##### 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 September 30, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 0-23636
 HAWTHORN BANCSHARES, INC.
  Missouri
    
    43-1626350(State or other jurisdiction of
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
  300 Southwest Longview Boulevard, Lees Summit, Missouri
    
    64081(Address of principal executive offices)
    
    (Zip Code)
 (816) 347-8100
 N/A
 þ o
  o þ o
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2  Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESINDEX TO 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)
 September 30, 2007
    
    
    December 31, 2006ASSETSLoans:
    
    $
    882,889,587
    
    
    $
    812,312,759Less allowance for loan losses
    
    
    9,217,966
    
    
    
    9,015,378Loans, net
    
    
    873,671,621
    
    
    
    803,297,381Investments in available for sale debt
securities, at fair value
    
    
    174,344,734
    
    
    
    183,566,135Investments in equity securities, at cost
    
    
    6,293,350
    
    
    
    6,207,175Federal funds sold and securities purchased
under agreements to resell
    
    
    296,118
    
    
    
    9,922,961Cash and due from banks
    
    
    27,359,983
    
    
    
    43,077,605Premises and equipment
    
    
    40,247,769
    
    
    
    34,706,857Other real estate owned and repossessed assets
    
    
    4,730,314
    
    
    
    2,734,500Accrued interest receivable
    
    
    9,327,978
    
    
    
    8,773,686Mortgage servicing rights
    
    
    1,230,062
    
    
    
    1,350,375Goodwill
    
    
    40,323,775
    
    
    
    40,323,775Intangible assets
    
    
    3,054,389
    
    
    
    3,753,877Cash surrender value  life insurance
    
    
    1,802,435
    
    
    
    1,750,420Other assets
    
    
    2,932,079
    
    
    
    3,247,150Total assets
    
    $
    1,185,614,607
    
    
    $
    1,142,711,897LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Demand deposits
    
    $
    126,728,941
    
    
    $
    138,885,883Time deposits
    
    
    799,231,085
    
    
    
    760,978,851Total deposits
    
    
    925,960,026
    
    
    
    899,864,734Federal funds purchased and securities
sold under agreements to repurchase
    
    
    25,996,935
    
    
    
    29,460,492Interest-bearing demand notes to U.S. Treasury
    
    
    
    
    
    
    1,735,638Subordinated notes
    
    
    49,486,000
    
    
    
    49,486,000Other borrowed money
    
    
    62,152,260
    
    
    
    47,368,315Accrued interest payable
    
    
    5,384,915
    
    
    
    4,366,250Other liabilities
    
    
    6,502,239
    
    
    
    5,485,878Total liabilities
    
    
    1,075,482,375
    
    
    
    1,037,767,307Stockholders equity:Common stock  $1 par value; 15,000,000 shares
authorized; 4,298,353 issued
    
    
    4,298,353
    
    
    
    4,298,353Surplus
    
    
    22,460,001
    
    
    
    22,248,319Retained earnings
    
    
    85,610,413
    
    
    
    81,431,713Accumulated other comprehensive
income (loss), net of tax
    
    
    332,538
    
    
    
    (381,286
    )Treasury stock, 123,858 and 128,506 shares at cost
    
    
    (2,569,073
    )
    
    
    (2,652,509
    )Total stockholders equity
    
    
    110,132,232
    
    
    
    104,944,590Total liabilities and stockholders equity
    
    $
    1,185,614,607
    
    
    $
    1,142,711,897
  2




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(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest income:Interest and fees on loans
    
    $
    16,893,715
    
    
    $
    16,064,823
    
    
    $
    48,411,899
    
    
    $
    46,545,816Interest on debt securities:Taxable
    
    
    1,449,274
    
    
    
    1,444,437
    
    
    
    4,416,454
    
    
    
    4,220,388Nontaxable
    
    
    498,369
    
    
    
    481,074
    
    
    
    1,498,268
    
    
    
    1,442,210Interest on federal funds sold and securities
purchased under agreements to resell
    
    
    78,153
    
    
    
    221,387
    
    
    
    536,009
    
    
    
    528,547Interest on interest-bearing deposits
    
    
    8,000
    
    
    
    19,492
    
    
    
    54,220
    
    
    
    76,492Dividends and interest on equity securities
    
    
    64,656
    
    
    
    83,252
    
    
    
    243,172
    
    
    
    223,699Total interest income
    
    
    18,992,167
    
    
    
    18,314,465
    
    
    
    55,160,022
    
    
    
    53,037,152Interest Expense:NOW accounts
    
    
    417,360
    
    
    
    322,507
    
    
    
    1,078,231
    
    
    
    1,104,083Savings accounts
    
    
    63,643
    
    
    
    73,324
    
    
    
    199,802
    
    
    
    226,983Money market accounts
    
    
    1,525,207
    
    
    
    1,377,511
    
    
    
    4,203,301
    
    
    
    3,769,533Certificates of deposit:$100,000 and over
    
    
    1,658,271
    
    
    
    1,420,547
    
    
    
    5,084,831
    
    
    
    3,685,900Other time deposits
    
    
    3,903,084
    
    
    
    3,262,639
    
    
    
    11,162,624
    
    
    
    8,969,634Federal funds purchased and securities sold
under agreements to repurchase
    
    
    427,592
    
    
    
    461,640
    
    
    
    1,130,597
    
    
    
    1,458,591Subordinated notes
    
    
    907,703
    
    
    
    912,438
    
    
    
    2,698,436
    
    
    
    2,628,177Advances from Federal Home Loan Bank
    
    
    764,064
    
    
    
    750,026
    
    
    
    2,045,508
    
    
    
    2,153,965Other borrowed money
    
    
    2
    
    
    
    8,830
    
    
    
    10,734
    
    
    
    22,188Total interest expense
    
    
    9,666,926
    
    
    
    8,589,462
    
    
    
    27,614,064
    
    
    
    24,019,054Net interest income
    
    
    9,325,241
    
    
    
    9,725,003
    
    
    
    27,545,958
    
    
    
