##### 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 March 31, 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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 EXHIBITS302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer    Table of Contents  
  
 Item 1. Financial Statements
  (Unaudited)
 March 31, 2008
    
    
    December 31, 2007ASSETSLoans:
    
    $
    929,567,337
    
    
    $
    911,278,111Less allowance for loan losses
    
    
    10,007,977
    
    
    
    9,281,848Loans, net
    
    
    919,559,360
    
    
    
    901,996,263Investments in available for sale debt
securities, at fair value
    
    
    175,302,247
    
    
    
    151,742,455Investments in equity securities, at cost
    
    
    6,236,450
    
    
    
    5,626,050Federal funds sold and securities purchased
under agreements to resell
    
    
    289,470
    
    
    
    664,184Cash and due from banks
    
    
    32,540,620
    
    
    
    35,209,201Premises and equipment
    
    
    40,308,582
    
    
    
    40,543,546Other real estate owned and repossessed assets
    
    
    2,720,175
    
    
    
    2,337,107Accrued interest receivable
    
    
    7,368,461
    
    
    
    8,764,196Mortgage servicing rights
    
    
    1,161,299
    
    
    
    1,184,868Goodwill
    
    
    40,323,775
    
    
    
    40,323,775Intangible assets
    
    
    2,642,546
    
    
    
    2,831,540Cash surrender value  life insurance
    
    
    1,827,777
    
    
    
    1,820,532Other assets
    
    
    3,146,549
    
    
    
    2,760,362Total assets
    
    $
    1,233,427,311
    
    
    $
    1,195,804,079LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Demand deposits
    
    $
    131,910,321
    
    
    $
    138,355,520Time deposits
    
    
    784,881,051
    
    
    
    782,901,771Total deposits
    
    
    916,791,372
    
    
    
    921,257,291Federal funds purchased and securities
sold under agreements to repurchase
    
    
    52,754,769
    
    
    
    25,729,863Subordinated notes
    
    
    49,486,000
    
    
    
    49,486,000Other borrowed money
    
    
    91,710,741
    
    
    
    77,915,027Accrued interest payable
    
    
    4,775,222
    
    
    
    4,723,965Other liabilities
    
    
    5,714,523
    
    
    
    5,493,110Total liabilities
    
    
    1,121,232,627
    
    
    
    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
    
    
    22,597,178
    
    
    
    22,530,191Retained earnings
    
    
    85,939,395
    
    
    
    85,728,114Accumulated other comprehensive
income, net of tax
    
    
    2,074,131
    
    
    
    1,356,538Treasury stock, 128,858 shares at cost
    
    
    (2,714,373
    )
    
    
    (2,714,373
    )Total stockholders equity
    
    
    112,194,684
    
    
    
    111,198,823Total liabilities and stockholders equity
    
    $
    1,233,427,311
    
    
    $
    1,195,804,079
  2




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(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Interest income:Interest and fees on loans
    
    $
    16,461,890
    
    
    $
    15,559,314Interest on debt securities:Taxable
    
    
    1,399,518
    
    
    
    1,545,812Nontaxable
    
    
    477,500
    
    
    
    500,907Interest on federal funds sold and securities
purchased under agreements to resell
    
    
    33,960
    
    
    
    312,318Interest on interest-bearing deposits
    
    
    187
    
    
    
    34,854Dividends and interest on equity securities
    
    
    52,611
    
    
    
    77,478Total interest income
    
    
    18,425,666
    
    
    
    18,030,683Interest Expense:NOW accounts
    
    
    373,758
    
    
    
    345,782Savings accounts
    
    
    58,312
    
    
    
    68,655Money market accounts
    
    
    1,117,311
    
    
    
    1,323,747Certificates of deposit:$100,000 and over
    
    
    1,621,318
    
    
    
    1,709,604Other time deposits
    
    
    3,551,537
    
    
    
    3,558,144Federal funds purchased and securities sold
under agreements to repurchase
    
