UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2008
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




---



##### 



Item 1. Financial Statements
   (Unaudited)
 June 30, 2008
    
    
    December 31, 2007ASSETSLoans:
    
    $
    970,661,124
    
    
    $
    911,278,111Less allowance for loan losses
    
    
    11,131,032
    
    
    
    9,281,848Loans, net
    
    
    959,530,092
    
    
    
    901,996,263Investments in available for sale debt
securities, at fair value
    
    
    144,079,342
    
    
    
    151,742,455Investments in equity securities, at cost
    
    
    9,065,350
    
    
    
    5,626,050Federal funds sold and securities purchased
under agreements to resell
    
    
    104,603
    
    
    
    664,184Cash and due from banks
    
    
    34,584,453
    
    
    
    35,209,201Premises and equipment
    
    
    40,054,133
    
    
    
    40,543,546Other real estate owned and repossessed assets
    
    
    3,044,707
    
    
    
    2,337,107Accrued interest receivable
    
    
    7,369,944
    
    
    
    8,764,196Mortgage servicing rights
    
    
    1,184,110
    
    
    
    1,184,868Goodwill
    
    
    40,323,775
    
    
    
    40,323,775Intangible assets
    
    
    2,467,183
    
    
    
    2,831,540Cash surrender value  life insurance
    
    
    1,845,867
    
    
    
    1,820,532Other assets
    
    
    3,979,654
    
    
    
    2,760,362Total assets
    
    $
    1,247,633,213
    
    
    $
    1,195,804,079LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Demand deposits
    
    $
    124,568,386
    
    
    $
    138,355,520Time deposits
    
    
    772,091,295
    
    
    
    782,901,771Total deposits
    
    
    896,659,681
    
    
    
    921,257,291Federal funds purchased and securities
sold under agreements to repurchase
    
    
    46,617,509
    
    
    
    25,729,863Subordinated notes
    
    
    49,486,000
    
    
    
    49,486,000Other borrowed money
    
    
    134,457,559
    
    
    
    77,915,027Accrued interest payable
    
    
    4,560,347
    
    
    
    4,723,965Other liabilities
    
    
    4,866,300
    
    
    
    5,493,110Total liabilities
    
    
    1,136,647,396
    
    
    
    1,084,605,256Stockholders equity:Common stock  $1 par value; 15,000,000 shares
authorized; 4,298,353 issued
    
    
    4,298,353
    
    
    
    4,298,353Surplus
    
    
    22,634,232
    
    
    
    22,530,191Retained earnings
    
    
    86,383,362
    
    
    
    85,728,114Accumulated other comprehensive
income, net of tax
    
    
    653,948
    
    
    
    1,356,538Treasury stock, 138,858 and 128,858, respectively,
shares at cost
    
    
    (2,984,078
    )
    
    
    (2,714,373
    )Total stockholders equity
    
    
    110,985,817
    
    
    
    111,198,823Total liabilities and stockholders equity
    
    $
    1,247,633,213
    
    
    $
    1,195,804,079
  2




---



##### 



(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:Interest and fees on loans
    
    $
    15,312,073
    
    
    $
    15,958,870
    
    
    $
    31,773,963
    
    
    $
    31,518,184Interest on debt securities:Taxable
    
    
    1,324,771
    
    
    
    1,421,368
    
    
    
    2,724,289
    
    
    
    2,967,180Nontaxable
    
    
    404,297
    
    
    
    498,992
    
    
    
    881,797
    
    
    
    999,899Interest on federal funds sold and securities
purchased under agreements to resell
    
    
    10,266
    
    
    
    145,538
    
    
    
    44,226
    
    
    
    457,856Interest on interest-bearing deposits
    
    
    102
    
    
    
    11,366
    
    
    
    289
    
    
    
    46,220Dividends and interest on equity securities
    
    
    69,797
    
    
    
    101,038
    
    
    
    122,408
    
    
    
    178,516Total interest income
    
    
    17,121,306
    
    
    
    18,137,172
    
    
    
    35,546,972
    
    
    
    36,167,855Interest Expense:NOW accounts
    
    
    251,889
    
    
    
    315,089
    
    
    
    625,647
    
    
    
    660,871Savings accounts
    
    
    57,170
    
    
    
    67,504
    
    
    
    115,482
    
    
    
    136,159Money market accounts
    
    
    714,263
    
    
    
    1,354,347
    
    
    
    1,831,574
    
    
    
    2,678,094Certificates of deposit:$100,000 and over
    
    
    1,464,699
    
    
    
    1,716,956
    
    
    
    3,086,017
    
    
    
    3,426,560Other time deposits
    
    
    3,194,119
    
    
    
    3,701,396
    
    
    
    6,745,656
    
    
    
    7,259,540Federal funds purchased and securities sold
under agreements to repurchase
    
    
    277,658
    
    
    
    356,642
    
    
    
    653,039
    
    
    
    703,005Subordinated notes
    
    
    731,932
    
    
    
    898,022
    
    
    
    1,582,922
    
    
    
    1,790,733Advances from Federal Home Loan Bank
    
    
    913,422
    
    
    
    640,125
    
    
    
    1,846,081
    
    
    
    1,281,444Other borrowed money
    
    
    
    
    
    
    2,074
    
    
    
    
    
    
    
    10,732Total interest expense
    
    
    7,605,152
    
    
    
    9,052,155
    
    
    
    16,486,418
    
    
    
    17,947,138Net interest income
    
    
    9,516,154
    
    
    
    9,085,017
    
    
    
    19,060,554
    
    
    
    18,220,717Provision for loan losses
    
    
    1,300,000
    
    
    
    154,216
    
    
    
    2,950,000
    
    
    
    379,216Net interest income after provision for loan losses
    
    
    8,216,154
    
    
    
    8,930,801
    
    
    
    16,110,554
    
    
    
    17,841,501
  3




---



##### 



(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Noninterest income:Service charges on deposit accounts
    
    $
    1,584,673
    
    
    $
    1,305,612
    
    
    $
    2,999,900
    
    
    $
    2,585,567Trust department income
    
    
    194,118
    
    
    
