e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2011
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.
(Exact name of registrant as specified in its charter)
     
Missouri   43-1626350
(State or other jurisdiction of   (I.R.S. Employer
of incorporation or organization)   Identification No.)
     
300 Southwest Longview Boulevard, Lee’s Summit, Missouri   64081
(Address of principal executive offices)   (Zip Code)
(816) 347-8100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
 
      (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
As of August 15, 2011 the registrant had 4,652,994 shares of common stock, par value $1.00 per share, outstanding
Page 1 of 61 pages
Index to Exhibits located on page 56
 
 

 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. (Removed and Reserved)
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
                 
    June 30,   December 31,
    2011   2010
 
ASSETS
               
 
               
Loans
  $ 868,798,817     $ 898,472,463  
Allowances for loan losses
    (13,863,050 )     (14,564,867 )
 
Net loans
    854,935,767       883,907,596  
 
Investment in available-for-sale securities, at fair value
    219,697,283       178,977,550  
Federal funds sold and securities purchased under agreements to resell
    171,338       125,815  
Cash and due from banks
    35,068,582       50,853,985  
Premises and equipment — net
    37,464,951       36,980,503  
Other real estate owned and repossessed assets — net
    15,768,518       14,009,017  
Accrued interest receivable
    5,672,339       5,733,684  
Mortgage servicing rights
    2,271,915       2,355,990  
Intangible assets — net
    750,796       977,509  
Cash surrender value — life insurance
    2,036,197       2,001,965  
Other assets
    20,869,488       24,248,590  
 
 
               
Total assets
  $ 1,194,707,174     $ 1,200,172,204  
 
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Deposits:
               
Non-interest bearing demand
  $ 148,139,814     $ 137,749,571  
Savings, interest checking and money market
    385,873,185       379,137,539  
Time deposits $100,000 and over
    132,783,863       124,566,760  
Other time deposits
    295,275,735       305,208,786  
 
 
               
Total deposits
    962,072,597       946,662,656  
 
Federal funds purchased and securities sold under agreements to repurchase
    28,689,667       30,068,453  
Subordinated notes
    49,486,000       49,486,000  
Other borrowed money
    43,656,668       66,985,978  
Accrued interest payable
    1,690,994       1,491,503  
Other liabilities
    4,766,987       3,989,303  
 
 
               
Total liabilities
    1,090,362,913       1,098,683,893  
 
Stockholders’ equity:
               
Preferred stock, $1,000 par value Authorized and issued 30,255 shares
    29,079,479       28,841,242  
Common stock, $1 par value Authorized 15,000,000 shares; issued 4,814,852, and 4,635,891 shares, respectively
    4,635,891       4,635,891  
Surplus
    30,420,956       28,928,545  
Retained earnings
    41,318,862       41,857,302  
Accumulated other comprehensive income, net of tax
    2,405,891       742,149  
Treasury stock; 161,858 shares, at cost
    (3,516,818 )     (3,516,818 )
 
 
               
Total stockholders’ equity
    104,344,261       101,488,311  
 
 
               
Total liabilities and stockholders’ equity
  $ 1,194,707,174     $ 1,200,172,204  
 
See accompanying notes to consolidated financial statements.

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
                                 
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
 
INTEREST INCOME
                               
Interest and fees on loans
  $ 11,991,200     $ 13,633,597     $ 24,078,842     $ 27,052,073  
Interest on debt securities:
                               
Taxable
    1,342,958       1,118,098       2,497,854       2,182,077  
Nontaxable
    254,093       294,553       529,901       620,755  
Interest on federal funds sold and securities purchased under agreements to resell
    25       47       62       83  
Interest on interest-bearing deposits
    11,695       21,891       32,288       35,522  
Dividends on other securities
    40,661       34,750       84,361       85,447  
 
Total interest income
    13,640,632       15,102,936       27,223,308       29,975,957  
 
INTEREST EXPENSE
                               
Interest on deposits:
                               
Savings, interest checking and money market
    447,813       554,453       931,504       1,185,206  
Time deposit accounts $100,000 and over
    432,649       651,252       895,821       1,362,634  
Other time deposit accounts
    1,315,987       1,850,082       2,738,789       3,848,733  
Interest on federal funds purchased and securities sold under agreements to repurchase
    12,628       19,123       25,983       39,663  
Interest on subordinated notes
    323,016       323,246       725,177       847,546  
Interest on other borrowed money
    326,008       590,653       642,967       1,267,014  
 
Total interest expense
    2,858,101       3,988,809       5,960,241       8,550,796  
 
Net interest income
    10,782,531       11,114,127       21,263,067       21,425,161  
Provision for loan losses
    1,883,334       2,150,000       3,633,336       4,655,000  
 
Net interest income after provision for loan losses
    8,899,197       8,964,127       17,629,731       16,770,161  
 
NON-INTEREST INCOME
                               
Service charges on deposit accounts
    1,419,272       1,427,202       2,729,763       2,723,290  
Trust department income
    228,771       200,644       423,866       379,506  
Gain on sale of mortgage loans, net
    215,996       297,201       462,230       521,774  
Other
    314,585       524,973       614,845       830,906  
 
