##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended June 30, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 0-23636
 HAWTHORN BANCSHARES, INC.
  Missouri
    
    43-1626350(State or other jurisdiction of
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 300 Southwest Longview Boulevard, Lees Summit, Missouri
    
    64081(Address of principal executive offices)
    
    (Zip Code)
 (816) 347-8100
 N/A
 þ o
  o þ o
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESINDEX TO EXHIBITSCertificationCertificationCertificationCertification    Table of Contents  
  
 Item 1. Financial Statements
  (Unaudited)
 June 30, 2007
    
    
    December 31, 2006ASSETSLoans:
    
    $
    837,421,852
    
    
    $
    812,312,759Less allowance for loan losses
    
    
    9,110,277
    
    
    
    9,015,378Loans, net
    
    
    828,311,575
    
    
    
    803,297,381Investments in available for sale debt
securities, at fair value
    
    
    171,639,308
    
    
    
    183,566,135Investments in equity securities, at cost
    
    
    5,574,725
    
    
    
    6,207,175Federal funds sold and securities purchased
under agreements to resell
    
    
    24,894,925
    
    
    
    9,922,961Cash and due from banks
    
    
    29,541,981
    
    
    
    43,077,605Premises and equipment
    
    
    38,306,845
    
    
    
    34,706,857Other real estate owned and repossessed assets
    
    
    2,636,434
    
    
    
    2,734,500Accrued interest receivable
    
    
    8,445,818
    
    
    
    8,773,686Mortgage servicing rights
    
    
    1,263,439
    
    
    
    1,350,375Goodwill
    
    
    40,323,775
    
    
    
    40,323,775Intangible assets
    
    
    3,277,238
    
    
    
    3,753,877Cash surrender value  life insurance
    
    
    1,788,505
    
    
    
    1,750,420Other assets
    
    
    4,103,468
    
    
    
    3,247,150Total assets
    
    $
    1,160,108,036
    
    
    $
    1,142,711,897LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Demand deposits
    
    $
    138,815,640
    
    
    $
    138,885,883Time deposits
    
    
    778,342,093
    
    
    
    760,978,851Total deposits
    
    
    917,157,733
    
    
    
    899,864,734Federal funds purchased and securities
sold under agreements to repurchase
    
    
    25,597,657
    
    
    
    29,460,492Interest-bearing demand notes to U.S. Treasury
    
    
    
    
    
    
    1,735,638Subordinated notes
    
    
    49,486,000
    
    
    
    49,486,000Other borrowed money
    
    
    49,387,760
    
    
    
    47,368,315Accrued interest payable
    
    
    4,683,655
    
    
    
    4,366,250Other liabilities
    
    
    6,220,854
    
    
    
    5,485,878Total liabilities
    
    
    1,052,533,659
    
    
    
    1,037,767,307Stockholders equity:Common stock  $1 par value; 15,000,000 shares
authorized; 4,298,353 issued
    
    
    4,298,353
    
    
    
    4,298,353Surplus
    
    
    22,352,702
    
    
    
    22,248,319Retained earnings
    
    
    84,350,072
    
    
    
    81,431,713Accumulated other comprehensive loss,
net of tax
    
    
    (799,659
    )
    
    
    (381,286
    )Treasury stock, 127,090 and 128,506 shares at cost
    
    
    (2,627,091
    )
    
    
    (2,652,509
    )Total stockholders equity
    
    
    107,574,377
    
    
    
    104,944,590Total liabilities and stockholders equity
    
    $
    1,160,108,036
    
    
    $
    1,142,711,897
  2




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(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest income:Interest and fees on loans
    
    $
    15,958,870
    
    
    $
    15,756,514
    
    
    $
    31,518,184
    
    
    $
    30,480,993Interest on debt securities:Taxable
    
    
    1,421,368
    
    
    
    1,375,081
    
    
    
    2,967,180
    
    
    
    2,775,951Nontaxable
    
    
    498,992
    
    
    
    477,003
    
    
    
    999,899
    
    
    
    961,136Interest on federal funds sold and securities
purchased under agreements to resell
    
    
    145,538
    
    
    
    213,606
    
    
    
    457,856
    
    
    
    307,160Interest on interest-bearing deposits
    
    
    11,366
    
    
    
    30,709
    
    
    
    46,220
    
    
    
    57,000Dividends and interest on equity securities
    
    
    101,038
    
    
    
    76,908
    
    
    
    178,516
    
    
    
    140,447Total interest income
    
    
    18,137,172
    
    
    
    17,929,821
    
    
    
    36,167,855
    
    
    
    34,722,687Interest Expense:NOW accounts
    
    
    315,089
    
    
    
    391,007
    
    
    
    660,871
    
    
    
    781,576Savings accounts
    
    
    67,504
    
    
    
    75,885
    
    
    
    136,159
    
    
    
    153,659Money market accounts
    
    
    1,354,347
    
    
    
    1,258,016
    
    
    
    2,678,094
    
    
    
    2,392,022Certificates of deposit:$100,000 and over
    
    
    1,716,956
    
    
    
    1,207,225
    
    
    
    3,426,560
    
    
    
    2,265,353Other time deposits
    
    
    3,701,396
    
    
    
    2,992,934
    
    
    
    7,259,540
    
    
    
    5,706,995Federal funds purchased and securities sold
under agreements to repurchase
    
    
    356,642
    
    
    
    486,090
    
    
    
    703,005
    
    
    
    996,951Subordinated notes
    
    
    898,022
    
    
    
    874,000
    
    
    
    1,790,733
    
    
    
    1,715,739Advances from Federal Home Loan Bank
    
    
    640,125
    
    
    
    801,416
    
    
    
    1,281,444
    
    
    
    1,403,939Other borrowed money
    
    
    2,074
    
    
    
    8,699
    
    
    
    10,732
    
    
    
    13,358Total interest expense
    
    
    9,052,155
    
    
    
    8,095,272
    
    
    
    17,947,138
    
    
    
    15,429,592Net interest income
    
    
    9,085,017
    
    
    
    9,834,549
    
    
    
    18,220,717
    
    
    
    19,293,095Provision for loan losses
    
    
    154,216
    
    
    
    310,500
    
    
    
    379,216
    
    
    
    628,000Net interest income after provision for loan losses
    
    
    8,930,801
    
    
    
    9,524,049
    
    
    
    17,841,501
    
    
    
    18,665,095
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(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Noninterest income:Service charges on deposit accounts
    
    $
    1,305,612
    
    
    $
    1,516,875
    
    
    $
    2,585,567
    
    
    $
    2,877,705Trust department income
    
    
    192,179
    
    
    
    228,369
    
    
    
    428,551
    
    
    
    408,079Mortgage loan servicing fees, net
    
    
    94,823
    
    
    