    192,179
    
    
    
    405,874
    
    
    
    428,551Mortgage loan servicing fees, net
    
    
    11,918
    
    
    
    94,823
    
    
    
    34,206
    
    
    
    189,792Gain on sale of mortgage loans, net
    
    
    301,175
    
    
    
    212,208
    
    
    
    552,794
    
    
    
    341,503Gain (loss) on sales and calls of debt
securities
    
    
    
    
    
    
    
    
    
    
    2,773
    
    
    
    (1,747
    )Other
    
    
    229,887
    
    
    
    1,044,819
    
    
    
    694,405
    
    
    
    1,829,544Total noninterest income
    
    
    2,321,771
    
    
    
    2,849,641
    
    
    
    4,689,952
    
    
    
    5,373,210Noninterest expense:Salaries and employee benefits
    
    
    4,484,595
    
    
    
    4,847,063
    
    
    
    9,178,314
    
    
    
    9,669,763Occupancy expense
    
    
    584,676
    
    
    
    485,515
    
    
    
    1,200,780
    
    
    
    992,295Furniture and equipment expense
    
    
    704,990
    
    
    
    579,607
    
    
    
    1,268,518
    
    
    
    1,159,796Legal, examination, and professional fees
    
    
    212,566
    
    
    
    600,166
    
    
    
    525,997
    
    
    
    911,090Advertising and promotion
    
    
    275,525
    
    
    
    249,356
    
    
    
    511,135
    
    
    
    428,965Postage, printing and supplies
    
    
    303,769
    
    
    
    292,440
    
    
    
    550,646
    
    
    
    559,286Processing expense
    
    
    737,419
    
    
    
    285,354
    
    
    
    1,552,910
    
    
    
    553,806Amortization of intangible assets
    
    
    175,363
    
    
    
    230,585
    
    
    
    364,357
    
    
    
    476,639Other
    
    
    1,146,979
    
    
    
    875,075
    
    
    
    2,117,873
    
    
    
    1,827,502Total noninterest expense
    
    
    8,625,882
    
    
    
    8,445,161
    
    
    
    17,270,530
    
    
    
    16,579,142Income before income taxes
    
    
    1,912,043
    
    
    
    3,335,281
    
    
    
    3,529,976
    
    
    
    6,635,569Income taxes
    
    
    594,583
    
    
    
    972,253
    
    
    
    1,125,641
    
    
    
    1,965,874Net income
    
    $
    1,317,460
    
    
    $
    2,363,028
    
    
    $
    2,404,335
    
    
    $
    4,669,695Basic earning per share
    
    $
    0.32
    
    
    $
    0.57
    
    
    $
    0.58
    
    
    $
    1.12Diluted earnings per share
    
    $
    0.31
    
    
    $
    0.56
    
    
    $
    0.57
    
    
    $
    1.11Weighed average shares of common stock
outstandingBasic
    
    
    4,166,638
    
    
    
    4,170,003
    
    
    
    4,168,066
    
    
    
    4,169,925Diluted
    
    
    4,187,907
    
    
    
    4,214,670
    
    
    
    4,190,026
    
    
    
    4,218,223Dividends per share:Declared
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.42Paid
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.42
  4




---



##### 



(Unaudited)
 Six Months Ended June 30,2008
    
    
    2007Cash flow from operating activities:Net income
    
    $
    2,404,335
    
    
    $
    4,669,695Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan losses
    
    
    2,950,000
    
    
    
    379,216Depreciation expense
    
    
    1,080,479
    
    
    
    952,255Net accretion of debt securities
premiums and discounts
    
    
    (92,109
    )
    
    
    (22,215
    )Amortization of intangible assets
    
    
    364,357
    
    
    
    476,639Stock based compensation expense
    
    
    104,041
    
    
    
    106,678Decrease in accrued interest receivable
    
    
    1,394,252
    
    
    
    327,868Increase in cash surrender value  life insurance
    
    
    (25,335
    )
    
    
    (38,085
    )Increase in other assets
    
    
    (417,834
    )
    
    
    (326,322
    )Increase (decrease) in accrued interest payable
    
    
    (163,618
    )
    
    
    317,405Increase (decrease) in other liabilities
    
    
    (626,810
    )
    
    
    734,976(Gain) loss on sales and calls of debt securities
    
    
    (2,773
    )
    
    
    1,747Origination of mortgage loans for sale
    
    
    (31,878,936
    )
    
    
    (16,508,000
    )Proceeds from the sale of mortgage loans held for sale
    
    
    32,431,727
    
    
    
    16,849,503Gain on sale of mortgage loans
    
    
    (552,791
    )
    
    
    (341,503
    )Loss on disposition of premises and equipment
    
    
    108,941
    
    
    
    1,064Other, net
    
    
    (259,535
    )
    
    
    (192,512
    )Net cash provided by operating activities
    
    
    6,818,391
    
    
    
    7,388,409Cash flow from investing activities:Net increase in loans
    
    
    (62,011,250
    )
    
    
    (26,195,306
    )Purchase of available-for-sale debt securities
    
    
    (192,141,107
    )
    
    
    (32,750,173
    )Proceeds from maturities of available-for-sale debt
securities
    
    
    132,855,429
    
    
    
    27,229,313Proceeds from calls of available-for-sale debt securities
    
    
    35,032,640
    
    
    
    9,888,600Proceeds from sales of available-for-sale debt securities
    
    
    30,920,778
    
    
    
    6,910,634Purchase of equity securities
    
    
    (3,934,100
    )
    
    
    (344,400
    )Proceeds from sales of equity securities
    
    
    494,800
    
    
    
    976,850Purchase of premises and equipment
    
    
    (727,907
    )
    
    
    (4,571,307
    )Proceeds from sales of premises and equipment
    
    
    27,900
    
    
    
    18,000Proceeds from sales of other real estate owned
and repossessions
    
    
    666,321
    
    
    
    899,962Net cash used in investing activities
    
    
    (58,816,496
    )
    