    29,018,098Provision for loan losses
    
    
    225,000
    
    
    
    300,000
    
    
    
    604,216
    
    
    
    928,000Net interest income after provision for loan
losses
    
    
    9,100,241
    
    
    
    9,425,003
    
    
    
    26,941,742
    
    
    
    28,090,098
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(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Noninterest income:Service charges on deposit accounts
    
    $
    1,306,969
    
    
    $
    1,461,703
    
    
    $
    3,892,536
    
    
    $
    4,339,408Trust department income
    
    
    200,672
    
    
    
    214,472
    
    
    
    629,223
    
    
    
    622,551Mortgage loan servicing fees, net
    
    
    60,059
    
    
    
    102,370
    
    
    
    249,851
    
    
    
    326,646Gain on sale of mortgage loans, net
    
    
    159,653
    
    
    
    126,686
    
    
    
    501,156
    
    
    
    328,520Loss on sales and calls of debt securities
    
    
    
    
    
    
    
    
    
    
    (1,747
    )
    
    
    (18,351
    )Other
    
    
    367,828
    
    
    
    311,342
    
    
    
    2,197,372
    
    
    
    892,890Total noninterest income
    
    
    2,095,181
    
    
    
    2,216,573
    
    
    
    7,468,391
    
    
    
    6,491,664Noninterest expense:Salaries and employee benefits
    
    
    4,484,240
    
    
    
    4,254,272
    
    
    
    14,154,003
    
    
    
    12,942,420Occupancy expense
    
    
    573,762
    
    
    
    499,840
    
    
    
    1,566,057
    
    
    
    1,400,006Furniture and equipment expense
    
    
    638,286
    
    
    
    591,482
    
    
    
    1,797,018
    
    
    
    1,653,967Advertising and promotion
    
    
    272,796
    
    
    
    234,298
    
    
    
    701,761
    
    
    
    621,636Postage, printing and supplies
    
    
    363,566
    
    
    
    277,290
    
    
    
    922,852
    
    
    
    861,209Legal, examination, and professional fees
    
    
    292,465
    
    
    
    333,575
    
    
    
    1,203,555
    
    
    
    946,664Processing expense
    
    
    324,860
    
    
    
    261,202
    
    
    
    878,866
    
    
    
    776,222Amortization of intangible assets
    
    
    222,849
    
    
    
    249,369
    
    
    
    699,488
    
    
    
    783,214Other
    
    
    988,349
    
    
    
    780,591
    
    
    
    2,816,715
    
    
    
    2,265,640Total noninterest expense
    
    
    8,161,173
    
    
    
    7,481,919
    
    
    
    24,740,315
    
    
    
    22,250,978Income before income taxes
    
    
    3,034,249
    
    
    
    4,159,657
    
    
    
    9,669,818
    
    
    
    12,330,784Income taxes
    
    
    897,262
    
    
    
    1,301,172
    
    
    
    2,863,136
    
    
    
    3,850,507Net income
    
    $
    2,136,987
    
    
    $
    2,858,485
    
    
    $
    6,806,682
    
    
    $
    8,480,277Basic earning per share
    
    $
    0.51
    
    
    $
    0.69
    
    
    $
    1.63
    
    
    $
    2.03Diluted earnings per share
    
    $
    0.51
    
    
    $
    0.68
    
    
    $
    1.61
    
    
    $
    2.02Weighed average shares of common stock
outstandingBasic
    
    
    4,174,179
    
    
    
    4,169,847
    
    
    
    4,171,359
    
    
    
    4,169,847Diluted
    
    
    4,213,563
    
    
    
    4,202,485
    
    
    
    4,216,682
    
    
    
    4,202,762Dividends per share:Declared
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.63
    
    
    $
    0.63Paid
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.63
    
    
    $
    0.63
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##### Table of Contents



(Unaudited)
 Nine Months Ended September 30,2007
    
    
    2006Cash flow from operating activities:Net income
    
    $
    6,806,682
    
    
    $
    8,480,277Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan losses
    
    
    604,216
    
    
    
    928,000Depreciation expense
    
    
    1,470,540
    
    
    
    1,360,457Net (accretion) amortization of debt securities
premiums and discounts
    
    
    (29,476
    )
    
    
    34,945Amortization of intangible assets
    
    
    699,488
    
    
    
    783,214Stock based compensation expense
    
    
    194,691
    
    
    
    162,741Increase in accrued interest receivable
    
    
    (554,292
    )
    
    
    (615,708
    )Increase in cash surrender value  life insurance
    
    
    (52,015
    )
    
    
    (47,672
    )Increase in other assets
    
    
    (303,820
    )
    
    
    (230,848
    )Increase in accrued interest payable
    
    
    1,018,665
    
    
    
    1,212,918Increase in other liabilities
    
    
    1,016,361
    
    
    
    505,510Loss on sales and calls of debt securities
    
    
    1,747
    
    
    
    18,351Origination of mortgage loans for sale
    
    
    (24,057,146
    )
    
    
    (15,247,120
    )Proceeds from the sale of mortgage loans held for sale
    
    
    24,558,302
    
    
    
    15,575,640Gain on sale of mortgage loans
    
    
    (501,156
    )
    
    
    (328,520
    )(Gain) Loss on disposition of premises and equipment
    
    
    (4,271
    )
    
    
    25,952Other, net
    
    
    413,128
    
    
    
    194,697Net cash provided by operating activities
    
    
    11,281,644
    
    
    
    12,812,834Cash flow from investing activities:Net increase in loans
    
    
    (74,226,029
    )
    
    
    (8,136,202
    )Purchase of available-for-sale debt securities
    
    
    (44,645,014
    )
    
    
    (117,945,571
    )Proceeds from maturities of available-for-sale debt securities
    
    
    37,102,209
    
    
    
    109,781,262Proceeds from calls of available-for-sale debt securities
    
    
    10,921,200
    
    
    
    950,038Proceeds from sales of available-for-sale debt securities
    
    
    6,910,634
    
    
    
    1,985,020Purchase of equity securities
    
    
    (1,310,900
    )
    