    
    375,381
    
    
    
    346,363Subordinated notes
    
    
    850,990
    
    
    
    892,711Advances from Federal Home Loan Bank
    
    
    932,659
    
    
    
    641,319Other borrowed money
    
    
    
    
    
    
    8,658Total interest expense
    
    
    8,881,266
    
    
    
    8,894,983Net interest income
    
    
    9,544,400
    
    
    
    9,135,700Provision for loan losses
    
    
    1,650,000
    
    
    
    225,000Net interest income after provision for loan losses
    
    
    7,894,400
    
    
    
    8,910,700
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(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Noninterest income:Service charges on deposit accounts
    
    $
    1,415,227
    
    
    $
    1,279,955Trust department income
    
    
    211,756
    
    
    
    236,372Mortgage loan servicing fees, net
    
    
    22,288
    
    
    
    94,969Gain on sale of mortgage loans, net
    
    
    251,619
    
    
    
    129,295Gain (loss) on sales and calls of debt securities
    
    
    2,773
    
    
    
    (1,747
    )Other
    
    
    464,518
    
    
    
    784,544Total noninterest income
    
    
    2,368,181
    
    
    
    2,523,388Noninterest expense:Salaries and employee benefits
    
    
    4,693,719
    
    
    
    4,822,700Occupancy expense
    
    
    616,104
    
    
    
    506,780Furniture and equipment expense
    
    
    555,618
    
    
    
    580,008Legal, examination, and professional fees
    
    
    313,431
    
    
    
    310,924Advertising and promotion
    
    
    235,610
    
    
    
    179,609Postage, printing and supplies
    
    
    246,877
    
    
    
    266,846Processing expense
    
    
    815,491
    
    
    
    268,452Amortization of intangible assets
    
    
    188,994
    
    
    
    246,054Other
    
    
    978,804
    
    
    
    952,427Total noninterest expense
    
    
    8,644,648
    
    
    
    8,133,800Income before income taxes
    
    
    1,617,933
    
    
    
    3,300,288Income taxes
    
    
    531,058
    
    
    
    993,621Net income
    
    $
    1,086,875
    
    
    $
    2,306,667Basic earning per share
    
    $
    0.26
    
    
    $
    0.55Diluted earnings per share
    
    $
    0.26
    
    
    $
    0.55Weighed average shares of common stock outstandingBasic
    
    
    4,169,495
    
    
    
    4,169,847Diluted
    
    
    4,192,266
    
    
    
    4,222,766Dividends per share:Declared
    
    $
    0.21
    
    
    $
    0.21Paid
    
    $
    0.21
    
    
    $
    0.21
  4




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(Unaudited)
 Three Months Ended March 31,2008
    
    
    2007Cash flow from operating activities:Net income
    
    $
    1,086,875
    
    
    $
    2,306,667Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan losses
    
    
    1,650,000
    
    
    
    225,000Depreciation expense
    
    
    537,037
    
    
    
    476,473Net accretion of debt securities
premiums and discounts
    
    
    (41,003
    )
    
    
    (12,123
    )Amortization of intangible assets
    
    
    188,994
    
    
    
    246,054Stock based compensation expense
    
    
    66,987
    
    
    
    46,191Decrease in accrued interest receivable
    
    
    1,395,735
    
    
    
    699,313Increase in cash surrender value  life insurance
    
    
    (7,245
    )
    
    
    (16,041
    )Increase in other assets
    
    
    (1,380,401
    )
    
    
    (99,462
    )Increase in accrued interest payable
    
    
    51,257
    
    
    
    165,225Increase (decrease) in other liabilities
    
    
    221,413
    
    
    
    (8,971
    )(Gain) loss on sales and calls of debt securities
    
    
    (2,773
    )
    
    
    1,747Origination of mortgage loans for sale
    
    
    (15,287,729
    )
    
    
    (9,259,479
    )Proceeds from the sale of mortgage loans held for sale
    
    
    15,539,348
    
    
    