    
    (17,937,827
    )
  5




---



##### 



(Unaudited)
 Six Months Ended June 30,2008
    
    
    2007Cash flow from financing activities:Net decrease in demand deposits
    
    $
    (13,787,134
    )
    
    $
    (70,243
    )Net increase (decrease) in interest-bearing
transaction accounts
    
    
    (9,219,913
    )
    
    
    16,503,724Net increase (decrease) in time deposits
    
    
    (1,590,563
    )
    
    
    859,518Net increase (decrease) in federal funds purchased
and securities
sold under agreements to repurchase
    
    
    20,887,646
    
    
    
    (3,862,835
    )Net decrease in interest-bearing demand notes to
U.S. Treasury
    
    
    
    
    
    
    (1,735,638
    )Proceeds from Federal Home Loan Bank advances
    
    
    192,300,000
    
    
    
    73,000,000Repayment of Federal Home Loan Bank advances
    
    
    (135,757,468
    )
    
    
    (70,980,555
    )Cash dividends paid
    
    
    (1,749,087
    )
    
    
    (1,751,336
    )(Purchase) sale of treasury stock
    
    
    (269,705
    )
    
    
    23,123Net cash provided by financing activities
    
    
    50,813,776
    
    
    
    11,985,758Net increase (decrease) in cash and cash equivalents
    
    
    (1,184,329
    )
    
    
    1,436,340Cash and cash equivalents, beginning of period
    
    
    35,873,385
    
    
    
    53,000,566Cash and cash equivalents, end of period
    
    $
    34,689,056
    
    
    $
    54,436,906Supplemental
disclosure of cash flow information -Cash paid during period for:Interest
    
    $
    16,650,036
    
    
    $
    17,629,733Income taxes
    
    
    1,800,000
    
    
    
    1,552,000Supplemental
schedule of noncash investing activities -Other real estate and repossessions
acquired in settlement of loans
    
    $
    1,527,721
    
    
    $
    801,896
  6




---



##### 



(Unaudited)
 Basis of Presentation
    Fair Value Measurements
 Fair Value Measurement.
 7




---



##### 



Available-for-sale securities
  Loans
 Accounting by Creditors for Impairment of a Loan,
 8




---



##### 



Fair Value MeasurementsAt June 30, 2008 UsingQuoted Pricesin ActiveMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    June 30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-Sa
le Securities
    
    $
    144,079,342
    
    
    $
    
    
    
    $
    144,079,342
    
    
    $
    Impaired loans
    
    $
    14,978,925
    
    
    $
    
    
    
    $
    14,978,925
    
    
    $
    
 Earnings per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June, 302008
    
    
    2007
    
    
    2008
    
    
    2007Net income, basic and diluted
    
    $
    1,317,460
    
    
    $
    2,363,028
    
    
    $
    2,404,335
    
    
    $
    4,669,695Average shares outstanding
    
    
    4,166,638
    
    
    
    4,170,003
    
    
    
    4,168,066
    
    
    
    4,169,925Effect of dilutive stock options
    
    
    21,269
    
    
    
    44,667
    
    
    
    21,960
    
    
    
    48,298Average shares outstanding
including dilutive stock options
    
    
    4,187,907
    
    
    
    4,214,670
    
    
    
    4,190,026
    
    
    
    4,218,223Basic earning per share
    
    $
    0.32
    
    
    $
    0.57
    
    
    $
    0.58
    
    
    $
    1.12Diluted earnings per share
    
    $
    0.31
    
    
    $
    0.56
    
    
    $
    0.57
    
    
    $
    1.11
  9




---



##### 



Stock-Based Compensation
  WeightedWeighted
    
    Aggregate
    
    AverageAverage
    
    Intrinsic
    
    ContractualExercise
    
    Value
    
    TermOptions
    
    Price
    
    (000)
    
    (in years)Outstanding, January 1, 2008
    
    
    242,968
    
    
    $
    27.23Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Forfeited
    
    
    (9,142
    )
    
    
    32.16Outstanding, June 30, 2008
    
    
    233,826
    
    
    
    27.04
    
    
    $
    412
    
    
    
    5.9Exercisable, June 30, 2008
    
    
    173,851
    
    
    
    25.46
    
    
    
    412
    
    
    
    5.2
   Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    1,317,460
    
    
    $
    2,363,028
    
    
    $
    2,404,335
    
    
    $
    4,669,695Other comprehensive loss:Unrealized gain on securities:Unrealized loss on debt and equity
securities available-for-sale, net of tax
    
    
    (1,424,109
    )
    
    
    (676,768
    )
    
    
    (708,750
    )
    
    
    (442,371
    )Adjustment for (gain) loss on sales and calls
of debt and equity securities, net of tax
    
    
    
    
    
    
    
    
    
    
    (1,692
    )
    
    
    1,136Defined benefit pension plans:Amortization of prior service cost included in
net periodic pension cost, net of tax
    
    
    3,926
    
    
    
    11,431
    
    
    
    7,852
    
    
    
    22,862Total other comprehensive loss
    
    
    (1,420,183
    )
    
    
    (665,337
    )
    
    
    (702,590
    )
    
    
    (418,373
    )Comprehensive income (loss)
    
    $
    (102,723
    )
    
    $
    1,697,691
    
    
    $
    1,701,745
    
    
    $
    4,251,322
 10




---



##### 



Goodwill and Intangible Assets
   June 30, 2008
    
    
    December 31, 2007Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible
assets:Core deposit intangible
    
    $
    7,060,224
    
    
    
    (4,593,041
    )
    
    $
    7,060,224
    
    
    
    (4,228,684
    )
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Aggregate
amortization expense
    
    $
    175,363
    
    
    
    230,585
    
    
    $
    364,357
    
    
    
    476,639
  Estimated amortization expense:For the six months ending December 31, 2008
    
    $
    337,086For year ending 2009
    
    
    626,111For year ending 2010
    
    
    526,477For year ending 2011
    
    
    434,763For year ending 2012
    
    
    408,062
 11




---



##### 



Mortgage Servicing Rights
   Six Months EndedJune 30,2008
    
    
    2007Balance, beginning of period
    
    $
    1,184,868
    
    
    
