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, 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
 (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
    Page 1 of 47
Pages
Index to Exhibits located on page 43




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##### 



Item 1. Financial Statements
  (Unaudited)
 September 30, 2008
    
    
    December 31, 2007ASSETSLoans:
    
    $
    994,559,098
    
    
    $
    911,278,111Less allowance for loan losses
    
    
    9,356,217
    
    
    
    9,281,848Loans, net
    
    
    985,202,881
    
    
    
    901,996,263Investments in available for sale debt
securities, at fair value
    
    
    152,381,443
    
    
    
    151,742,455Investments in equity securities, at cost
    
    
    10,172,050
    
    
    
    5,626,050Federal funds sold and securities purchased
under agreements to resell
    
    
    5,532,104
    
    
    
    664,184Cash and due from banks
    
    
    28,408,103
    
    
    
    35,209,201Premises and equipment
    
    
    39,704,454
    
    
    
    40,543,546Other real estate owned and repossessed assets
    
    
    7,168,747
    
    
    
    2,337,107Accrued interest receivable
    
    
    7,651,084
    
    
    
    8,764,196Mortgage servicing rights
    
    
    1,150,825
    
    
    
    1,184,868Goodwill
    
    
    40,323,775
    
    
    
    40,323,775Intangible assets
    
    
    2,298,639
    
    
    
    2,831,540Cash surrender value  life insurance
    
    
    1,854,532
    
    
    
    1,820,532Other assets
    
    
    3,426,254
    
    
    
    2,760,362Total assets
    
    $
    1,285,274,891
    
    
    $
    1,195,804,079LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Demand deposits
    
    $
    124,959,995
    
    
    $
    138,355,520Time deposits
    
    
    803,693,789
    
    
    
    782,901,771Total deposits
    
    
    928,653,784
    
    
    
    921,257,291Federal funds purchased and securities
sold under agreements to repurchase
    
    
    26,773,077
    
    
    
    25,729,863Subordinated notes
    
    
    49,486,000
    
    
    
    49,486,000Other borrowed money
    
    
    159,260,208
    
    
    
    77,915,027Accrued interest payable
    
    
    4,104,700
    
    
    
    4,723,965Other liabilities
    
    
    5,058,357
    
    
    
    5,493,110Total liabilities
    
    
    1,173,336,126
    
    
    
    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
    
    
    22,720,298
    
    
    
    22,530,191Retained earnings
    
    
    87,528,898
    
    
    
    85,728,114Accumulated other comprehensive
income, net of tax
    
    
    908,034
    
    
    
    1,356,538Treasury stock, 161,858 and 128,858,
respectively,
shares at cost
    
    
    (3,516,818
    )
    
    
    (2,714,373
    )Total stockholders equity
    
    
    111,938,765
    
    
    
    111,198,823Total liabilities and stockholders equity
    
    $
    1,285,274,891
    
    
    $
    1,195,804,079
  2




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##### 



(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:Interest and fees on loans
    
    $
    15,757,925
    
    
    $
    16,893,715
    
    
    $
    47,531,888
    
    
    $
    48,411,899Interest on debt securities:Taxable
    
    
    1,140,427
    
    
    
    1,449,274
    
    
    
    3,864,716
    
    
    
    4,416,454Nontaxable
    
    
    406,598
    
    
    
    498,369
    
    
    
    1,288,395
    
    
    
    1,498,268Interest on federal funds sold and securities
purchased under agreements to resell
    
    
    14,238
    
    
    
    78,153
    
    
    
    58,464
    
    
    
    536,009Interest on interest-bearing deposits
    
    
    12
    
    
    
    8,000
    
    
    
    301
    
    
    
    54,220Dividends and interest on equity securities
    
    
    110,627
    
    
    
    64,656
    
    
    
    233,035
    
    
    
    243,172Total interest income
    
    
    17,429,827
    
    
    
    18,992,167
    
    
    
    52,976,799
    
    
    
    55,160,022Interest Expense:NOW accounts
    
    
    343,570
    
    
    
    417,360
    
    
    
    969,217
    
    
    
    1,078,231Savings accounts
    
    
    57,807
    
    
    
    63,643
    
    
    
    173,289
    
    
    
    199,802Money market accounts
    
    
    699,198
    
    
    
    1,525,207
    
    
    
    2,530,772
    
    
    
    4,203,301Certificates of deposit:$100,000 and over
    
    
    1,333,732
    
    
    
    1,658,271
    
    
    
    4,419,749
    
    
    
    5,084,831Other time deposits
    
    
    2,975,430
    
    
    
    3,903,084
    
    
    
    9,721,086
    
    
    
    11,162,624Federal funds purchased and securities sold
under agreements to repurchase
    
    
    170,386
    
    
    
    427,592
    
    
    
    823,425
    
    
    
    1,130,597Subordinated notes
    
    
    736,663
    
    
    
    907,703
    
    
    
    2,319,585
    
    
    
    2,698,436Advances from Federal Home Loan Bank
    
    
    1,258,578
    
    
    
    764,064
    
    
    
    3,104,659
    
    
    
    2,045,508Other borrowed money
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    10,734Total interest expense
    
    
    7,575,364
    
    
    
    9,666,926
    
    
    
    24,061,782
    
    
    
    27,614,064Net interest income
    
    
    9,854,463
    
    
    
    9,325,241
    
    
    
    28,915,017
    
    
    
    27,545,958Provision for loan losses
    
    
    1,000,000
    
    
    
    225,000
    
    
    
    3,950,000
    
    
    
    604,216Net interest income after provision for loan losses
    
    
    8,854,463
    
    
    
    9,100,241
    
    
    
    24,965,017
    
    
    
    26,941,742
  3




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##### 



(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Noninterest income:Service charges on deposit accounts
    
    $
    1,636,165
    
    
    $
    1,452,190
    
    
    $
    4,636,065
    
    
    $
    4,162,350Trust department income
    
    
    198,743
    
    
    
    200,672
    
    
    
    604,617
    
    
    
    629,223Mortgage loan servicing fees, net
    
    
    62,027
    
    
    
    60,059
    
    
    
    96,233
    
    
    