    109,594
    
    
    
    189,792
    
    
    
    224,276Gain on sale of mortgage loans, net
    
    
    212,208
    
    
    
    89,600
    
    
    
    341,503
    
    
    
    201,834Loss on sales and calls of debt securities
    
    
    
    
    
    
    
    
    
    
    (1,747
    )
    
    
    (18,351
    )Other
    
    
    1,044,819
    
    
    
    304,742
    
    
    
    1,829,544
    
    
    
    581,548Total noninterest income
    
    
    2,849,641
    
    
    
    2,249,180
    
    
    
    5,373,210
    
    
    
    4,275,091Noninterest expense:Salaries and employee benefits
    
    
    4,847,063
    
    
    
    4,342,902
    
    
    
    9,669,763
    
    
    
    8,688,148Occupancy expense
    
    
    485,515
    
    
    
    447,824
    
    
    
    992,295
    
    
    
    900,166Furniture and equipment expense
    
    
    579,607
    
    
    
    542,858
    
    
    
    1,159,796
    
    
    
    1,062,485Advertising and promotion
    
    
    249,356
    
    
    
    204,501
    
    
    
    428,965
    
    
    
    387,338Postage, printing and supplies
    
    
    292,440
    
    
    
    291,546
    
    
    
    559,286
    
    
    
    583,919Legal, examination, and professional fees
    
    
    600,166
    
    
    
    318,866
    
    
    
    911,090
    
    
    
    613,089Processing expense
    
    
    285,354
    
    
    
    302,237
    
    
    
    553,806
    
    
    
    515,020Amortization of intangible assets
    
    
    230,585
    
    
    
    258,148
    
    
    
    476,639
    
    
    
    533,845Other
    
    
    875,075
    
    
    
    748,585
    
    
    
    1,827,502
    
    
    
    1,485,049Total noninterest expense
    
    
    8,445,161
    
    
    
    7,457,467
    
    
    
    16,579,142
    
    
    
    14,769,059Income before income taxes
    
    
    3,335,281
    
    
    
    4,315,762
    
    
    
    6,635,569
    
    
    
    8,171,127Income taxes
    
    
    972,253
    
    
    
    1,382,577
    
    
    
    1,965,874
    
    
    
    2,549,335Net income
    
    $
    2,363,028
    
    
    $
    2,933,185
    
    
    $
    4,669,695
    
    
    $
    5,621,792Basic earning per share
    
    $
    0.57
    
    
    $
    0.70
    
    
    $
    1.12
    
    
    $
    1.35Diluted earnings per share
    
    $
    0.56
    
    
    $
    0.70
    
    
    $
    1.11
    
    
    $
    1.34Weighed average shares of common stock
outstandingBasic
    
    
    4,170,003
    
    
    
    4,169,847
    
    
    
    4,169,925
    
    
    
    4,169,847Diluted
    
    
    4,214,670
    
    
    
    4,202,079
    
    
    
    4,218,223
    
    
    
    4,202,891Dividends per share:Declared
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.42Paid
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.42
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##### Table of Contents



(Unaudited)
 Six Months Ended June 30,2007
    
    
    2006Cash flow from operating activities:Net income
    
    $
    4,669,695
    
    
    $
    5,621,792Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan losses
    
    
    379,216
    
    
    
    628,000Depreciation expense
    
    
    952,255
    
    
    
    887,099Net (accretion) amortization of debt securities
premiums and discounts
    
    
    (22,215
    )
    
    
    24,181Amortization of intangible assets
    
    
    476,639
    
    
    
    533,845Stock based compensation expense
    
    
    106,678
    
    
    
    102,567Decrease (increase) in accrued interest receivable
    
    
    327,868
    
    
    
    (398,597
    )Increase in cash surrender value  life insurance
    
    
    (38,085
    )
    
    
    (27,615
    )(Increase) decrease in other assets
    
    
    (326,322
    )
    
    
    488,926Increase in accrued interest payable
    
    
    317,405
    
    
    
    680,681Increase in other liabilities
    
    
    734,976
    
    
    
    9,742Loss on sales and calls of debt securities
    
    
    1,747
    
    
    
    18,351Origination of mortgage loans for sale
    
    
    (16,508,000
    )
    
    
    (10,831,923
    )Proceeds from the sale of mortgage loans held for sale
    
    
    16,849,503
    
    
    
    11,033,757Gain on sale of mortgage loans
    
    
    (341,503
    )
    
    
    (201,834
    )Loss on disposition of premises and equipment
    
    
    1,064
    
    
    
    22,989Other, net
    
    
    (192,512
    )
    
    
    (593,819
    )Net cash provided by operating activities
    
    
    7,388,409
    
    
    
    7,998,142Cash flow from investing activities:Net increase in loans
    
    
    (26,195,306
    )
    
    
    (21,463,240
    )Purchase of available-for-sale debt securities
    
    
    (32,750,173
    )
    
    
    (94,746,721
    )Proceeds from maturities of available-for-sale debt securities
    
    
    27,229,313
    
    
    
    84,743,761Proceeds from calls of available-for-sale debt securities
    
    
    9,888,600
    
    
    
    610,038Proceeds from sales of available-for-sale debt securities
    
    
    6,910,634
    
    
    
    1,985,020Purchase of equity securities
    
    
    (344,400
    )
    
    
    (1,008,150
    )Proceeds from sales of equity securities
    
    
    976,850
    
    
    
    495,500Purchase of premises and equipment
    
    
    (4,571,307
    )
    
    
    (1,446,926
    )Proceeds from sales of premises and equipment
    
    
    18,000
    
    
    
    32,250Proceeds from sales of other real estate owned
and repossessions
    
    
    899,962
    
    
    
    83,501Net cash used in investing activities
    
    
    (17,937,827
    )
    
    
    (30,714,967
    )
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(Unaudited)
 Six Months Ended June 30,2007
    
    
    2006Cash flow from financing activities:Net (decrease) increase in demand deposits
    
    $
    (70,243
    )
    
    $
    8,347,769Net increase (decrease) in interest-bearing transaction accounts
    
    
    16,503,724
    
    
    
    (3,992,022
    )Net increase in time deposits
    
    
    859,518
    
    
    
    13,038,357Net (decrease) increase in federal funds purchased and securities
sold under agreements to repurchase
    
    
    (3,862,835
    )
    
    
    9,089,170Net decrease in interest-bearing demand notes to U.S. Treasury
    
    
    (1,735,638
    )
    
    
    (650,763
    )Proceeds from Federal Home Loan Bank advances
    
    
    73,000,000
    
    
    
    123,624,684Repayment of Federal Home Loan Bank advances
    
    
    (70,980,555
    )
    
    
    (117,924,606
    )Cash dividends paid
    
    
    (1,751,336
    )
    
