allowance recorded	12,198	18,270
Average Recorded Investment, With an allowance recorded	11,271	12,724
Interest Recognized For the Period Ended, With no related allowance recorded	124	73
Interest Recognized For the Period Ended, With an allowance recorded	99	0
Consumer [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment, With no related allowance recorded	170	190
Average Recorded Investment, With an allowance recorded	2	0
Interest Recognized For the Period Ended, With no related allowance recorded	1	4
Interest Recognized For the Period Ended, With an allowance recorded	0	0
Installment Loans to Individuals [Member]
Average recorded investment and interest income recognized on impaired loans
Average Recorded Investment, With an allowance recorded		22,434
Interest Recognized For the Period Ended, With an allowance recorded		$ 130

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Intangible Assets (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Changes in the net carrying amount of core deposit intangible assets
Balance at beginning of year	$ 543
Amortization	(408)	(1,243)	(1,360)
Balance at end of year	135	543
Core Deposit Intangible Asset [Member]
Changes in the net carrying amount of core deposit intangible assets
Balance at beginning of year	543	978	1,504
Additions	0	0	0
Amortization	(408)	(435)	(526)
Balance at end of year	$ 135	$ 543	$ 978

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
ASSETS
Loans	$ 846,984	$ 842,930
Allowances for loan losses	(14,842)	(13,809)
Net loans	832,142	829,121
Investment in available-for-sale securities, at fair value	200,246	213,806
Federal funds sold and securities purchased under agreements to resell	0	75
Cash and due from banks	58,877	43,135
Premises and equipment - net	37,021	37,953
Other real estate owned and repossessed assets - net	23,592	16,020
Accrued interest receivable	5,190	5,341
Mortgage servicing rights	2,549	2,308
Intangible assets - net	135	543
Cash surrender value - life insurance	2,136	2,064
Other assets	19,718	20,795
Total assets	1,181,606	1,171,161
Deposits:
Non-interest bearing demand	192,271	159,187
Savings, interest checking and money market	405,702	384,599
Time deposits $100,000 and over	120,777	139,504
Other time deposits	272,525	274,934
Total deposits	991,275	958,224
Federal funds purchased and securities sold under agreements to repurchase	21,058	24,516
Subordinated notes	49,486	49,486
Federal Home Loan Bank advances	20,126	28,410
Accrued interest payable	909	1,054
Other liabilities	6,532	6,895
Total liabilities	1,089,386	1,068,585
Stockholders' equity:
Preferred stock, $0.01 par value per share, 1,000,000 shares authorized; Issued 18,255 shares and 30,255 shares, respectively, $1,000 per share liquidation value, net of discount	17,977	29,318
Common stock, $1 par value, authorized 15,000,000 shares ; Issued 5,000,972 and 4,814,852 shares, respectively	5,001	4,815
Surplus	31,816	30,266
Retained earnings	39,118	40,354
Accumulated other comprehensive income, net of tax	1,825	1,340
Treasury stock; 161,858 shares, at cost	(3,517)	(3,517)
Total stockholders' equity	92,220	102,576
Total liabilities and stockholders' equity	$ 1,181,606	$ 1,171,161

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Quarterly Financial Information (Unaudited) (Tables)

12 Months Ended

Dec. 31, 2012

Quarterly Financial Information (Unaudited) [Abstract]

Quarterly Financial Information (Unaudited)

(In thousands except per share data)	First quarter		Second quarter		Third quarter			Fourth quarter			Year to Date
Year Ended December 31, 2012
Interest income	$	12,646	$	12,297	$	12,151		$	12,020		$	49,114
Interest expense		1,831		2,125		2,029			1,920			7,905
Net interest income		10,815		10,172		10,122			10,100			41,209
Provision for loan losses		1,700		1,500		4,700			1,000			8,900
Noninterest income		1,970		2,443		2,680			2,633			9,726
Noninterest expense		9,480		10,098		10,378			8,711			38,667
Income tax (benefit) expense		154		277		(704	)		819			546
Net income (loss)	$	1,451	$	740	$	(1,572	)	$	2,203		$	2,822
Preferred stock dividends		370		296		228			231			1,125
Accretion of discount on preferred stock		119		396		72			72			659
Net income (loss) available to common stockholders	$	962	$	48	$	(1,872	)	$	1,900		$	1,038
Net income (loss) per share:
Basic earnings (loss) per share	$	0.21	$	0.01	$	(0.39	)	$	0.39		$	0.21
Diluted earnings (loss) per share		0.21		0.01		(0.39	)		0.39			0.21
Year Ended December 31, 2011
Interest income	$	13,583	$	13,640	$	13,384		$	12,862		$	53,469
Interest expense		3,102		2,858		2,580			2,313			10,853
Net interest income		10,481		10,782		10,804			10,549			42,616
Provision for loan losses		1,750		1,883		2,010			5,880			11,523
Noninterest income		2,052		2,178		2,358			2,612			9,200
Noninterest expense		9,378		9,008		8,925			9,534			36,845
Income tax (benefit) expense		451		661		711			(1,232	)		591
Net income (loss)	$	954	$	1,408	$	1,516		$	(1,021	)	$	2,857
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	$	465	$	907	$	1,018		$	(1,522	)	$	868
Net income (loss) per share:
Basic earnings (loss) per share	$	0.10	$	0.19	$	0.21		$	(0.31	)	$	0.18
Diluted earnings (loss) per share		0.10		0.19		0.21			(0.31	)		0.18

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Stock Compensation (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Jul. 02, 2012
Stock Compensation (Textual) [Abstract]
Grant of options to purchase	526,435
Options issued in 2008 to acquire shares that vested immediately	11,133
Percentage of stock dividend				4.00%
Weighted average remaining contractual life, options outstanding	3 years	3 years 6 months
Aggregate intrinsic value, options outstanding	$ 0	$ 0
Number of shares, Granted	0	0	0
Weighted average remaining contractual life, options exercisable	2 years 9 months 18 days	3 years 3 months 18 days
Aggregate intrinsic value, options exercisable	0	0
Number of shares, Exercised	0	0	0
Stock based compensation expense	29,000	58,000	87,000
Total unrecognized compensation expense related to non-vested stock awards	$ 68,000
Weighted average period is expected to be recognized	2 years
Minimum [Member]
Stock Compensation (Additional Textual) [Abstract]
Options vest over periods	4 years
Maximum [Member]
Stock Compensation (Additional Textual) [Abstract]
Options vest over periods	5 years

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Quarterly Financial Information (Unaudited) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Quarterly Financial Information (Unaudited)
Interest income	$ 12,020	$ 12,151	$ 12,297	$ 12,646	$ 12,862	$ 13,384	$ 13,640	$ 13,583	$ 49,114	$ 53,469	$ 58,739
Interest expense	1,920	2,029	2,125	1,831	2,313	2,580	2,858	3,102	7,905	10,853	15,753
Net interest income	10,100	10,122	10,172	10,815	10,549	10,804	10,782	10,481	41,209	42,616	42,986
Provision for loan losses	1,000	4,700	1,500	1,700	5,880	2,010	1,883	1,750	8,900	11,523	15,255
Noninterest income	2,633	2,680	2,443	1,970	2,612	2,358	2,178	2,052	9,726	9,200	10,481
Noninterest expense	8,711	10,378	10,098	9,480	9,534	8,925	9,008	9,378	38,667	36,845	44,851
Income tax expense (benefit)	819	(704)	277	154	(1,232)	711	661	451	546	591	(3,087)
Net income (loss)	2,203	(1,572)	740	1,451	(1,021)	1,516	1,408	954	2,822	2,857	(3,552)
Preferred stock dividends	231	228	296	370	382	379	382	370	1,125	1,513	1,513
Accretion of discount on preferred stock	72	72	396	119	119	119	119	119	659	476	476
Net income (loss) available to common shareholders	$ 1,900	$ (1,872)	$ 48	$ 962	$ (1,522)	$ 1,018	$ 907	$ 465	$ 1,038	$ 868	$ (5,541)
Net income (loss) per share:
Basic earnings (loss) per share	$ 0.39	$ (0.39)	$ 0.01	$ 0.21	$ (0.31)	$ 0.21	$ 0.19	$ 0.10	$ 0.21	$ 0.18	$ (1.15)
Diluted earnings (loss) per share	$ 0.39	$ (0.39)	$ 0.01	$ 0.21	$ (0.31)	$ 0.21	$ 0.19	$ 0.10	$ 0.21	$ 0.18	$ (1.15)

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Consolidated Statements of Stockholders' Equity (USD $) In Thousands	Total	Preferred Stock	Common Stock	Surplus	Retained Earnings	Accumulated Other Comprehensive Income	Treasury Stock
Beginning balance at Dec. 31, 2009	$ 107,771	$ 28,365	$ 4,464	$ 26,971	$ 50,576	$ 912	$ (3,517)
Net income (loss)	(3,552)	0	0	0	(3,552)	0	0
Other comprehensive income	(170)	0	0	0	0	(170)	0
Stock based compensation expense	87	0	0	87	0	0	0
Accretion of preferred stock discount	0	476	0	0	(476)	0	0
Redemption of 12,000 shares of preferred stock	0
Stock dividend	0	0	172	1,871	(2,043)	0	0
Cash dividends declared, preferred stock	(1,513)	0	0	0	(1,513)	0	0
Cash dividends declared, common stock	(1,135)	0	0	0	(1,135)	0	0
Ending balance at Dec. 31, 2010	101,488	28,841	4,636	28,929	41,857	742	(3,517)
Net income (loss)	2,857	0	0	0	2,857	0	0
Other comprehensive income	598	0	0	0	0	598	0
Stock based compensation expense	58	0	0	58	0	0	0
Accretion of preferred stock discount	0	477	0	0	(477)	0	0
Redemption of 12,000 shares of preferred stock	0
Stock dividend	0	0	179	1,279	(1,458)	0	0
Cash dividends declared, preferred stock	(1,513)	0	0	0	(1,513)	0	0
Cash dividends declared, common stock	(912)	0	0	0	(912)	0	0
Ending balance at Dec. 31, 2011 (Scenario, previously reported)	102,576	29,318	4,815	30,266	40,354	1,340	(3,517)
Ending balance (Cumulative effect of change in accounting principle)	460	0	0	0	460	0	0
Ending balance at Dec. 31, 2011	102,576	29,318	4,815	30,266	40,814	1,340	(3,517)
Net income (loss)	2,822	0	0	0	2,822	0	0
Other comprehensive income	485	0	0	0	0	485	0
Stock based compensation expense	29	0	0	29	0	0	0
Accretion of preferred stock discount	0	659	0	0	(659)	0	0
Redemption of 12,000 shares of preferred stock	(12,000)	(12,000)	0	0	0	0	0
Stock dividend	0	0	186	1,521	(1,707)	0	0
Cash dividends declared, preferred stock	(1,203)	0	0	0	(1,203)	0	0
Cash dividends declared, common stock	(949)	0	0	0	(949)	0	0
Ending balance at Dec. 31, 2012	$ 92,220	$ 17,977	$ 5,001	$ 31,816	$ 39,118	$ 1,825	$ (3,517)

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Employee Benefit Plans (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Employee Benefit Plans (Textual) [Abstract]
Employer contribution	$ 766,000	$ 1,005,000
Return on pension plan assets	7.00%
Employee Benefit Plans (Additional Textual) [Abstract]
Amortized from accumulated other comprehensive income	79,000
Net accumulated actuarial net loss	(458,000)	2,240,000
Past annual returns	11.40%	0.10%	12.40%	22.00%	(32.60%)
Expected Expense to incur	1,144,000	1,224,000
Percentage of equity securities in long-term investment target mix	70.00%
Percentage of fixed income in long-term investment target mix	30.00%
Low-cost equity index funds	37.00%	37.00%
Profit-sharing plan [Member]
Employee Benefit Plans (Textual) [Abstract]
Eligible employee contributions	3.00%
Defined benefit plan contributions by employer percent	6.00%
Pension plans, defined benefit [Member]
Employee Benefit Plans (Textual) [Abstract]
Employer contribution	766,000	238,000
Minimum required contribution	$ 665,000
Return on pension plan assets	7.00%	7.00%	7.00%

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Real Estate and Other Assets Acquired in Settlement of Loans (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Schedule of real estate acquired in settlement of loans
Beginning Balance	$ 16,020	$ 20,168
Additions	16,869	10,903
Proceeds from sales	(8,571)	(7,435)
Charge-offs against the valuation allowance for other real estate owned, net	(1,883)	(433)
Net gain on sales	317	(206)
Total other real estate owned and repossessed assets	29,729	22,997
Less valuation allowance for other real estate owned	(6,137)	(6,977)
Ending Balance	$ 23,592	$ 16,020

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Earnings per Share (Details 1)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of anti-dilutive shares
Anti-dilutive shares	502,476	557,767	557,968
Option shares [Member]
Summary of anti-dilutive shares
Anti-dilutive shares	215,343	270,634	270,835
Warrant shares [Member]
Summary of anti-dilutive shares
Anti-dilutive shares	287,133	287,133	287,133

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Borrowings (Tables)

12 Months Ended

Dec. 31, 2012

Borrowings [Abstract]

Federal Funds Purchased and Securities Sold under Agreements to Repurchase (Repurchase Agreements)

(in thousands)	Year End Weighted Rate			Average Weighted Rate			Average Balance Outstanding		Maximum Outstanding at any Month End		Balance at December 31,
2012
Federal funds purchased		0.0	%		0.6	%	$	412	$	345	$	0
Short-term repurchase agreements		0.1			0.1			22,867		24,734		21,058
Total											$	21,058
2011
Federal funds purchased		0.0	%		0.3	%	$	2	$	0	$	0
Short-term repurchase agreements		0.1			0.2			27,634		30,227		24,516
Total											$	24,516