    1,350,375Originated mortgage servicing rights
    
    
    346,766
    
    
    
    138,019Amortization
    
    
    (347,524
    )
    
    
    (224,955
    )Balance, end of period
    
    $
    1,184,110
    
    
    
    1,263,439Mortgage loans serviced
    
    $
    211,420,928
    
    
    
    210,636,388Mortgage servicing rights as a
percentage of loans serviced
    
    
    0.56
    %
    
    
    0.60
    %
  Estimated amortization expense:For the six months ending December 31, 2008
    
    $
    32,500For year ending 2009
    
    
    260,000For year ending 2010
    
    
    178,000For year ending 2011
    
    
    145,000For year ending 2012
    
    
    118,000
 Income Taxes
  12




---



##### 



Defined Benefit Retirement Plan
   Estimated
    
    
    Actual2008
    
    
    2007Service cost  benefits earned during the year
    
    $
    848,635
    
    
    $
    797,675Interest cost on projected benefit obligations
    
    
    447,195
    
    
    
    364,406Expected return on plan assets
    
    
    (448,235
    )
    
    
    (385,269
    )Amortization of prior service cost
    
    
    78,628
    
    
    
    78,628Amortization of net gains
    
    
    (52,879
    )
    
    
    (18,152
    )Pension expense  Annual
    
    $
    873,344
    
    
    $
    837,288Pension expense  three months
ended June 30 (actual)
    
    $
    218,336
    
    
    $
    213,834Pension expense  six months
ended June 30 (actual)
    
    $
    436,673
    
    
    $
    427,668
  13




---



##### 



Item 2 - Managements Discussion and Analysis of Financial Condition
And Results of Operations
 Forward-Looking Statements
  
    
    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.
  
    
    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.
  General
  14




---



##### 



Overview
    Credit Risk Environment
  Goodwill Impairment
  15




---



##### 



Critical Accounting Policies
  Results of Operations
 Net Income
   Net Interest Income / Net Interest Margin
   16




---



##### 



Average Balance Sheets
    17




---



##### 



(Dollars expressed in thousands)
 Three Months Ended June 30,2008
    
    
    2007Interest
    
    
    Rate
    
    
    
    
    
    
    Interest
    
    
    RateAverage
    
    
    Income/
    
    
    Earned/
    
    
    Average
    
    
    Income/
    
    
    Earned/Balance
    
    
    Expense(1)
    
    
    Paid(1)
    
    
    Balance
    
    
    Expense(1)
    
    
    Paid(1)ASSETSLoans: (2) (4)
    
    $
    947,031
    
    
    $
    15,351
    
    
    
    6.50
    %
    
    $
    829,365
    
    
    $
    16,174
    
    
    
    7.82
    %Investment in debt and
equity securities: (3)Government sponsored
enterprises
    
    
    115,832
    
    
    
    1,307
    
    
    
    4.53
    
    
    
    119,097
    
    
    
    1,396
    
    
    
    4.70State and municipal
    
    
    45,637
    
    
    
    601
    
    
    
    5.28
    
    
    
    54,795
    
    
    
    548
    
    
    
    4.01Other
    
    
    7,868
    
    
    
    70
    
    
    
    3.57
    
    
    
    6,103
    
    
    
    101
    
    
    
    6.64Federal funds sold
    
    
    2,082
    
    
    
    10
    
    
    
    1.93
    
    
    
    10,320
    
    
    
    146
    
    
    
    5.67Interest bearing deposits
in other financial institutions
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    962
    
    
    
    11
    
    
    
    4.59Total interest earning assets
    
    
    1,118,686
    
    
    
    17,339
    
    
    
    6.22
    
    
    
    1,020,642
    
    
    
    18,376
    
    
    
    7.22All other assets
    
    
    126,088
    
    
    
    
    
    
    
    
    
    
    
    126,898Allowance for loan losses
    
    
    (10,161
    )
    
    
    
    
    
    
    
    
    
    
    (9,096
    )Total assets
    
    $
    1,234,613
    
    
    
    
    
    
    
    
    
    
    $
    1,138,444LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    116,570
    
    
    $
    252
    
    
    
    0.87
    %
    
    $
    103,167
    
    
    $
    315
    
    
    
    1.22
    %Savings
    
    
    44,818
    
    
    
    57
    
    
    
    0.51
    
    
    
    48,096
    
    
    
    68
    
    
    
    0.57Money market
    
    
    165,779
    
    
    
    714
    
    
    
    1.73
    
    
    
    153,395
    
    
    
    1,354
    
    
    
    3.54Time deposits of
$100,000 and over
    
    
    141,899
    
    
    
    1,465
    
    
    
    4.14
    
    
    
    140,748
    
    
    
    1,717
    
    
    
    4.89Other time deposits
    
    
    311,178
    
    
    
    3,194
    
    
    
    4.12
    
    
    
    319,104
    
    
    
    3,701
    
    
    
    4.65Total time deposits
    
    
    780,244
    
    
    
    5,682
    
    
    
    2.92
    
    
    
    764,510
    
    
    
    7,155
    
    
    
    3.75Federal funds purchased and
securities
sold under agreements to
repurchase
    
    
    49,434
    
    
    
    278
    
    
    
    2.26
    
    
    
    32,534
    
    
    
    357
    
    
    
    4.40Interest  bearing demand
notes to U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    2
    
    
    
    5.57Subordinated notes
    
    
    49,486
    
    
    
    732
    
    
    
    5.93
    
    
    
    49,486
    
    
    
    898
    
    
    
    7.28Other borrowed money
    
    
    110,563
    
    
    
    913
    
    
    
    3.31
    
    
    
    46,711
    
    
    
    640
    
    
    
    5.50Total interest -
bearing liabilities
    
    
    989,727
    
    
    
    7,605
    
    
    
    3.08
    
    
    
    893,385
    
    
    
    9,052
    
    
    
    4.06Demand deposits
    
    
    122,930
    
    
    
    
    