    
    (1,751,336
    )Sale of treasury stock
    
    
    23,123
    
    
    
    Net cash provided by financing activities
    
    
    11,985,758
    
    
    
    29,781,253Net increase in cash and cash equivalents
    
    
    1,436,340
    
    
    
    7,064,428Cash and cash equivalents, beginning of period
    
    
    53,000,566
    
    
    
    47,730,549Cash and cash equivalents, end of period
    
    $
    54,436,906
    
    
    $
    54,794,977Supplemental disclosure of cash flow information -Cash paid during period for:Interest
    
    $
    17,629,733
    
    
    $
    14,748,911Income taxes
    
    
    1,552,000
    
    
    
    2,660,000Supplemental schedule of noncash investing activities -Other real estate and repossessions
acquired in settlement of loans
    
    $
    801,896
    
    
    $
    250,620
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(Unaudited)
 Three and Six Months Ended June 30, 2007 and 2006
    7




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##### Table of Contents



Earnings per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income, basic and diluted
    
    $
    2,363,028
    
    
    $
    2,933,185
    
    
    $
    4,669,695
    
    
    $
    5,621,792Average shares outstanding
    
    
    4,170,003
    
    
    
    4,169,847
    
    
    
    4,169,925
    
    
    
    4,169,847Effect of dilutive stock options
    
    
    44,667
    
    
    
    32,232
    
    
    
    48,298
    
    
    
    33,044Average shares outstanding
including dilutive stock options
    
    
    4,214,670
    
    
    
    4,202,079
    
    
    
    4,218,223
    
    
    
    4,202,891Basic earning per share
    
    $
    0.57
    
    
    $
    0.70
    
    
    $
    1.12
    
    
    $
    1.35Diluted earnings per share
    
    $
    0.56
    
    
    $
    0.70
    
    
    $
    1.11
    
    
    $
    1.34
  Stock Option Plans
    8




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WeightedWeighted
    
    Aggregate
    
    AverageAverage
    
    Intrinsic
    
    ContractualExercise
    
    Value
    
    TermOptions
    
    Price
    
    (000)
    
    (in years)Outstanding, January 1, 2007
    
    
    202,738
    
    
    $
    24.54Granted
    
    
    48,104
    
    
    
    33.50Exercised
    
    
    (1,416
    )
    
    
    16.33Expired
    
    
    
    
    
    
    Forfeited
    
    
    (1,186
    )
    
    
    28.45Outstanding, June 30, 2007
    
    
    248,240
    
    
    
    26.30
    
    
    $
    1,430
    
    
    
    7.0Exercisable, June 30, 2007
    
    
    144,013
    
    
    
    20.30
    
    
    
    1,297
    
    
    
    5.6
   Options granted during 2007:Grant date fair value per option
    
    $
    7.13Significant assumptions:Risk-free interest rate at grant date
    
    
    4.49
    %Expected annual dividend yield
    
    
    2.50
    %Expected stock price volatility
    
    
    20.00
    %Expected life to exercise (years)
    
    
    6.25
 9




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Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    2,363,028
    
    
    $
    2,933,185
    
    
    $
    4,669,695
    
    
    $
    5,621,792Other comprehensive income (loss):Unrealized gain (loss) on securities:Unrealized gain (loss) on debt and equity
securities available-for-sale, net of tax
    
    
    (676,768
    )
    
    
    (804,648
    )
    
    
    (442,371
    )
    
    
    (1,092,462
    )Adjustment for loss on sales and calls of debt
and equity securities, net of tax
    
    
    
    
    
    
    
    
    
    
    1,136
    
    
    
    11,928Defined benefit pension plans:Amortization of prior service cost included in
net periodic pension cost, net of tax
    
    
    11,431
    
    
    
    
    
    
    
    22,862
    
    
    
    Total other comprehensive income (loss)
    
    
    (665,337
    )
    
    
    (804,648
    )
    
    
    (418,373
    )
    
    
    (1,080,534
    )Comprehensive income
    
    $
    1,697,691
    
    
    $
    2,128,537
    
    
    $
    4,251,322
    
    
    $
    4,541,258
 Intangible Assets
  June 30, 2007
    
    
    December 31, 2006Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Core deposit intangible
    
    $
    7,060,224
    
    
    
    (3,782,986
    )
    
    $
    7,060,224
    
    
    
    (3,306,347
    )
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Aggregate amortization expense
    
    $
    230,585
    
    
    
    258,148
    
    
    $
    476,639
    
    
    
    533,845
 10




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Estimated amortization expense:For the six months ending December, 2007
    
    $
    445,698For year ending 2008
    
    
    701,443For year ending 2009
    
    
    626,111For year ending 2010
    
    
    526,477For year ending 2011
    
    
    434,763
 Mortgage Servicing Rights
   June 30,2007
    
    
    2006Balance, beginning of period
    
    $
    1,350,375
    
    
    
    1,536,331Originated mortgage servicing rights
    
    
    138,019
    
    
    
    103,784Amortization
    
    
    (224,955
    )
    
    
    (205,888
    )Balance, end of period
    
    $
    1,263,439
    
    
    
    1,434,227Mortgage loans serviced
    
    $
    210,636,388
    
    
    
    218,204,948Mortgage servicing rights as a
percentage of loans serviced
    
    
    0.60
    %
    
    
    0.66
    %
  Estimated amortization expense:For the six months ending December 31, 2007
    
    $
    114,000For year ending 2008
    
    
    295,000For year ending 2009
    
    
    223,000For year ending 2010
    
    
    151,000For year ending 2011
    
    
    126,000
 11




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##### Table of Contents



Income Taxes
    Sale of Bank Charters
   12




---



##### Table of Contents



Defined Benefit Retirement Plan
   Estimated
    
    
    Actual2007
    
    
    2006Service cost  benefits earned during the year
    
    $
    797,675
    
    
    $
    620,564Interest cost on projected benefit obligations
    
    
    364,493
    
    
    
    318,142Expected return on plan assets
    
    
    (377,180
    )
    
    
    (369,164
    )Amortization of prior service cost
    
    
    78,628
    
    
    
    78,628Amortization of net gains
    
    
    (8,279
    )
    
    
    (2,601
    )Pension expense  Annual
    
    $
    855,337
    
    
    $
    645,569Pension expense  three months
ended June 30 (actual)
    
    $
    213,834
    
    
    $
    166,760Pension expense  six months
ended June 30 (actual)
    
    $
    427,668
    
    
    $
    333,519
  Segment reporting
  13




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##### Table of Contents



June 30, 2007The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalBalance sheet information:Loans, net of allowance
for loan losses
    
    $
    369,053,429
    
    
    $
    459,258,146
    
    
    $
    
    
    