Subordinated Notes and Other Borrowings

		2012							2011
(in thousands)	Borrower	Maturity Date		Year End Balance		Year End Weighted Rate			Year End Balance		Year End Weighted Rate
FHLB advances	The Bank		2013	$	10,126		1.5	%	$	8,284		1.6	%
			2014		0		na			10,126		1.5	%
			2015		0		na			0		na
			2016		0		na			0		na
			2017-18		10,000		2.5	%		10,000		2.5	%
Total Bank				$	20,126				$	28,410
Subordinated notes	The Company		2034	$	25,774		3.0	%	$	25,774		3.3	%
			2035		23,712		2.1	%		23,712		2.4	%
Total Company				$	49,486				$	49,486

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Investment Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Gross unrealized losses on debt securities and the fair value of the related securities
Fair Value, Less than 12 months	$ 7,887	$ 18,070
Fair Value, 12 months or more	150	150
Fair Value, Total	8,037	18,220
Unrealized Losses, Less than 12 months	(28)	(43)
Unrealized Losses, 12 months or more	0	0
Unrealized Losses, Total	(28)	(43)
Government sponsored enterprises [Member]
Gross unrealized losses on debt securities and the fair value of the related securities
Fair Value, Less than 12 months	1,044	13,250
Fair Value, 12 months or more	0	0
Fair Value, Total	1,044	13,250
Unrealized Losses, Less than 12 months	0	(18)
Unrealized Losses, 12 months or more	0	0
Unrealized Losses, Total	0	(18)
Asset-backed securities [Member]
Gross unrealized losses on debt securities and the fair value of the related securities
Fair Value, Less than 12 months	4,729	4,591
Fair Value, 12 months or more	0	0
Fair Value, Total	4,729	4,591
Unrealized Losses, Less than 12 months	(11)	(24)
Unrealized Losses, 12 months or more	0	0
Unrealized Losses, Total	(11)	(24)
Obligations of states and political subdivisions [Member]
Gross unrealized losses on debt securities and the fair value of the related securities
Fair Value, Less than 12 months	2,114	229
Fair Value, 12 months or more	150	150
Fair Value, Total	2,264	379
Unrealized Losses, Less than 12 months	(17)	(1)
Unrealized Losses, 12 months or more	0	0
Unrealized Losses, Total	$ (17)	$ (1)

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Capital Requirements

12 Months Ended

Dec. 31, 2012

Deposits and Capital Requirements [Abstract]

Capital Requirements

(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, 2012 and 2011, the Company and the Bank met all capital adequacy requirements.

As of December 31, 2012, 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.

						Minimum					Well-Capitalized
	Actual					Capital Requirements					Capital Requirements
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Total capital (to risk-weighted assets):
Company	$	148,889		16.83	%	$	70,759		8.00	%		N.A.		N.A.	%
Bank		131,126		15.12			69,375		8.00		$	86,715		10.00
Tier I capital (to risk-weighted assets):
Company	$	120,138		13.58	%	$	35,380		4.00	%		N.A.		N.A.	%
Bank		120,243		13.87			34,686		4.00		$	52,029		6.00
Tier I capital (to adjusted average assets):
Company	$	120,138		10.37	%	$	34,762		3.00	%	$	N.A.		N.A.	%
Bank		120,243		10.60			34,037		3.00			56,729		5.00
(in thousands)
December 31, 2011
Total capital (to risk-weighted assets):
Company	$	159,768		18.03	%	$	70,905		8.00	%	$	N.A.		N.A.	%
Bank		130,398		15.00			69,567		8.00			86,959		10.00
Tier I capital (to risk-weighted assets):
Company	$	134,391		15.16	%	$	35,453		4.00	%	$	N.A.		N.A.	%
Bank		119,498		13.74			34,784		4.00			52,175		6.00
Tier I capital (to adjusted average assets):
Company	$	134,391		11.52	%	$	34,993		3.00	%	$	N.A.		N.A.	%
Bank		119,498		10.45			34,309		3.00			57,181		5.00

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Composition of income tax expense (benefit)

(in thousands)	2012			2011			2010
Current:
Federal	$	651		$	374		$	(837	)
State		156			(214	)		80
Total current		807			160			(757	)
Deferred:
Federal		(197	)		386			(2,091	)
State		(64	)		45			(239	)
Total deferred		(261	)		431			(2,330	)
Total income tax expense (benefit)	$	546		$	591		$	(3,087	)

Applicable income tax (benefit) expense for financial reporting purposes

	2012						2011						2010
(in thousands)	Amount			%			Amount			%			Amount			%
Income (loss) before provision for income tax expense (benefit)	$	3,368					$	3,448					$	(6,639	)
Tax at statutory Federal income tax rate	$	1,145			34.00	%	$	1,172			34.00	%	$	(2,257	)		34.00	%
Tax-exempt income		(380	)		(11.27	)		(404	)		(11.72	)		(445	)		6.70
State income tax, net of Federal tax benefit		61			1.81			(111	)		(3.23	)		(105	)		1.58
Release of prior year over accrual		(371	)		(11.01	)		0			0.00			0			0.00
Other, net		91			2.70			(66	)		(1.91	)		(280	)		4.22
Provision for income tax expense (benefit)	$	546			16.23	%	$	591			17.14	%	$	(3,087	)		46.50	%

Components of deferred tax assets and deferred tax liabilities

(in thousands)	2012		2011
Deferred tax assets:
Allowance for loan losses	$	5,640	$	5,248
Impairment of other real estate owned		2,774		2,734
Goodwill		2,483		2,831
Deferred taxes on pension		997		1,380
Nonaccrual loan interest		940		1,033
Core deposit intangible		904		883
Pension		450		276
Deferred compensation		36		27
Other		449		549
Total deferred tax assets	$	14,673	$	14,961
Deferred tax liabilities:
Available-for-sale securities	$	2,088	$	2,177
Premises and equipment		958		960
Mortgage servicing rights		908		791
Assets held for sale		110		109
FHLB stock dividend		100		100
Other		1		2
Total deferred tax liabilities		4,165		4,139
Net deferred tax asset	$	10,508	$	10,822

Reconciliation of the beginning and ending amount of the unrecognized tax benefits

	2012		2011			2010
Unrecognized tax benefits as of January 1,	$	0	$	340,351		$	562,076
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during prior years		0		0			0
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during year		0		0			0
The amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities		0		0			0
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations		0		(340,351	)		(221,725	)
Unrecognized tax benefits as of December 31,	$	0	$	0		$	340,351

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Earnings Per Share (Details) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Basic earnings (loss) per common share:
Net income (loss)	$ 2,203,000	$ (1,572,000)	$ 740,000	$ 1,451,000	$ (1,021,000)	$ 1,516,000	$ 1,408,000	$ 954,000	$ 2,822,000	$ 2,857,000	$ (3,552,000)
Less: Preferred stock dividends									1,124,417	1,512,750	1,512,750
Accretion of discount on preferred stock	72,000	72,000	396,000	119,000	119,000	119,000	119,000	119,000	659,000	476,000	476,000
Net income (loss) available to common shareholders	1,900,000	(1,872,000)	48,000	962,000	(1,522,000)	1,018,000	907,000	465,000	1,038,000	868,000	(5,541,000)
Basic earnings (loss) per share	$ 0.39	$ (0.39)	$ 0.01	$ 0.21	$ (0.31)	$ 0.21	$ 0.19	$ 0.10	$ 0.21	$ 0.18	$ (1.15)
Diluted earnings (loss) per common share:
Net income (loss)	2,203,000	(1,572,000)	740,000	1,451,000	(1,021,000)	1,516,000	1,408,000	954,000	2,822,000	2,857,000	(3,552,000)
Less: Preferred stock dividends									1,124,417	1,512,750	1,512,750
Accretion of discount on preferred stock	72,000	72,000	396,000	119,000	119,000	119,000	119,000	119,000	659,000	476,000	476,000
Net income (loss) available to common shareholders	$ 1,900,000	$ (1,872,000)	$ 48,000	$ 962,000	$ (1,522,000)	$ 1,018,000	$ 907,000	$ 465,000	$ 1,038,000	$ 868,000	$ (5,541,000)
Average shares outstanding									4,839,114	4,839,114	4,839,114
Effect of dilutive stock options									0	0	0
Average shares outstanding including dilutive stock options									4,839,114	4,839,114	4,839,114
Diluted earnings (loss) per share	$ 0.39	$ (0.39)	$ 0.01	$ 0.21	$ (0.31)	$ 0.21	$ 0.19	$ 0.10	$ 0.21	$ 0.18	$ (1.15)

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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2012

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

(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 values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans could be made to borrowers with similar credit ratings and for the same remaining maturities. 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.

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 Home Loan Bank (FHLB) Stock

Ownership of equity securities of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.

Federal Funds Sold, Cash, and Due from Banks

The carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell classified as short-term generally mature in 90 days or less.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.

Cash Surrender Value –Life Insurance

The fair value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

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.

Subordinated Notes and Other Borrowings

The fair value of subordinated notes and other 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.

A summary of the carrying amounts and fair values of the Company’s financial instruments at December 31, 2012 and 2011 is as follows:

					December 31, 2012 Fair Value Measurements
	December 31, 2012				Quoted Prices in Active Markets for Identical		Other Observable		Net Significant Unobservable
(in thousands)	Carrying amount		Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Loans	$	832,142	$	834,824	$	0	$	0	$	834,824
Investment securities		200,246		200,246		2,030		198,216		0
FHLB stock		2,278		2,278		0		2,278		0
Cash and due from banks		58,877		58,877		58,877		0		0
Mortgage servicing rights		2,549		2,549		0		0		2,549
Cash surrender value—life insurance		2,136		2,136				2,136		0
Accrued interest receivable		5,190		5,190		5,190		0		0
	$	1,103,418	$	1,106,100	$	66,097	$	202,630	$	837,373
Liabilities:
Deposits:
Demand	$	192,271	$	192,271	$	192,271	$	0	$	0
NOW		178,121		178,121		178,121		0		0
Savings		69,997		69,997		69,997		0		0
Money market		157,584		157,584		157,584		0		0
Time		393,302		397,986		0		0		397,986
Federal funds purchased and securities sold under agreements to repurchase		21,058		21,058		21,058		0		0
Subordinated notes		49,486		13,154		0		13,154		0
Federal Home Loan Bank advances		20,126		20,651		0		20,651		0
Accrued interest payable		909		909		909		0		0
	$	1,082,854	$	1,051,731	$	619,940	$	33,805	$	397,986

					December 31, 2011
					Fair Value Measurements
	December 31, 2011				Quoted Prices in Active Markets for Identical		Other Observable		Net Significant Unobservable
(in thousands)	Carrying amount		Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Loans	$	829,121	$	830,077	$	0	$	0	$	830,077
Investment securities		213,806		213,806		2,054		211,752		0
FHLB stock		2,738		2,738		0		2,738		0
Federal fund sold and securities purchased under agreements to resell		75		75		75		0		0
Cash and due from banks		43,135		43,135		43,135		0		0
Mortgage servicing rights		2,308		2,512		0		0		2,512
Cash surrender value—life insurance		2,064		2,064				2,064		0
Accrued interest receivable		5,341		5,341		5,341		0		0
	$	1,098,588	$	1,099,748	$	50,605	$	216,554	$	832,589
Liabilities:
Deposits:
Demand	$	159,187	$	159,187	$	159,187	$	0	$	0
NOW		169,452		169,452		169,452		0		0
Savings		62,075		62,075		62,075		0		0
Money market		153,072		153,072		153,072		0		0
Time		414,438		421,687		0		0		421,687
Federal funds purchased and securities sold under agreements to repurchase		24,516		24,516		24,516		0		0
Subordinated notes		49,486		22,082		0		22,082		0
Federal Home Loan Bank advances		28,410		29,525		0		29,525		0
Accrued interest payable		1,054		1,054		1,054		0		0
	$	1,061,690	$	1,042,650	$	569,356	$	51,607	$	421,687

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is 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 that are competitive in the markets in which it operates.