    
    (1,008,150
    )Proceeds from sales of equity securities
    
    
    1,224,725
    
    
    
    742,000Purchase of premises and equipment
    
    
    (7,505,467
    )
    
    
    (2,020,077
    )Proceeds from sales of premises and equipment
    
    
    498,286
    
    
    
    69,202Proceeds from sales of other real estate owned
and repossessions
    
    
    1,251,760
    
    
    
    570,624Net cash used in investing activities
    
    
    (69,778,596
    )
    
    
    (15,011,854
    )
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(Unaudited)
 Nine Months Ended September 30,2007
    
    
    2006Cash flow from financing activities:Net (decrease) increase in demand deposits
    
    $
    (12,156,942
    )
    
    $
    3,228,761Net increase (decrease) in interest-bearing transaction accounts
    
    
    15,212,993
    
    
    
    (19,314,069
    )Net increase in time deposits
    
    
    23,039,241
    
    
    
    26,366,533Net (decrease) increase in federal funds purchased and securities
sold under agreements to repurchase
    
    
    (3,463,557
    )
    
    
    4,548,459Net (decrease) increase in interest-bearing demand notes to U.S.
Treasury
    
    
    (1,735,638
    )
    
    
    791,135Proceeds from Federal Home Loan Bank advances
    
    
    103,000,000
    
    
    
    176,355,627Repayment of Federal Home Loan Bank advances
    
    
    (88,216,055
    )
    
    
    (177,924,605
    )Cash dividends paid
    
    
    (2,627,982
    )
    
    
    (2,627,004
    )Sale of treasury stock
    
    
    100,427
    
    
    
    Net cash provided by financing activities
    
    
    33,152,487
    
    
    
    11,424,837Net (decrease) increase in cash and cash equivalents
    
    
    (25,344,465
    )
    
    
    9,225,817Cash and cash equivalents, beginning of period
    
    
    53,000,566
    
    
    
    47,730,549Cash and cash equivalents, end of period
    
    $
    27,656,101
    
    
    $
    56,956,366Supplemental disclosure of cash flow information -Cash paid during period for:Interest
    
    $
    26,595,399
    
    
    $
    22,806,136Income taxes
    
    
    2,552,000
    
    
    
    4,135,000Supplemental schedule of noncash investing activities -Other real estate and repossessions
acquired in settlement of loans
    
    $
    3,247,574
    
    
    $
    489,498
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(Unaudited)
 Basis of Presentation
    7




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##### Table of Contents



Earnings per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income, basic and diluted
    
    $
    2,136,987
    
    
    $
    2,858,485
    
    
    $
    6,806,682
    
    
    $
    8,480,277Average shares outstanding
    
    
    4,174,179
    
    
    
    4,169,847
    
    
    
    4,171,359
    
    
    
    4,169,847Effect of dilutive stock options
    
    
    39,384
    
    
    
    32,638
    
    
    
    45,323
    
    
    
    32,915Average shares outstanding
including dilutive stock options
    
    
    4,213,563
    
    
    
    4,202,485
    
    
    
    4,216,682
    
    
    
    4,202,762Basic earning per share
    
    $
    0.51
    
    
    $
    0.69
    
    
    $
    1.63
    
    
    $
    2.03Diluted earnings per share
    
    $
    0.51
    
    
    $
    0.68
    
    
    $
    1.61
    
    
    $
    2.02
  Stock-Based Compensation
    8




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WeightedWeighted
    
    Aggregate
    
    AverageAverage
    
    Intrinsic
    
    ContractualExercise
    
    Value
    
    TermOptions
    
    Price
    
    (000)
    
    (in years)Outstanding, January 1, 2007
    
    
    202,738
    
    
    $
    24.54Granted
    
    
    48,104
    
    
    
    33.50Exercised
    
    
    (4,648
    )
    
    
    20.13Expired
    
    
    
    
    
    
    Forfeited
    
    
    (3,226
    )
    
    
    30.53Outstanding, September 30, 2007
    
    
    242,968
    
    
    
    27.23
    
    
    $
    1,143
    
    
    
    6.7Exercisable, September 30, 2007
    
    
    140,186
    
    
    
    23.69
    
    
    
    1,077
    
    
    
    5.3
   Options granted during 2007:Grant date fair value per option
    
    $
    7.13Significant assumptions:Risk-free interest rate at grant date
    
    
    4.49
    %Expected annual dividend yield
    
    
    2.50
    %Expected stock price volatility
    
    
    20.00
    %Expected life to exercise (years)
    
    
    6.25
 9




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Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    2,136,987
    
    
    $
    2,858,485
    
    
    $
    6,806,682
    
    
    $
    8,480,277Other comprehensive income:Unrealized gain on securities:Unrealized gain on debt and equity
securities available-for-sale, net of tax
    
    
    1,120,767
    
    
    
    1,339,440
    
    
    
    678,396
    
    
    
    246,978Adjustment for loss on sales and calls of debt
and equity securities, net of tax
    
    
    
    
    
    
    
    
    
    
    1,136
    
    
    
    11,928Defined benefit pension plans:Amortization of prior service cost included in
net periodic pension cost, net of tax
    
    
    11,430
    
    
    
    
    
    
    
    34,292
    
    
    
    Total other comprehensive income
    
    
    1,132,197
    
    
    
    1,339,440
    
    
    
    713,824
    
    
    
    258,906Comprehensive income
    
    $
    3,269,184
    
    
    $
    4,197,925
    
    
    $
    7,520,506
    
    
    $
    8,739,183
 Intangible Assets
  September 30, 2007
    
    
    December 31, 2006Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Core deposit intangible
    
    $
    7,060,224
    
    
    
    (4,005,835
    )
    
    $
    7,060,224
    
    
    
    (3,306,347
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Aggregate amortization expense
    
    $
    222,849
    
    
    
    249,369
    
    
    $
    699,488
    
    
    
    783,214
 10




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Estimated amortization expense:For the three months ending December, 2007
    