    9,388,774Gain on sale of mortgage loans
    
    
    (251,619
    )
    
    
    (129,295
    )Loss on disposition of premises and equipment
    
    
    7,910
    
    
    
    297Other, net
    
    
    575,025
    
    
    
    142,144Net cash provided by operating activities
    
    
    4,349,811
    
    
    
    4,172,514Cash flow from investing activities:Net (increase) decrease in loans
    
    
    (20,015,410
    )
    
    
    1,145,123Purchase of available-for-sale debt securities
    
    
    (136,956,490
    )
    
    
    (19,268,852
    )Proceeds from maturities of available-for-sale debt securities
    
    
    57,531,407
    
    
    
    6,578,138Proceeds from calls of available-for-sale debt securities
    
    
    26,232,640
    
    
    
    4,918,600Proceeds from sales of available-for-sale debt securities
    
    
    30,920,778
    
    
    
    6,910,634Purchase of equity securities
    
    
    (966,900
    )
    
    
    (216,400
    )Proceeds from sales of equity securities
    
    
    356,500
    
    
    
    129,700Purchase of premises and equipment
    
    
    (337,883
    )
    
    
    (2,217,296
    )Proceeds from sales of premises and equipment
    
    
    27,900
    
    
    
    Proceeds from sales of other real estate owned
and repossessions
    
    
    335,245
    
    
    
    45,075Net cash used in investing activities
    
    
    (42,872,213
    )
    
    
    (1,975,278
    )
  5




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(Unaudited)
 Three Months Ended March 31,2008
    
    
    2007Cash flow from financing activities:Net decrease in demand deposits
    
    $
    (6,445,199
    )
    
    $
    (6,940,396
    )Net increase (decrease) in interest-bearing transaction accounts
    
    
    1,078,276
    
    
    
    (1,390,980
    )Net increase in time deposits
    
    
    901,004
    
    
    
    11,961,835Net increase in federal funds purchased and securities
sold under agreements to repurchase
    
    
    27,024,906
    
    
    
    762,859Net decrease in interest-bearing demand notes to U.S. Treasury
    
    
    
    
    
    
    (765,950
    )Proceeds from Federal Home Loan Bank advances
    
    
    70,000,000
    
    
    
    42,000,000Repayment of Federal Home Loan Bank advances
    
    
    (56,204,286
    )
    
    
    (49,667,731
    )Cash dividends paid
    
    
    (875,594
    )
    
    
    (875,669
    )Net cash provided (used) by financing activities
    
    
    35,479,107
    
    
    
    (4,916,032
    )Net decrease in cash and cash equivalents
    
    
    (3,043,295
    )
    
    
    (2,718,796
    )Cash and cash equivalents, beginning of period
    
    
    35,873,385
    
    
    
    53,000,566Cash and cash equivalents, end of period
    
    $
    32,830,090
    
    
    $
    50,281,770Supplemental disclosure of cash flow information -Cash paid during period for:Interest
    
    $
    8,830,006
    
    
    $
    8,729,758Income taxes
    
    
    
    
    
    
    Supplemental schedule of noncash investing activities -Other real estate and repossessions
acquired in settlement of loans
    
    $
    802,313
    
    
    $
    801,896
  6




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




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##### Table of Contents



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




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Fair Value MeasurementsAt March 31, 2008 UsingQuoted Pricesin ActiveMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    March 31, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-Sale Securities
    
    $
    175,302,247
    
    
    $
    
    
    
    $
    175,302,247
    
    
    $
    Impaired loans
    
    $
    3,252,688
    
    
    $
    
    
    
    $
    3,252,688
    
    
    $
    
 Earnings per Share
  Three Months EndedMarch 31,2008
    
    
    2007Net income, basic and diluted
    
    $
    1,086,875
    
    
    $
    2,306,667Average shares outstanding
    
    
    4,169,495
    
    
    
    4,169,847Effect of dilutive stock options
    
    
    22,771
    
    
    