    
    
    
    
    
    
    126,186Other liabilities
    
    
    8,591
    
    
    
    
    
    
    
    
    
    
    
    10,831Total liabilities
    
    
    1,121,248
    
    
    
    
    
    
    
    
    
    
    
    1,030,402Stockholders equity
    
    
    113,365
    
    
    
    
    
    
    
    
    
    
    
    108,042Total liabilities and
stockholders equity
    
    $
    1,234,613
    
    
    
    
    
    
    
    
    
    
    $
    1,138,444Net interest income
    
    
    
    
    
    $
    9,734
    
    
    
    
    
    
    
    
    
    
    $
    9,324Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.49
    %
    
    
    
    
    
    
    
    
    
    
    3.66
    %
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the combined
statutory federal and state income tax rate in effect for the year, net of nondeductible interest
expense. Such adjustments totaled $218,000 in 2008 and $239,000 in 2007./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. 18




---



##### 



(Dollars expressed in thousands)
 Six Months Ended June 30,2008
    
    
    2007Interest
    
    
    Rate
    
    
    
    
    
    
    Interest
    
    
    RateAverage
    
    
    Income/
    
    
    Earned/
    
    
    Average
    
    
    Income/
    
    
    Earned/Balance
    
    
    Expense(1)
    
    
    Paid(1)
    
    
    Balance
    
    
    Expense(1)
    
    
    Paid(1)ASSETSLoans: (2) (4)
    
    $
    932,415
    
    
    $
    31,838
    
    
    
    6.85
    %
    
    $
    816,541
    
    
    $
    31,952
    
    
    
    7.89
    %Investment in debt and
equity securities: (3)Government sponsored
enterprises
    
    
    119,838
    
    
    
    2,688
    
    
    
    4.50
    
    
    
    121,980
    
    
    
    2,917
    
    
    
    4.82State and municipal
    
    
    48,368
    
    
    
    1,300
    
    
    
    5.39
    
    
    
    54,304
    
    
    
    1,101
    
    
    
    4.09Other
    
    
    7,060
    
    
    
    123
    
    
    
    3.49
    
    
    
    6,210
    
    
    
    179
    
    
    
    5.81Federal funds sold
    
    
    3,327
    
    
    
    44
    
    
    
    2.65
    
    
    
    17,308
    
    
    
    458
    
    
    
    5.34Interest bearing deposits
in other financial institutions
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    1,757
    
    
    
    46
    
    
    
    5.28Total interest earning assets
    
    
    1,111,186
    
    
    
    35,993
    
    
    
    6.50
    
    
    
    1,018,100
    
    
    
    36,653
    
    
    
    7.26All other assets
    
    
    126,490
    
    
    
    
    
    
    
    
    
    
    
    125,753Allowance for loan losses
    
    
    (9,798
    )
    
    
    
    
    
    
    
    
    
    
    (9,070
    )Total assets
    
    $
    1,227,878
    
    
    
    
    
    
    
    
    
    
    $
    1,134,783LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    115,854
    
    
    $
    626
    
    
    
    1.08
    %
    
    $
    105,219
    
    
    $
    661
    
    
    
    1.27
    %Savings
    
    
    44,042
    
    
    
    115
    
    
    
    0.52
    
    
    
    48,158
    
    
    
    136
    
    
    
    0.57Money market
    
    
    169,959
    
    
    
    1,832
    
    
    
    2.16
    
    
    
    152,775
    
    
    
    2,678
    
    
    
    3.53Time deposits of
$100,000 and over
    
    
    142,389
    
    
    
    3,086
    
    
    
    4.35
    
    
    
    140,430
    
    
    
    3,426
    
    
    
    4.92Other time deposits
    
    
    312,583
    
    
    
    6,745
    
    
    
    4.33
    
    
    
    316,894
    
    
    
    7,260
    
    
    
    4.62Total time deposits
    
    
    784,827
    
    
    
    12,404
    
    
    
    3.17
    
    
    
    763,476
    
    
    
    14,161
    
    
    
    3.74Federal funds purchased and
securities
sold under agreements to
repurchase
    
    
    50,664
    
    
    
    653
    
    
    
    2.58
    
    
    
    31,815
    
    
    
    703
    
    
    
    4.46Interest  bearing demand
notes to U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    413
    
    
    
    11
    
    
    
    5.37Subordinated notes
    
    
    49,486
    
    
    
    1,583
    
    
    
    6.42
    
    
    
    49,486
    
    
    
    1,791
    
    
    
    7.30Other borrowed money
    
    
    100,308
    
    
    
    1,846
    
    
    
    3.69
    
    
    
    47,324
    
    
    
    1,281
    
    
    
    5.46Total interest -
bearing liabilities
    
    
    985,285
    
    
    
    16,486
    
    
    
    3.36
    
    
    
    892,514
    
    
    
    17,947
    
    
    
    4.06Demand deposits
    
    
    120,937
    
    
    
    
    
    
    
    
    
    
    
    126,211Other liabilities
    
    
    8,867
    
    
    
    
    
    
    
    
    
    
    
    9,935Total liabilities
    
    
    1,115,089
    
    
    
    
    
    
    
    
    
    
    
    1,028,660Stockholders equity
    
    
    112,789
    
    
    
    
    
    
    
    
    
    
    
    106,123Total liabilities and
stockholders equity
    
    $
    1,227,878
    
    
    
    
    
    
    
    
    
    
    $
    1,134,783Net interest income
    
    
    
    
    
    $
    19,507
    
    
    
    
    
    
    
    
    
    
    $
    18,706Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.52
    %
    
    
    
    
    
    
    
    
    
    
    3.71
    %
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the combined
statutory federal and state income tax rate in effect for the year, net of nondeductible interest
expense. Such adjustments totaled $446,000 in 2008 and $485,000 in 2007./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. 19