    $
    222,849For year ending 2008
    
    
    701,443For year ending 2009
    
    
    626,111For year ending 2010
    
    
    526,477For year ending 2011
    
    
    434,763
 Mortgage Servicing Rights
   Nine Months EndedSeptember 30,2007
    
    
    2006Balance, beginning of period
    
    $
    1,350,375
    
    
    
    1,536,331Originated mortgage servicing rights
    
    
    217,975
    
    
    
    192,849Amortization
    
    
    (338,288
    )
    
    
    (314,226
    )Balance, end of period
    
    $
    1,230,062
    
    
    
    1,414,954Mortgage loans serviced
    
    $
    211,098,203
    
    
    
    219,160,535Mortgage servicing rights as a
percentage of loans serviced
    
    
    0.58
    %
    
    
    0.65
    %
 11




---



##### Table of Contents



Estimated amortization expense:For the three months ending December 31, 2007
    
    $
    113,000For year ending 2008
    
    
    290,000For year ending 2009
    
    
    219,000For year ending 2010
    
    
    147,000For year ending 2011
    
    
    122,000
 Income Taxes
    Sale of Bank Charters
   12




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##### Table of Contents



Defined Benefit Retirement Plan
   Estimated
    
    
    Actual2007
    
    
    2006Service cost  benefits earned during the year
    
    $
    797,675
    
    
    $
    620,564Interest cost on projected benefit obligations
    
    
    364,493
    
    
    
    318,142Expected return on plan assets
    
    
    (377,180
    )
    
    
    (369,164
    )Amortization of prior service cost
    
    
    78,628
    
    
    
    78,628Amortization of net gains
    
    
    (8,279
    )
    
    
    (2,601
    )Pension expense  Annual
    
    $
    855,337
    
    
    $
    645,569Pension expense  three months
ended September 30 (actual)
    
    $
    213,834
    
    
    $
    166,760Pension expense  nine months
ended September 30 (actual)
    
    $
    641,502
    
    
    $
    484,177
  Segment reporting
  13




---



##### Table of Contents



September 30, 2007The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalBalance sheet information:Loans, net of allowance
for loan losses
    
    $
    378,635,657
    
    
    $
    495,035,964
    
    
    $
    
    
    
    $
    873,671,621Debt and equity securities
    
    
    77,961,075
    
    
    
    101,191,009
    
    
    
    1,486,000
    
    
    
    180,638,084Goodwill
    
    
    4,382,098
    
    
    
    35,941,677
    
    
    
    
    
    
    
    40,323,775Intangible assets
    
    
    
    
    
    
    3,054,389
    
    
    
    
    
    
    
    3,054,389Total assets
    
    
    505,582,753
    
    
    
    692,305,601
    
    
    
    (12,273,747
    )
    
    
    1,185,614,607Deposits
    
    
    415,751,035
    
    
    
    521,197,960
    
    
    
    (10,988,969
    )
    
    
    925,960,026Stockholders equity
    
    $
    52,396,366
    
    
    $
    96,273,858
    
    
    $
    (38,537,992
    )
    
    $
    110,132,232
 December 31, 2006The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalBalance sheet informationLoans, net of allowance
for loan losses
    
    $
    350,563,084
    
    
    $
    452,734,297
    
    
    $
    
    
    
    $
    803,297,381Debt and equity securities
    
    
    85,177,657
    
    
    
    103,109,653
    
    
    
    1,486,000
    
    
    
    189,773,310Goodwill
    
    
    4,382,098
    
    
    
    35,941,677
    
    
    
    
    
    
    
    40,323,775Intangible assets
    
    
    
    
    
    
    3,753,877
    
    
    
    
    
    
    
    3,753,877Total assets
    
    
    475,048,886
    
    
    
    666,138,165
    
    
    
    1,524,846
    
    
    
    1,142,711,897Deposits
    
    
    384,413,021
    
    
    
    524,228,167
    
    
    
    (8,776,454
    )
    
    
    899,864,734Stockholders equity
    
    $
    51,168,606
    
    
    $
    83,080,439
    
    
    $
    (29,304,455
    )
    
    $
    104,944,590
 14




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##### Table of Contents



Three Months Ended September 30, 2007The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalStatement of earnings:Total interest income
    
    $
    8,676,071
    
    
    $
    10,417,070
    
    
    $
    (100,974
    )
    
    $
    18,992,167Total interest expense
    
    
    3,819,706
    
    
    
    5,090,551
    
    
    
    756,669
    
    
    
    9,666,926Net interest income
    
    
    4,856,365
    
    
    
    5,326,519
    
    
    
    (857,643
    )
    
    
    9,325,241Provision for loan losses
    
    
    150,000
    
    
    
    75,000
    
    
    
    
    
    
    
    225,000Noninterest income
    
    
    1,003,634
    
    
    
    1,091,547
    
    
    
    
    
    
    
    2,095,181Noninterest expense
    
    
    2,902,584
    
    
    
    4,646,197
    
    
    
    612,392
    
    
    
    8,161,173Income taxes
    
    
    915,050
    
    
    
    455,196
    
    
    
    (472,984
    )
    
    
    897,262Net income (loss)
    
    $
    1,892,365
    
    
    $
    1,241,673
    
    
    $
    (997,051
    )
    
    $
    2,136,987
 Three Months Ended September 30, 2006The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalStatement of earnings:Total interest income
    
    $
    8,209,775
    
    
    $
    10,077,638
    
    
    $
    27,052
    
    
    $
    18,314,465Total interest expense
    
    
    3,430,944
    
    
    
    4,266,113
    
    
    
    892,405
    
    
    
    8,589,462Net interest income
    
    
    4,778,831
    
    
    
    5,811,525
    
    
    
    (865,353
    )
    
    
    9,725,003Provision for loan losses
    
    
    225,000
    
    
    
    75,000
    
    
    
    
    
    
    
    300,000Noninterest income
    
    
    1,069,554
    
    
    
    1,167,848
    
    
    
    (20,829
    )
    
    
    2,216,573Noninterest expense
    
    
    2,824,360
    
    
    
    4,469,283
    
    
    