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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Premises and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of premises and equipment
Total, premises and equipment	$ 56,594	$ 56,063
Less accumulated depreciation	19,631	18,110
Premises and equipment, net	37,021	37,953
Land and land improvements [Member]
Summary of premises and equipment
Total, premises and equipment	10,073	10,121
Buildings and improvements [Member]
Summary of premises and equipment
Total, premises and equipment	34,174	33,652
Furniture and equipment [Member]
Summary of premises and equipment
Total, premises and equipment	12,250	12,013
Construction in progress [Member]
Summary of premises and equipment
Total, premises and equipment	$ 155	$ 277

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Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Commitments to extend credit [Member]
Contractual amount of off-balance-sheet financial instruments
Contractual amount	$ 118,412	$ 117,171
Standby letters of credit [Member]
Contractual amount of off-balance-sheet financial instruments
Contractual amount	$ 2,995	$ 2,992

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Consolidated Statements of Stockholders' Equity (Parenthetical)	12 Months Ended
	Dec. 31, 2012
Redeemed preferred stock	12,000
Preferred Stock
Redeemed preferred stock	12,000

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Consolidated Balance Sheets (Parenthetical) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	18,255	30,255
Preferred stock, liquidation value	$ 1,000	$ 1,000
Common stock, par value	$ 1	$ 1
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	5,000,972	4,814,852
Treasury stock, shares	161,858	161,858

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Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Income Taxes

(9) Income Taxes

The composition of income tax expense (benefit) for the years ended December 31, 2012, 2011, and 2010 are as follows:

(in thousands)	2012			2011			2010
Current:
Federal	$	651		$	374		$	(837	)
State		156			(214	)		80
Total current		807			160			(757	)
Deferred:
Federal		(197	)		386			(2,091	)
State		(64	)		45			(239	)
Total deferred		(261	)		431			(2,330	)
Total income tax expense (benefit)	$	546		$	591		$	(3,087	)

Applicable income tax (benefit) expense for financial reporting purposes differs from the amount computed by applying the statutory Federal income tax rate for the reasons noted in the table for the years ended December 31, 2012, 2011, and 2010 are as follows:

	2012						2011						2010
(in thousands)	Amount			%			Amount			%			Amount			%
Income (loss) before provision for income tax expense (benefit)	$	3,368					$	3,448					$	(6,639	)
Tax at statutory Federal income tax rate	$	1,145			34.00	%	$	1,172			34.00	%	$	(2,257	)		34.00	%
Tax-exempt income		(380	)		(11.27	)		(404	)		(11.72	)		(445	)		6.70
State income tax, net of Federal tax benefit		61			1.81			(111	)		(3.23	)		(105	)		1.58
Release of prior year over accrual		(371	)		(11.01	)		0			0.00			0			0.00
Other, net		91			2.70			(66	)		(1.91	)		(280	)		4.22
Provision for income tax expense (benefit)	$	546			16.23	%	$	591			17.14	%	$	(3,087	)		46.50	%

The components of deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are as follows:

(in thousands)	2012		2011
Deferred tax assets:
Allowance for loan losses	$	5,640	$	5,248
Impairment of other real estate owned		2,774		2,734
Goodwill		2,483		2,831
Deferred taxes on pension		997		1,380
Nonaccrual loan interest		940		1,033
Core deposit intangible		904		883
Pension		450		276
Deferred compensation		36		27
Other		449		549
Total deferred tax assets	$	14,673	$	14,961
Deferred tax liabilities:
Available-for-sale securities	$	2,088	$	2,177
Premises and equipment		958		960
Mortgage servicing rights		908		791
Assets held for sale		110		109
FHLB stock dividend		100		100
Other		1		2
Total deferred tax liabilities		4,165		4,139
Net deferred tax asset	$	10,508	$	10,822

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, 2012 and, therefore, did not establish a valuation reserve.

At December 31, 2012, 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. As a result of the lapse of the statue of limitations for the 2007 tax year, the Company recognized $340,351 of gross unrecognized tax benefits and $30,969 of accrued interest. This resulted in a decrease in the effective tax rate for the year ended December 31, 2011 compared to December 31, 2010. As of December 31, 2012 and 2011, respectively, the Company did not have any uncertain tax provisions.

A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:

	2012		2011			2010
Unrecognized tax benefits as of January 1,	$	0	$	340,351		$	562,076
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during prior years		0		0			0
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during year		0		0			0
The amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities		0		0			0
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations		0		(340,351	)		(221,725	)
Unrecognized tax benefits as of December 31,	$	0	$	0		$	340,351

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Fair Value Measurements (Details 2) (Level 3 [Member], Mortgage servicing rights [Member])	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Level 3 [Member] | Mortgage servicing rights [Member]
Quantitative Information about Level 3 Fair Value Measurements
Weighted average constant prepayment rate	18.60%	20.86%
Weighted average discount rate	7.99%	7.99%

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Employee Benefit Plans (Details 6) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Future benefit payments expected to be paid
2013	$ 336
2014	428
2015	452
2016	462
2017	561
2018 to 2022	$ 3,712

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Employee Benefit Plans (Details 4)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Determination of benefit obligation at year end:
Discount rate	4.25%	4.75%	5.75%
Annual rate of compensation increase	3.61%	4.50%	4.50%
Determination of pension expense for year ended:
Discount rate for the service cost	4.25%	4.75%	5.75%
Annual rate of compensation increase	3.61%	4.50%	4.50%
Expected long-term rate of return on plan assets	7.00%
Determination of Pension expense [Member]
Determination of benefit obligation at year end:
Discount rate	4.75%	5.75%	5.75%
Annual rate of compensation increase	3.61%	4.50%	4.50%
Determination of pension expense for year ended:
Discount rate for the service cost	4.75%	5.75%	5.75%
Annual rate of compensation increase	3.61%	4.50%	4.50%
Expected long-term rate of return on plan assets	7.00%	7.00%	7.00%

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Apr. 01, 2013	Jun. 29, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	HAWTHORN BANCSHARES, INC.
Entity Central Index Key	0000893847
Document Type	10-K
Document Period End Date	Dec. 31, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	FY
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Public Float			$ 37,302,749
Entity Common Stock, Shares Outstanding		4,839,114

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Employee Benefit Plans

12 Months Ended

Dec. 31, 2012

Employee Benefit Plans [Abstract]

Employee Benefit Plans

(10) Employee Benefit Plans

Employee benefits charged to operating expenses are summarized in the table below for the years ended December 31, as indicated.

(in thousands)	2012		2011		2010
Payroll taxes	$	1,127	$	1,098	$	1,105
Medical plans		1,772		1,676		1,545
401k match		298		291		319
Pension plan		1,224		907		864
Profit-sharing		58		0		0
Other		318		250		162
Total employee benefits	$	4,797	$	4,222	$	3,995

The Company’s profit-sharing plan includes 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 periods shown. In addition, employees were able to make additional tax-deferred contributions.

Pension

The Company 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 $766,000 of contributions to the defined benefit plan through April 1, 2013, of which $238,000 relates to the 2011 plan year and $528,000 relates to the 2012 plan year. The minimum required contribution for the 2013 plan year is estimated to be $665,000. The Company has not determined whether it will make any contributions other than the minimum required funding contribution for 2013.

Obligations and Funded Status at December 31

(in thousands)	2012			2011
Change in projected benefit obligation:
Balance, January 1	$	14,217		$	10,655
Service cost		1,168			931
Interest cost		667			604
Actuarial (gain) loss		(458	)		2,240
Benefits paid		(252	)		(213	)
Balance, December 31	$	15,342		$	14,217
Change in plan assets:
Fair value, January 1	$	10,034		$	9,296
Actual gain (loss) return on plan assets		1,193			(54	)
Employer contribution		766			1,005
Expenses paid		(34	)		0
Benefits paid		(252	)		(213	)
Fair value, December 31	$	11,707		$	10,034
Funded status at end of year	$	(3,635	)	$	(4,183	)
Accumulated benefit obligation	$	12,564		$	10,762

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, as indicated:

(in thousands)	2012			2011			2010
Service cost—benefits earned during the year	$	1,168		$	931		$	844
Interest costs on projected benefit obligations		668			604			556
Expected return on plan assets		(776	)		(706	)		(614	)
Expected administrative expenses		40			0			0
Amortization of prior service cost		78			78			78
Amortization of unrecognized net loss		46			0			0
Net periodic pension expense	$	1,224		$	907		$	864

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at December 31, 2012 and 2011 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

(in thousands)	2012			2011
Prior service costs	$	(600	)	$	(679	)
Net accumulated actuarial net loss		(1,849	)		(2,777	)
Accumulated other comprehensive loss		(2,449	)		(3,456	)
Net periodic benefit cost in excess of cumulative employer contributions		(1,185	)		(727	)
Net amount recognized at December 31, balance sheet	$	(3,634	)	$	(4,183	)
Net gain (loss) arising during period	$	881		$	(3,001	)
Prior service cost amortization		79			79
Amortization of net actuarial loss		46			0
Total recognized in other comprehensive income (loss)	$	1,006		$	(2,922	)
Total recognized in net periodic pension cost and other comprehensive income (loss)	$	218		$	3,829

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 2013 is $79,000. During 2013, $30,000 is the estimated amount of actuarial loss subject to amortization into net periodic pension cost.

Assumptions utilized to determine benefit obligations as of December 31, 2012, 2011 and 2010 and to determine pension expense for the years then ended are as follows:

	2012			2011			2010
Determination of benefit obligation at year end:
Discount rate		4.25	%		4.75	%		5.75	%
Annual rate of compensation increase		3.61	%		4.50	%		4.50	%
Determination of pension expense for year ended:
Discount rate for the service cost		4.75	%		5.75	%		5.75	%
Annual rate of compensation increase		3.61	%		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 2012 pension expense was 7.0%. 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: 11.4% in 2012, 0.1% in 2011, 12.4% in 2010, 22.0% in 2009, and (32.6)% in 2008. 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 decrease in discount rates used in the actuarial calculation of plan income, the Company expects to incur $1,144,000 of expense in 2013 compared to $1,224,000 in 2012.

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, 2012 and 2011 by asset category are as follows:

	Fair Value Measurements
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Cash equivalents	$	485	$	485	$	0	$	0
Equity securities:
U.S. large-cap (a)		4,335		4,335		0		0
U.S. mid-cap (b)		575		575		0		0
U.S. small-cap (c)		635		635		0		0
International (d)		1,670		1,670		0		0
Real estate (e)		395		395		0		0
Commodities (f)		370		370		0		0
Fixed income securities:
U.S. gov’t agency obligations (g)		2,726		0		2,726		0
Corporate investment grade (g)		416		0		416		0
Corporate non-investment grade (g)		100		0		100		0
Total	$	11,707	$	8,465	$	3,242	$	0
December 31, 2011
Cash equivalents	$	1,791	$	1,791	$	0	$	0
Equity securities:
U.S. large-cap (a)		3,821		3,821		0		0
U.S. mid-cap (b)		502		502		0		0
U.S. small-cap (c)		595		595		0		0
International (d)		1,278		1,278		0		0
Real estate (e)		203		203		0		0
Commodities (f)		198		198		0		0
Fixed income securities:
U.S. gov’t agency obligations (g)		841		0		841		0
Corporate investment grade (g)		653		0		653		0
Corporate non-investment grade (g)		152		0		152		0
Total	$	10,034	$	8,388	$	1,646	$	0

(a) This category comprises of low-cost equity index funds not actively managed that track the S&P 500.

(b) This category comprises of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.

(c) This is comprises 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 comprises of low-cost real estate index exchange traded funds.

(f) This category comprises of exchange traded funds investing in agricultural and energy commodities.

(g) This category comprises of individual bonds.

The following future benefit payments are expected to be paid:

Year	Pension benefits
(in thousands)
2013	$	336
2014		428
2015		452
2016		462
2017		561
2018 to 2022		3,712

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Borrowings (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Subordinated Notes and Other Borrowings
FHLB advances, Year End Balance	$ 20,126	$ 28,410
Subordinated notes, Year End Balance	49,486	49,486
The Bank [Member]
Subordinated Notes and Other Borrowings
FHLB advances, Year End Balance	20,126
The Bank [Member] | 2013 [Member]
Subordinated Notes and Other Borrowings
FHLB advances, Year End Balance	10,126	8,284
FHLB advances, Year End Weighted Rate	1.50%	1.60%
The Bank [Member] | 2014 [Member]
Subordinated Notes and Other Borrowings
FHLB advances, Year End Balance	0	10,126
FHLB advances, Year End Weighted Rate		1.50%
The Bank [Member] | 2015 [Member]
Subordinated Notes and Other Borrowings
FHLB advances, Year End Balance	0	0
The Bank [Member] | 2016 [Member]
Subordinated Notes and Other Borrowings
FHLB advances, Year End Balance	0	0
The Bank [Member] | 2017 - 2018 [Member]
Subordinated Notes and Other Borrowings
FHLB advances, Year End Balance	10,000	10,000
FHLB advances, Year End Weighted Rate	2.50%	2.50%
The Company [Member] | 2034 [Member]
Subordinated Notes and Other Borrowings
Subordinated notes, Year End Balance	25,774	25,774
Subordinated notes, Year End Weighted Rate	3.00%	3.30%
The Company [Member] | 2035 [Member]
Subordinated Notes and Other Borrowings
Subordinated notes, Year End Balance	$ 23,712	$ 23,712
Subordinated notes, Year End Weighted Rate	2.10%	2.40%

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Employee Benefit Plans (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss)
Prior service costs	$ (600)	$ (679)
Net accumulated actuarial net loss	(1,849)	(2,777)
Accumulated other comprehensive loss	(2,449)	(3,456)
Net periodic benefit cost in excess of cumulative employer contributions	(1,185)	(727)
Net amount recognized at December 31, balance sheet	(3,634)	(4,183)
Net gain (loss) arising during period	881	(3,001)
Prior service cost amortization	79	79
Amortization of net actuarial loss	46	0
Total recognized in other comprehensive income (loss)	1,006	(2,922)
Total recognized in net periodic pension cost and other comprehensive income (loss)	$ 218	$ 3,829

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
INTEREST INCOME
Interest and fees on loans	$ 43,957	$ 47,361	$ 53,089
Interest on debt securities:
Taxable	4,100	4,864	4,214
Nontaxable	909	1,029	1,174
Interest on federal funds sold and securities purchased under agreements to resell	0	1	0
Interest on interest-bearing deposits	46	58	86
Dividends on other securities	102	156	176
Total interest income	49,114	53,469	58,739
Interest on deposits:
Savings, interest checking and money market	1,146	1,645	2,171
Time deposit accounts $100,000 and over	1,111	1,663	2,485
Other time deposits	3,715	5,123	7,211
Interest on federal funds purchased and securities sold under agreements to repurchase	21	47	75
Interest on subordinated notes	1,381	1,301	1,526
Interest on Federal Home Loan Bank advances	531	1,074	2,285
Total interest expense	7,905	10,853	15,753
Net interest income	41,209	42,616	42,986
Provision for loan losses	8,900	11,523	15,255
Net interest income after provision for loan losses	32,309	31,093	27,731
NON-INTEREST INCOME
Service charges on deposit accounts	5,439	5,566	5,554
Trust department income	893	898	803
Gain on sale of mortgage loans, net	2,669	1,649	2,493
Gain on sale of investment securities	26	0	0
Other	699	1,087	1,631
Total non-interest income	9,726	9,200	10,481
NON-INTEREST EXPENSE
Salaries and employee benefits	19,165	17,982	17,899
Occupancy expense, net	2,598	2,701	2,532
Furniture and equipment expense	1,840	2,019	1,997
FDIC insurance assessment	993	1,107	1,651
Legal, examination, and professional fees	1,189	1,332	1,441
Advertising and promotion	1,083	1,103	1,256
Postage, printing, and supplies	1,144	1,158	1,201
Processing expense	3,593	3,193	3,353
Other real estate expense, net	2,937	2,736	9,804
Other	4,125	3,514	3,717
Total non-interest expense	38,667	36,845	44,851
Income (loss) before income taxes	3,368	3,448	(6,639)
Income tax expense (benefit)	546	591	(3,087)
Net income (loss)	2,822	2,857	(3,552)
Preferred stock dividends	1,125	1,513	1,513
Accretion of discount on preferred stock	659	476	476
Net income (loss) available to common shareholders	$ 1,038	$ 868	$ (5,541)
Basic earnings (loss) per share	$ 0.21	$ 0.18	$ (1.15)
Diluted earnings (loss) per share	$ 0.21	$ 0.18	$ (1.15)

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Investment Securities

12 Months Ended

Dec. 31, 2012

Investment Securities [Abstract]

Investment Securities

(4) Investment Securities

A summary of investment securities by major category, at fair value, consisted of the following at December 31, 2012 and 2011, respectively.