---



##### 



Rate Volume Analysis
  (Dollars expressed in thousands)
 Three Months Ended
    
    
    Six Months EndedCompared to
    
    
    Compared toJune 30, 2008 vs 2007
    
    
    June 30, 2008 vs 2007Total
    
    
    Change due to
    
    
    Total
    
    
    Change due toChange
    
    
    Volume /3/
    
    
    Rate /4/
    
    
    Change
    
    
    Volume /3/
    
    
    Rate /4/Interest income on a fully taxable
equivalent basis:Loans:/1/
    
    $
    (823
    )
    
    
    2,117
    
    
    
    (2,940
    )
    
    $
    269
    
    
    
    4,195
    
    
    
    (3,926
    )Investment in debt and
equity securities :/3/Government sponsored enterprises
    
    
    (89
    )
    
    
    (38
    )
    
    
    (51
    )
    
    
    (229
    )
    
    
    (50
    )
    
    
    (179
    )State and municipal
    
    
    53
    
    
    
    (102
    )
    
    
    155
    
    
    
    (184
    )
    
    
    (159
    )
    
    
    (25
    )Other
    
    
    (31
    )
    
    
    24
    
    
    
    (55
    )
    
    
    (56
    )
    
    
    22
    
    
    
    (78
    )Federal funds sold
    
    
    (136
    )
    
    
    (75
    )
    
    
    (61
    )
    
    
    (414
    )
    
    
    (256
    )
    
    
    (158
    )Interest-bearing deposits
    
    
    (11
    )
    
    
    (5
    )
    
    
    (6
    )
    
    
    (46
    )
    
    
    (22
    )
    
    
    (24
    )Total interest income
    
    
    (1,037
    )
    
    
    1,921
    
    
    
    (2,958
    )
    
    
    (660
    )
    
    
    3,730
    
    
    
    (4,390
    )Interest expense:NOW accounts
    
    $
    (63
    )
    
    
    37
    
    
    
    (100
    )
    
    $
    (35
    )
    
    
    63
    
    
    
    (98
    )Savings accounts
    
    
    (11
    )
    
    
    (5
    )
    
    
    (6
    )
    
    
    (21
    )
    
    
    (11
    )
    
    
    (10
    )Money market
    
    
    (640
    )
    
    
    101
    
    
    
    (741
    )
    
    
    (846
    )
    
    
    275
    
    
    
    (1,121
    )Deposits of $100 and over
    
    
    (252
    )
    
    
    14
    
    
    
    (266
    )
    
    
    (340
    )
    
    
    47
    
    
    
    (387
    )Other time deposits
    
    
    (507
    )
    
    
    (90
    )
    
    
    (417
    )
    
    
    (515
    )
    
    
    (98
    )
    
    
    (417
    )Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    (79
    )
    
    
    139
    
    
    
    (218
    )
    
    
    (50
    )
    
    
    314
    
    
    
    (364
    )Interest-bearing demand notes
of U.S. Treasury
    
    
    (2
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (11
    )
    
    
    (5
    )
    
    
    (6
    )Subordinated debentures
    
    
    (166
    )
    
    
    
    
    
    
    (166
    )
    
    
    (208
    )
    
    
    
    
    
    
    (208
    )Other borrowed money
    
    
    273
    
    
    
    605
    
    
    
    (332
    )
    
    
    565
    
    
    
    1,077
    
    
    
    (512
    )Total interest expense
    
    
    (1,447
    )
    
    
    800
    
    
    
    (2,247
    )
    
    
    (1,461
    )
    
    
    1,662
    
    
    
    (3,123
    )Net interest income on a fully
taxable equivalent basis
    
    $
    410
    
    
    
    1,121
    
    
    
    (711
    )
    
    $
    801
    
    
    
    2,068
    
    
    
    (1,267
    )
 
 /1/
    
    /Interest income and yields are presented on a fully taxable equivalent basis using the
combined statutory federal and state income tax rate in effect for the year, net of nondeductible
interest expense. Such adjustments were $218,000 and $239,000, and $446,000 and $485,000 for the
three and six months June 30, 2008 and 2007, respectively./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. 20




---



##### 



Provision for Loan Losses
   21




---



##### 



Noninterest Income and Expense
  (
 Three Months EndedJune 30,
    
    
    Increase (decrease)2008
    
    
    2007
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    1,585
    
    
    $
    1,306
    
    
    $
    279
    
    
    
    21.4
    %Trust department income
    
    
    194
    
    
    
    192
    
    
    
    2
    
    
    
    1.0Mortgage loan servicing fees, net
    
    
    12
    
    
    
    95
    
    
    
    (83
    )
    
    
    (87.4
    )Gain on sale of mortgage loans
    
    
    301
    
    
    
    212
    
    
    
    89
    
    
    
    42.0Other
    
    
    230
    
    
    
    1,045
    
    
    
    (815
    )
    
    
    (78.0
    )$
    2,322
    
    
    $
    2,850
    
    
    $
    (528
    )
    
    
    (18.5)
    %Noninterest ExpenseSalaries and employee benefits
    
    $
    4,485
    
    
    $
    4,847
    
    
    $
    (362
    )
    
    
    (7.5)
    %Occupancy expense
    
    
    585
    
    
    
    486
    
    
    
    99
    
    
    
    20.4Furniture and equipment expense
    
    
    705
    
    
    
    580
    
    
    
    125
    
    
    
    21.6Legal, examination, and professional fees
    
    
    213
    
    
    
    600
    
    
    
    (387
    )
    
    
    (64.5
    )Advertising and promotion
    
    
    275
    
    
    
    249
    
    
    
    26
    
    
    
    10.4Postage, printing and supplies
    
    
    304
    
    
    
    292
    
    
    
    12
    
    
    
    4.1Processing expense
    
    
    737
    
    
    
    285
    
    
    
    452
    
    
    
    158.6Amortization  CDI
    
    
    175
    
    
    
    231
    
    
    
    (56
    )
    
    
    (24.2
    )Other
    
    
    1,147
    
    
    
    875
    
    
    
    272
    
    
    
    31.1$
    8,626
    
    
    $
    8,445
    
    
    $
    181
    
    
    