    52,919Average shares outstanding
including dilutive stock options
    
    
    4,192,266
    
    
    
    4,222,766Basic earning per share
    
    $
    0.26
    
    
    $
    0.55Diluted earnings per share
    
    $
    0.26
    
    
    $
    0.55
  9




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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
    
    
    (8,539
    )
    
    
    32.32Outstanding, March 31, 2008
    
    
    234,429
    
    
    
    27.05
    
    
    $
    689
    
    
    
    6.1Exercisable, March 31, 2008
    
    
    154,355
    
    
    
    24.56
    
    
    
    689
    
    
    
    5.0
   Comprehensive Income
  Three Months EndedMarch 31,2008
    
    
    2007Net income
    
    $
    1,086,875
    
    
    $
    2,306,667Other comprehensive income:Unrealized gain on securities:Unrealized gain on debt and equity
securities available-for-sale, net of tax
    
    
    715,359
    
    
    
    234,397Adjustment 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
    
    
    
    11,431Total other comprehensive income
    
    
    717,593
    
    
    
    246,964Comprehensive income
    
    $
    1,804,468
    
    
    $
    2,553,631
 10




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Intangible Assets
  March 31, 2008
    
    
    December 31, 2007Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Core deposit intangible
    
    $
    7,060,224
    
    
    
    (4,417,678
    )
    
    $
    7,060,224
    
    
    
    (4,228,684
    )
  Three Months EndedMarch 31,2008
    
    
    2007Aggregate amortization expense
    
    $
    188,994
    
    
    
    246,054
  Estimated amortization expense:For the nine months ending December, 2008
    
    $
    512,449For year ending 2009
    
    
    626,111For year ending 2010
    
    
    526,477For year ending 2011
    
    
    434,763For year ending 2012
    
    
    408,062
 Mortgage Servicing Rights
  11




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Three Months EndedMarch 31,2008
    
    
    2007Balance, beginning of period
    
    $
    1,184,868
    
    
    
    1,350,375Originated mortgage servicing rights
    
    
    141,678
    
    
    
    74,885Amortization
    
    
    (165,247
    )
    
    
    (107,770
    )Balance, end of period
    
    $
    1,161,299
    
    
    
    1,317,490Mortgage loans serviced
    
    $
    208,377,675
    
    
    
    215,132,837Mortgage servicing rights as a
percentage of loans serviced
    
    
    0.56
    %
    
    
    0.61
    %
  Estimated amortization expense:For the nine months ending December 31, 2008
    
    $
    211,000For year ending 2008
    
    
    256,000For year ending 2009
    
    
    175,000For year ending 2010
    
    
    143,000For year ending 2011
    
    
    116,000
 Income Taxes
 Accounting for
Uncertainty in Income Taxes, , Accounting for Income Taxes
  12




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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 March 31 (actual)
    
    $
    218,336
    
    
    $
    213,834
  13




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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,
 
    
    costs or difficulties related to the integration of the business of Hawthorn and its
acquisition targets may be greater than expected,
 
    
    changes in the interest rate environment may reduce interest margins,
 
    
    general economic conditions, either nationally or in Missouri, may be less favorable 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




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Overview
    Critical Accounting Policies
  15




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##### Table of Contents



Results of Operations
 Net Income
  Net Interest Income / Net Interest Margin
    Average Balance Sheets
   16




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(Dollars expressed in thousands)
 Three Months Ended March 31,2008
    
    
    2007Interest
    
    
    Rate
    
    
    
    
    
    
    Interest
    
    
    RateAverage
    
    
    Income/
    
    
    Earned/
    
    
    Average
    
    
    Income/
    
    
    Earned/Balance
    
    
    Expense
    
    
    Paid(1)
    
    
    Balance
    
    
    Expense
    
    
    Paid(1)ASSETSLoans: (2) (4)
    
    $
    917,800
    
    
    $
    16,487
    
    
    
    7.21
    %
    
    $
    803,574
    
    
    $
    15,585
    
    
    