(in thousands)	2012		2011
U.S. Treasury	$	2,030	$	2,054
Government sponsored enterprises		55,180		70,314
Asset-backed securities		107,872		107,329
Obligations of states and political subdivisions		35,164		34,109
Total available for sale securities	$	200,246	$	213,806

All of the 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. The Company does not invest in subprime originated mortgage-backed or collateralized debt obligation instruments.

Investment securities that are classified as restricted equity securities primarily consist of Federal Home Loan Bank stock and the Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of $3,925,000 and $4,385,000 as of December 31, 2012 and 2011, respectively.

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2012 and 2011 are as follows:

(in thousands)	Amortized cost			Gross unrealized gains		Gross unrealized losses		Fair value
December 31, 2012
U.S. Treasury	$	2,000		$	30	$	0	$	2,030
Government sponsored enterprises		54,327			853		0		55,180
Asset-backed securities		104,607			3,276		11		107,872
Obligations of states and political subdivisions		33,959			1,222		17		35,164
Total available for sale securities	$	194,893		$	5,381	$	28	$	200,246
Weighted average yield at end of period		2.54	%
December 31, 2011
U.S. Treasury	$	2,000		$	54	$	0	$	2,054
Government sponsored enterprises		69,703			629		18		70,314
Asset-backed securities		103,806			3,547		24		107,329
Obligations of states and political subdivisions		32,716			1,394		1		34,109
Total available for sale securities	$	208,225		$	5,624	$	43	$	213,806
Weighted average yield at end of period		2.89	%

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2012, 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
(in thousands)	cost		value
Due in one year or less	$	3,919	$	3,951
Due after one year through five years		63,985		65,154
Due after five years through ten years		20,478		21,340
Due after ten years		1,904		1,929
Total		90,286		92,374
Asset-backed securities		104,607		107,872
Total available for sale securities	$	194,893	$	200,246

Debt securities with carrying values aggregating approximately $146,442,000 and $172,447,000 at December 31, 2012 and 2011, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

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, 2012 and 2011, were as follows:

	Less than 12 months					12 months or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses		Value		Losses
At December 31, 2012
Government sponsored enterprises	$	1,044	$	0		$	0	$	0	$	1,044	$	0
Asset-backed securities		4,729		(11	)		0		0		4,729		(11	)
Obligations of states and political subdivisions		2,114		(17	)		150		0		2,264		(17	)
Total	$	7,887	$	(28	)	$	150	$	0	$	8,037	$	(28	)
(in thousands)
At December 31, 2011
Government sponsored enterprises	$	13,250	$	(18	)	$	0	$	0	$	13,250	$	(18	)
Asset-backed securities		4,591		(24	)		0		0		4,591		(24	)
Obligations of states and political subdivisions		229		(1	)		150		0		379		(1	)
Total	$	18,070	$	(43	)	$	150	$	0	$	18,220	$	(43	)

The total available for sale portfolio consisted of approximately 380 securities at December 31, 2012. The portfolio included 14 securities, having an aggregate fair value of $8,037,000 that were in a loss position at December 31, 2012. Securities identified as temporarily impaired which have been in a loss position for 12 months or longer totaled $150,000 at fair value. The $98 unrealized loss included in other comprehensive income at December 31, 2012 was caused by interest rate fluctuations. The total available for sale portfolio consisted of approximately 365 securities at December 31, 2011. The portfolio included 20 securities, having an aggregate fair value of $18,220,000 that were in a loss position at December 31, 2011. Securities identified as temporarily impaired which have been in a loss position for 12 months or longer totaled $150,000 at fair value. The $294 unrealized loss included in other comprehensive income at December 31, 2011 was caused by interest rate fluctuations. 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 at December 31, 2012 and 2011, respectively.

The table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings as follows:

(in thousands)	2012		2011		2010
Proceeds from sales of available for sales securities	$	790	$	0	$	0
Gains realized on sales		26		0		0
Losses realized on sales		0		0		0
Other-than-temporary impairment recognized		0		0		0
Investment securities gains	$	26	$	0	$	0

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Real Estate and Other Assets Acquired in Settlement of Loans

12 Months Ended

Dec. 31, 2012

Real Estate and Other Assets Acquired in Settlement of Loans [Abstract]

Real Estate and Other Assets Acquired in Settlement of Loans

(3) Real Estate and Other Assets Acquired in Settlement of Loans

(in thousands)	2012			2011
Commercial	$	329		$	17
Real estate construction—residential		112			307
Real estate construction—commercial		13,392			13,650
Real estate mortgage—residential		1,227			2,121
Real estate mortgage—commercial		14,201			6,623
Repossessed assets		468			279
Total	$	29,729		$	22,997
Less valuation allowance for other real estate owned		(6,137	)		(6,977	)
Total other real estate owned and repossessed assets	$	23,592		$	16,020

Balance at December 31, 2010	$	20,168
Additions		10,903
Proceeds from sales		(7,435	)
Charge-offs against the valuation allowance for other real estate owned		(433	)
Net gain on sales		(206	)
Balance at December 31, 2011	$	22,997
Additions		16,869
Proceeds from sales		(8,571	)
Charge-offs against the valuation allowance for other real estate owned, net		(1,883	)
Net gain on sales		317
Total other real estate owned and repossessed assets	$	29,729
Less valuation allowance for other real estate owned		(6,137	)
Balance at December 31, 2012	$	23,592

During the years ended December 31, 2012 and 2011, net charge-offs against the allowance for loan losses at the time of foreclosure were approximately $6,705,000 and $8,248,000, respectively.

Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2012, 2011 and 2010, respectively, is summarized as follows:

(in thousands)	2012			2011			2010
Balance, beginning of year	$	6,977		$	6,158		$	0
Provision for other real estate owned		713			1,252			6,158
Charge-offs		(1,553	)		(433	)		0
Balance, end of year	$	6,137		$	6,977		$	6,158

The significant change in the expense provision from the years ended 2010 to 2012, primarily related to one foreclosed commercial real estate construction property. During the year ended December 31, 2010, the Company recorded a $5,663,000 provision and related valuation allowance related to this property reflecting its current appraised value. During the year ended December 31, 2012, real estate values improved and comparable sales occurred which led to an increased current appraised value that allowed the Company to recover $3,908,000 of this valuation allowance. This recovery partially offset current year expense provisions for other real estate owned of $4,621,000, primarily attributable to eight properties where significant write-downs were required to reflect current appraises values. These amounts are reflected in other real estate expense in the consolidated statements of operations.

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Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

(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, 2012 and 2011, respectively, there were no transfers into or out of Levels 1-3.

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 have 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

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers 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. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.

Mortgage servicing rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3.

			Fair Value Measurements
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Assets:
U.S. treasury	$	2,030	$	2,030	$	0	$	0
Government sponsored enterprises		55,180		0		55,180		0
Asset-backed securities		107,872		0		107,872		0
Obligations of states and political subdivisions		35,164		0		35,164		0
Mortgage servicing rights		2,549		0		0		2,549
Total	$	202,795	$	2,030	$	198,216	$	2,549
December 31, 2011
Assets:
U.S. treasury	$	2,054	$	2,054	$	0	$	0
Government sponsored enterprises		70,314		0		70,314		0
Asset-backed securities		107,329		0		107,329		0
Obligations of states and political subdivisions		34,109		0		34,109		0
Total	$	213,806	$	2,054	$	211,752	$	0

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

(in thousands)	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Mortgage Servicing Rights
Balance at December 31, 2011	$	0
Transfer into level 3		3,050
Total gains or losses (realized/unrealized):
Included in earnings		(1,331	)
Included in other comprehensive income		0
Purchases		0
Sales		0
Issues		830
Settlements		0
Balance at December 31, 2012	$	2,549

Total gains for the years ended included in earnings attributable to the change in unrealized gains or losses related to assets still held were $2,216,000 and $1,705,000 at December 31, 2012 and 2011, respectively.

	Quantitative Information about Level 3 Fair Value Measurements
	Valuation Technique	Unobservable Inputs	Input Value
			2012			2011
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate		18.60	%		20.86	%
		Weighted average discount rate		7.99	%		7.99	%

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, 2012, the Company identified $24.6 million in impaired loans that had specific allowances for losses aggregating $4.0 million. Related to these loans, there was $5.2 million in charge-offs recorded during the year ended December 31, 2012. As of December 31, 2011, the Company identified $30.4 million in impaired loans that had specific allowances for losses aggregating $3.7 million. Related to these loans, there was $11.3 million in charge-offs recorded during the year ended December 31, 2012.

Other Real Estate Owned and Repossessed Assets

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

	Fair Value Measurements Using
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)*
December 31, 2012
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	672	$	0	$	0	$	672	$	(1,659	)
Real estate construction—residential		64		0		0		64		0
Real estate construction—commercial		5,341		0		0		5,341		0
Real estate mortgage—residential		2,763		0		0		2,763		(839	)
Real estate mortgage—commercial		11,726		0		0		11,726		(2,716	)
Consumer		44		0		0		44		0
Total	$	20,610	$	0	$	0	$	20,610	$	(5,214	)
Other real estate owned and repossessed assets	$	23,592	$	0	$	0	$	23,592	$	(4,378	)
December 31, 2011
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	643	$	0	$	0	$	643	$	(2,136	)
Real estate construction—residential		396		0		0		396		(1,557	)
Real estate construction—commercial		6,029		0		0		6,029		(279	)
Real estate mortgage—residential		3,601		0		0		3,601		(1,509	)
Real estate mortgage—commercial		15,980		0		0		15,980		(5,842	)
Total	$	26,649	$	0	$	0	$	26,649	$	(11,323	)
Other real estate owned and repossessed assets	$	16,020	$	0	$	0	$	16,020	$	(2,112	)

* 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.

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Stock Compensation

12 Months Ended

Dec. 31, 2012

Stock Compensation [Abstract]

Stock Compensation

(11) Stock Compensation

The Company’s stock option plan provides for the grant of options to purchase up to 526,435 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 options issued in 2008 to acquire 11,133 shares that vested immediately.

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

										Weighted average
	Number of shares									exercise price
	December 31									December 31
	2012			2011			2010			2012		2011		2010
Outstanding, beginning of year		270,634			270,835			310,263		$	23.51	$	23.50	$	22.29
Granted		0			0			0			0.00		0.00		0.00
Exercised		0			0			0			0.00		0.00		0.00
Forfeited		0			0			0			0.00		0.00		0.00
Expired		(55,291	)		(201	)		(39,428	)		18.92		17.96		13.96
Outstanding, end of year		215,343			270,634			270,835		$	24.68	$	23.51	$	23.50
Exercisable, end of year		197,713			242,970			226,100		$	24.76	$	23.59	$	23.58

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2012.

Options outstanding at December 31, 2012 had a weighted average remaining contractual life of approximately 3.0 years and no intrinsic value. Options outstanding at December 31, 2011 had a remaining contractual life of approximately 3.5 years and no intrinsic value. No stock options were granted during the years presented above.

Options exercisable at December 31, 2012 had a weighted average remaining contractual life of approximately 2.8 years and no intrinsic value. Options exercisable at December 31, 2011 had a weighted average remaining contractual life of approximately 3.3 years and no intrinsic value. No stock options were exercised during the years presented above.

Total stock-based compensation expense for the years ended December 31, 2012, 2011, and 2010 was $29,000, $58,000, and $87,000, respectively. As of December 31, 2012, the total unrecognized compensation expense related to non-vested stock awards was $68,000 and the related weighted average period over which it is expected to be recognized is approximately 2 years.