    249,851Gain on sale of mortgage loans, net
    
    
    132,988
    
    
    
    159,653
    
    
    
    685,782
    
    
    
    501,156Gain (loss) on sales and calls of debt
securities
    
    
    
    
    
    
    
    
    
    
    2,773
    
    
    
    (1,747
    )Other
    
    
    291,402
    
    
    
    222,607
    
    
    
    985,807
    
    
    
    1,927,558Total noninterest income
    
    
    2,321,325
    
    
    
    2,095,181
    
    
    
    7,011,277
    
    
    
    7,468,391Noninterest expense:Salaries and employee benefits
    
    
    4,483,943
    
    
    
    4,484,240
    
    
    
    13,662,257
    
    
    
    14,154,003Occupancy expense
    
    
    601,435
    
    
    
    573,762
    
    
    
    1,802,215
    
    
    
    1,566,057Furniture and equipment expense
    
    
    536,786
    
    
    
    638,286
    
    
    
    1,805,304
    
    
    
    1,797,018Legal, examination, and professional fees
    
    
    360,641
    
    
    
    292,465
    
    
    
    886,638
    
    
    
    1,203,555Advertising and promotion
    
    
    280,540
    
    
    
    272,796
    
    
    
    791,675
    
    
    
    701,761Postage, printing and supplies
    
    
    259,538
    
    
    
    363,566
    
    
    
    894,188
    
    
    
    922,852Processing expense
    
    
    774,314
    
    
    
    324,860
    
    
    
    2,327,224
    
    
    
    878,866Amortization of intangible assets
    
    
    168,543
    
    
    
    222,849
    
    
    
    532,900
    
    
    
    699,488Other
    
    
    916,103
    
    
    
    988,349
    
    
    
    2,949,972
    
    
    
    2,816,715Total noninterest expense
    
    
    8,381,843
    
    
    
    8,161,173
    
    
    
    25,652,373
    
    
    
    24,740,315Income before income taxes
    
    
    2,793,945
    
    
    
    3,034,249
    
    
    
    6,323,921
    
    
    
    9,669,818Income taxes
    
    
    779,745
    
    
    
    897,262
    
    
    
    1,905,386
    
    
    
    2,863,136Net income
    
    $
    2,014,200
    
    
    $
    2,136,987
    
    
    $
    4,418,535
    
    
    $
    6,806,682Basic earning per share
    
    $
    0.49
    
    
    $
    0.51
    
    
    $
    1.06
    
    
    $
    1.63Diluted earnings per share
    
    $
    0.48
    
    
    $
    0.51
    
    
    $
    1.06
    
    
    $
    1.61Weighed average shares of common stock
outstandingBasic
    
    
    4,150,635
    
    
    
    4,174,179
    
    
    
    4,162,214
    
    
    
    4,171,359Diluted
    
    
    4,164,053
    
    
    
    4,213,563
    
    
    
    4,181,791
    
    
    
    4,216,682Dividends per share:Declared
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.63
    
    
    $
    0.63Paid
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.63
    
    
    $
    0.63
  4




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##### 



(Unaudited)
 Nine Months Ended September 30,2008
    
    
    2007Cash flow from operating activities:Net income
    
    $
    4,418,535
    
    
    $
    6,806,682Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan losses
    
    
    3,950,000
    
    
    
    604,216Depreciation expense
    
    
    1,619,146
    
    
    
    1,470,540Net accretion of debt securities
premiums and discounts
    
    
    (49,056
    )
    
    
    (29,476
    )Amortization of intangible assets
    
    
    532,901
    
    
    
    699,488Stock based compensation expense
    
    
    190,107
    
    
    
    194,691Decrease (increase) in accrued interest receivable
    
    
    1,113,112
    
    
    
    (554,292
    )Increase in cash surrender value  life insurance
    
    
    (34,000
    )
    
    
    (52,015
    )Increase in other assets
    
    
    (153,536
    )
    
    
    (303,820
    )(Decrease) increase in accrued interest payable
    
    
    (619,265
    )
    
    
    1,018,665(Decrease) increase in other liabilities
    
    
    (434,753
    )
    
    
    1,016,361Loss (gain) on sales and calls of debt securities
    
    
    (2,773
    )
    
    
    1,747Origination of mortgage loans for sale
    
    
    (39,900,081
    )
    
    
    (24,057,146
    )Proceeds from the sale of mortgage loans held for
sale
    
    
    40,585,863
    
    
    
    24,558,302Gain on sale of mortgage loans
    
    
    (685,782
    )
    
    
    (501,156
    )(Loss) gain on disposition of premises and
equipment
    
    
    74,932
    
    
    
    (4,271
    )Other, net
    
    
    (93,158
    )
    
    
    413,128Net cash provided by operating activities
    
    
    10,512,192
    
    
    
    11,281,644Cash flow from investing activities:Net increase in loans
    
    
    (93,628,211
    )
    
    
    (74,226,029
    )Purchase of available-for-sale debt securities
    
    
    (258,120,019
    )
    
    
    (44,645,014
    )Proceeds from maturities of available-for-sale debt
securities
    
    
    186,799,283
    
    
    
    37,102,209Proceeds from calls of available-for-sale debt securities
    
    
    39,132,640
    
    
    
    10,921,200Proceeds from sales of available-for-sale debt securities
    
    
    30,920,778
    
    
    
    6,910,634Purchase of equity securities
    
    
    (5,040,800
    )
    
    
    (1,310,900
    )Proceeds from sales of equity securities
    
    
    494,800
    
    
    
    1,224,725Purchase of premises and equipment
    
    
    (884,886
    )
    
    
    (7,505,467
    )Proceeds from sales of premises and equipment
    
    
    29,900
    
    
    
    498,286Proceeds from sales of other real estate owned
and repossessions
    
    
    1,486,453
    
    
    
    1,251,760Net cash used in investing activities
    
    
    (98,810,062
    )
    
    
    (69,778,596
    )
  5




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##### 



(Unaudited)
 Nine Months Ended September 30,2008
    
    
    2007Cash flow from financing activities:Net decrease in demand deposits
    
    $
    (13,395,525
    )
    
    $
    (12,156,942
    )Net increase in interest-bearing transaction accounts
    
    
    2,069,084
    
    
    