    188,276
    
    
    
    7,481,919Income taxes
    
    
    903,100
    
    
    
    745,252
    
    
    
    (347,180
    )
    
    
    1,301,172Net income (loss)
    
    $
    1,895,925
    
    
    $
    1,689,838
    
    
    $
    (727,278
    )
    
    $
    2,858,485
 15




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##### Table of Contents



Nine Months Ended September 30, 2007The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalStatement of earnings:Total interest income
    
    $
    24,845,038
    
    
    $
    30,362,184
    
    
    $
    (47,200
    )
    
    $
    55,160,022Total interest expense
    
    
    10,826,546
    
    
    
    14,279,901
    
    
    
    2,507,617
    
    
    
    27,614,064Net interest income
    
    
    14,018,492
    
    
    
    16,082,283
    
    
    
    (2,554,817
    )
    
    
    27,545,958Provision for loan losses
    
    
    450,000
    
    
    
    154,216
    
    
    
    
    
    
    
    604,216Noninterest income
    
    
    3,084,872
    
    
    
    3,526,383
    
    
    
    857,136
    
    
    
    7,468,391Noninterest expense
    
    
    8,505,561
    
    
    
    13,521,662
    
    
    
    2,713,092
    
    
    
    24,740,315Income taxes
    
    
    2,644,500
    
    
    
    1,660,646
    
    
    
    (1,442,010
    )
    
    
    2,863,136Net income (loss)
    
    $
    5,503,303
    
    
    $
    4,272,142
    
    
    $
    (2,968,763
    )
    
    $
    6,806,682
 Nine Months Ended September 30, 2006The ExchangeNationalBank of
    
    
    Hawthorn
    
    
    CorporateJefferson City
    
    
    Bank
    
    
    and other
    
    
    TotalStatement of earnings:Total interest income
    
    $
    24,040,166
    
    
    $
    28,918,413
    
    
    $
    78,573
    
    
    $
    53,037,152Total interest expense
    
    
    9,805,051
    
    
    
    11,644,888
    
    
    
    2,569,115
    
    
    
    24,019,054Net interest income
    
    
    14,235,115
    
    
    
    17,273,525
    
    
    
    (2,490,542
    )
    
    
    29,018,098Provision for loan losses
    
    
    675,000
    
    
    
    253,000
    
    
    
    
    
    
    
    928,000Noninterest income
    
    
    3,151,596
    
    
    
    3,397,817
    
    
    
    (57,749
    )
    
    
    6,491,664Noninterest expense
    
    
    8,583,106
    
    
    
    13,145,581
    
    
    
    522,291
    
    
    
    22,250,978Income taxes
    
    
    2,618,700
    
    
    
    2,226,777
    
    
    
    (994,970
    )
    
    
    3,850,507Net income (loss)
    
    $
    5,509,905
    
    
    $
    5,045,984
    
    
    $
    (2,075,612
    )
    
    $
    8,480,277
 16




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##### Table of Contents



Item 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations
 Forward-Looking Statements
     17




---



##### Table of Contents



Overview
  Business Strategy
  Material Challenges and Risks
 18




---



##### Table of Contents



Revenue Source:
    Critical Accounting Policies:
 19




---



##### Table of Contents



Results of Operations
       20




---



##### Table of Contents



Average Balance Sheets
    21




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##### Table of Contents



(Dollars expressed in thousands)
 Three Months EndedSeptember 30, 2007
    
    
    September 30, 2006Interest
    
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    
    and
    
    
    Yield /
    
    
    Average
    
    
    and
    
    
    Yield /Balance
    
    
    Dividends /1/
    
    
    Cost
    
    
    Balance
    
    
    Dividends /1/
    
    
    CostASSETSLoans:/2/ /3/
    
    $
    869,669
    
    
    $
    16,920
    
    
    
    7.72
    %
    
    $
    828,848
    
    
    $
    16,101
    
    
    
    7.71
    %Investment in debt and
equity securities :/4/Government sponsored enterprises
    
    
    118,532
    
    
    
    1,428
    
    
    
    4.78
    
    
    
    125,463
    
    
    
    1,420
    
    
    
    4.49State and municipal
    
    
    53,922
    
    
    
    739
    
    
    
    5.44
    
    
    
    52,924
    
    
    
    718
    
    
    
    5.38Other
    
    
    6,014
    
    
    
    65
    
    
    
    4.29
    
    
    
    6,650
    
    
    
    83
    
    
    
    4.95Federal funds sold
    
    
    5,331
    
    
    
    78
    
    
    
    5.80
    
    
    
    16,613
    
    
    
    221
    
    
    
    5.28Interest-bearing deposits
    
    
    711
    
    
    
    8
    
    
    
    4.46
    
    
    
    1,607
    
    
    
    19
    
    
    
    4.69Total interest earning assets
    
    
    1,054,179
    
    
    
    19,238
    
    
    
    7.24
    
    
    
    1,032,105
    
    
    
    18,562
    
    
    
    7.14All other assets
    
    
    129,614
    
    
    
    
    
    
    
    
    
    
    
    124,628Allowance for loan losses
    
    
    (9,139
    )
    
    
    
    
    
    
    
    
    
    
    (9,321
    )Total assets
    
    $
    1,174,654
    
    
    
    
    
    
    
    
    
    
    $
    1,147,412LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    117,905
    
    
    $
    417
    
    
    
    1.40
    %
    
    $
    102,521
    
    
    $
    323
    
    
    
    1.25
    %Savings accounts
    
    
    46,219
    
    
    
    64
    
    
    
    0.55
    
    
    
    50,779
    
    
    
    73
    
    
    
    0.57Money market
    
    
    163,540
    
    
    
    1,525
    
    
    
    3.70
    
    
    
    158,797
    
    
    
    1,378
    
    
    
    3.44Deposits of $100 and over
    
    
    132,360
    
    
    
    1,659
    
    
    
    4.97
    
    
    
    126,220
    
    
    
    1,420
    
    
    
    4.46Other time deposits
    
    
    327,542
    
    
    