    2.1
    %
  22




---



##### 



Income taxes
  23




---



##### 



(
 Six Months EndedJune 30,
    
    
    Increase (decrease)2008
    
    
    2007
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    3,000
    
    
    $
    2,586
    
    
    $
    414
    
    
    
    16.0
    %Trust department income
    
    
    406
    
    
    
    429
    
    
    
    (23
    )
    
    
    (5.4
    )Mortgage loan servicing fees, net
    
    
    34
    
    
    
    190
    
    
    
    (156
    )
    
    
    (82.1
    )Gain on sale of mortgage loans
    
    
    553
    
    
    
    341
    
    
    
    212
    
    
    
    62.2Loss on sales and calls of debt securities
    
    
    3
    
    
    
    (2
    )
    
    
    5
    
    
    
    (250.0
    )Other
    
    
    694
    
    
    
    1,829
    
    
    
    (1,135
    )
    
    
    (62.1
    )$
    4,690
    
    
    $
    5,373
    
    
    $
    (683
    )
    
    
    (12.7
    )%Noninterest ExpenseSalaries and employee benefits
    
    $
    9,178
    
    
    $
    9,670
    
    
    $
    (492
    )
    
    
    (5.1
    )%Occupancy expense
    
    
    1,201
    
    
    
    992
    
    
    
    209
    
    
    
    21.1Furniture and equipment expense
    
    
    1,269
    
    
    
    1,160
    
    
    
    109
    
    
    
    9.4Legal, examination, and professional fees
    
    
    526
    
    
    
    911
    
    
    
    (385
    )
    
    
    (42.3
    )Advertising and promotion
    
    
    511
    
    
    
    429
    
    
    
    82
    
    
    
    19.1Postage, printing and supplies
    
    
    551
    
    
    
    559
    
    
    
    (8
    )
    
    
    (1.4
    )Processing expense
    
    
    1,553
    
    
    
    554
    
    
    
    999
    
    
    
    180.3Amortization  CDI
    
    
    364
    
    
    
    477
    
    
    
    (113
    )
    
    
    (23.7
    )Other
    
    
    2,118
    
    
    
    1,827
    
    
    
    291
    
    
    
    15.9$
    17,271
    
    
    $
    16,579
    
    
    $
    692
    
    
    
    4.2
    %
  24




---



##### 



Income taxes
  Lending and Credit Management
    25




---



##### 



26




---



##### 



(Dollars expressed in thousands)
 June 30, 2008
    
    
    December 31, 2007% of Gross
    
    
    
    
    
    
    % of GrossBalance
    
    
    Loans
    
    
    Balance
    
    
    LoansNonaccrual loans:Commercial
    
    $
    5,592
    
    
    
    0.58
    %
    
    $
    2,332
    
    
    
    0.33
    %Real estate:Construction
    
    
    2,455
    
    
    
    0.25
    
    
    
    866
    
    
    
    0.10Mortgage
    
    
    3,890
    
    
    
    0.40
    
    
    
    1,309
    
    
    
    0.07Consumer
    
    
    102
    
    
    
    0.01
    
    
    
    32
    
    
    
    12,039
    
    
    
    1.24
    
    
    
    4,539
    
    
    
    0.50Loans contractually past-due 90 days
or more and still accruing:Commercial
    
    
    239
    
    
    
    0.02
    
    
    
    265
    
    
    
    0.06Real estate:Construction
    
    
    406
    
    
    
    0.04
    
    
    
    158
    
    
    
    0.02Mortgage
    
    
    218
    
    
    
    0.02
    
    
    
    1,053
    
    
    
    0.08Consumer
    
    
    31
    
    
    
    0.01
    
    
    
    70
    
    
    
    0.01894
    
    
    
    0.09
    
    
    
    1,546
    
    
    
    0.17Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    12,933
    
    
    
    1.33
    %
    
    
    6,085
    
    
    
    0.67
    %Other real estate
    
    
    3,045
    
    
    
    
    
    
    
    2,337Repossessions
    
    
    
    
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    15,978
    
    
    
    
    
    
    $
    8,422
   27




---



##### 



28




---



##### 



Financial Condition
   29




---



##### 



30




---



##### 



Liquidity and Capital Resources
     31




---



##### 



Sources and Uses of Funds
    Regulatory Capital
  32




---



##### 



(dollars in thousands):
 June 30, 2008To be well capitalizedunder prompt correctiveActual
    
    Capital requirements
    
    action provisionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets):Company
    
    $
    126,672
    
    
    
    12.85
    %
    
    $
    78,854
    
    
    
    8.00
    %
    
    
    
    
    
    
    
    %Hawthorn Bank
    
    
    118,132
    
    
    
    11.99
    
    
    
    78,796
    
    
    
    8.00
    
    
    
    98,495
    
    
    
    10.00Tier I capital (to risk-weighted assets):Company
    
    
    104,536
    
    
    
    10.61
    
    
    
    39,427
    
    
    
    4.00
    
    
    
    
    
    
    
    Hawthorn Bank
    
    
    107,001
    
    
    
    10.86
    
    
    
    39,398
    
    
    
    4.00
    
    
    
    59,097
    
    
    
    6.00Tier I capital (to adjusted average assets):Company
    
    
    104,536
    
    
    
    8.77
    
    
    
    35,741
    
    
    
    3.00
    
    
    
    
    
    
    
    Hawthorn Bank
    
    
    107,001
    
    
    
    8.99
    
    
    
    35,696
    
    
    
    3.00
    
    
    
    59,493
    
    
    
    5.00
 December 31, 2007To be well capitalizedunder prompt correctiveActual
    
    Capital requirements
    
    action provisionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets):Company
    
    $
    123,970
    
    
    
    13.24
    %
    
    $
    74,925
    
    
    
    8.00
    %
    
    
    
    
    
    
    
    %Hawthorn Bank
    
    
    115,395
    
    
    
    12.35
    
    
    
    74,740
    
    
    
    8.00
    
    
    
    93,425
    
    
    
    10.00Tier I capital (to risk-weighted assets):Company
    
    
    103,754
    
    
    
    11.08
    
    
    
    37,463
    
    
    
    4.00
    
    
    