    $
    828,311,575Debt and equity securities
    
    
    73,190,804
    
    
    
    102,537,229
    
    
    
    1,486,000
    
    
    
    177,214,033Goodwill
    
    
    4,382,098
    
    
    
    35,941,677
    
    
    
    
    
    
    
    40,323,775Intangible assets
    
    
    
    
    
    
    3,277,238
    
    
    
    
    
    
    
    3,277,238Total assets
    
    
    498,942,177
    
    
    
    659,380,017
    
    
    
    1,785,842
    
    
    
    1,160,108,036Deposits
    
    
    406,521,156
    
    
    
    521,968,826
    
    
    
    (11,332,249
    )
    
    
    917,157,733Stockholders equity
    
    $
    51,762,880
    
    
    $
    94,152,540
    
    
    $
    (38,341,043
    )
    
    $
    107,574,377
 December 31, 2006The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalBalance sheet informationLoans, net of allowance
for loan losses
    
    $
    350,563,084
    
    
    $
    452,734,297
    
    
    $
    
    
    
    $
    803,297,381Debt and equity securities
    
    
    85,177,657
    
    
    
    103,109,653
    
    
    
    1,486,000
    
    
    
    189,773,310Goodwill
    
    
    4,382,098
    
    
    
    35,941,677
    
    
    
    
    
    
    
    40,323,775Intangible assets
    
    
    
    
    
    
    3,753,877
    
    
    
    
    
    
    
    3,753,877Total assets
    
    
    475,048,886
    
    
    
    666,138,165
    
    
    
    1,524,846
    
    
    
    1,142,711,897Deposits
    
    
    384,413,021
    
    
    
    524,228,167
    
    
    
    (8,776,454
    )
    
    
    899,864,734Stockholders equity
    
    $
    51,168,606
    
    
    $
    83,080,439
    
    
    $
    (29,304,455
    )
    
    $
    104,944,590
 14




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##### Table of Contents



Three Months Ended June 30, 2007The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalStatement of earnings:Total interest income
    
    $
    8,158,762
    
    
    $
    9,951,443
    
    
    $
    26,967
    
    
    $
    18,137,172Total interest expense
    
    
    3,538,844
    
    
    
    4,635,328
    
    
    
    877,983
    
    
    
    9,052,155Net interest income
    
    
    4,619,918
    
    
    
    5,316,115
    
    
    
    (851,016
    )
    
    
    9,085,017Provision for loan losses
    
    
    150,000
    
    
    
    4,216
    
    
    
    
    
    
    
    154,216Noninterest income
    
    
    1,048,260
    
    
    
    1,351,381
    
    
    
    450,000
    
    
    
    2,849,641Noninterest expense
    
    
    2,791,297
    
    
    
    4,477,428
    
    
    
    1,176,436
    
    
    
    8,445,161Income taxes
    
    
    883,650
    
    
    
    607,779
    
    
    
    (519,176
    )
    
    
    972,253Net income (loss)
    
    $
    1,843,231
    
    
    $
    1,578,073
    
    
    $
    (1,058,276
    )
    
    $
    2,363,028
 Three Months Ended June 30, 2006The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalStatement of earnings:Total interest income
    
    $
    8,089,318
    
    
    $
    9,814,258
    
    
    $
    26,245
    
    
    $
    17,929,821Total interest expense
    
    
    3,319,994
    
    
    
    3,921,019
    
    
    
    854,259
    
    
    
    8,095,272Net interest income
    
    
    4,769,324
    
    
    
    5,893,239
    
    
    
    (828,014
    )
    
    
    9,834,549Provision for loan losses
    
    
    225,000
    
    
    
    85,500
    
    
    
    
    
    
    
    310,500Noninterest income
    
    
    1,102,531
    
    
    
    1,164,663
    
    
    
    (18,014
    )
    
    
    2,249,180Noninterest expense
    
    
    2,895,649
    
    
    
    4,389,082
    
    
    
    172,736
    
    
    
    7,457,467Income taxes
    
    
    888,200
    
    
    
    807,667
    
    
    
    (313,290
    )
    
    
    1,382,577Net income (loss)
    
    $
    1,863,006
    
    
    $
    1,775,653
    
    
    $
    (705,474
    )
    
    $
    2,933,185
 15




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##### Table of Contents



Six Months Ended June 30, 2007The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalStatement of earnings:Total interest income
    
    $
    16,168,967
    
    
    $
    19,945,114
    
    
    $
    53,774
    
    
    $
    36,167,855Total interest expense
    
    
    7,006,840
    
    
    
    9,189,350
    
    
    
    1,750,948
    
    
    
    17,947,138Net interest income
    
    
    9,162,127
    
    
    
    10,755,764
    
    
    
    (1,697,174
    )
    
    
    18,220,717Provision for loan losses
    
    
    300,000
    
    
    
    79,216
    
    
    
    
    
    
    
    379,216Noninterest income
    
    
    2,081,238
    
    
    
    2,434,836
    
    
    
    857,136
    
    
    
    5,373,210Noninterest expense
    
    
    5,602,977
    
    
    
    8,875,465
    
    
    
    2,100,700
    
    
    
    16,579,142Income taxes
    
    
    1,729,450
    
    
    
    1,205,450
    
    
    
    (969,026
    )
    
    
    1,965,874Net income (loss)
    
    $
    3,610,938
    
    
    $
    3,030,469
    
    
    $
    (1,971,712
    )
    
    $
    4,669,695
 Six Months Ended June 30, 2006The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalStatement of earnings:Total interest income
    
    $
    15,830,391
    
    
    $
    18,840,775
    
    
    $
    51,521
    
    
    $
    34,722,687Total interest expense
    
    
    6,374,107
    
    
    
    7,378,775
    
    
    
    1,676,710
    
    
    
    15,429,592Net interest income
    
    
    9,456,284
    
    
    
    11,462,000
    
    
    
    (1,625,189
    )
    
    
    19,293,095Provision for loan losses
    
    
    450,000
    
    
    
    178,000
    
    
    
    
    
    
    
    628,000Noninterest income
    
    
    2,082,042
    
    
    
    2,229,969
    
    
    
    (36,920
    )
    
    
    4,275,091Noninterest expense
    
    
    5,758,746
    
    
    
    8,676,298
    
    
    
    334,015
    
    
    
    14,769,059Income taxes
    
    
    1,715,600
    
    
    
    1,481,525
    
    
    
    (647,790
    )
    
    
    2,549,335Net income (loss)
    
    $
    3,613,980
    
    
    $
    3,356,146
    
    
    $
    (1,348,334
    )
    