    15,212,993Net increase in time deposits
    
    
    18,722,934
    
    
    
    23,039,241Net increase (decrease) in federal funds purchased and
securities
sold under agreements to repurchase
    
    
    1,043,214
    
    
    
    (3,463,557
    )Net decrease in interest-bearing demand notes to U.S.
Treasury
    
    
    
    
    
    
    (1,735,638
    )Proceeds from Federal Home Loan Bank advances
    
    
    257,300,000
    
    
    
    103,000,000Repayment of Federal Home Loan Bank advances
    
    
    (175,954,819
    )
    
    
    (88,216,055
    )Cash dividends paid
    
    
    (2,617,751
    )
    
    
    (2,627,982
    )(Purchase) sale of treasury stock
    
    
    (802,445
    )
    
    
    100,427Net cash provided by financing activities
    
    
    86,364,692
    
    
    
    33,152,487Net decrease in cash and cash equivalents
    
    
    (1,933,178
    )
    
    
    (25,344,465
    )Cash and cash equivalents, beginning of period
    
    
    35,873,385
    
    
    
    53,000,566Cash and cash equivalents, end of period
    
    $
    33,940,207
    
    
    $
    27,656,101Supplemental
disclosure of cash flow information -Cash paid during period for:Interest
    
    $
    24,681,047
    
    
    $
    26,595,399Income taxes
    
    
    2,240,000
    
    
    
    2,552,000Supplemental
schedule of noncash investing activities -Other real estate and repossessions acquired in settlement of loans
    
    $
    6,471,593
    
    
    $
    3,247,574
  6




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##### 



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




---



##### 



Determining the Fair Value of a Financial Asset When the Market for That Asset Is
Not Active,
  Available-for-sale securities
  Loans
 Accounting by Creditors for Impairment of a Loan,
 8




---



##### 



Fair Value MeasurementsAt September 30, 2008 UsingQuoted Pricesin ActiveMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    September 30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-
Sale
Securities
    
    $
    152,381,443
    
    
    $
    
    
    
    $
    152,381,443
    
    
    $
    Impaired loans
    
    $
    9,489,540
    
    
    $
    
    
    
    $
    9,489,540
    
    
    $
    
 Earnings per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income, basic and diluted
    
    $
    2,014,200
    
    
    $
    2,136,987
    
    
    $
    4,418,535
    
    
    $
    6,806,682Average shares outstanding
    
    
    4,150,635
    
    
    
    4,174,179
    
    
    
    4,162,214
    
    
    
    4,171,359Effect of dilutive stock options
    
    
    13,418
    
    
    
    39,384
    
    
    
    19,577
    
    
    
    45,323Average shares outstanding
including
dilutive stock
options
    
    
    4,164,053
    
    
    
    4,213,563
    
    
    
    4,181,791
    
    
    
    4,216,682Basic earning per share
    
    $
    0.49
    
    
    $
    0.51
    
    
    $
    1.06
    
    
    $
    1.63Diluted earnings per share
    
    $
    0.48
    
    
    $
    0.51
    
    
    $
    1.06
    
    
    $
    1.61
  9




---



##### 



Stock-Based Compensation
  WeightedWeighted
    
    Aggregate
    
    AverageAverage
    
    Intrinsic
    
    ContractualExercise
    
    Value
    
    TermOptions
    
    Price
    
    (000)
    
    (in years)Outstanding, January 1, 2008
    
    
    242,968
    
    
    $
    27.23Granted
    
    
    37,537
    
    
    
    21.01Exercised
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Forfeited
    
    
    (10,369
    )
    
    
    32.06Outstanding, September 30,
2008
    
    
    270,136
    
    
    
    26.18
    
    
    $
    536
    
    
    
    6.2Exercisable, September 30,
2008
    
    
    183,368
    
    
    
    25.23
    
    
    
    454
    
    
    
    5.2
    Options granted during 2008:Grant date fair value per option
    
    $
    4.72Significant assumptions:Risk-free interest rate at grant date
    
    
    3.14
    %Expected annual dividend yield
    
    
    4.00
    %Expected stock price volatility
    
    
    29.92
    %Expected life to exercise (years)
    
    
    6.24
 10




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##### 



Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    2,014,200
    
    
    $
    2,136,987
    
    
    $
    4,418,535
    
    
    $
    6,806,682Other comprehensive income (loss):Unrealized gain (loss) on securities:Unrealized gain (loss) on debt and equity
securities available-for-sale, net of tax
    
    
    250,158
    
    
    
    1,120,767
    
    
    
    (458,592
    )
    
    
    678,396Adjustment 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
    
    
    3,928
    
    
    
    11,430
    
    
    
    11,780
    
    
    
    34,292Total other comprehensive income
(loss)
    
    
    254,086
    
    
    
    1,132,197
    
    
    
    (448,504
    )
    
    
    713,824Comprehensive income
    
    $
    2,268,286
    
    
    $
    3,269,184
    
    
    $
    3,970,031
    
    
    $
    7,520,506
 Goodwill and Intangible Assets
  11




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##### 



September 30, 2008
    
    
    December 31, 2007Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized
intangible assets:Core
deposit
intangible
    
    $
    7,060,224
    
    
    
    (4,761,585
    )
    
    $
    7,060,224
    
    
    
    (4,228,684
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Aggregate
amortization
expense
    
    $
    168,543
    
    
    
    222,849
    
    
    $
    532,900
    
    
    
    699,488
  Estimated amortization expense:For the three months ending December 31, 2008
    
    $
    168,543For year ending 2009
    
    
    626,111For year ending 2010
    
    
    526,477For year ending 2011
    
    
    434,763For year ending 2012
    
    
    408,062
 Mortgage Servicing Rights
  12




---



##### 



Nine Months EndedSeptember 30,2008
    
    
    2007Balance, beginning of period
    
    $
    1,184,868
    
    
    
    1,350,375Originated mortgage servicing rights
    
    
    436,634
    
    
    
    217,975Amortization
    
    
    (470,677
    )
    
    
    (338,288
    )Balance, end of period
    
    $
    1,150,825
    
    
    