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Income Taxes (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Deferred tax assets:
Allowance for loan losses	$ 5,640	$ 5,248
Impairment of other real estate owned	2,774	2,734
Goodwill	2,483	2,831
Deferred taxes on pension	997	1,380
Nonaccrual loan interest	940	1,033
Core deposit intangible	904	883
Pension	450	276
Deferred compensation	36	27
Other	449	549
Total deferred tax assets	14,673	14,961
Deferred tax liabilities:
Available-for-sale securities	2,088	2,177
Premises and equipment	958	960
Mortgage servicing rights	908	791
Assets held for sale	110	109
FHLB stock dividend	100	100
Other	1	2
Total deferred tax liabilities	4,165	4,139
Net deferred tax asset	$ 10,508	$ 10,822

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Deposits

12 Months Ended

Dec. 31, 2012

Deposits and Capital Requirements [Abstract]

Deposits

(7) Deposits

The scheduled maturities of total time deposits as of the years ended December 31, 2012 and 2011 are as follows:

(in thousands)	2012		2011
Due within:
One year	$	280,477	$	266,516
Two years		65,220		93,209
Three years		23,482		34,730
Four years		11,984		8,811
Five years		12,139		11,172
Thereafter		0		0
Total	$	393,302	$	414,438

At December 31, 2012 and 2011, the Company had certificates and other time deposits in denominations of $100,000 or more which mature as follows:

(in thousands)	2012		2011
Due within:
Three months or less	$	37,166	$	52,274
Over three months through six months		18,690		16,017
Over six months through twelve months		33,265		32,291
Over twelve months		31,656		38,922
Total	$	120,777	$	139,504

The Federal Reserve Bank required the Bank to maintain cash or balances of $1,367,000 and $1,335,000 at December 31, 2012 and 2011, respectively, to satisfy reserve requirements.

Average compensating balances held at correspondent banks were $1,595,000 and $489,000 at December 31, 2012 and 2011, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks.

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Real Estate and Other Assets Acquired in Settlement of Loans (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of activity in valuation allowance for other real estate owned in settlement of loans
Balance, beginning of year	$ 6,977	$ 6,158	$ 0
Provision for other real estate owned	713	1,252	6,158
Charge-offs	(1,553)	(433)	0
Balance, end of year	$ 6,137	$ 6,977	$ 6,158

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Condensed Financial Information of the Parent Company Only (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Assets
Cash and due from bank subsidiaries	$ 58,877	$ 43,135
Investment in equity securities	200,246	213,806
Premises and equipment	37,021	37,953
Deferred tax asset	14,673	14,961
Other assets	19,718	20,795
Total assets	1,181,606	1,171,161
Liabilities and Stockholders' Equity
Subordinated notes	49,486	49,486
Other liabilities	6,532	6,895
Stockholders' equity	92,220	102,576	101,488	107,771
Total liabilities and stockholders' equity	1,181,606	1,171,161
Parent Company [Member]
Assets
Cash and due from bank subsidiaries	1,863	13,282
Investment in equity securities	1,486	1,486
Investment in subsidiaries	139,849	140,361
Premises and equipment	1	1
Deferred tax asset	1,424	1,611
Other assets	1,022	10
Total assets	145,645	156,751
Liabilities and Stockholders' Equity
Subordinated notes	49,486	49,486
Other liabilities	3,939	4,689
Stockholders' equity	92,220	102,576
Total liabilities and stockholders' equity	$ 145,645	$ 156,751

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Premises and Equipment

12 Months Ended

Dec. 31, 2012

Premises and Equipment [Abstract]

Premises and Equipment

(5) Premises and Equipment

A summary of premises and equipment at December 31, 2012 and 2011 is as follows:

(in thousands)	2012		2011
Land and land improvements	$	10,073	$	10,121
Buildings and improvements		34,174		33,652
Furniture and equipment		12,250		12,013
Construction in progress		155		277
Total		56,594		56,063
Less accumulated depreciation		19,631		18,110
Premises and equipment, net	$	37,021	$	37,953

Depreciation expense for the years ended December 31, 2012, 2011, and 2010 is as follows:

(in thousands)	2012		2011		2010
Depreciation expense	$	1,858	$	1,940	$	1,964

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Intangible Assets

12 Months Ended

Dec. 31, 2012

Intangible Assets [Abstract]

Intangible Assets

(6) Intangible Assets

Core Deposit Intangible Asset

A summary of amortizable intangible assets at December 31, 2012 and 2011 is as follows:

	2012							2011
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
(in thousands)	Amount		Amortization			Amount		Amount		Amortization			Amount
Core deposit intangible	$	4,795	$	(4,660	)	$	135	$	4,795	$	(4,252	)	$	543

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, 2012 for the next five years:

(in thousands)	Core Deposit Intangible Asset
2013	$	135
2014		0
2015		0
2016		0
2017		0

Changes in the net carrying amount of core deposit intangible assets for the years ended December 31, 2012, 2011, and 2010 is as follows:

(in thousands)	2012			2011			2010
Balance at beginning of year	$	543		$	978		$	1,504
Additions		0			0			0
Amortization		(408	)		(435	)		(526	)
Balance at end of year	$	135		$	543		$	978

Mortgage Servicing Rights

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights is recognized in earnings in noninterest income in the period in which the change occurs and no amortization will be recognized on mortgage servicing rights going forward. For the years ended December 31, 2011 and 2010, MSRs were amortized over the shorter of 7 years or the life of the loan and periodically reviewed for impairment. At December 31, 2011 and 2010, no temporary impairment was recognized.

At December 31, 2012 and 2011, respectively, the Company serviced mortgage loans for others totaling $310,587,000 and $307,016,000, respectively. Mortgage loan servicing fees earned on loans sold were $878,000, $863,000, and $927,000 for the years ended December 31, 2012, 2011, and 2010, respectively, and are reported as other noninterest income.

The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2012, 2011, and 2010 as follows:

(in thousands)	2012			2011			2010
Balance at beginning of year	$	2,308		$	2,356		$	2,021
Re-measurement to fair value upon election to measure servicing rights at fair value		742			0			0
Originated mortgage servicing rights		830			760			1,169
Changes in fair value:
Due to change in model inputs and assumptions (1)		122			0			0
Other changes in fair value (2)		(1,453	)		0			0
Amortization		0			(808	)		(834	)
Balance at end of year	$	2,549		$	2,308		$	2,356

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

(2) Other changes in fair value reflect changes due to customer payments and passage of time. This also includes a one time adjustment of a $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years. If the aforementioned was corrected as of December 31, 2011, the balance at the beginning of the period would have been $1,770,000.

The following key data and assumptions were used in estimating the fair value of the Company’s mortgage servicing rights as of the years ended December 31, 2012 and 2011:

	2012			2011
Weighted-Average Constant Prepayment Rate		18.60	%		20.86	%
Weighted-Average Note Rate		4.22	%		4.64	%
Weighted-Average Discount Rate		7.99	%		7.99	%
Weighted-Average Contractual Life (in years)		20.00			23.00

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Borrowings

12 Months Ended

Dec. 31, 2012

Borrowings [Abstract]

Borrowings

(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:

(in thousands)	Year End Weighted Rate			Average Weighted Rate			Average Balance Outstanding		Maximum Outstanding at any Month End		Balance at December 31,
2012
Federal funds purchased		0.0	%		0.6	%	$	412	$	345	$	0
Short-term repurchase agreements		0.1			0.1			22,867		24,734		21,058
Total											$	21,058
2011
Federal funds purchased		0.0	%		0.3	%	$	2	$	0	$	0
Short-term repurchase agreements		0.1			0.2			27,634		30,227		24,516
Total											$	24,516

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 Bank’s investment portfolio.

Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $15,000,000 on an unsecured basis and $5,135,000 on a secured basis at December 31, 2012.

Subordinated Notes and Other Borrowings

Other borrowings of the Company consisted of the following:

		2012							2011
(in thousands)	Borrower	Maturity Date		Year End Balance		Year End Weighted Rate			Year End Balance		Year End Weighted Rate
FHLB advances	The Bank		2013	$	10,126		1.5	%	$	8,284		1.6	%
			2014		0		na			10,126		1.5	%
			2015		0		na			0		na
			2016		0		na			0		na
			2017-18		10,000		2.5	%		10,000		2.5	%
Total Bank				$	20,126				$	28,410
Subordinated notes	The Company		2034	$	25,774		3.0	%	$	25,774		3.3	%
			2035		23,712		2.1	%		23,712		2.4	%
Total Company				$	49,486				$	49,486

The Bank 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 FHLB 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 $20,126,000 includes $10,000,000 which the FHLB may call for early payment within the next year. Based upon the collateral pledged to the FHLB at December 31, 2012, the Bank could borrow up to an additional $269,958,000 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 (2.14% at December 31, 2012). 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, 2012). 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.

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, 2012 and 2011 was $49,486,000, respectively. 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.

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Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Contractual maturity of amortized cost and fair value of debt securities
Amortized cost, Due in one year or less	$ 3,919
Amortized cost, Due after one year through five years	63,985
Amortized cost, Due after five years through ten years	20,478
Amortized cost, Due after ten years	1,904
Amortized cost, Maturity period	90,286
Amortized cost, Asset-backed securities	104,607
Amortized cost, Total	194,893
Fair value, Due in one year or less	3,951
Fair value, Due after one year through five years	65,154
Fair value, Due after five years through ten years	21,340
Fair value, Due after ten years	1,929
Fair value, Maturity period	92,374
Fair value, Asset-backed securities	107,872
Fair value, Total	$ 200,246	$ 213,806

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Income Taxes (Details 3) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Reconciliation of the beginning and ending amount of the unrecognized tax benefits
Unrecognized tax benefits as of January 1,	$ 221,000	$ 340,351	$ 562,076
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during prior years	0	0	0
Gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during year	0	0	0
The amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities	0	0	0
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations	0	(340,351)	(221,725)
Unrecognized tax benefits as of December 31,	$ 0	$ 221,000	$ 340,351

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Investment Securities (Details 4) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Available for sale securities proceeds and gross realized gain loss net
Proceeds from sales of available for sales securities	$ 42,735	$ 36,923	$ 114,899
Gains realized on sales	26	0	0
Losses realized on sales	0	0	0
Other-than-temporary impairment recognized	0	0	0
Investment securities gains	$ 26	$ 0	$ 0

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Fair Value Measurements (Details 1) (Mortgage servicing rights [Member], USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012
Mortgage servicing rights [Member]
Summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis
Balance beginning	$ 0
Transfer into level 3	3,050
Total gains or losses (realized/unrealized) Included in earnings	(1,331)
Total gains or losses (realized/unrealized) included in other comprehensive income	0
Purchases	0
Sales	0
Issues	830
Settlements	0
Balance Ending	$ 2,549

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Investment Securities (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
The amortized cost and fair value of debt securities
Amortized cost	$ 194,893	$ 208,225
Gross unrealized gains	5,381	5,624
Gross unrealized losses	28	43
Fair value, Total	200,246	213,806
Weighted average yield at end of period	2.54%	2.89%
U.S. Treasury [Member]
The amortized cost and fair value of debt securities
Amortized cost	2,000	2,000
Gross unrealized gains	30	54
Gross unrealized losses	0	0
Fair value, Total	2,030	2,054
Government sponsored enterprises [Member]
The amortized cost and fair value of debt securities
Amortized cost	54,327	69,703
Gross unrealized gains	853	629
Gross unrealized losses	0	18
Fair value, Total	55,180	70,314
Asset-backed securities [Member]
The amortized cost and fair value of debt securities
Amortized cost	104,607	103,806
Gross unrealized gains	3,276	3,547
Gross unrealized losses	11	24
Fair value, Total	107,872	107,329
Obligations of states and political subdivisions [Member]
The amortized cost and fair value of debt securities
Amortized cost	33,959	32,716
Gross unrealized gains	1,222	1,394
Gross unrealized losses	17	1
Fair value, Total	$ 35,164	$ 34,109

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Employee Benefit Plans (Details 5) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Fair value of the pension plan assets by asset category
Total	$ 11,707	$ 10,034	$ 9,296
Pension plans, defined benefit [Member]
Fair value of the pension plan assets by asset category
Total	11,707	10,034
Pension plans, defined benefit [Member] | Cash equivalents [Member]
Fair value of the pension plan assets by asset category
Total	485	1,791
Pension plans, defined benefit [Member] | U.S. large-cap (a) [Member]
Fair value of the pension plan assets by asset category
Total	4,335	3,821
Pension plans, defined benefit [Member] | U.S. mid-cap (b) [Member]
Fair value of the pension plan assets by asset category
Total	575	502
Pension plans, defined benefit [Member] | U.S. small-cap (c) [Member]
Fair value of the pension plan assets by asset category
Total	635	595
Pension plans, defined benefit [Member] | International (d) [Member]
Fair value of the pension plan assets by asset category
Total	1,670	1,278
Pension plans, defined benefit [Member] | Real estate (e) [Member]
Fair value of the pension plan assets by asset category
Total	395	203
Pension plans, defined benefit [Member] | Commodities (f) [Member]
Fair value of the pension plan assets by asset category
Total	370	198
Pension plans, defined benefit [Member] | U.S. gov't agency obligations (g) [Member]
Fair value of the pension plan assets by asset category
Total	2,726	841
Pension plans, defined benefit [Member] | Corporate investment grade (g) [Member]
Fair value of the pension plan assets by asset category
Total	416	653
Pension plans, defined benefit [Member] | Corporate non-investment grade (g) [Member]
Fair value of the pension plan assets by asset category
Total	100	152
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Fair value of the pension plan assets by asset category
Total	8,465	8,388
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Cash equivalents [Member]
Fair value of the pension plan assets by asset category
Total	485	1,791
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | U.S. large-cap (a) [Member]
Fair value of the pension plan assets by asset category
Total	4,335	3,821
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | U.S. mid-cap (b) [Member]
Fair value of the pension plan assets by asset category
Total	575	502
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | U.S. small-cap (c) [Member]
Fair value of the pension plan assets by asset category
Total	635	595
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | International (d) [Member]
Fair value of the pension plan assets by asset category
Total	1,670	1,278
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Real estate (e) [Member]
Fair value of the pension plan assets by asset category
Total	395	203
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Commodities (f) [Member]
Fair value of the pension plan assets by asset category
Total	370	198
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | U.S. gov't agency obligations (g) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Corporate investment grade (g) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Corporate non-investment grade (g) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member]
Fair value of the pension plan assets by asset category
Total	3,242	1,646
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | Cash equivalents [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | U.S. large-cap (a) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | U.S. mid-cap (b) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | U.S. small-cap (c) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | International (d) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | Real estate (e) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | Commodities (f) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | U.S. gov't agency obligations (g) [Member]
Fair value of the pension plan assets by asset category
Total	2,726	841
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | Corporate investment grade (g) [Member]
Fair value of the pension plan assets by asset category
Total	416	653
Pension plans, defined benefit [Member] | Other Observable Inputs (Level 2) [Member] | Corporate non-investment grade (g) [Member]
Fair value of the pension plan assets by asset category
Total	100	152
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | Cash equivalents [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | U.S. large-cap (a) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | U.S. mid-cap (b) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | U.S. small-cap (c) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | International (d) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | Real estate (e) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | Commodities (f) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | U.S. gov't agency obligations (g) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | Corporate investment grade (g) [Member]
Fair value of the pension plan assets by asset category
Total	0	0
Pension plans, defined benefit [Member] | Significant Unobservable Inputs (Level 3) [Member] | Corporate non-investment grade (g) [Member]
Fair value of the pension plan assets by asset category
Total	$ 0	$ 0