    3,904
    
    
    
    4.73
    
    
    
    317,542
    
    
    
    3,262
    
    
    
    4.08Total time deposits
    
    
    787,566
    
    
    
    7,569
    
    
    
    3.81
    
    
    
    755,859
    
    
    
    6,456
    
    
    
    3.39Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    34,464
    
    
    
    427
    
    
    
    4.92
    
    
    
    40,304
    
    
    
    462
    
    
    
    4.55Interest-bearing demand
notes to US Treasury
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    763
    
    
    
    9
    
    
    
    4.68Subordinated notes
    
    
    49,486
    
    
    
    907
    
    
    
    7.27
    
    
    
    49,486
    
    
    
    912
    
    
    
    7.31Advances from Federal Home Loan Bank
    
    
    55,924
    
    
    
    764
    
    
    
    5.42
    
    
    
    55,468
    
    
    
    750
    
    
    
    5.36Total interest-bearing liabilities
    
    
    927,442
    
    
    
    9,667
    
    
    
    4.14
    
    
    
    901,880
    
    
    
    8,589
    
    
    
    3.78Demand deposits
    
    
    127,857
    
    
    
    
    
    
    
    
    
    
    
    134,539Other liabilities
    
    
    10,558
    
    
    
    
    
    
    
    
    
    
    
    9,656Total liabilities
    
    
    1,065,857
    
    
    
    
    
    
    
    
    
    
    
    1,046,075Stockholders equity
    
    
    108,797
    
    
    
    
    
    
    
    
    
    
    
    101,337Total liabilities and
stockholders equity
    
    $
    1,174,654
    
    
    
    
    
    
    
    
    
    
    $
    1,147,412Net interest income
    
    
    
    
    
    $
    9,571
    
    
    
    
    
    
    
    
    
    
    $
    9,973Net interest margin/5/
    
    
    
    
    
    
    
    
    
    
    3.60
    %
    
    
    
    
    
    
    
    
    
    
    3.83
    %
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the Federal
statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled
$246,000 in 2007 and $248,000 in 2006./2/
    
    Non-accruing loans are included in the average amounts outstanding./3/
    
    Fees on loans are included in average amounts outstanding./4/
    
    Average balances based on amortized cost./5/
    
    Net interest income divided by average total interest earning assets. 22




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##### Table of Contents



(Dollars expressed in thousands)
 Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006Interest
    
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    
    and
    
    
    Yield/
    
    
    Average
    
    
    and
    
    
    Yield/Balance
    
    
    Dividends /1/
    
    
    Cost /1/
    
    
    Balance
    
    
    Dividends /1/
    
    
    Cost /1/ASSETSLoans:/2/ /3/
    
    $
    834,445
    
    
    $
    48,489
    
    
    
    7.77
    %
    
    $
    826,644
    
    
    $
    46,654
    
    
    
    7.55
    %Investment in debt and
equity securities :/4/Government sponsored enterprises
    
    
    120,818
    
    
    
    4,346
    
    
    
    4.81
    
    
    
    129,766
    
    
    
    4,139
    
    
    
    4.26State and municipal
    
    
    54,175
    
    
    
    2,223
    
    
    
    5.49
    
    
    
    53,042
    
    
    
    2,159
    
    
    
    5.44Other
    
    
    6,143
    
    
    
    243
    
    
    
    5.29
    
    
    
    6,968
    
    
    
    231
    
    
    
    4.43Federal funds sold
    
    
    13,272
    
    
    
    536
    
    
    
    5.40
    
    
    
    14,204
    
    
    
    529
    
    
    
    4.98Interest-bearing deposits
    
    
    1,405
    
    
    
    54
    
    
    
    5.14
    
    
    
    2,312
    
    
    
    76
    
    
    
    4.40Total interest earning assets
    
    
    1,030,258
    
    
    
    55,891
    
    
    
    7.25
    
    
    
    1,032,936
    
    
    
    53,788
    
    
    
    6.96All other assets
    
    
    127,054
    
    
    
    
    
    
    
    
    
    
    
    123,532Allowance for loan losses
    
    
    (9,093
    )
    
    
    
    
    
    
    
    
    
    
    (9,267
    )Total assets
    
    $
    1,148,219
    
    
    
    
    
    
    
    
    
    
    $
    1,147,201LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    109,494
    
    
    $
    1,078
    
    
    
    1.32
    %
    
    $
    109,034
    
    
    $
    1,104
    
    
    
    1.35
    %Savings accounts
    
    
    47,505
    
    
    
    200
    
    
    
    0.56
    
    
    
    53,113
    
    
    
    227
    
    
    
    0.57Money market
    
    
    156,402
    
    
    
    4,203
    
    
    
    3.59
    
    
    
    156,701
    
    
    
    3,770
    
    
    
    3.22Deposits of $100 and over
    
    
    137,711
    
    
    
    5,085
    
    
    
    4.94
    
    
    
    119,487
    
    
    
    3,686
    
    
    
    4.12Other time deposits
    
    
    320,482
    
    
    
    11,163
    
    
    
    4.66
    
    
    
    313,533
    
    
    
    8,969
    
    
    
    3.82Total time deposits
    
    
    771,594
    
    
    
    21,729
    
    
    
    3.77
    
    
    
    751,868
    
    
    
    17,756
    
    
    
    3.16Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    32,708
    
    
    
    1,131
    
    
    
    4.62
    
    
    
    45,885
    
    
    
    1,459
    
    
    
    4.25Interest-bearing demand
notes to US Treasury
    
    
    274
    
    
    
    11
    
    
    
    5.37
    
    
    
    655
    
    
    
    22
    
    
    
    4.49Subordinated notes
    
    
    49,486
    
    
    
    2,698
    
    
    
    7.29
    
    
    
    49,486
    
    
    
    2,628
    
    
    
    7.10Advances from Federal Home Loan Bank
    
    
    50,222
    
    
    
    2,045
    
    
    
    5.44
    
    
    
    59,270
    
    
    
    2,154
    
    
    