    1,230,062Mortgage loans serviced
    
    $
    210,793,699
    
    
    
    211,098,203Mortgage servicing rights as a
percentage of loans serviced
    
    
    0.55
    %
    
    
    0.58
    %
  Estimated amortization expense:For the three months ending December 31, 2008
    
    $
    94,000For year ending 2009
    
    
    254,000For year ending 2010
    
    
    173,000For year ending 2011
    
    
    141,000For year ending 2012
    
    
    115,000
 Income Taxes
   13




---



##### 



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 September 30, (actual)
    
    $
    218,336
    
    
    $
    213,834Pension expense  nine months
ended September 30, (actual)
    
    $
    655,010
    
    
    $
    641,502
  14




---



##### 



Item 2 - Managements Discussion and Analysis of Financial Condition
And Results of Operations
 Forward-Looking Statements
  
    
    statements that are not historical in nature, and
    
    statements preceded by, followed by or that include the words believes, expects, may,
will, should, could, anticipates, estimates, intends or similar expressions.
  
    
    competitive pressures among financial services companies may increase significantly,
    
    changes in the interest rate environment may reduce interest margins,
    
    general economic conditions, either nationally or in Missouri, may be less favorable than
expected and may adversely affect the quality of our loans and other assets,
    
    increases in non-performing assets in our loan portfolios and adverse economic conditions
may necessitate increases to our provisions for loan losses,
    
    costs or difficulties related to the integration of the business of Hawthorn and its
acquisition targets may be greater than expected,
    
    legislative or regulatory changes may adversely affect the business in which Hawthorn and
its subsidiaries are engaged, and
    
    changes may occur in the securities markets.
  General
  15




---



##### 



Overview
    Credit Risk Environment
  Goodwill Impairment
  16




---



##### 



Critical Accounting Policies
  Results of Operations
 Net Income
   Net Interest Income / Net Interest Margin
   17




---



##### 



Average Balance Sheets
    18




---



##### 



(Dollars expressed in thousands)
 Three Months Ended September 30,2008
    
    
    2007Interest
    
    
    Rate
    
    
    
    
    
    Interest
    
    
    RateAverage
    
    
    Income/
    
    
    Earned/
    
    
    Average
    
    
    Income/
    
    
    Earned/Balance
    
    
    Expense(1)
    
    
    Paid(1)
    
    
    Balance
    
    
    Expense(1)
    
    
    Paid(1)ASSETSLoans: (2) (4)
    
    $
    986,139
    
    
    $
    15,793
    
    
    
    6.35
    %
    
    $
    869,669
    
    
    $
    16,920
    
    
    
    7.72
    %Investment in debt and
equity securities: (3)Government sponsored
enterprises
    
    
    101,630
    
    
    
    1,122
    
    
    
    4.38
    
    
    
    118,532
    
    
    
    1,428
    
    
    
    4.78State and municipal
    
    
    44,191
    
    
    
    606
    
    
    
    5.44
    
    
    
    53,922
    
    
    
    739
    
    
    
    5.44Other
    
    
    9,851
    
    
    
    111
    
    
    
    4.47
    
    
    
    6,014
    
    
    
    65
    
    
    
    4.29Federal funds sold
    
    
    3,118
    
    
    
    14
    
    
    
    1.78
    
    
    
    5,331
    
    
    
    78
    
    
    
    5.80Interest bearing deposits
in other financial institutions
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    711
    
    
    
    8
    
    
    
    4.46Total interest earning assets
    
    
    1,145,054
    
    
    
    17,646
    
    
    
    6.11
    
    
    
    1,054,179
    
    
    
    19,238
    
    
    
    7.24All other assets
    
    
    128,237
    
    
    
    
    
    
    
    
    
    
    
    129,614Allowance for loan losses
    
    
    (11,216
    )
    
    
    
    
    
    
    
    
    
    
    (9,139
    )Total assets
    
    $
    1,262,075
    
    
    
    
    
    
    
    
    
    
    $
    1,174,654LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    118,360
    
    
    $
    343
    
    
    
    1.15
    %
    
    $
    117,905
    
    
    $
    417
    
    
    
    1.40
    %Savings
    
    
    44,894
    
    
    
    58
    
    
    
    0.51
    
    
    
    46,219
    
    
    
    64
    
    
    
    0.55Money market
    
    
    162,322
    
    
    
    699
    
    
    
    1.71
    
    
    
    163,540
    
    
    
    1,525
    
    
    
    3.70Time deposits of
$100,000 and over
    
    
    141,917
    
    
    
    1,334
    
    
    
    3.73
    
    
    
    132,360
    
    
    
    1,659
    
    
    
    4.97Other time deposits
    
    
    313,824
    
    
    
    2,976
    
    
    
    3.76
    
    
    
    327,542
    
    
    
    3,904
    
    
    
    4.73Total time deposits
    
    
    781,317
    
    
    
    5,410
    
    
    
    2.75
    
    
    
    787,566
    
    
    
    7,569
    
    
    
    3.81Federal funds purchased and securities
sold under agreements to
repurchase
    
    
    36,358
    
    
    
    170
    
    
    
    1.86
    
    
    
    34,464
    
    
    
    427
    
    
    
    4.92Interest  bearing demand
notes to U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Subordinated notes
    
    
    49,486
    
    
    
    737
    
    
    
    5.91
    
    
    
    49,486
    
    
    
    907
    
    
    
    7.27Other borrowed money
    
    
    152,158
    
    
    
    1,258
    
    
    
    3.28
    
    
    
    55,924
    
    
    
    764
    
    
    
    5.42Total interest -
bearing liabilities
    
    
    1,019,319
    
    
    
    7,575
    
    
    
    2.95
    
    
    
    927,442
    
    
    
    9,667
    
    
    
    4.14Demand deposits
    
    
    122,421
    
    
    
    
    
    
    
    
    
    
    
    127,857Other liabilities
    
    
    8,588
    
    
    
    
    
    
    
    
    
    
    
    10,558Total liabilities
    
    
    1,150,328
    
    
    
    
    
    
    
    
    
    
    
    1,065,857Stockholders equity
    
    
    111,747
    
    
    
    
    
    
    
    
    
    
    