    $
    5,621,792
 16




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN THIS REPORT ON FORM
10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE WORDS SHOULD,
EXPECT, ANTICIPATE, BELIEVE, INTEND, MAY, HOPE, FORECAST AND SIMILAR EXPRESSIONS MAY
IDENTIFY FORWARD LOOKING STATEMENTS. IN PARTICULAR, STATEMENTS CONCERNING OUR COMPANYS ABILITY TO
EXPAND ITS PRESENCE IN THE KANSAS CITY, MISSOURI METROPOLITAN MARKET, CONCERNING OUR EXPECTED
CONTRIBUTIONS TO ANY OF OUR BANKS BENEFIT PLANS, CONCERNING OUR AMORTIZATION OF CORE DEPOSIT
INTANGIBLES OR OTHER ASSETS, CONCERNING OUR INTENT AND ABILITY TO HOLD SECURITIES UNTIL MATURITY,
THAT THE PERIODIC REVIEW OF OUR LOAN PORTFOLIO KEEPS MANAGEMENT INFORMED OF POSSIBLE LOAN PROBLEMS
AND THAT THE ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON SPECIFIC CREDITS ARE ALL
FORWARD-LOOKING STATEMENTS. OUR COMPANYS ACTUAL RESULTS, FINANCIAL CONDITION, OR BUSINESS COULD
DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION, OR BUSINESS, OR FROM THE
RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS CONDITIONS SPECIFICALLY
AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS HAVING A SPECIFIC IMPACT ON OUR COMPANY
INCLUDING, BUT NOT LIMITED TO, FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF
LAWS AND REGULATIONS APPLICABLE TO OUR COMPANY AND CHANGES THEREIN; COMPETITIVE CONDITIONS IN THE
MARKETS IN WHICH OUR COMPANY CONDUCTS ITS OPERATIONS, INCLUDING COMPETITION FROM BANKING AND
NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER RESOURCES THAN OUR COMPANY, SOME OF WHICH MAY
OFFER AND DEVELOP PRODUCTS AND SERVICES NOT OFFERED BY OUR COMPANY; AND THE ABILITY OF OUR COMPANY
TO RESPOND TO CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES WERE DISCUSSED UNDER THE CAPTION FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS,
FINANCIAL CONDITION, OR BUSINESS, IN OUR COMPANYS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2006, AS WELL AS THOSE DISCUSSED ELSEWHERE IN OUR COMPANYS REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
 17




---



##### Table of Contents



Overview
  Business Strategy
  Material Challenges and Risks
 18




---



##### Table of Contents



Revenue Source:
    Critical Accounting Policies:
 19




---



##### Table of Contents



Results of Operations
       20




---



##### Table of Contents



Net Interest Income
  21




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##### Table of Contents



(Dollars expressed in thousands)
 Three Months Ended
    
    
    Three Months EndedJune 30, 2007
    
    
    June 30, 2006Interest
    
    
    Rate
    
    
    
    
    
    
    Interest
    
    
    RateAverage
    
    
    Income/
    
    
    Earned/
    
    
    Average
    
    
    Income/
    
    
    Earned/Balance
    
    
    Expense/1/
    
    
    Paid/1/
    
    
    Balance
    
    
    Expense/1/
    
    
    Paid/1/ASSETSLoans:/2/ /3/
    
    $
    829,365
    
    
    $
    16,174
    
    
    
    7.82
    %
    
    $
    829,590
    
    
    $
    15,791
    
    
    
    7.63
    %Investment in debt and
equity securities :/4/Government sponsored enterprises
    
    
    119,097
    
    
    
    1,396
    
    
    
    4.70
    
    
    
    127,046
    
    
    
    1,349
    
    
    
    4.26State and municipal
    
    
    54,795
    
    
    
    548
    
    
    
    4.01
    
    
    
    52,624
    
    
    
    714
    
    
    
    5.44Other
    
    
    6,103
    
    
    
    101
    
    
    
    6.64
    
    
    
    7,089
    
    
    
    78
    
    
    
    4.41Federal funds sold
    
    
    10,320
    
    
    
    146
    
    
    
    5.67
    
    
    
    17,341
    
    
    
    213
    
    
    
    4.93Interest-bearing deposits
    
    
    962
    
    
    
    11
    
    
    
    4.59
    
    
    
    2,677
    
    
    
    31
    
    
    
    4.64Total interest earning assets
    
    
    1,020,642
    
    
    
    18,376
    
    
    
    7.22
    
    
    
    1,036,367
    
    
    
    18,176
    
    
    
    7.03All other assets
    
    
    126,898
    
    
    
    
    
    
    
    
    
    
    
    123,989Allowance for loan losses
    
    
    (9,096
    )
    
    
    
    
    
    
    
    
    
    
    (9,285
    )Total assets
    
    $
    1,138,444
    
    
    
    
    
    
    
    
    
    
    $
    1,151,071LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    103,167
    
    
    $
    315
    
    
    
    1.22
    %
    
    $
    111,648
    
    
    $
    391
    
    
    
    1.40
    %Savings accounts
    
    
    48,096
    
    
    
    68
    
    
    
    0.57
    
    
    
    53,495
    
    
    
    76
    
    
    
    0.57Money market
    
    
    153,395
    
    
    
    1,354
    
    
    
    3.54
    
    
    
    154,104
    
    
    
    1,258
    
    
    
    3.27Deposits of $100 and over
    
    
    140,748
    
    
    
    1,717
    
    
    
    4.89
    
    
    
    116,662
    
    
    
    1,207
    
    
    
    4.15Other time deposits
    
    
    319,104
    
    
    
    3,701
    
    
    
    4.65
    
    
    
    312,462
    
    
    
    2,993
    
    
    
    3.84Total time deposits
    
    
    764,510
    
    
    
    7,155
    
    
    
    3.75
    
    
    
    748,371
    
    
    
    5,925
    
    
    
    3.18Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    32,534
    
    
    
    357
    
    
    
    4.40
    
    
    
    45,460
    
    
    
    486
    
    
    
    4.29Interest-bearing demand
notes to US Treasury
    
    
    144
    
    
    
    2
    
    
    
    5.57
    
    
    
    720
    
    
    
    9
    
    
    
    5.01Subordinated notes
    
    
    49,486
    
    
    
    898
    
    
    
    7.28
    
    
    
    49,486
    
    
    
    874
    
    
    
    7.08Advances from Federal Home Loan Bank
    
    
    46,711
    
    
    
    640
    
    
    
    5.50
    
    
    
    65,236
    
    
    
    801
    
    
    
    4.92Total interest-bearing liabilities
    
    
    893,385
    
    
    
    9,052
    
    
    
    4.06
    
    
    
    909,273
    
    
    
    8,095
    
    
    
    3.57Demand deposits
    
    
    126,186
    
    
    
    
    
    
    
    
    
    
    
    133,501Other liabilities
    
    
    10,831
    
    
    
    
    
    
    
    
    
    
    