    4.86Total interest-bearing liabilities
    
    
    904,284
    
    
    
    27,614
    
    
    
    4.08
    
    
    
    907,164
    
    
    
    24,019
    
    
    
    3.54Demand deposits
    
    
    126,766
    
    
    
    
    
    
    
    
    
    
    
    131,872Other liabilities
    
    
    10,145
    
    
    
    
    
    
    
    
    
    
    
    8,823Total liabilities
    
    
    1,041,195
    
    
    
    
    
    
    
    
    
    
    
    1,047,859Stockholders equity
    
    
    107,024
    
    
    
    
    
    
    
    
    
    
    
    99,693Total liabilities and
stockholders equity
    
    $
    1,148,219
    
    
    
    
    
    
    
    
    
    
    $
    1,147,552Net interest income
    
    
    
    
    
    $
    28,277
    
    
    
    
    
    
    
    
    
    
    $
    29,769Net interest margin/5/
    
    
    
    
    
    
    
    
    
    
    3.67
    %
    
    
    
    
    
    
    
    
    
    
    3.85
    %
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the Federal
statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled
$731,000 in 2007 and $751,000 in 2006./2/
    
    Non-accruing loans are included in the average amounts outstanding./3/
    
    Fees on loans are included in average amounts outstanding./4/
    
    Average balances based on amortized cost./5/
    
    Net interest income divided by average total interest earning assets. 23




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##### Table of Contents



Rate Volume Analysis
  Dollars expressed in thousands)
 Three Months Ended
    
    
    Nine Months EndedCompared to
    
    
    Compared toSeptember 30, 2007 vs 2006
    
    
    September 30, 2007 vs 2006Total
    
    
    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/
    
    $
    819
    
    
    
    794
    
    
    
    25
    
    
    $
    1,835
    
    
    
    444
    
    
    
    1,391Investment in debt and
equity securities :/3/Government sponsored enterprises
    
    
    8
    
    
    
    (80
    )
    
    
    88
    
    
    
    207
    
    
    
    (298
    )
    
    
    505State and municipal
    
    
    21
    
    
    
    14
    
    
    
    7
    
    
    
    64
    
    
    
    46
    
    
    
    18Other
    
    
    (18
    )
    
    
    (8
    )
    
    
    (10
    )
    
    
    12
    
    
    
    (29
    )
    
    
    41Federal funds sold
    
    
    (143
    )
    
    
    (163
    )
    
    
    20
    
    
    
    7
    
    
    
    (36
    )
    
    
    43Interest-bearing deposits
    
    
    (11
    )
    
    
    (10
    )
    
    
    (1
    )
    
    
    (22
    )
    
    
    (33
    )
    
    
    11Total interest income
    
    
    676
    
    
    
    547
    
    
    
    129
    
    
    
    2,103
    
    
    
    94
    
    
    
    2,009Interest expense:NOW accounts
    
    $
    94
    
    
    
    51
    
    
    
    43
    
    
    $
    (26
    )
    
    
    5
    
    
    
    (31
    )Savings accounts
    
    
    (9
    )
    
    
    (7
    )
    
    
    (2
    )
    
    
    (27
    )
    
    
    (24
    )
    
    
    (3
    )Money market
    
    
    147
    
    
    
    42
    
    
    
    105
    
    
    
    433
    
    
    
    (7
    )
    
    
    440Deposits of $100 and over
    
    
    239
    
    
    
    71
    
    
    
    168
    
    
    
    1,399
    
    
    
    610
    
    
    
    789Other time deposits
    
    
    642
    
    
    
    106
    
    
    
    536
    
    
    
    2,194
    
    
    
    203
    
    
    
    1,991Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    (35
    )
    
    
    (70
    )
    
    
    35
    
    
    
    (328
    )
    
    
    (447
    )
    
    
    119Interest-bearing demand notes
of U.S. Treasury
    
    
    (9
    )
    
    
    (4
    )
    
    
    (5
    )
    
    
    (11
    )
    
    
    (15
    )
    
    
    4Subordinated debentures
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )
    
    
    70
    
    
    
    
    
    
    
    70Other borrowed money
    
    
    14
    
    
    
    6
    
    
    
    8
    
    
    
    (109
    )
    
    
    (351
    )
    
    
    242Total interest expense
    
    
    1,078
    
    
    
    195
    
    
    
    883
    
    
    
    3,595
    
    
    
    (26
    )
    
    
    3,621Net interest income on a fully
taxable equivalent basis
    
    $
    (402
    )
    
    
    352
    
    
    
    (754
    )
    
    $
    (1,492
    )
    
    
    120
    
    
    
    (1,612
    )
 
 /1/
    
    Interest income and yields are presented on a fully taxable equivalent basis using the
Federal statutory income tax rate. Such adjustments were $246,000 and $248,000 for the three
months ended 2007 and 2006, respectively. Such adjustments were $731,000 and $751,000 for the
nine months ended 2007 and 2006, 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. 24




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THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006
  25




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(Dollars expressed in thousands)
 Three Months EndedSeptember 30,
    
    
    Increase (decrease)2007
    
    
    2006
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    1,307
    
    
    $
    1,462
    
    
    $
    (155
    )
    
    
    (10.6
    )%Trust department income
    
    
    201
    
    
    
    215
    
    
    
    (14
    )
    
    
    (6.5
    )Mortgage loan servicing fees, net
    
    
    60
    
    
    
    102
    
    
    
    (42
    )
    
    
    (41.2
    )Gain on sale of mortgage loans
    
    
    159
    
    
    
    127
    
    
    
    32
    
    
    
    25.2Other
    
    
    368
    
    
    
    311
    
    
    
    57
    
    
    
    18.3$
    2,095
    
    
    $
    2,217
    
    
    $
    (122
    )
    
    
    (5.5
    )%Noninterest ExpenseSalaries and employee benefits
    
    $
    4,484
    
    
    $
    4,254
    
    
    $
    230
    
    
    
    5.4
    %Occupancy expense
    
    
    574
    
    
    
    500
    
    
    
    74
    
    
    