    108,797Total liabilities and
stockholders equity
    
    $
    1,262,075
    
    
    
    
    
    
    
    
    
    
    $
    1,174,654Net interest income
    
    
    
    
    
    $
    10,071
    
    
    
    
    
    
    
    
    
    
    $
    9,571Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.49
    %
    
    
    
    
    
    
    
    
    
    
    3.60
    %
 
 /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 $217,000 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. 19




---



##### 



(Dollars expressed in thousands)
 2008
    
    
    2007Interest
    
    
    Rate
    
    
    
    
    
    Interest
    
    
    RateAverage
    
    
    Income/
    
    
    Earned/
    
    
    Average
    
    
    Income/
    
    
    Earned/Balance
    
    
    Expense(1)
    
    
    Paid(1)
    
    
    Balance
    
    
    Expense(1)
    
    
    Paid(1)ASSETSLoans: (2) (4)
    
    $
    950,454
    
    
    $
    47,632
    
    
    
    6.68
    %
    
    $
    834,445
    
    
    $
    48,489
    
    
    
    7.77
    %Investment in debt and
equity securities: (3)Government sponsored
enterprises
    
    
    113,724
    
    
    
    3,810
    
    
    
    4.46
    
    
    
    120,818
    
    
    
    4,346
    
    
    
    4.81State and municipal
    
    
    46,966
    
    
    
    1,905
    
    
    
    5.40
    
    
    
    54,175
    
    
    
    2,223
    
    
    
    5.49Other
    
    
    7,997
    
    
    
    233
    
    
    
    3.88
    
    
    
    6,143
    
    
    
    243
    
    
    
    5.29Federal funds sold
    
    
    3,257
    
    
    
    59
    
    
    
    2.41
    
    
    
    13,272
    
    
    
    536
    
    
    
    5.40Interest bearing deposits
in other financial institutions
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    1,405
    
    
    
    54
    
    
    
    5.14Total interest earning assets
    
    
    1,122,558
    
    
    
    53,639
    
    
    
    6.37
    
    
    
    1,030,258
    
    
    
    55,891
    
    
    
    7.25All other assets
    
    
    127,076
    
    
    
    
    
    
    
    
    
    
    
    127,054Allowance for loan losses
    
    
    (10,274
    )
    
    
    
    
    
    
    
    
    
    
    (9,093
    )Total assets
    
    $
    1,239,360
    
    
    
    
    
    
    
    
    
    
    $
    1,148,219LIABILITIES AND
STOCKHOLDERS EQUITYNOW accounts
    
    $
    116,695
    
    
    $
    970
    
    
    
    1.11
    %
    
    $
    109,494
    
    
    $
    1,078
    
    
    
    1.32
    %Savings
    
    
    44,328
    
    
    
    173
    
    
    
    0.52
    
    
    
    47,505
    
    
    
    200
    
    
    
    0.56Money market
    
    
    167,395
    
    
    
    2,531
    
    
    
    2.01
    
    
    
    156,402
    
    
    
    4,203
    
    
    
    3.59Time deposits of
$100,000 and over
    
    
    142,231
    
    
    
    4,419
    
    
    
    4.14
    
    
    
    137,711
    
    
    
    5,085
    
    
    
    4.94Other time deposits
    
    
    313,000
    
    
    
    9,721
    
    
    
    4.14
    
    
    
    320,482
    
    
    
    11,163
    
    
    
    4.66Total time deposits
    
    
    783,649
    
    
    
    17,814
    
    
    
    3.03
    
    
    
    771,594
    
    
    
    21,729
    
    
    
    3.77Federal funds purchased and securities
sold under agreements to
repurchase
    
    
    45,860
    
    
    
    823
    
    
    
    2.39
    
    
    
    32,708
    
    
    
    1,131
    
    
    
    4.62Interest  bearing demand
notes to U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    274
    
    
    
    11
    
    
    
    5.37Subordinated notes
    
    
    49,486
    
    
    
    2,320
    
    
    
    6.25
    
    
    
    49,486
    
    
    
    2,698
    
    
    
    7.29Other borrowed money
    
    
    117,718
    
    
    
    3,105
    
    
    
    3.51
    
    
    
    50,222
    
    
    
    2,045
    
    
    
    5.44Total interest -
bearing liabilities
    
    
    996,713
    
    
    
    24,062
    
    
    
    3.22
    
    
    
    904,284
    
    
    
    27,614
    
    
    
    4.08Demand deposits
    
    
    121,435
    
    
    
    
    
    
    
    
    
    
    
    126,766Other liabilities
    
    
    8,773
    
    
    
    
    
    
    
    
    
    
    
    10,145Total liabilities
    
    
    1,126,921
    
    
    
    
    
    
    
    
    
    
    
    1,041,195Stockholders equity
    
    
    112,439
    
    
    
    
    
    
    
    
    
    
    
    107,024Total liabilities and
stockholders equity
    
    $
    1,239,360
    
    
    
    
    
    
    
    
    
    
    $
    1,148,219Net interest income
    
    
    
    
    
    $
    29,577
    
    
    
    
    
    
    
    
    
    
    $
    28,277Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.51
    %
    
    
    
    
    
    
    
    
    
    
    3.67
    %
 
 /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 $662,000 in 2008 and $731,000 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. 20




---



##### 



Rate Volume Analysis
  (Dollars expressed in thousands)
 Three Months Ended
    
    
    Nine Months EndedCompared to
    
    
    Compared toSeptember 30, 2008 vs 2007
    
    
    September 30, 2008 vs 2007Total
    
    
    Change due to
    
    
    Total
    
    
    Change due toChange
    
    
    Volume /3/
    
    
    Rate /4/
    
    
    Change
    
    
    Volume /3/
    
    
    Rate /4/Interest income on a fully taxable equivalent
basis:Loans:/1/
    
    $
    (1,127
    )
    
    
    2,093
    
    
    
    (3,220
    )
    
    $
    (857
    )
    
    
    6,276
    
    
    
    (7,133
    )Investment in debt and
equity securities :/3/Government sponsored enterprises
    
    
    (306
    )
    
    
    (193
    )
    
    
    (113
    )
    
    
    (536
    )
    