    7.87
    %Investment in debt and
equity securities: (3)Government sponsored
enterprises
    
    
    123,844
    
    
    
    1,381
    
    
    
    4.47
    
    
    
    124,896
    
    
    
    1,521
    
    
    
    4.94State and municipal
    
    
    51,099
    
    
    
    698
    
    
    
    5.48
    
    
    
    53,806
    
    
    
    746
    
    
    
    5.62Other
    
    
    6,252
    
    
    
    53
    
    
    
    3.40
    
    
    
    6,317
    
    
    
    78
    
    
    
    5.01Federal funds sold
    
    
    4,573
    
    
    
    34
    
    
    
    2.98
    
    
    
    24,374
    
    
    
    312
    
    
    
    5.19Interest bearing deposits
in other financial institutions
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    2,561
    
    
    
    35
    
    
    
    5.54Total interest earning assets
    
    
    1,103,692
    
    
    
    18,653
    
    
    
    6.78
    
    
    
    1,015,528
    
    
    
    18,277
    
    
    
    7.30All other assets
    
    
    126,890
    
    
    
    
    
    
    
    
    
    
    
    124,595Allowance for loan losses
    
    
    (9,435
    )
    
    
    
    
    
    
    
    
    
    
    (9,043
    )Total assets
    
    $
    1,221,147
    
    
    
    
    
    
    
    
    
    
    $
    1,131,080LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    115,138
    
    
    $
    373
    
    
    
    1.30
    %
    
    $
    107,292
    
    
    $
    346
    
    
    
    1.31
    %Savings
    
    
    43,266
    
    
    
    58
    
    
    
    0.54
    
    
    
    48,220
    
    
    
    68
    
    
    
    0.57Money market
    
    
    174,142
    
    
    
    1,117
    
    
    
    2.57
    
    
    
    152,148
    
    
    
    1,324
    
    
    
    3.53Time deposits of
$100,000 and over
    
    
    142,880
    
    
    
    1,622
    
    
    
    4.55
    
    
    
    140,111
    
    
    
    1,710
    
    
    
    4.95Other time deposits
    
    
    313,988
    
    
    
    3,552
    
    
    
    4.54
    
    
    
    314,660
    
    
    
    3,558
    
    
    
    4.59Total time deposits
    
    
    789,414
    
    
    
    6,722
    
    
    
    3.42
    
    
    
    762,431
    
    
    
    7,006
    
    
    
    3.73Federal funds purchased and
securities
sold under agreements to repurchase
    
    
    51,894
    
    
    
    375
    
    
    
    2.90
    
    
    
    42,350
    
    
    
    346
    
    
    
    4.51Interest  bearing demand
notes to U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    704
    
    
    
    9
    
    
    
    5.08Subordinated notes
    
    
    49,486
    
    
    
    851
    
    
    
    6.90
    
    
    
    49,486
    
    
    
    893
    
    
    
    7.32Other borrowed money
    
    
    90,053
    
    
    
    933
    
    
    
    4.16
    
    
    
    56,757
    
    
    
    641
    
    
    
    5.42Total interest -
bearing liabilities
    
    
    980,847
    
    
    
    8,881
    
    
    
    3.63
    
    
    
    903,242
    
    
    
    8,895
    
    
    
    4.05Demand deposits
    
    
    118,944
    
    
    
    
    
    
    
    
    
    
    
    132,912Other liabilities
    
    
    8,962
    
    
    
    
    
    
    
    
    
    
    
    9,175Total liabilities
    
    
    1,108,753
    
    
    
    
    
    
    
    
    
    
    
    1,045,329Stockholders equity
    
    
    112,394
    
    
    
    
    
    
    
    
    
    
    
    100,821Total liabilities and
stockholders equity
    
    $
    1,221,147
    
    
    
    
    
    
    
    
    
    
    $
    1,146,150Net interest income
    
    
    
    
    
    $
    9,772
    
    
    
    
    