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Deposits (Tables)

12 Months Ended

Dec. 31, 2012

Deposits and Capital Requirements [Abstract]

Summary of maturities and time deposits

(in thousands)	2012		2011
Due within:
One year	$	280,477	$	266,516
Two years		65,220		93,209
Three years		23,482		34,730
Four years		11,984		8,811
Five years		12,139		11,172
Thereafter		0		0
Total	$	393,302	$	414,438

Maturity period of certificates and other time deposit in denominations of $100,000 or more

(in thousands)	2012		2011
Due within:
Three months or less	$	37,166	$	52,274
Over three months through six months		18,690		16,017
Over six months through twelve months		33,265		32,291
Over twelve months		31,656		38,922
Total	$	120,777	$	139,504

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Loans and Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Categories of impaired loans
Non-accrual loans	$ 31,081	$ 46,403
Troubled debt restructurings continuing to accrue interest	8,282	7,217
Total impaired loans	$ 39,363	$ 53,620

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Earnings per Share

12 Months Ended

Dec. 31, 2012

Earnings per Share [Abstract]

Earnings per Share

(13) Earnings per Share

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

	2012		2011		2010
Basic earnings (loss) per common share:
Net income (loss)	$	2,821,969	$	2,857,270	$	(3,551,740	)
Less:
Preferred stock dividends		1,124,417		1,512,750		1,512,750
Accretion of discount on preferred stock		659,244		476,474		476,474
Net income (loss) available to common shareholders	$	1,038,308	$	868,046	$	(5,540,964	)
Basic earnings (loss) per share	$	0.21	$	0.18	$	(1.15	)
Diluted earnings (loss) per common share:
Net income (loss)	$	2,821,969	$	2,857,270	$	(3,551,740	)
Less:
Preferred stock dividends		1,124,417		1,512,750		1,512,750
Accretion of discount on preferred stock		659,244		476,474		476,474
Net income (loss) available to common shareholders	$	1,038,308	$	868,046	$	(5,540,964	)
Average shares outstanding		4,839,114		4,839,114		4,839,114
Effect of dilutive stock options		0		0		0
Average shares outstanding including dilutive stock options		4,839,114		4,839,114		4,839,114
Diluted earnings (loss) per share	$	0.21	$	0.18	$	(1.15	)

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 years ended December 31, 2012, 2011 and 2010 were not included in the respective computations of diluted earnings 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.

	2012		2011		2010
Anti-dilutive shares—option shares		215,343		270,634		270,835
Anti-dilutive shares—warrant shares		287,133		287,133		287,133
Total anti-dilutive shares		502,476		557,767		557,968

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Condensed Financial Information of the Parent Company Only

12 Months Ended

Dec. 31, 2012

Condensed Financial Information of the Parent Company Only [Abstract]

Condensed Financial Information of the Parent Company Only

(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,
(in thousands)	2012		2011
Assets
Cash and due from bank subsidiaries	$	1,863	$	13,282
Investment in equity securities		1,486		1,486
Investment in subsidiaries		139,849		140,361
Premises and equipment		1		1
Deferred tax asset		1,424		1,611
Other assets		1,022		10
Total assets	$	145,645	$	156,751
Liabilities and Stockholders’ Equity
Subordinated notes	$	49,486	$	49,486
Other liabilities		3,939		4,689
Stockholders’ equity		92,220		102,576
Total liabilities and stockholders’ equity	$	145,645	$	156,751

Condensed Balance Sheets

	For the Years Ended December 31,
	2012		2011		2010
Income
Interest and dividends received from subsidiaries	$	4,596	$	5,192	$	4,405
Total income		4,596		5,192		4,405
Expenses
Interest on subordinated notes		1,381		1,301		1,526
Other		2,889		2,605		2,904
Total expenses		4,270		3,906		4,430
Income (loss) before income tax benefit and equity in undistributed income of subsidiaries		326		1,285		(25	)
Income tax benefit		2,257		1,368		1,450
Equity in undistributed income (loss) of subsidiaries		239		204		(4,977	)
Net income (loss)	$	2,822	$	2,857	$	(3,552	)

Condensed Statements of Cash Flows

(in thousands)	2012			2011			2010
Cash flows from operating activities:
Net income (loss)	$	2,822		$	2,857		$	(3,552	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1			2			3
Equity in undistributed (income) losses of subsidiaries		(239	)		(204	)		4,977
Stock based compensation expense		29			58			87
(Increase) decrease in deferred tax asset		(148	)		(274	)		(38	)
Other, net		(813	)		(89	)		382
Net cash provided by operating activities		1,652			2,350			1,859
Cash flows from investing activities:
Investment in subsidiary		1,072			900			(1,250	)
Net cash provided by (used in) investing activities		1,072			900			(1,250	)
Cash flows from financing activities:
Redemption of 12,000 shares of preferred stock		(12,000	)		0			0
Cash dividends paid—preferred stock		(1,203	)		(1,513	)		(1,513	)
Cash dividends paid—common stock		(940	)		(904	)		(1,385	)
Net cash used in financing activities		(14,143	)		(2,417	)		(2,898	)
Net (decrease) increase in cash and due from banks		(11,419	)		833			(2,289	)
Cash and due from banks at beginning of year		13,282			12,449			14,738
Cash and due from banks at end of year	$	1,863		$	13,282		$	12,449

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Stock Compensation (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of Company's stock option activity
Number of shares, Outstanding, beginning of year	270,634	270,835	310,263
Number of shares, Granted	0	0	0
Number of shares, Exercised	0	0	0
Number of shares, Forfeited	0	0	0
Number of shares, Expired	(55,291)	(201)	(39,428)
Number of shares, Outstanding, end of year	215,343	270,634	270,835
Number of shares, Exercisable, end of year	197,713	242,970	226,100
Weighted Average Exercise Price, Outstanding, beginning of year	$ 23.51	$ 23.50	$ 22.29
Weighted Average Exercise Price, Granted	$ 0.00	$ 0.00	$ 0.00
Weighted Average Exercise Price, Exercised	$ 0.00	$ 0.00	$ 0.00
Weighted Average Exercise Price, Forfeited	$ 0.00	$ 0.00	$ 0.00
Weighted Average Exercise Price, Expired	$ 18.92	$ 17.96	$ 13.96
Weighted Average Exercise Price, Outstanding, end of year	$ 24.68	$ 23.51	$ 23.50
Weighted Average Exercise Price, Exercisable, end of year	$ 24.76	$ 23.59	$ 23.58

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Loans and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of the allowance for loan losses
Balance, beginning of period	$ 13,809	$ 14,565	$ 14,797
Additions:
Provision for loan losses	8,900	11,523	15,254
Deductions:
Loans charged off	8,789	13,206	16,189
Less recoveries on loans	(922)	(927)	(703)
Net loans charged off	(7,867)	12,279	15,486
Balance, end of period	14,842	13,809	14,565
Commercial, Financial, and Agricultural [Member]
Summary of the allowance for loan losses
Balance, beginning of period	1,804	2,931	2,773
Additions:
Provision for loan losses	1,732	837	1,908
Deductions:
Loans charged off	1,760	2,157	1,903
Less recoveries on loans	(161)	(193)	(153)
Net loans charged off	1,599	1,964	1,750
Balance, end of period	1,937	1,804	2,931
Real Estate Construction - Residential [Member]
Summary of the allowance for loan losses
Balance, beginning of period	1,188	2,067	348
Additions:
Provision for loan losses	(523)	914	2,622
Deductions:
Loans charged off	0	1,858	933
Less recoveries on loans	(67)	(65)	(30)
Net loans charged off	(67)	1,793	903
Balance, end of period	732	1,188	2,067
Real Estate Construction - Commercial [Member]
Summary of the allowance for loan losses
Balance, beginning of period	1,562	1,339	1,740
Additions:
Provision for loan losses	126	485	4,133
Deductions:
Loans charged off	0	512	4,556
Less recoveries on loans	(23)	(250)	(22)
Net loans charged off	(23)	262	4,534
Balance, end of period	1,711	1,562	1,339
Real Estate Mortgage - Residential [Member]
Summary of the allowance for loan losses
Balance, beginning of period	3,251	3,922	3,488
Additions:
Provision for loan losses	955	1,104	4,740
Deductions:
Loans charged off	977	1,883	4,534
Less recoveries on loans	(158)	(108)	(228)
Net loans charged off	819	1,775	4,306
Balance, end of period	3,387	3,251	3,922
Real Estate Mortgage - Commercial [Member]
Summary of the allowance for loan losses
Balance, beginning of period	5,734	3,458	4,693
Additions:
Provision for loan losses	6,318	8,593	2,577
Deductions:
Loans charged off	5,466	6,420	3,841
Less recoveries on loans	(248)	(103)	(29)
Net loans charged off	5,218	6,317	3,812
Balance, end of period	6,834	5,734	3,458
Installment Loans to Individuals [Member]
Summary of the allowance for loan losses
Balance, beginning of period	267	231	380
Additions:
Provision for loan losses	293	204	32
Deductions:
Loans charged off	586	376	422
Less recoveries on loans	(265)	(208)	(241)
Net loans charged off	321	168	181
Balance, end of period	239	267	231
Unallocated [Member]
Summary of the allowance for loan losses
Balance, beginning of period	3	617	1,375
Additions:
Provision for loan losses	(1)	(614)	(758)
Deductions:
Loans charged off	0	0	0
Less recoveries on loans	0	0	0
Net loans charged off	0	0	0
Balance, end of period	$ 2	$ 3	$ 617

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Fair Value Measurements (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Fair Value Measurements (Textual) [Abstract]
Transfers into or out of Levels 1-3	$ 0	$ 0
Earnings attributable to change in unrealized gains or losses related to assets	2,216,000	1,705,000
Impaired loans	24,600,000	30,400,000
Impaired allowances for losses aggregating	4,020,000	3,748,000
Impaired loans charge-offs	$ 5,200,000	$ 11,300,000

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Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Assets measured at fair value on a recurring basis

			Fair Value Measurements
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Assets:
U.S. treasury	$	2,030	$	2,030	$	0	$	0
Government sponsored enterprises		55,180		0		55,180		0
Asset-backed securities		107,872		0		107,872		0
Obligations of states and political subdivisions		35,164		0		35,164		0
Mortgage servicing rights		2,549		0		0		2,549
Total	$	202,795	$	2,030	$	198,216	$	2,549
December 31, 2011
Assets:
U.S. treasury	$	2,054	$	2,054	$	0	$	0
Government sponsored enterprises		70,314		0		70,314		0
Asset-backed securities		107,329		0		107,329		0
Obligations of states and political subdivisions		34,109		0		34,109		0
Total	$	213,806	$	2,054	$	211,752	$	0

Summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis

(in thousands)	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Mortgage Servicing Rights
Balance at December 31, 2011	$	0
Transfer into level 3		3,050
Total gains or losses (realized/unrealized):
Included in earnings		(1,331	)
Included in other comprehensive income		0
Purchases		0
Sales		0
Issues		830
Settlements		0
Balance at December 31, 2012	$	2,549

Quantitative Information about Level 3 Fair Value Measurements

	Quantitative Information about Level 3 Fair Value Measurements
	Valuation Technique	Unobservable Inputs	Input Value
			2012			2011
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate		18.60	%		20.86	%
		Weighted average discount rate		7.99	%		7.99	%

Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis

	Fair Value Measurements Using
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)*
December 31, 2012
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	672	$	0	$	0	$	672	$	(1,659	)
Real estate construction—residential		64		0		0		64		0
Real estate construction—commercial		5,341		0		0		5,341		0
Real estate mortgage—residential		2,763		0		0		2,763		(839	)
Real estate mortgage—commercial		11,726		0		0		11,726		(2,716	)
Consumer		44		0		0		44		0
Total	$	20,610	$	0	$	0	$	20,610	$	(5,214	)
Other real estate owned and repossessed assets	$	23,592	$	0	$	0	$	23,592	$	(4,378	)
December 31, 2011
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	643	$	0	$	0	$	643	$	(2,136	)
Real estate construction—residential		396		0		0		396		(1,557	)
Real estate construction—commercial		6,029		0		0		6,029		(279	)
Real estate mortgage—residential		3,601		0		0		3,601		(1,509	)
Real estate mortgage—commercial		15,980		0		0		15,980		(5,842	)
Total	$	26,649	$	0	$	0	$	26,649	$	(11,323	)
Other real estate owned and repossessed assets	$	16,020	$	0	$	0	$	16,020	$	(2,112	)

* 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.