    
    (247
    )
    
    
    (289
    )State and municipal
    
    
    (133
    )
    
    
    (133
    )
    
    
    
    
    
    
    (318
    )
    
    
    (293
    )
    
    
    (25
    )Other
    
    
    46
    
    
    
    43
    
    
    
    3
    
    
    
    (10
    )
    
    
    63
    
    
    
    (73
    )Federal funds sold
    
    
    (64
    )
    
    
    (24
    )
    
    
    (40
    )
    
    
    (477
    )
    
    
    (275
    )
    
    
    (202
    )Interest-bearing deposits
    
    
    (8
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (54
    )
    
    
    (25
    )
    
    
    (29
    )Total interest income
    
    
    (1,592
    )
    
    
    1,782
    
    
    
    (3,374
    )
    
    
    (2,252
    )
    
    
    5,499
    
    
    
    (7,751
    )Interest expense:NOW accounts
    
    $
    (74
    )
    
    
    2
    
    
    
    (76
    )
    
    $
    (108
    )
    
    
    68
    
    
    
    (176
    )Savings accounts
    
    
    (6
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    (27
    )
    
    
    (13
    )
    
    
    (14
    )Money market
    
    
    (826
    )
    
    
    (11
    )
    
    
    (815
    )
    
    
    (1,672
    )
    
    
    277
    
    
    
    (1,949
    )Deposits of $100 and over
    
    
    (325
    )
    
    
    113
    
    
    
    (438
    )
    
    
    (666
    )
    
    
    163
    
    
    
    (829
    )Other time deposits
    
    
    (928
    )
    
    
    (158
    )
    
    
    (770
    )
    
    
    (1,442
    )
    
    
    (256
    )
    
    
    (1,186
    )Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    (257
    )
    
    
    22
    
    
    
    (279
    )
    
    
    (308
    )
    
    
    355
    
    
    
    (663
    )Interest-bearing demand notes
of U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    (5
    )
    
    
    (6
    )Subordinated debentures
    
    
    (170
    )
    
    
    
    
    
    
    (170
    )
    
    
    (378
    )
    
    
    
    
    
    
    (378
    )Other borrowed money
    
    
    494
    
    
    
    893
    
    
    
    (399
    )
    
    
    1,060
    
    
    
    1,981
    
    
    
    (921
    )Total interest expense
    
    
    (2,092
    )
    
    
    859
    
    
    
    (2,951
    )
    
    
    (3,552
    )
    
    
    2,570
    
    
    
    (6,122
    )Net interest income on a fully
taxable equivalent basis
    
    $
    500
    
    
    
    923
    
    
    
    (423
    )
    
    $
    1,300
    
    
    
    2,929
    
    
    
    (1,629
    )
 
 /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 $217,000 and $246,000, and $662,000 and $731,000 for the
three and nine months September 30, 2008 and 2007, respectively./2/
    
    Non-accruing loans are included in the average amounts outstanding./3/
    
    Change in volume multiplied by yield/rate of prior period./4/
    
    Change in yield/rate multiplied by volume of prior period. 21




---



##### 



Provision for Loan Losses
   22




---



##### 



Noninterest Income and Expense
  (
 Three Months EndedSeptember 30,
    
    
    Increase (decrease)2008
    
    
    2007
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    1,636
    
    
    $
    1,452
    
    
    $
    184
    
    
    
    12.7
    %Trust department income
    
    
    199
    
    
    
    201
    
    
    
    (2
    )
    
    
    (1.0
    )Mortgage loan servicing fees, net
    
    
    62
    
    
    
    60
    
    
    
    2
    
    
    
    3.3Gain on sale of mortgage loans
    
    
    133
    
    
    
    159
    
    
    
    (26
    )
    
    
    (16.4
    )Other
    
    
    291
    
    
    
    223
    
    
    
    68
    
    
    
    30.5$
    2,321
    
    
    $
    2,095
    
    
    $
    226
    
    
    
    10.8
    %Noninterest ExpenseSalaries and employee benefits
    
    $
    4,484
    
    
    $
    4,484
    
    
    $
    
    
    
    
    
    %Occupancy expense
    
    
    601
    
    
    
    574
    
    
    
    27
    
    
    
    4.7Furniture and equipment expense
    
    
    537
    
    
    
    638
    
    
    
    (101
    )
    
    
    (15.8
    )Legal, examination, and professional fees
    
    
    361
    
    
    
    292
    
    
    
    69
    
    
    
    23.6Advertising and promotion
    
    
    280
    
    
    
    273
    
    
    
    7
    
    
    
    2.6Postage, printing and supplies
    
    
    260
    
    
    
    364
    
    
    
    (104
    )
    
    
    (28.6
    )Processing expense
    
    
    774
    
    
    
    325
    
    
    
    449
    
    
    
    138.2Amortization  CDI
    
    
    169
    
    
    
    223
    
    
    
    (54
    )
    
    
    (24.2
    )Other
    
    
    916
    
    
    
    988
    
    
    
    (72
    )
    
    
    (7.3
    )$
    8,382
    
    
    $
    8,161
    
    
    $
    221
    
    
    
    2.7
    %
   23




---



##### 



(
 Nine Months EndedSeptember 30,
    
    
    Increase (decrease)2008
    
    
    2007
    
    
    Amount
    
    
    %Noninterest IncomeService charges on deposit accounts
    
    $
    4,636
    
    
    $
    4,163
    
    
    $
    473
    
    
    
    11.4
    %Trust department income
    
    
    604
    
    
    
    629
    
    
    
    (25
    )
    
    
    (4.0
    )Mortgage loan servicing fees, net
    
    
    96
    
    
    
    250
    
    
    
    (154
    )
    
    
    (61.6
    )Gain on sale of mortgage loans
    
    
    686
    
    
    
    501
    
    
    
    185
    
    
    
    36.9Loss on sales and calls of debt securities
    
    
    3
    
    
    
    (2
    )
    
    
    5
    
    
    
    (250.0
    )Other
    
    
    986
    
    
    
    1,927
    
    
    
    (941
    )
    
    
    (48.8
    )$
    7,011
    
    
    $
    7,468
    
    
    $
    (457
    )
    