    8,491Total liabilities
    
    
    1,030,402
    
    
    
    
    
    
    
    
    
    
    
    1,051,265Stockholders equity
    
    
    108,042
    
    
    
    
    
    
    
    
    
    
    
    99,806Total liabilities and
stockholders equity
    
    $
    1,138,444
    
    
    
    
    
    
    
    
    
    
    $
    1,151,071Net interest income
    
    
    
    
    
    $
    9,324
    
    
    
    
    
    
    
    
    
    
    $
    10,081Net interest margin/5/
    
    
    
    
    
    
    
    
    
    
    3.66
    %
    
    
    
    
    
    
    
    
    
    
    3.90
    %
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the
Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments
totaled $239,000 in 2007 and $247,000 in 2006./2/
    
    Non-accruing loans are included in the average amounts outstanding./3/
    
    Fees on loans are included in average amounts outstanding./4/
    
    Average balances based on amortized cost./5/
    
    Net interest income divided by average total interest earning assets . 22




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##### Table of Contents



(Dollars expressed in thousands)
 Six Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2006Interest
    
    
    Rate
    
    
    
    
    
    
    Interest
    
    
    RateAverage
    
    
    Income/
    
    
    Earned/
    
    
    Average
    
    
    Income/
    
    
    Earned/Balance
    
    
    Expense/1/
    
    
    Paid/1/
    
    
    Balance
    
    
    Expense/1/
    
    
    Paid/1/ASSETSLoans:/2/ /3/
    
    $
    816,541
    
    
    $
    31,952
    
    
    
    7.89
    %
    
    $
    825,524
    
    
    $
    30,553
    
    
    
    7.46
    %Investment in debt and
equity securities :/4/Government sponsored enterprises
    
    
    121,980
    
    
    
    2,917
    
    
    
    4.82
    
    
    
    131,952
    
    
    
    2,720
    
    
    
    4.16State and municipal
    
    
    54,304
    
    
    
    1,101
    
    
    
    4.09
    
    
    
    53,102
    
    
    
    1,442
    
    
    
    5.48Other
    
    
    6,210
    
    
    
    179
    
    
    
    5.81
    
    
    
    7,129
    
    
    
    147
    
    
    
    4.16Federal funds sold
    
    
    17,308
    
    
    
    458
    
    
    
    5.34
    
    
    
    12,980
    
    
    
    307
    
    
    
    4.77Interest-bearing deposits
    
    
    1,757
    
    
    
    46
    
    
    
    5.28
    
    
    
    2,671
    
    
    
    57
    
    
    
    4.30Total interest earning assets
    
    
    1,018,100
    
    
    
    36,653
    
    
    
    7.26
    
    
    
    1,033,358
    
    
    
    35,226
    
    
    
    6.87All other assets
    
    
    125,753
    
    
    
    
    
    
    
    
    
    
    
    123,532Allowance for loan losses
    
    
    (9,070
    )
    
    
    
    
    
    
    
    
    
    
    (9,267
    )Total assets
    
    $
    1,134,783
    
    
    
    
    
    
    
    
    
    
    $
    1,147,623LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    105,219
    
    
    $
    661
    
    
    
    1.27
    %
    
    $
    112,345
    
    
    $
    782
    
    
    
    1.40
    %Savings accounts
    
    
    48,158
    
    
    
    136
    
    
    
    0.57
    
    
    
    54,299
    
    
    
    154
    
    
    
    0.57Money market
    
    
    152,775
    
    
    
    2,678
    
    
    
    3.53
    
    
    
    155,636
    
    
    
    2,392
    
    
    
    3.10Deposits of $100 and over
    
    
    140,430
    
    
    
    3,426
    
    
    
    4.92
    
    
    
    116,064
    
    
    
    2,265
    
    
    
    3.94Other time deposits
    
    
    316,894
    
    
    
    7,260
    
    
    
    4.62
    
    
    
    311,495
    
    
    
    5,707
    
    
    
    3.69Total time deposits
    
    
    763,476
    
    
    
    14,161
    
    
    
    3.74
    
    
    
    749,839
    
    
    
    11,300
    
    
    
    3.04Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    31,815
    
    
    
    703
    
    
    
    4.46
    
    
    
    48,722
    
    
    
    997
    
    
    
    4.13Interest-bearing demand
notes to US Treasury
    
    
    413
    
    
    
    11
    
    
    
    5.37
    
    
    
    601
    
    
    
    13
    
    
    
    4.36Subordinated notes
    
    
    49,486
    
    
    
    1,791
    
    
    
    7.30
    
    
    
    49,486
    
    
    
    1,716
    
    
    
    6.99Advances from Federal Home Loan Bank
    
    
    47,324
    
    
    
    1,281
    
    
    
    5.46
    
    
    
    61,202
    
    
    
    1,404
    
    
    
    4.63Total interest-bearing liabilities
    
    
    892,514
    
    
    
    17,947
    
    
    
    4.06
    
    
    
    909,850
    
    
    
    15,430
    
    
    
    3.42Demand deposits
    
    
    126,211
    
    
    
    
    
    
    
    
    
    
    
    130,517Other liabilities
    
    
    9,935
    
    
    
    
    
    
    
    
    
    
    
    8,398Total liabilities
    
    
    1,028,660
    
    
    
    
    
    
    
    
    
    
    
    1,048,765Stockholders equity
    
    
    106,123
    
    
    
    
    
    
    
    
    
    
    
    98,858Total liabilities and
stockholders equity
    
    $
    1,134,783
    
    
    
    
    
    
    
    
    
    
    $
    1,147,623Net interest income
    
    
    
    
    
    $
    18,706
    
    
    
    
    
    
    
    
    
    
    $
    19,796Net interest margin/5/
    
    
    
    
    
    
    
    
    
    
    3.71
    %
    
    
    
    
    
    
    
    
    
    
    3.86
    %
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the
Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments
totaled $485,000 in 2007 and $503,000 in 2006./2/
    
    Non-accruing loans are included in the average amounts outstanding./3/
    
    Fees on loans are included in average amounts outstanding./4/
    
    Average balances based on amortized cost./5/
    
    Net interest income divided by average total interest earning assets. 23




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##### Table of Contents



(Dollars expressed in thousands)
 Three Months Ended June 30, 2007Compared toThree Months Ended June 30, 2007Total
    
    
    Change due toChange
    
    
    Volume /3/
    
    
    Rate /4/Interest income on a fully taxable
equivalent basis:Loans:/1/
    
    $
    383
    
    
    
    (4
    )
    
    
    387Investment in debt and equity securities :/3/Government sponsored enterprises
    
    
    47
    
    
    
    (87
    )
    
    
    134State and municipal
    
    
    (166
    )
    
    
    28
    
    
    