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Fair Value of Financial Instruments (Details Textual)	12 Months Ended
	Dec. 31, 2012
Fair Value of Financial Instruments (Textual) [Abstract]
Federal funds sold and securities purchased under agreements to resell	Mature in 90 days or less

XML

Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net income (loss)	$ 2,822	$ 2,857	$ (3,552)
Other comprehensive income (loss), net of tax
Unrealized (loss) gain on investment securities available-for-sale, net of tax	(123)	2,380	(389)
Adjustment for gain on sales of investment securities, net of tax	(16)	0	0
Defined benefit pension plans:
Net gain (loss) arising during the year, net of tax	547	(1,830)	171
Amortization of prior service cost included in net periodic pension cost, net of tax	77	48	48
Total other comprehensive income (loss)	485	598	(170)
Total comprehensive income (loss)	$ 3,307	$ 3,455	$ (3,722)

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Employee Benefit Plans (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Change in projected benefit obligation:
Balance, January 1	$ 14,217	$ 10,655
Service cost	1,168	931
Interest cost	667	604
Actuarial (gain) loss	(458)	2,240
Benefits paid	(252)	(213)
Balance, December 31	15,342	14,217
Change in plan assets:
Fair value, January 1	10,034	9,296
Actual gain (loss) return on plan assets	1,193	(54)
Employer contribution	766	1,005
Expenses paid	(34)	0
Benefits paid	(252)	(213)
Fair value, December 31	11,707	10,034
Funded status at end of year	(3,635)	(4,183)
Accumulated benefit obligation	$ 12,564	$ 10,762

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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2012

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

(2) Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at December 31, 2012 and 2011 is as follows:

(in thousands)	2012		2011
Commercial, financial, and agricultural	$	130,040	$	128,555
Real estate construction—residential		22,177		30,201
Real estate construction—commercial		43,486		47,697
Real estate mortgage—residential		221,223		203,454
Real estate mortgage—commercial		405,092		402,960
Installment and other consumer		24,966		30,063
Total loans	$	846,984	$	842,930

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. At December 31, 2012, loans with a carrying value of $457,000,000 were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

The following is a summary of loans to directors and executive officers or to entities in which such individuals had a beneficial interest of the Company, are summarized as follows:

(in thousands)
Balance at December 31, 2011	$	3,161
New loans		9,791
Amounts collected		(1,937	)
Balance at December 31, 2012	$	11,015

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.

Allowance for loan losses

The following is a summary of the allowance for loan losses for the years ended December 31, 2012, 2011, and 2010:

(in thousands)	Commercial, Financial, & Agricultural			Real Estate Construction - Residential			Real Estate Construction - Commercial			Real Estate Mortgage - Residential			Real Estate Mortgage - Commercial			Installment Loans to Individuals			Un - allocated			Total
Balance at December 31, 2009	$	2,773		$	348		$	1,740		$	3,488		$	4,693		$	380		$	1,375		$	14,797
Additions:
Provision for loan losses		1,908			2,622			4,133			4,740			2,577			32			(758	)		15,254
Deductions:
Loans charged off		1,903			933			4,556			4,534			3,841			422			0			16,189
Less recoveries on loans		(153	)		(30	)		(22	)		(228	)		(29	)		(241	)		0			(703	)
Net loans charged off		1,750			903			4,534			4,306			3,812			181			0			15,486
Balance at December 31, 2010	$	2,931		$	2,067		$	1,339		$	3,922		$	3,458		$	231		$	617		$	14,565
Additions:
Provision for loan losses		837			914			485			1,104			8,593			204			(614	)		11,523
Deductions:
Loans charged off		2,157			1,858			512			1,883			6,420			376			0			13,206
Less recoveries on loans		(193	)		(65	)		(250	)		(108	)		(103	)		(208	)		0			(927	)
Net loans charged off		1,964			1,793			262			1,775			6,317			168			0			12,279
Balance at December 31, 2011	$	1,804		$	1,188		$	1,562		$	3,251		$	5,734		$	267		$	3		$	13,809
Additions:
Provision for loan losses		1,732			(523	)		126			955			6,318			293			(1	)		8,900
Deductions:
Loans charged off		1,760			0			0			977			5,466			586			0			8,789
Less recoveries on loans		(161	)		(67	)		(23	)		(158	)		(248	)		(265	)		0			(922	)
Net loans charged off		1,599			(67	)		(23	)		819			5,218			321			0			7,867
Balance at December 31, 2012	$	1,937		$	732		$	1,711		$	3,387		$	6,834		$	239		$	2		$	14,842

The following table provides the balance in the allowance for loan losses at December 31, 2012 and 2011, 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.

(in thousands)	Commercial, Financial,  and Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage  - Residential		Real Estate Mortgage - Commercial		Installment Loans to Individuals		Unallocated		Total
December 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	213	$	125	$	542	$	1,069	$	2,071	$	0	$	0	$	4,020
Collectively evaluated for impairment		1,724		607		1,169		2,318		4,763		239		2		10,822
Total	$	1,937	$	732	$	1,711	$	3,387	$	6,834	$	239	$	2	$	14,842
Loans outstanding:
Individually evaluated for impairment	$	4,157	$	2,496	$	7,762	$	5,771	$	18,959	$	44	$	0	$	39,189
Collectively evaluated for impairment		125,883		19,681		35,724		215,452		386,133		24,922		0		807,795
Total	$	130,040	$	22,177	$	43,486	$	221,223	$	405,092	$	24,966	$	0	$	846,984
December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	239	$	167	$	380	$	653	$	2,309	$	0	$	0	$	3,748
Collectively evaluated for impairment		1,565		1,021		1,182		2,598		3,425		267		3		10,061
Total	$	1,804	$	1,188	$	1,562	$	3,251	$	5,734	$	267	$	3	$	13,809
Loans outstanding:
Individually evaluated for impairment	$	4,428	$	1,147	$	7,867	$	6,569	$	33,440	$	0	$	0	$	53,451
Collectively evaluated for impairment		124,127		29,054		39,830		196,885		369,520		30,063		0		789,479
Total	$	128,555	$	30,201	$	47,697	$	203,454	$	402,960	$	30,063	$	0	$	842,930

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.

Impaired loans

Impaired loans totaled $39,363,000 and $53,620,000 at December 31, 2012 and 2011 respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings.

The categories of impaired loans at December 31, 2012 and 2011 are as follows:

(in thousands)	2012		2011
Non-accrual loans	$	31,081	$	46,403
Troubled debt restructurings continuing to accrue interest		8,282		7,217
Total impaired loans	$	39,363	$	53,620

The following tables provide additional information about impaired loans at December 31, 2012 and 2011, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided:

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
At December 31, 2012
With no related allowance recorded:
Commercial, financial and agricultural	$	3,272	$	4,009	$	0
Real estate—construction residential		2,307		2,339		0
Real estate—construction commercial		1,879		2,102		0
Real estate—residential		1,939		2,393		0
Real estate—commercial		5,162		5,565		0
Consumer		174		186		0
Total	$	14,733	$	16,594	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	885	$	898	$	213
Real estate—construction residential		189		189		125
Real estate—construction commercial		5,883		6,011		542
Real estate—residential		3,832		3,999		1,069
Real estate—commercial		13,797		14,167		2,071
Consumer		44		44		0
Total	$	24,630	$	25,308	$	4,020
Total impaired loans	$	39,363	$	41,902	$	4,020
At December 31, 2011
With no related allowance recorded:
Commercial, financial and agricultural	$	3,546	$	3,625	$	0
Real estate—construction residential		584		788		0
Real estate—construction commercial		1,459		1,756		0
Real estate—residential		2,315		2,654		0
Real estate—commercial		15,151		21,190		0
Consumer		168		177		0
Total	$	23,223	$	30,190	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	882	$	904	$	239
Real estate—construction residential		563		563		167
Real estate—construction commercial		6,409		6,448		380
Real estate—residential		4,254		4,265		653
Real estate—commercial		18,289		18,780		2,309
Total	$	30,397	$	30,960	$	3,748
Total impaired loans	$	53,620	$	61,150	$	3,748

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2012 and 2011:

	2012				2011
(in thousands)	Average Recorded Investment		Interest Recognized For the Period Ended		Average Recorded Investment		Interest Recognized For the Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	4,157	$	93	$	3,510	$	52
Real estate—construction residential		1,137		7		1,273		0
Real estate—construction commercial		1,692		0		3,568		0
Real estate—residential		3,169		50		3,596		26
Real estate—commercial		12,198		124		18,270		73
Consumer		170		1		190		4
Total	$	22,523	$	275	$	30,407	$	155
With an allowance recorded:
Commercial, financial and agricultural	$	776	$	29	$	655	$	17
Real estate—construction residential		189		0		47		0
Real estate—construction commercial		6,087		0		5,805		0
Real estate—residential		2,604		11		3,203		113
Real estate—commercial		11,271		99		12,724		0
Consumer		2		0		0		0
Total	$	20,929	$	139	$	22,434	$	130
Total impaired loans	$	43,452	$	414	$	52,841	$	285

The specific reserve component of the Company’s allowance for loan losses at December 31, 2012 and 2011 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 $275,000 and $155,000, for the years ended December 31, 2012 and 2011, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported. Contractual interest due on loans in non-accrual status was $1,198,000 at December 31, 2012 compared to $1,952,000 at December 31, 2011. Interest income recognized on loans in non-accrual status was $11,000 for the year ended December 31, 2011. During the year ended December 31, 2012 there was no significant interest recognized on loans in non-accrual status.

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due.

The following table provides aging information for the Company’s past due and non-accrual loans at December 31, 2012 and 2011.

(in thousands)	Current or Less Than 30 Days Past Due		30-89 Days Past Due		90 Days Past Due And Still Accruing		Non-Accrual		Total
December 31, 2012
Commercial, Financial, and Agricultural	$	126,884	$	1,821	$	0	$	1,335	$	130,040
Real Estate Construction—Residential		19,390		290		0		2,497		22,177
Real Estate Construction—Commercial		35,117		607		0		7,762		43,486
Real Estate Mortgage—Residential		213,694		2,199		0		5,330		221,223
Real Estate Mortgage—Commercial		390,032		1,122		0		13,938		405,092
Installment and Other Consumer		24,221		520		6		219		24,966
Total	$	809,338	$	6,559	$	6	$	31,081	$	846,984
December 31, 2011
Commercial, Financial, and Agricultural	$	126,244	$	243	$	0	$	2,068	$	128,555
Real Estate Construction—Residential		29,054		0		0		1,147		30,201
Real Estate Construction—Commercial		39,822		0		8		7,867		47,697
Real Estate Mortgage—Residential		195,779		3,513		9		4,153		203,454
Real Estate Mortgage—Commercial		371,000		924		36		31,000		402,960
Installment and Other Consumer		29,282		612		1		168		30,063
Total	$	791,181	$	5,292	$	54	$	46,403	$	842,930

Credit Quality

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. Loans are placed on watch status when (1) one or more weaknesses that 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 by 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. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. 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) payment of 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 collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.

(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage  - Residential		Real Estate Mortgage - Commercial		Installment and other Consumer		Total
At December 31, 2012
Watch	$	14,814	$	4,580	$	6,459	$	26,063	$	29,753	$	672	$	82,341
Substandard		6,485		396		2,035		5,472		11,027		423		25,838
Non-accrual		1,335		2,497		7,762		5,330		13,938		219		31,081
Total	$	22,634	$	7,473	$	16,256	$	36,865	$	54,718	$	1,314	$	139,260
At December 31, 2011
Watch	$	22,206	$	9,644	$	9,338	$	13,231	$	24,392	$	557	$	79,368
Substandard		4,142		842		1,189		4,269		8,004		444		18,890
Non-accrual		2,068		1,147		7,867		4,153		31,000		168		46,403
Total	$	28,416	$	11,633	$	18,394	$	21,653	$	63,396	$	1,169	$	144,661

Troubled Debt Restructurings

At December 31, 2012, loans classified as troubled debt restructurings (TDRs) totaled $22,363,000, of which $14,081,000 was on non-accrual status and $8,282,000 was on accrual status. At December 31, 2011, loans classified as TDRs totaled $32,165,000, of which $24,948,000 was on non-accrual status and $7,217,000 was on accrual status. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $1,544,000 and $1,522,000 were allocated to the allowance for loan losses at December 31, 2012 and 2011, respectively.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2012 and 2011:

	2012						2011
	Recorded Investment (1)						Recorded Investment (1)
(in thousands)	Number of Contracts		Pre - Modification		Post - Modification		Number of Contracts		Pre - Modification		Post - Modification
Troubled Debt Restructurings
Commercial, financial and agricultural		4	$	637	$	613		9	$	3,500	$	3,486
Real estate construction—commercial		1		43		41		8		6,616		6,227
Real estate mortgage—residential		5		657		657		7		1,157		1,010
Real estate mortgage—commercial		2		645		644		9		9,553		9,215
Consumer		2		44		44		0		0		0
Total		14	$	2,026	$	1,999		33	$	20,826	$	19,938

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon during the period ended are not reported.

The Company’s portfolio of loans classified as TDRs include concessions such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, charged-off, or the collateral for the loan is foreclosed and sold. The Company considers a loan in TDR status in default when the borrower’s payment according to the modified terms is at least 90 days past due or has defaulted due to expiration of the loan’s maturity date. During the year ended December 31, 2012, fourteen loans meeting the TDR criteria were modified. There was one loan modified as a TDR that defaulted during the year ended December 31, 2012, and within twelve months of their modification date. No loans modified as a TDR during the year ended December 31, 2011 defaulted.