    
    (6.1
    )%Noninterest ExpenseSalaries and employee benefits
    
    $
    13,662
    
    
    $
    14,154
    
    
    $
    (492
    )
    
    
    (3.5
    )%Occupancy expense
    
    
    1,802
    
    
    
    1,566
    
    
    
    236
    
    
    
    15.1Furniture and equipment expense
    
    
    1,805
    
    
    
    1,797
    
    
    
    8
    
    
    
    0.4Legal, examination, and professional fees
    
    
    887
    
    
    
    1,203
    
    
    
    (316
    )
    
    
    (26.3
    )Advertising and promotion
    
    
    792
    
    
    
    702
    
    
    
    90
    
    
    
    12.8Postage, printing and supplies
    
    
    894
    
    
    
    923
    
    
    
    (29
    )
    
    
    (3.1
    )Processing expense
    
    
    2,327
    
    
    
    879
    
    
    
    1,448
    
    
    
    164.7Amortization  CDI
    
    
    533
    
    
    
    699
    
    
    
    (166
    )
    
    
    (23.7
    )Other
    
    
    2,950
    
    
    
    2,817
    
    
    
    133
    
    
    
    4.7$
    25,652
    
    
    $
    24,740
    
    
    $
    912
    
    
    
    3.7
    %
  24




---



##### 



Income taxes
   Lending and Credit Management
    25




---



##### 



26




---



##### 



(Dollars expressed in thousands)
 September 30, 2008
    
    
    December 31, 2007% of Gross
    
    
    
    
    
    
    % of GrossBalance
    
    
    Loans
    
    
    Balance
    
    
    LoansNonaccrual loans:Commercial
    
    $
    3,787
    
    
    
    0.38
    %
    
    $
    2,332
    
    
    
    0.33
    %Real estate:Construction
    
    
    4,687
    
    
    
    0.47
    
    
    
    866
    
    
    
    0.10Mortgage
    
    
    2,493
    
    
    
    0.25
    
    
    
    1,309
    
    
    
    0.07Consumer
    
    
    80
    
    
    
    0.01
    
    
    
    32
    
    
    
    11,047
    
    
    
    1.11
    
    
    
    4,539
    
    
    
    0.50Loans contractually past-due 90 days
or more and still accruing:Commercial
    
    
    312
    
    
    
    0.03
    
    
    
    265
    
    
    
    0.06Real estate:Construction
    
    
    1,341
    
    
    
    0.13
    
    
    
    158
    
    
    
    0.02Mortgage
    
    
    1,350
    
    
    
    0.14
    
    
    
    1,053
    
    
    
    0.08Consumer
    
    
    15
    
    
    
    
    
    
    
    70
    
    
    
    0.013,018
    
    
    
    0.30
    
    
    
    1,546
    
    
    
    0.17Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    14,065
    
    
    
    1.41
    %
    
    
    6,085
    
    
    
    0.67
    %Other real estate
    
    
    7,169
    
    
    
    
    
    
    
    2,337Repossessions
    
    
    
    
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    21,234
    
    
    
    
    
    
    $
    8,422
   27




---



##### 



28




---



##### 



Financial Condition
  29




---



##### 



30




---



##### 



Liquidity and Capital Resources
   31




---



##### 



Sources and Uses of Funds
    32




---



##### 



Regulatory Capital
    (dollars in thousands):
 September 30, 2008To bewell capitalizedunder prompt correctiveActual
    
    Capital requirements
    
    action provisionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets):Company
    
    $
    125,765
    
    
    
    12.47
    %
    
    $
    80,681
    
    
    
    8.00
    %
    
    
    
    
    
    
    
    %Hawthorn Bank
    
    
    117,524
    
    
    
    11.66
    
    
    
    80,618
    
    
    
    8.00
    
    
    
    100,772
    
    
    
    10.00Tier I capital (to risk-weighted assets):Company
    
    
    105,722
    
    
    
    10.48
    
    
    
    40,340
    
    
    
    4.00
    
    
    
    
    
    
    
    Hawthorn Bank
    
    
    108,168
    
    
    
    10.73
    
    
    
    40,309
    
    
    
    4.00
    
    
    
    60,463
    
    
    
    6.00Tier I capital (to adjusted average assets):Company
    
    
    105,722
    
    
    
    8.67
    
    
    
    36,594
    
    
    
    3.00
    
    
    
    
    
    
    
    Hawthorn Bank
    
    
    108,168
    
    
    
    8.88
    
    
    
    36,530
    
    
    
    3.00
    
    
    
    60,883
    
    
    
    5.00
 33




---



##### 



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
  34




---



##### 



(dollars in thousands):
 Over5 years orno statedYear 1
    
    
    Year 2
    
    
    Year 3
    
    
    Year 4
    
    
    Year 5
    
    
    Maturity
    
    
    TotalASSETSInvestments in debt and
equity securities
    
    $
    50,166
    
    
    
    21,513
    
    
    
    7,132
    
    
    
    6,012
    
    
    
    17,901
    
    
    
    59,829
    
    
    
    162,553Interest-bearing deposits
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121Federal funds sold and securities
purchased under agreements
to resell
    
    
    5,532
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,532Loans
    
    
    486,839
    
    
    
    162,125
    
    
    
    136,503
    
    
    
    64,090
    
    
    
    105,419
    
    
    
    30,227
    
    
    
    985,203Total
    
    $
    542,658
    
    
    
    183,638
    
    
    
    143,635
    
    
    
    70,102
    
    
    
    123,320
    
    
    
    90,056
    
    
    
    1,153,409LIABILITIESSavings, Now deposits
    
    $
    
    
    
    
    
    
    
    
    115,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,152Rewards checking, Super Now,
money market deposits, CC
    
    
    216,589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216,589Time deposits
    
    
    351,893
    
    
    
    52,394
    
    
    
    36,671
    
    
    
    4,671
    
    
    
    26,253
    
    
    
    71
    
    
    
    471,953Federal funds purchased and
securities sold under
agreements to repurchase
    
    
    26,773
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,773Subordinated notes
    
    
    25,774
    
    
    
    23,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,486Other borrowed money
    
    
    97,792
    
    
    