    
    
    
    
    Hawthorn Bank
    
    
    106,113
    
    
    
    11.36
    
    
    
    37,370
    
    
    
    4.00
    
    
    
    56,055
    
    
    
    6.00Tier I capital (to adjusted average assets):Company
    
    
    103,754
    
    
    
    9.12
    
    
    
    34,148
    
    
    
    3.00
    
    
    
    
    
    
    
    Hawthorn
 Bank
    
    
    106,113
    
    
    
    9.33
    
    
    
    34,126
    
    
    
    3.00
    
    
    
    56,876
    
    
    
    5.00
 33




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   (dollars in thousands):
 Over5 years orno statedYear 1
    
    
    Year 2
    
    
    Year 3
    
    
    Year 4
    
    
    Year 5
    
    
    Maturity
    
    
    TotalASSETSInvestments in debt and
equity securities
    
    $
    44,434
    
    
    
    21,252
    
    
    
    10,802
    
    
    
    6,017
    
    
    
    14,875
    
    
    
    55,765
    
    
    
    153,145Interest-bearing deposits
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124Federal funds sold and securities
purchased under agreements
to resell
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Loans
    
    
    484,816
    
    
    
    161,558
    
    
    
    133,565
    
    
    
    51,959
    
    
    
    96,602
    
    
    
    42,161
    
    
    
    970,661Total
    
    $
    529,479
    
    
    
    182,810
    
    
    
    144,367
    
    
    
    57,976
    
    
    
    111,477
    
    
    
    97,926
    
    
    
    1,124,035LIABILITIESSavings, Now deposits
    
    $
    
    
    
    
    
    
    
    
    106,836
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,836Rewards checking, Super Now,
money market deposits, CC
    
    
    219,965
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,965Time deposits
    
    
    365,685
    
    
    
    49,378
    
    
    
    27,333
    
    
    
    5,373
    
    
    
    3,916
    
    
    
    71
    
    
    
    451,756Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    46,618
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,618Subordinated notes
    
    
    25,774
    
    
    
    23,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,486Other borrowed money
    
    
    87,804
    
    
    
    7,384
    
    
    
    38,746
    
    
    
    370
    
    
    
    154
    
    
    
    
    
    
    
    134,458Total
    
    $
    745,846
    
    
    
    80,474
    
    
    
    172,915
    
    
    
    5,743
    
    
    
    4,070
    
    
    
    71
    
    
    
    1,009,119Interest-sensitivity GAPPeriodic GAP
    
    $
    (216,367
    )
    
    
    102,336
    
    
    
    (28,548
    )
    
    
    52,233
    
    
    
    107,407
    
    
    
    97,855
    
    
    
    114,916Cumulative GAP
    
    $
    (216,367
    )
    
    
    (114,031
    )
    
    
    (142,579
    )
    
    
    (90,346
    )
    
    
    17,061
    
    
    
    114,916
    
    
    
    114,916Ratio of interest-earnings
assets to interest-bearing liabilitiesPeriodic GAP
    
    
    0.71
    
    
    
    2.27
    
    
    
    0.83
    
    
    
    10.10
    
    
    
    27.39
    
    
    
    1,379.24
    
    
    
    1.11Cumulative GAP
    
    
    0.71
    
    
    
    0.86
    
    
    
    0.86
    
    
    
    0.91
    
    
    
    1.02
    
    
    
    1.11
    
    
    
    1.11
 34




---



##### 



Item 4. Controls and Procedures
   Impact of New Accounting Pronouncements
 Fair Value Measurement.
 , Business Combinations Noncontrolling Interests in Consolidated Financial Statements an
amendment to ARB No. 51
 35




---



##### 



The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No. 115
 Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements Employers Accounting for Postretirement Benefits Other Than Pensions Omnibus Opinion-1967
 36




---



##### 



PART II  OTHER INFORMATION
        WithholdAuthorityFor
    
    Against
    
    AbstentionsElection of Directors:Charles G. Dudenhoeffer, Jr.
    
    
    2,999,546
    
    
    
    341,561
    
    
    
    N/APhillip D. Freeman
    
    
    2,992,052
    
    
    
    349,055
    
    
    
    N/AJames E. Smith
    
    
    2,941,372
    
    
    
    399,734
    
    
    
    N/ARatification of KPMG LLP
as independent registered
public accounting firm
    
    
    3,204,517
    
    
    
    18,091
    
    
    
    118,501
  37




---



##### 



Exhibit No.
    
    Description3.1
    
    Restated Articles of Incorporation of our Company (filed as
Exhibit 3.1 to our Companys current report on Form 8-K on
August 9, 2007 and incorporated herein by reference).3.2
    
    Amended and Restated Bylaws of our Company (filed as Exhibit
3.2 to our Companys current report on Form 8-K on November 1,
2007 and incorporated herein by reference).4
    
    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
 38




---



##### 



SIGNATURES
  HAWTHORN BANCSHARES, INC.DateAugust 08, 2008
    
    /s/ James E. Smith

James E. Smith, Chairman of the Boardand Chief Executive Officer (Principal Executive Officer)August 08, 2008
    
    /s/ Richard G. Rose

Richard G. Rose, Chief Financial Officer (Principal FinancialOfficer and Principal Accounting Officer)
 39




---



##### 



HAWTHORN BANCSHARES, INC.
   Exhibit No.
    
    Description
    
    Page No.3.1
    
    Restated Articles of Incorporation of our
Company (filed as Exhibit 3.1 to our Companys
current report on Form 8-K on August 9, 2007 and
incorporated herein by reference).
    
    **3.2
    
    Amended and Restated Bylaws of our Company
(filed as Exhibit 3.2 to our Companys current
report on Form 8-k on November 1, 2007 and
incorporated herein by reference).
    
    **4
    
    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
    
    3531.2
    
    Certificate of the Chief Financial Officer of
our Company pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    3632.1
    
    Certificate of the Chief Executive Officer of
our Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    3732.2
    
    Certificate of the Chief Financial Officer of
our Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    38
 
 **
    
    Incorporated by reference. 40