    (194
    )Other
    
    
    23
    
    
    
    (12
    )
    
    
    35Federal funds sold
    
    
    (67
    )
    
    
    (95
    )
    
    
    28Interest-bearing deposits
    
    
    (20
    )
    
    
    (20
    )
    
    
    Total interest income
    
    
    200
    
    
    
    (190
    )
    
    
    390Interest expense:NOW accounts
    
    $
    (76
    )
    
    
    (28
    )
    
    
    (48
    )Savings accounts
    
    
    (8
    )
    
    
    (8
    )
    
    
    Money market
    
    
    96
    
    
    
    (6
    )
    
    
    102Deposits of $100 and over
    
    
    510
    
    
    
    273
    
    
    
    237Other time deposits
    
    
    708
    
    
    
    65
    
    
    
    643Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    (129
    )
    
    
    (142
    )
    
    
    13Interest-bearing demand notes
of U.S. Treasury
    
    
    (7
    )
    
    
    (8
    )
    
    
    1Subordinated debentures
    
    
    24
    
    
    
    
    
    
    
    24Other borrowed money
    
    
    (161
    )
    
    
    (245
    )
    
    
    84Total interest expense
    
    
    957
    
    
    
    (99
    )
    
    
    1,056Net interest income on a fully
taxable equivalent basis
    
    $
    (757
    )
    
    
    (91
    )
    
    
    (666
    )
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the
Federal statutory income tax rate. Such adjustments were $239,000 in 2007 and $247,000 in 2006./2/
    
    Non-accruing loans are included in the average amounts outstanding./3/
    
    Change in volume multiplied by yield/rate of prior period./4/
    
    Change in yield/rate multiplied by volume of prior period. 24




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##### Table of Contents



Six Months Ended June 30, 2007Compared toSix Months Ended June 30, 2006Total
    
    
    Change due toChange
    
    
    Volume /3/
    
    
    Rate /4/Interest income on a fully taxable
equivalent basis:Loans:/1/
    
    $
    1,399
    
    
    
    (335
    )
    
    
    1,734Investment in debt and equity securities :/3/Government sponsored enterprises
    
    
    197
    
    
    
    (217
    )
    
    
    414State and municipal
    
    
    (341
    )
    
    
    32
    
    
    
    (373
    )Other
    
    
    32
    
    
    
    (21
    )
    
    
    53Federal funds sold
    
    
    151
    
    
    
    111
    
    
    
    40Interest-bearing deposits
    
    
    (11
    )
    
    
    (22
    )
    
    
    11Total interest income
    
    
    1,427
    
    
    
    (452
    )
    
    
    1,879Interest expense:NOW accounts
    
    $
    (121
    )
    
    
    (48
    )
    
    
    (73
    )Savings accounts
    
    
    (18
    )
    
    
    (17
    )
    
    
    (1
    )Money market
    
    
    286
    
    
    
    (45
    )
    
    
    331Deposits of $100 and over
    
    
    1,161
    
    
    
    530
    
    
    
    631Other time deposits
    
    
    1,553
    
    
    
    101
    
    
    
    1,452Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    (294
    )
    
    
    (369
    )
    
    
    75Interest-bearing demand notes
of U.S. Treasury
    
    
    (2
    )
    
    
    (5
    )
    
    
    3Subordinated debentures
    
    
    75
    
    
    
    
    
    
    
    75Other borrowed money
    
    
    (123
    )
    
    
    (350
    )
    
    
    227Total interest expense
    
    
    2,517
    
    
    
    (203
    )
    
    
    2,720Net interest income on a fully
taxable equivalent basis
    
    $
    (1,090
    )
    
    
    (249
    )
    
    
    (841
    )
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the
Federal statutory income tax rate. Such adjustments were $485,000 in 2007 and $503,000 in 2006./2/
    
    Non-accruing loans are included in the average amounts outstanding./3/
    
    Change in volume multiplied by yield/rate of prior period./4/
    
    Change in yield/rate multiplied by volume of prior period. 25




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THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006
  26




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(Dollars expressed in thousands)
 Three Months EndedJune 30,
    
    
    Increase (decrease)2007
    
    
    2006
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    1,306
    
    
    $
    1,517
    
    
    $
    (211
    )
    
    
    (13.9
    )%Trust department income
    
    
    192
    
    
    
    228
    
    
    
    (36
    )
    
    
    (15.8
    )Mortgage loan servicing fees, net
    
    
    95
    
    
    
    109
    
    
    
    (14
    )
    
    
    (12.8
    )Gain on sale of mortgage loans
    
    
    212
    
    
    
    90
    
    
    
    122
    
    
    
    135.6Other
    
    
    1,045
    
    
    
    305
    
    
    
    740
    
    
    
    242.6$
    2,850
    
    
    $
    2,249
    
    
    $
    601
    
    
    
    26.7
    %Noninterest ExpenseSalaries and employee benefits
    
    $
    4,847
    
    
    $
    4,343
    
    
    $
    504
    
    
    
    11.6
    %Occupancy expense
    
    
    486
    
    
    
    448
    
    
    
    38
    
    
    
    8.5Furniture and equipment expense
    
    
    580
    
    
    
    543
    
    
    
    37
    
    
    
    6.8Advertising and promotion
    
    
    249
    
    
    
    205
    
    
    
    44
    
    
    
    21.5Postage, printing and supplies
    
    
    292
    
    
    
    291
    
    
    
    1
    
    
    
    0.3Legal, examination, and professional fees
    
    
    600
    
    
    
    319
    
    
    
    281
    
    
    
    88.1Processing expense
    
    
    285
    
    
    
    302
    
    
    
    (17
    )
    
    
    (5.6
    )Amortization  CDI
    
    
    231
    
    
    
    258
    
    
    
    (27
    )
    
    
    (10.5
    )Other
    
    
    875
    
    
    
    748
    
    
    
    127
    
    
    
    17.0$
    8,445
    
    
    $
    7,457
    
    
    $
    988
    
    
    
    13.2
    %
  27




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SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
  28




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(Dollars expressed in thousands)
 Six Months EndedJune 30,
    
    
    Increase (decrease)2007
    
    
    2006
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    2,586
    
    
    $
    2,878
    
    
    $
    (292
    )
    
    
    (10.1
    )%Trust department income
    
    
    429
    
    
    
    408
    
    
    
    21
    
    
    
    5.1Mortgage loan servicing fees, net
    
    
    190
    
    
    
    224
    
    
    
    (34
    )
    
    
    (15.2
    )Gain on sale of mortgage loans
    
    
    341
    
    
    
    202
    
    
    
    139
    
    
    
    68.8Loss on sales and calls of debt securities
    
    
    (2
    )
    
    
    (18
    )
    
    
    16
    
    
    