    
    
    
    
    
    $
    9,382Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.55
    %
    
    
    
    
    
    
    
    
    
    
    3.75
    %
 
 /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 $228,000 in 2008 and $246,000 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. 17




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##### Table of Contents



Rate Volume Analysis
  (Dollars expressed in thousands)
 Three Months EndedCompared toMarch 31, 2008 vs 2007Total
    
    
    Change due toChange
    
    
    Volume /3/
    
    
    Rate /4/Interest income on a fully taxable equivalent basis:Loans:/1/
    
    $
    902
    
    
    
    2,110
    
    
    
    (1,208
    )Investment in debt and
equity securities :/3/Government sponsored enterprises
    
    
    (140
    )
    
    
    (13
    )
    
    
    (127
    )State and municipal
    
    
    (48
    )
    
    
    (37
    )
    
    
    (11
    )Other
    
    
    (25
    )
    
    
    (1
    )
    
    
    (24
    )Federal funds sold
    
    
    (278
    )
    
    
    (183
    )
    
    
    (95
    )Interest-bearing deposits
    
    
    (35
    )
    
    
    (17
    )
    
    
    (18
    )Total interest income
    
    
    376
    
    
    
    1,859
    
    
    
    (1,483
    )Interest expense:NOW accounts
    
    $
    27
    
    
    
    25
    
    
    
    2Savings accounts
    
    
    (10
    )
    
    
    (7
    )
    
    
    (3
    )Money market
    
    
    (207
    )
    
    
    173
    
    
    
    (380
    )Deposits of $100 and over
    
    
    (88
    )
    
    
    34
    
    
    
    (122
    )Other time deposits
    
    
    (6
    )
    
    
    (8
    )
    
    
    2Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    29
    
    
    
    179
    
    
    
    (150
    )Interest-bearing demand notes
of U.S. Treasury
    
    
    (9
    )
    
    
    (4
    )
    
    
    (5
    )Subordinated debentures
    
    
    (42
    )
    
    
    
    
    
    
    (42
    )Other borrowed money
    
    
    292
    
    
    
    462
    
    
    
    (170
    )Total interest expense
    
    
    (14
    )
    
    
    854
    
    
    
    (868
    )Net interest income on a fully
taxable equivalent basis
    
    $
    390
    
    
    
    1,005
    
    
    
    (615
    )
 
 /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 $228,000 and $246,000 for the three
months ended 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. 18




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##### Table of Contents



Provision for Loan Losses
  Noninterest Income and Expense
  (
 Three Months EndedMarch 31,
    
    
    Increase (decrease)2008
    
    
    2007
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    1,415
    
    
    $
    1,280
    
    
    $
    135
    
    
    
    10.5
    %Trust department income
    
    
    212
    
    
    
    236
    
    
    
    (24
    )
    
    
    (10.2
    )Mortgage loan servicing fees, net
    
    
    22
    
    
    
    95
    
    
    
    (73
    )
    
    
    (76.8
    )Gain on sale of mortgage loans
    
    
    252
    
    
    
    129
    
    
    
    123
    
    
    
    95.3Loss on sales and calls of debt securities
    
    
    3
    
    
    
    (2
    )
    
    
    5
    
    
    
    (250.0
    )Other
    
    
    464
    
    
    
    785
    
    
    
    (321
    )
    
    
    (40.9
    )$
    2,368
    
    
    $
    2,523
    
    
    $
    (155
    )
    
    
    (6.1
    )%Noninterest ExpenseSalaries and employee benefits
    
    $
    4,694
    
    
    $
    4,823
    
    
    $
    (129
    )
    
    
    (2.7
    )%Occupancy expense
    
    
    616
    
    
    
    507
    
    
    
    109
    
    
    
    21.5Furniture and equipment expense
    
    
    557
    
    
    
    580
    
    
    
    (23
    )
    
    
    (4.0
    )Legal, examination, and professional fees
    
    
    313
    
    
    
    311
    
    
    