    17,376
    
    
    
    43,680
    
    
    
    317
    
    
    
    95
    
    
    
    
    
    
    
    159,260Total
    
    $
    718,821
    
    
    
    93,482
    
    
    
    195,503
    
    
    
    4,988
    
    
    
    26,348
    
    
    
    71
    
    
    
    1,039,213Interest-sensitivity GAPPeriodic GAP
    
    $
    (176,163
    )
    
    
    90,156
    
    
    
    (51,868
    )
    
    
    65,114
    
    
    
    96,972
    
    
    
    89,985
    
    
    
    114,196Cumulative GAP
    
    $
    (176,163
    )
    
    
    (86,007
    )
    
    
    (137,875
    )
    
    
    (72,761
    )
    
    
    24,211
    
    
    
    114,196
    
    
    
    114,196Ratio of interest-earnings
assets to interest-bearing liabilitiesPeriodic GAP
    
    
    0.75
    
    
    
    1.96
    
    
    
    0.73
    
    
    
    14.05
    
    
    
    4.68
    
    
    
    1,268.39
    
    
    
    1.11Cumulative GAP
    
    
    0.75
    
    
    
    0.89
    
    
    
    0.86
    
    
    
    0.93
    
    
    
    1.02
    
    
    
    1.11
    
    
    
    1.11
 Item 4. Controls and Procedures
  35




---



##### 



Impact of New Accounting Pronouncements
 Fair Value Measurement. Determining the Fair Value of a Financial Asset When the Market for That Asset Is
Not Active,
 , Business Combinations Noncontrolling Interests in Consolidated Financial Statements an
amendment to ARB No. 51
 36




---



##### 



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
 37




---



##### 



PART II  OTHER INFORMATION
     The continuation of adverse market conditions in the U.S. economy and the markets in which we
operate could adversely impact us.
 Current and further deterioration in the housing market could cause further increases in
delinquencies and non-performing assets, including loan charge-offs, and depress our income and
growth.
 
    
    the borrowers may not be able to repay their loans;
    
    the value of the collateral securing our loans to borrowers may decline further;
    
    the quality of our loan portfolio may decline further; and
    
    customers may not want or need our products and services.
  Recent developments affecting the financial markets presently have an unknown effect on our
business.
 38




---



##### 



We may elect or be compelled to seek additional capital in the future, but that capital may
not be available when it is needed.
 39




---



##### 



(c) Total Number
    
    (d) Maximum Number(a) Total
    
    
    
    
    
    of Shares (or Units)
    
    (or Approximate DollarNumber of
    
    (b) Average
    
    Purchased as Part
    
    Value) of Shares (orShares (or
    
    Price Paid
    
    of Publicly
    
    Units) that May Yet BeUnits)
    
    per Share (or
    
    Announced Plans
    
    Purchased Under thePeriod
    
    Purchased
    
    Unit)
    
    or Programs
    
    Plans or Programs *July 1 - 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    865,778August 1 - 31, 2008
    
    
    10,000
    
    
    $
    21.49
    
    
    
    10,000
    
    
    $
    650,918September 1 - 30,
2008
    
    
    13,000
    
    
    $
    24.45
    
    
    
    13,000
    
    
    $
    333,038Total
    
    
    23,000
    
    
    $
    23.16
    
    
    
    23,000
    
    
    $
    333,038
 
 *
    
    On August 22, 2001, our Company announced that our Board of Directors authorized the
purchase, through open market transactions, of up to $2,000,000 market value of our Companys
common stock. Management was given discretion to determine the number and pricing of the
shares to be purchased, as well as, the timing of any such purchases. On November 26, 2002,
our Company announced that our board of directors authorized an additional $2,000,000 for the
purchase of our Companys stock through open market transactions. Item 3. Defaults Upon Senior Securities
    
    None
 Item 4. Submission of Matters to a Vote of Security Holders
    
    None
 Item 5. Other Information
    
    None
 40




---



##### 



Exhibit No.
    
    Description3.1
    
    Restated Articles of Incorporation of our Company (filed as
Exhibit 3.1 to our Companys current report on Form 8-K on
August 9, 2007 and incorporated herein by reference).3.2
    
    Amended and Restated Bylaws of our Company (filed as Exhibit
3.2 to our Companys current report on Form 8-K on November 1,
2007 and incorporated herein by reference).4
    
    Specimen certificate representing shares of our
Companys $1.00 par value common stock (filed as Exhibit 4 to
our Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (Commission file number 0-23636) and
incorporated herein by reference).31.1
    
    Certificate of the Chief Executive Officer of our Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of the Chief Financial Officer of our Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certificate of the Chief Executive Officer of our Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certificate of the Chief Financial Officer of our Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 41




---



##### 



SIGNATURES
  HAWTHORN BANCSHARES, INC.DateNovember 10, 2008
    
    /s/ James E. Smith

James E. Smith, Chairman of the Board
and Chief Executive Officer (Principal Executive Officer)/s/ Richard G. RoseNovember 10, 2008
    
    Richard G. Rose, Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
 42




---



##### 



HAWTHORN BANCSHARES, INC.
   Exhibit No.
    
    Description
    
    Page No.3.1
    
    Restated Articles of Incorporation of our
Company (filed as Exhibit 3.1 to our Companys
current report on Form 8-K on August 9, 2007 and
incorporated herein by reference).
    
    
    **3.2
    
    Amended and Restated Bylaws of our Company
(filed as Exhibit 3.2 to our Companys current
report on Form 8-k on November 1, 2007 and
incorporated herein by reference).
    
    
    **4
    
    Specimen certificate representing shares of our
Companys $1.00 par value common stock (filed as
Exhibit 4 to our Companys Annual Report on Form
10-K for the fiscal year ended December 31, 1999
(Commission file number 0-23636) and
incorporated herein by reference).
    
    
    **31.1
    
    Certificate of the Chief Executive Officer of
our Company pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    4431.2
    
    Certificate of the Chief Financial Officer of
our Company pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    4532.1
    
    Certificate of the Chief Executive Officer of
our Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    4632.2
    
    Certificate of the Chief Financial Officer of
our Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    47
 
 **
    
    Incorporated by reference. 43