    (88.9
    )Other
    
    
    1,829
    
    
    
    581
    
    
    
    1,248
    
    
    
    214.8$
    5,373
    
    
    $
    4,275
    
    
    $
    1,098
    
    
    
    25.7
    %Noninterest ExpenseSalaries and employee benefits
    
    $
    9,670
    
    
    $
    8,688
    
    
    $
    982
    
    
    
    11.3
    %Occupancy expense
    
    
    992
    
    
    
    900
    
    
    
    92
    
    
    
    10.2Furniture and equipment expense
    
    
    1,160
    
    
    
    1,062
    
    
    
    98
    
    
    
    9.2Advertising and promotion
    
    
    429
    
    
    
    387
    
    
    
    42
    
    
    
    10.9Postage, printing and supplies
    
    
    559
    
    
    
    584
    
    
    
    (25
    )
    
    
    (4.3
    )Legal, examination, and professional fees
    
    
    911
    
    
    
    613
    
    
    
    298
    
    
    
    48.6Processing expense
    
    
    554
    
    
    
    515
    
    
    
    39
    
    
    
    7.6Amortization  CDI
    
    
    477
    
    
    
    534
    
    
    
    (57
    )
    
    
    (10.7
    )Other
    
    
    1,827
    
    
    
    1,486
    
    
    
    341
    
    
    
    22.9$
    16,579
    
    
    $
    14,769
    
    
    $
    1,810
    
    
    
    12.3
    %
  29




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Lending and Credit Management
      30




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##### Table of Contents



Accounting by Creditors for Impairment of a Loan,
   31




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##### Table of Contents



(Dollars expressed in thousands)
 June 30, 2007
    
    
    December 31, 2006% of Gross
    
    
    
    
    
    
    % of GrossBalance
    
    
    Loans
    
    
    Balance
    
    
    LoansNonaccrual loans:Commercial
    
    $
    2,805
    
    
    
    0.34
    %
    
    $
    2,495
    
    
    
    0.31
    %Real estate:Construction
    
    
    1,241
    
    
    
    0.15
    
    
    
    1,657
    
    
    
    0.20Mortgage
    
    
    825
    
    
    
    0.10
    
    
    
    644
    
    
    
    0.08Consumer
    
    
    38
    
    
    
    
    
    
    
    73
    
    
    
    0.014,909
    
    
    
    0.59
    
    
    
    4,869
    
    
    
    0.60Loans contractually past-due 90 days
or more and still accruing:Commercial
    
    
    3
    
    
    
    
    
    
    
    5
    
    
    
    Real estate:Construction
    
    
    453
    
    
    
    0.06
    
    
    
    
    
    
    
    Mortgage
    
    
    367
    
    
    
    0.04
    
    
    
    170
    
    
    
    0.02Consumer
    
    
    15
    
    
    
    
    
    
    
    22
    
    
    
    838
    
    
    
    0.10
    
    
    
    197
    
    
    
    0.02Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    5,747
    
    
    
    0.69
    %
    
    
    5,066
    
    
    
    0.62
    %Other real estate
    
    
    2,636
    
    
    
    
    
    
    
    2,720Repossessions
    
    
    
    
    
    
    
    
    
    
    15Total nonperforming assets
    
    $
    8,383
    
    
    
    
    
    
    $
    7,801
    32




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##### Table of Contents



33




---



##### Table of Contents



Financial Condition
    34




---



##### Table of Contents



35




---



##### Table of Contents



Liquidity
     Sources and Uses of Funds
   36




---



##### Table of Contents



Impact of New Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes Accounting for
Income Taxes
 37




---



##### Table of Contents



38




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   39




---



##### Table of Contents



PART II  OTHER INFORMATION
 
   
   
   
   
    WithholdAuthorityFor
    
    
    Against
    
    
    AbstentionsElection of Directors:Kevin L. Riley
    
    
    2,872,174
    
    
    
    434,033
    
    
    
    N/ADavid T. Turner
    
    
    2,889,371
    
    
    
    416,836
    
    
    
    N/ARatification of KPMG LLP
as independent registered
public accounting firm
    
    
    3,266,108
    
    
    
    23,038
    
    
    
    17,062Ratification of Omnibus
Incentive Plan
    
    
    2,028,716
    
    
    
    643,384
    
    
    
    113,170Ratification of corporate
name change
    
    
    2,516,392
    
    
    
    758,032
    
    
    
    31,778
 
   40




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##### Table of Contents



Exhibit No.
    
    Description3.1
    
    Articles of Incorporation of our Company (filed as Exhibit
3(a) to our Companys Registration Statement on Form S-4
(Registration No. 33-54166) and incorporated herein by
reference).3.2
    
    Bylaws of our Company (filed as Exhibit 3.2 to our Companys
Annual Report on Form 10-K for the fiscal year ended December
31, 2002 (Commission file number 0-23636) and incorporated
herein by reference).4
    
    Specimen certificate representing shares of our
Companys $1.00 par value common stock (filed as Exhibit 4 to
our Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (Commission file number 0-23636) and
incorporated herein by reference).31.1
    
    Certificate of the Chief Executive Officer of our Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of the Chief Financial Officer of our Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certificate of the Chief Executive Officer of our Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certificate of the Chief Financial Officer of our Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 41




---



##### Table of Contents



SIGNATURES
  HAWTHORN BANCSHARES, INC.Date/s/ James E. SmithAugust 9, 2007
    
    James E. Smith, Chairman of the Boardand Chief Executive Officer (Principal
Executive Officer)/s/ Richard G. RoseAugust 9, 2007
    
    Richard G. Rose, Chief Financial Officer
(Principal Financial
Officer and Principal Accounting Officer)
 42




---



##### Table of Contents



HAWTHORN BANCSHARES, INC.
 
   Exhibit No.
    
    Description
    
    Page No.3.1
    
    Articles of Incorporation of our Company (filed
as Exhibit 3(a) to our Companys Registration
Statement on Form S-4 (Registration No.
33-54166) and incorporated herein by reference).
    
    
    **3.2
    
    Bylaws of our Company (filed as Exhibit 3.2 to
our Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 (Commission
file number 0-23636) and incorporated herein by
reference).
    
    
    **4
    
    Specimen certificate representing shares of our
Companys $1.00 par value common stock (filed as
Exhibit 4 to our Companys Annual Report on Form
10-K for the fiscal year ended December 31, 1999
(Commission file number 0-23636) and
incorporated herein by reference).
    
    
    **31.1
    
    Certificate of the Chief Executive Officer of
our Company pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    4431.2
    
    Certificate of the Chief Financial Officer of
our Company pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    4532.1
    
    Certificate of the Chief Executive Officer of
our Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    4632.2
    
    Certificate of the Chief Financial Officer of
our Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    47
 
 **
    
    Incorporated by reference. 43