    2
    
    
    
    0.6Advertising and promotion
    
    
    235
    
    
    
    180
    
    
    
    55
    
    
    
    30.6Postage, printing and supplies
    
    
    247
    
    
    
    267
    
    
    
    (20
    )
    
    
    (7.5
    )Processing expense
    
    
    815
    
    
    
    268
    
    
    
    547
    
    
    
    204.1Amortization  CDI
    
    
    189
    
    
    
    246
    
    
    
    (57
    )
    
    
    (23.2
    )Other
    
    
    979
    
    
    
    952
    
    
    
    27
    
    
    
    2.8$
    8,645
    
    
    $
    8,134
    
    
    $
    511
    
    
    
    6.3
    %
 19




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Income taxes
  20




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Lending and Credit Management
        21




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##### Table of Contents



(Dollars expressed in thousands)
 March 31, 2008
    
    
    December 31, 2007% of Gross
    
    
    
    
    
    
    % of GrossBalance
    
    
    Loans
    
    
    Balance
    
    
    LoansNonaccrual loans:Commercial
    
    $
    5,741
    
    
    
    0.62
    %
    
    $
    2,332
    
    
    
    0.33
    %Real estate:Construction
    
    
    1,378
    
    
    
    0.15
    
    
    
    866
    
    
    
    0.10Mortgage
    
    
    1,078
    
    
    
    0.12
    
    
    
    1,309
    
    
    
    0.07Consumer
    
    
    42
    
    
    
    
    
    
    
    32
    
    
    
    8,239
    
    
    
    0.89
    
    
    
    4,539
    
    
    
    0.50Loans contractually
past-due 90 days
or more and still accruing:Commercial
    
    
    159
    
    
    
    0.02
    
    
    
    265
    
    
    
    0.06Real estate:Construction
    
    
    143
    
    
    
    0.02
    
    
    
    158
    
    
    
    0.02Mortgage
    
    
    1,611
    
    
    
    0.16
    
    
    
    1,053
    
    
    
    0.08Consumer
    
    
    97
    
    
    
    0.01
    
    
    
    70
    
    
    
    0.012,010
    
    
    
    0.21
    
    
    
    1,546
    
    
    
    0.17Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    10,249
    
    
    
    1.10
    %
    
    
    6,085
    
    
    
    0.67
    %Other real estate
    
    
    2,720
    
    
    
    
    
    
    
    2,337Repossessions
    
    
    
    
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    12,969
    
    
    
    
    
    
    $
    8,422
   22




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23




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##### Table of Contents



Financial Condition
   24




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##### Table of Contents



25




---



##### Table of Contents



Liquidity and Capital Resources
     26




---



##### Table of Contents



Sources and Uses of Funds
    Regulatory Capital
   27




---



##### Table of Contents



(dollars in thousands):
 March 31, 2008To bewell capitalizedunder prompt correctiveActual
    
    Capital requirements
    
    action provisionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets):Company
    
    $
    125,163
    
    
    
    13.17
    %
    
    $
    76,025
    
    
    
    8.00
    %
    
    
    
    
    
    
    
    %Hawthorn Bank
    
    
    116,558
    
    
    
    12.28
    
    
    
    75,938
    
    
    
    8.00
    
    
    
    94,923
    
    
    
    10.00Tier I capital (to risk-weighted assets):Company
    
    
    104,553
    
    
    
    11.00
    
    
    
    38,012
    
    
    
    4.00
    
    
    
    
    
    
    
    Hawthorn Bank
    
    
    106,550
    
    
    
    11.22
    
    
    
    37,969
    
    
    
    4.00
    
    
    
    56,954
    
    
    
    6.00Tier I capital (to adjusted average assets):Company
    
    
    104,553
    
    
    
    8.87
    
    
    
    35,356
    
    
    
    3.00
    
    
    
    
    
    
    
    Hawthorn Bank
    
    
    106,550
    
    
    
    9.07
    
    
    