    14.8Furniture and equipment expense
    
    
    638
    
    
    
    592
    
    
    
    46
    
    
    
    7.8Advertising and promotion
    
    
    273
    
    
    
    234
    
    
    
    39
    
    
    
    16.7Postage, printing and supplies
    
    
    364
    
    
    
    277
    
    
    
    87
    
    
    
    31.4Legal, examination, and professional fees
    
    
    292
    
    
    
    334
    
    
    
    (42
    )
    
    
    (12.6
    )Processing expense
    
    
    325
    
    
    
    261
    
    
    
    64
    
    
    
    24.5Amortization  CDI
    
    
    223
    
    
    
    249
    
    
    
    (26
    )
    
    
    (10.4
    )Other
    
    
    988
    
    
    
    781
    
    
    
    207
    
    
    
    26.5$
    8,161
    
    
    $
    7,482
    
    
    $
    679
    
    
    
    9.1
    %
  26




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NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006
  27




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(Dollars expressed in thousands)
 Nine Months EndedSeptember 30,
    
    
    Increase (decrease)2007
    
    
    2006
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    3,893
    
    
    $
    4,339
    
    
    $
    (446
    )
    
    
    (10.3
    )%Trust department income
    
    
    629
    
    
    
    623
    
    
    
    6
    
    
    
    1.0Mortgage loan servicing fees, net
    
    
    250
    
    
    
    327
    
    
    
    (77
    )
    
    
    (23.5
    )Gain on sale of mortgage loans
    
    
    501
    
    
    
    328
    
    
    
    173
    
    
    
    52.7Loss on sales and calls of debt securities
    
    
    (2
    )
    
    
    (18
    )
    
    
    16
    
    
    
    (88.9
    )Other
    
    
    2,197
    
    
    
    893
    
    
    
    1,304
    
    
    
    146.0$
    7,468
    
    
    $
    6,492
    
    
    $
    976
    
    
    
    15.0
    %Noninterest ExpenseSalaries and employee benefits
    
    $
    14,154
    
    
    $
    12,942
    
    
    $
    1,212
    
    
    
    9.4
    %Occupancy expense
    
    
    1,566
    
    
    
    1,400
    
    
    
    166
    
    
    
    11.9Furniture and equipment expense
    
    
    1,797
    
    
    
    1,654
    
    
    
    143
    
    
    
    8.6Advertising and promotion
    
    
    702
    
    
    
    622
    
    
    
    80
    
    
    
    12.9Postage, printing and supplies
    
    
    923
    
    
    
    861
    
    
    
    62
    
    
    
    7.2Legal, examination, and professional fees
    
    
    1,203
    
    
    
    947
    
    
    
    256
    
    
    
    27.0Processing expense
    
    
    879
    
    
    
    776
    
    
    
    103
    
    
    
    13.3Amortization  CDI
    
    
    699
    
    
    
    783
    
    
    
    (84
    )
    
    
    (10.7
    )Other
    
    
    2,817
    
    
    
    2,266
    
    
    
    551
    
    
    
    24.3$
    24,740
    
    
    $
    22,251
    
    
    $
    2,489
    
    
    
    11.2
    %
  28




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Lending and Credit Management
   29




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Accounting by Creditors for Impairment of a Loan,
   30




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(Dollars expressed in thousands)
 September 30, 2007
    
    
    December 31, 2006% of Gross
    
    
    
    
    
    
    % of GrossBalance
    
    
    Loans
    
    
    Balance
    
    
    LoansNonaccrual loans:Commercial
    
    $
    2,991
    
    
    
    0.35
    %
    
    $
    2,495
    
    
    
    0.31
    %Real estate:Construction
    
    
    909
    
    
    
    0.10
    
    
    
    1,657
    
    
    
    0.20Mortgage
    
    
    647
    
    
    
    0.07
    
    
    
    644
    
    
    
    0.08Consumer
    
    
    43
    
    
    
    
    
    
    
    73
    
    
    
    0.014,590
    
    
    
    0.52
    
    
    
    4,869
    
    
    
    0.60Loans contractually
past-due 90 days
or more and still accruing:Commercial
    
    
    101
    
    
    
    0.01
    
    
    
    5
    
    
    
    Real estate:Construction
    
    
    20
    
    
    
    0.01
    
    
    
    
    
    
    
    Mortgage
    
    
    962
    
    
    
    0.11
    
    
    
    170
    
    
    
    0.02Consumer
    
    
    23
    
    
    
    
    
    
    
    22
    
    
    
    1,106
    
    
    
    0.13
    
    
    
    197
    
    
    
    0.02Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    5,696
    
    
    
    0.65
    %
    
    
    5,066
    
    
    
    0.62
    %Other real estate
    
    
    4,730
    
    
    
    
    
    
    
    2,720Repossessions
    
    
    
    
    
    
    
    
    
    
    15Total nonperforming assets
    
    $
    10,426
    
    
    
    
    
    
    $
    7,801
    31




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32




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Financial Condition
   33




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##### Table of Contents



34




---



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Liquidity
     35




---



##### Table of Contents



Sources and Uses of Funds
    Impact of New Accounting Pronouncements
  36




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##### Table of Contents



Accounting for Uncertainty in Income Taxes Accounting for
Income Taxes
   37




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  38




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39




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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
 
 Item 6. Exhibits
 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
 40




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##### Table of Contents



SIGNATURES
  HAWTHORN BANCSHARES, INC.
 Date/s/ James E. SmithNovember 9, 2007
    
    James E. Smith, Chairman of the Boardand Chief Executive Officer (PrincipalExecutive Officer)/s/ Richard G. RoseNovember 9, 2007
    
    Richard G. Rose, Chief Financial Officer (Principal FinancialOfficer and Principal Accounting Officer)
 41




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##### 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
    
    4331.2
    
    Certificate of the Chief Financial Officer of
our Company pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    4432.1
    
    Certificate of the Chief Executive Officer of
our Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    4532.2
    
    Certificate of the Chief Financial Officer of
our Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    46
 
 **
    
    Incorporated by reference. 42