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Real Estate and Other Assets Acquired in Settlement of Loans (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of real estate and other assets acquired in settlement of loans
Total other real estate owned	$ 29,729	$ 22,997
Less valuation allowance for other real estate owned	(6,137)	(6,977)
Total other real estate owned and repossessed assets	23,592	16,020	20,168
Commercial [Member]
Summary of real estate and other assets acquired in settlement of loans
Total other real estate owned	329	17
Real estate construction - residential [Member]
Summary of real estate and other assets acquired in settlement of loans
Total other real estate owned	112	307
Real estate construction - commercial [Member]
Summary of real estate and other assets acquired in settlement of loans
Total other real estate owned	13,392	13,650
Real estate mortgage - residential [Member]
Summary of real estate and other assets acquired in settlement of loans
Total other real estate owned	1,227	2,121
Real estate mortgage - commercial [Member]
Summary of real estate and other assets acquired in settlement of loans
Total other real estate owned	14,201	6,623
Repossessed assets [Member]
Summary of real estate and other assets acquired in settlement of loans
Total other real estate owned	$ 468	$ 279

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Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Current:
Federal									$ 651	$ 374	$ (837)
State									156	(214)	80
Total current									807	160	(757)
Deferred:
Federal									(197)	386	(2,091)
State									(64)	45	(239)
Total deferred									(261)	431	(2,330)
Total income tax expense (benefit)	$ 819	$ (704)	$ 277	$ 154	$ (1,232)	$ 711	$ 661	$ 451	$ 546	$ 591	$ (3,087)

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets:
Loans	$ 0	$ 0
Investment securities	2,030	2,054
FHLB stock	0	0
Federal fund sold and securities purchased under agreements to resell		75
Cash and due from banks	58,877	43,135
Mortgage servicing rights	0	0
Accrued interest receivable	5,190	5,341
Assets, Fair value disclosure, Total	66,097	50,605
Deposits:
Demand	192,271	159,187
NOW	178,121	169,452
Savings	69,997	62,075
Money market	157,584	153,072
Time	0	0
Federal funds purchased and securities sold under agreements to repurchase	21,058	24,516
Subordinated notes	0	0
Federal Home Loan Bank advances	0	0
Accrued interest payable	909	1,054
Liabilities, Fair Value Disclosure, Total	619,940	569,356
Other Observable Inputs (Level 2) [Member]
Assets:
Loans	0	0
Investment securities	198,216	211,752
FHLB stock	2,278	2,738
Federal fund sold and securities purchased under agreements to resell		0
Cash and due from banks	0	0
Mortgage servicing rights	0	0
Cash surrender value - life insurance	2,136	2,064
Accrued interest receivable	0	0
Assets, Fair value disclosure, Total	202,630	216,554
Deposits:
Demand	0	0
NOW	0	0
Savings	0	0
Money market	0	0
Time	0	0
Federal funds purchased and securities sold under agreements to repurchase	0	0
Subordinated notes	13,154	22,082
Federal Home Loan Bank advances	20,651	29,525
Accrued interest payable	0	0
Liabilities, Fair Value Disclosure, Total	33,805	51,607
Significant Unobservable Inputs (Level 3) [Member]
Assets:
Loans	834,824	830,077
Investment securities	0	0
FHLB stock	0	0
Federal fund sold and securities purchased under agreements to resell		0
Cash and due from banks	0	0
Mortgage servicing rights	2,549	2,512
Cash surrender value - life insurance	0	0
Accrued interest receivable	0	0
Assets, Fair value disclosure, Total	837,373	832,589
Deposits:
Demand	0	0
NOW	0	0
Savings	0	0
Money market	0	0
Time	397,986	421,687
Federal funds purchased and securities sold under agreements to repurchase	0	0
Subordinated notes	0	0
Federal Home Loan Bank advances	0	0
Accrued interest payable	0	0
Liabilities, Fair Value Disclosure, Total	397,986	421,687
Carrying amount [Member]
Assets:
Loans	832,142	829,121
Investment securities	200,246	213,806
FHLB stock	2,278	2,738
Federal fund sold and securities purchased under agreements to resell		75
Cash and due from banks	58,877	43,135
Mortgage servicing rights	2,549	2,308
Cash surrender value - life insurance	2,136	2,064
Accrued interest receivable	5,190	5,341
Assets, Fair value disclosure, Total	1,103,418	1,098,588
Deposits:
Demand	192,271	159,187
NOW	178,121	169,452
Savings	69,997	62,075
Money market	157,584	153,072
Time	393,302	414,438
Federal funds purchased and securities sold under agreements to repurchase	21,058	24,516
Subordinated notes	49,486	49,486
Federal Home Loan Bank advances	20,126	28,410
Accrued interest payable	909	1,054
Liabilities, Fair Value Disclosure, Total	1,082,854	1,061,690
Fair value [Member]
Assets:
Loans	834,824	830,077
Investment securities	200,246	213,806
FHLB stock	2,278	2,738
Federal fund sold and securities purchased under agreements to resell		75
Cash and due from banks	58,877	43,135
Mortgage servicing rights	2,549	2,512
Cash surrender value - life insurance	2,136	2,064
Accrued interest receivable	5,190	5,341
Assets, Fair value disclosure, Total	1,106,100	1,099,748
Deposits:
Demand	192,271	159,187
NOW	178,121	169,452
Savings	69,997	62,075
Money market	157,584	153,072
Time	397,986	421,687
Federal funds purchased and securities sold under agreements to repurchase	21,058	24,516
Subordinated notes	13,154	22,082
Federal Home Loan Bank advances	20,651	29,525
Accrued interest payable	909	1,054
Liabilities, Fair Value Disclosure, Total	$ 1,051,731	$ 1,042,650

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Premises and Equipment (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Depreciation expense
Depreciation expense	$ 1,858	$ 1,940	$ 1,964

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Quarterly Financial Information (Unaudited)

12 Months Ended

Dec. 31, 2012

Quarterly Financial Information (Unaudited) [Abstract]

Quarterly Financial Information (Unaudited)

(19) Quarterly Financial Information (Unaudited)

(In thousands except per share data)	First quarter		Second quarter		Third quarter			Fourth quarter			Year to Date
Year Ended December 31, 2012
Interest income	$	12,646	$	12,297	$	12,151		$	12,020		$	49,114
Interest expense		1,831		2,125		2,029			1,920			7,905
Net interest income		10,815		10,172		10,122			10,100			41,209
Provision for loan losses		1,700		1,500		4,700			1,000			8,900
Noninterest income		1,970		2,443		2,680			2,633			9,726
Noninterest expense		9,480		10,098		10,378			8,711			38,667
Income tax (benefit) expense		154		277		(704	)		819			546
Net income (loss)	$	1,451	$	740	$	(1,572	)	$	2,203		$	2,822
Preferred stock dividends		370		296		228			231			1,125
Accretion of discount on preferred stock		119		396		72			72			659
Net income (loss) available to common stockholders	$	962	$	48	$	(1,872	)	$	1,900		$	1,038
Net income (loss) per share:
Basic earnings (loss) per share	$	0.21	$	0.01	$	(0.39	)	$	0.39		$	0.21
Diluted earnings (loss) per share		0.21		0.01		(0.39	)		0.39			0.21
Year Ended December 31, 2011
Interest income	$	13,583	$	13,640	$	13,384		$	12,862		$	53,469
Interest expense		3,102		2,858		2,580			2,313			10,853
Net interest income		10,481		10,782		10,804			10,549			42,616
Provision for loan losses		1,750		1,883		2,010			5,880			11,523
Noninterest income		2,052		2,178		2,358			2,612			9,200
Noninterest expense		9,378		9,008		8,925			9,534			36,845
Income tax (benefit) expense		451		661		711			(1,232	)		591
Net income (loss)	$	954	$	1,408	$	1,516		$	(1,021	)	$	2,857
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	$	465	$	907	$	1,018		$	(1,522	)	$	868
Net income (loss) per share:
Basic earnings (loss) per share	$	0.10	$	0.19	$	0.21		$	(0.31	)	$	0.18
Diluted earnings (loss) per share		0.10		0.19		0.21			(0.31	)		0.18

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Intangible Assets (Details 4) (Mortgage service rights [Member])	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Mortgage service rights [Member]
Assumptions used in estimating the fair value of mortgage service rights
Weighted - Average Constant Prepayment Rate	18.60%	20.86%
Weighted - Average Note Rate	4.22%	4.64%
Weighted - Average Discount Rate	7.99%	7.99%
Weighted - Average Contractual Life (in years)	20 years	23 years

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Stock Compensation (Tables)

12 Months Ended

Dec. 31, 2012

Stock Compensation [Abstract]

Summary of Company 's stock option activity

										Weighted average
	Number of shares									exercise price
	December 31									December 31
	2012			2011			2010			2012		2011		2010
Outstanding, beginning of year		270,634			270,835			310,263		$	23.51	$	23.50	$	22.29
Granted		0			0			0			0.00		0.00		0.00
Exercised		0			0			0			0.00		0.00		0.00
Forfeited		0			0			0			0.00		0.00		0.00
Expired		(55,291	)		(201	)		(39,428	)		18.92		17.96		13.96
Outstanding, end of year		215,343			270,634			270,835		$	24.68	$	23.51	$	23.50
Exercisable, end of year		197,713			242,970			226,100		$	24.76	$	23.59	$	23.58

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Preferred Stock

12 Months Ended

Dec. 31, 2012

Preferred Stock [Abstract]

Preferred Stock

(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 was designed to attract broad participation by banking institutions to help stabilize the financial system by encouraging lending.

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 287,133 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. On May 9, 2012, the Company redeemed 12,000 shares of preferred stock from the U.S. Department of Treasury by repaying $12,000,000 of the $30,255,000 CPP funds along with $140,000 of accrued and unpaid dividends on the shares redeemed. Related to these shares was an additional $300,000 of accretion that was recognized at the time of the redemption. The allocated carrying values of the senior preferred stock and common stock warrant at December 31, 2012 were $17,977,000 and $2,382,000, respectively.

The preferred shares remaining outstanding of 18,255 carry a 5% cumulative dividend through December 2013 and 9% thereafter if not redeemed. The Company intends to redeem the remaining shares by December 2013. 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 nine or more quarterly periods, whether or not consecutive. Under such circumstances, the Treasury will be entitled to vote to elect two directors to the board until all unpaid dividends have been paid or declared and set apart for payment. The Company is prohibited from paying any dividends with respect to shares of common stock unless all accrued and unpaid dividends are paid in full on the senior preferred stock for all past dividend periods. The Treasury Department may also transfer the senior preferred stock to a third party at any time.

The common stock warrant is exercisable immediately with a ten year term, in whole or in part, at an exercise price of $15.81 per share. The preferred stock and warrant are classified as stockholders’ equity in the consolidated balance sheets and qualify, for regulatory capital purposes, as Tier I capital. For the year ended December 31, 2012, the Company had declared and paid $1,203,000 of dividends and amortized $659,000 of accretion of the discount on preferred stock.

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Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Mortgage servicing rights [Member]
Assets:
Assets, Total	$ 2,549	$ 0
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets:
Assets, Total	66,097	50,605
Other Observable Inputs (Level 2) [Member]
Assets:
Assets, Total	202,630	216,554
Significant Unobservable Inputs (Level 3) [Member]
Assets:
Assets, Total	837,373	832,589
Recurring [Member]
Assets:
Assets, Total	202,795	213,806
Recurring [Member] | U.S. Treasury [Member]
Assets:
Assets, Total	2,030	2,054
Recurring [Member] | Government sponsored enterprises [Member]
Assets:
Assets, Total	55,180	70,314
Recurring [Member] | Asset-backed securities [Member]
Assets:
Assets, Total	107,872	107,329
Recurring [Member] | Obligations of states and political subdivisions [Member]
Assets:
Assets, Total	35,164	34,109
Recurring [Member] | Mortgage servicing rights [Member]
Assets:
Assets, Total	2,549
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets:
Assets, Total	2,030	2,054
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | U.S. Treasury [Member]
Assets:
Assets, Total	2,030	2,054
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Government sponsored enterprises [Member]
Assets:
Assets, Total	0	0
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Asset-backed securities [Member]
Assets:
Assets, Total	0	0
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Obligations of states and political subdivisions [Member]
Assets:
Assets, Total	0	0
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Mortgage servicing rights [Member]
Assets:
Assets, Total	0
Recurring [Member] | Other Observable Inputs (Level 2) [Member]
Assets:
Assets, Total	198,216	211,752
Recurring [Member] | Other Observable Inputs (Level 2) [Member] | U.S. Treasury [Member]
Assets:
Assets, Total	0	0
Recurring [Member] | Other Observable Inputs (Level 2) [Member] | Government sponsored enterprises [Member]
Assets:
Assets, Total	55,180	70,314
Recurring [Member] | Other Observable Inputs (Level 2) [Member] | Asset-backed securities [Member]
Assets:
Assets, Total	107,872	107,329
Recurring [Member] | Other Observable Inputs (Level 2) [Member] | Obligations of states and political subdivisions [Member]
Assets:
Assets, Total	35,164	34,109
Recurring [Member] | Other Observable Inputs (Level 2) [Member] | Mortgage servicing rights [Member]
Assets:
Assets, Total	0
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Assets:
Assets, Total	2,549	0
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | U.S. Treasury [Member]
Assets:
Assets, Total	0	0
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Government sponsored enterprises [Member]
Assets:
Assets, Total	0	0
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Asset-backed securities [Member]
Assets:
Assets, Total	0	0
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Obligations of states and political subdivisions [Member]
Assets:
Assets, Total	0	0
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Mortgage servicing rights [Member]
Assets:
Assets, Total	$ 2,549