    35,255
    
    
    
    3.00
    
    
    
    58,758
    
    
    
    5.00
 December 31, 2007To bewell 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
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  28




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##### Table of Contents



(dollars in thousands):
 Over5 years orno statedYear 1
    
    
    Year 2
    
    
    Year 3
    
    
    Year 4
    
    
    Year 5
    
    
    Maturity
    
    
    TotalASSETSInvestments in debt and
equity securities
    
    $
    81,305
    
    
    
    24,248
    
    
    
    12,311
    
    
    
    7,470
    
    
    
    37,781
    
    
    
    18,424
    
    
    
    181,539Interest-bearing deposits
    
    
    133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133Federal funds sold and securities
purchased under agreements
to resell
    
    
    289
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    289Loans
    
    
    492,481
    
    
    
    128,723
    
    
    
    167,280
    
    
    
    37,575
    
    
    
    66,316
    
    
    
    37,192
    
    
    
    929,567Total
    
    $
    574,208
    
    
    
    152,971
    
    
    
    179,591
    
    
    
    45,045
    
    
    
    104,097
    
    
    
    55,616
    
    
    
    1,111,528LIABILITIESSavings, Now deposits
    
    $
    
    
    
    
    56,499
    
    
    
    
    
    
    
    56,499
    
    
    
    
    
    
    
    
    
    
    
    112,998Rewards checking, Super Now,
money market deposits
    
    
    223,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    223,950Time deposits
    
    
    380,710
    
    
    
    44,616
    
    
    
    19,259
    
    
    
    5,821
    
    
    
    3,895
    
    
    
    77
    
    
    
    454,378Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    52,755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,755Subordinated notes
    
    
    25,774
    
    
    
    
    
    
    
    23,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,486Other borrowed money
    
    
    59,153
    
    
    
    11,007
    
    
    
    20,754
    
    
    
    472
    
    
    
    254
    
    
    
    71
    
    
    
    91,711Total
    
    $
    742,342
    
    
    
    112,122
    
    
    
    63,725
    
    
    
    62,792
    
    
    
    4,149
    
    
    
    148
    
    
    
    985,278Interest-sensitivity GAPPeriodic GAP
    
    $
    (168,134
    )
    
    
    40,849
    
    
    
    115,866
    
    
    
    (17,747
    )
    
    
    99,948
    
    
    
    55,468
    
    
    
    126,250Cumulative GAP
    
    $
    (168,134
    )
    
    
    (127,285
    )
    
    
    (11,419
    )
    
    
    (29,166
    )
    
    
    70,782
    
    
    
    126,250
    
    
    
    126,250Ratio of interest-earnings
assets to interest-bearing liabilitiesPeriodic GAP
    
    
    0.77
    
    
    
    1.36
    
    
    
    2.82
    
    
    
    0.72
    
    
    
    25.09
    
    
    
    375.78
    
    
    
    1.13Cumulative GAP
    
    
    0.77
    
    
    
    0.85
    
    
    
    0.99
    
    
    
    0.97
    
    
    
    1.07
    
    
    
    1.13
    
    
    
    1.13
 29




---



##### Table of Contents



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
 30




---



##### Table of Contents



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
 31




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
    None
 
 Item 1A. Risk Factors
    
    None
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    None
 
 Item 3. Defaults Upon Senior Securities
    
    None
 
 Item 4. Submission of Matters to a Vote of Security Holders
    
    None
 
 Item 5. Other Information
    
    None
 
  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
 32




---



##### Table of Contents



SIGNATURES
  HAWTHORN BANCSHARES, INC.DateMay 12, 2008
    
    
    
    /s/ James E. Smith

James E. Smith, Chairman of the Boardand Chief Executive Officer (PrincipalExecutive Officer)May 12, 2008
    
    
    
    /s/ Richard G. Rose

Richard G. Rose, Chief Financial Officer (Principal FinancialOfficer and Principal Accounting Officer)
 33




---



##### 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
    
    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. 34