Total non-interest income
    2,178,624       2,450,020       4,230,704       4,455,476  
 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
    4,333,620       4,550,320       9,010,693       9,207,441  
Occupancy expense, net
    584,685       604,734       1,223,049       1,226,406  
Furniture and equipment expense
    509,104       534,611       1,015,783       1,026,650  
FDIC insurance assessment
    396,266       435,020       875,013       845,198  
Legal, examination, and professional fees
    307,105       336,033       797,609       583,323  
Advertising and promotion
    269,700       296,834       501,875       575,023  
Postage, printing, and supplies
    295,774       286,190       564,481       574,356  
Processing expense
    812,808       856,495       1,634,885       1,706,860  
Other real estate expense
    548,436       1,506,291       1,040,869       2,012,746  
Other
    950,627       913,110       1,721,592       1,692,381  
 
Total non-interest expense
    9,008,125       10,319,638       18,385,849       19,450,384  
 
Income before income taxes
    2,069,696       1,094,509       3,474,586       1,775,253  
Income tax expense
    661,202       312,043       1,112,475       499,019  
 
Net income
    1,408,494       782,466       2,362,111       1,276,234  
Preferred stock dividends
    382,390       382,390       752,173       752,173  
Accretion of discount on preferred stock
    119,118       119,118       238,237       238,237  
 
Net income available to common shareholders
  $ 906,986     $ 280,958     $ 1,371,701     $ 285,824  
 
Basic earnings per share
  $ 0.19     $ 0.06     $ 0.29     $ 0.06  
Diluted earnings per share
  $ 0.19     $ 0.06     $ 0.29     $ 0.06  
 
See accompanying notes to consolidated financial statements.

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (unaudited)
                                                         
                                    Accumulated             Total  
                                    Other             Stock -  
    Preferred     Common             Retained     Comprehensive     Treasury     holders’  
    Stock     Stock     Surplus     Earnings     Income     Stock     Equity  
 
Balance, December 31, 2009
  $ 28,364,768     $ 4,463,813     $ 26,970,745     $ 50,576,551     $ 912,224     $ (3,516,818 )   $ 107,771,283  
 
Net income
                      1,276,234                   1,276,234  
Change in unrealized gain (loss) on securities:
                                                       
Unrealized gain on debt securities available-for-sale, net of tax
                            1,145,269             1,145,269  
Defined benefit pension plans:
                                                       
Amortization of prior service cost included in net periodic pension cost, net of tax
                            23,982             23,982  
 
                                                     
Total other comprehensive income
                                                    1,169,251  
 
                                                     
Total comprehensive income
                                                    2,445,485  
 
                                                     
Stock based compensation expense
                48,542                         48,542  
Accretion of preferred stock discount
    238,237                   (238,237 )                  
Stock dividend
                2,042,568       (2,042,568 )                  
Cash dividends declared, preferred stock
                            (756,375 )                     (756,375 )
Cash dividends declared, common stock
                      (688,313 )                 (688,313 )
 
Balance, June 30, 2010
  $ 28,603,005     $ 4,463,813     $ 29,061,855     $ 48,127,292     $ 2,081,475     $ (3,516,818 )   $ 108,820,622  
 
 
                                                       
 
Balance, December 31, 2010
  $ 28,841,242     $ 4,635,891     $ 28,928,545     $ 41,857,302     $ 742,149     $ (3,516,818 )   $ 101,488,311  
 
 
                                                       
Net income
                      2,362,111                   2,362,111  
Change in unrealized gain on securities:
                                                       
Unrealized gain on debt securities available-for-sale, net of tax
                            1,639,760             1,639,760  
Defined benefit pension plans:
                                                       
Amortization of prior service cost included in net periodic pension cost, net of tax
                            23,982             23,982  
 
                                                     
Total other comprehensive income
                                                    1,663,742  
 
                                                     
Total comprehensive income
                                                    4,025,853  
 
                                                     
Stock based compensation expense
                33,877                         33,877  
Accretion of preferred stock discount
    238,237                   (238,237 )                  
Stock dividend
                1,458,534       (1,458,534 )                  
Cash dividends declared, preferred stock
                            (756,376 )                     (756,376 )
Cash dividends declared, common stock
                      (447,404 )                 (447,404 )
 
Balance, June 30, 2011
  $ 29,079,479     $ 4,635,891     $ 30,420,956     $ 41,318,862     $ 2,405,891     $ (3,516,818 )   $ 104,344,261  
 
See accompanying notes to consolidated financial statements.

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
                 
    Six Months Ended June 30,
    2011   2010
 
Cash flows from operating activities:
               
Net income
  $ 2,362,111     $ 1,276,234  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    3,633,336       4,655,000  
Depreciation expense
    963,122       1,005,026  
Net amortization of debt securities, premiums, and discounts
    406,130       283,997  
Amortization of core deposit intangible assets
    226,713       290,425  
Stock based compensation expense
    33,877       48,542  
Loss on sales and dispositions of premises and equipment
    667       59,621  
Loss on sales and dispositions of other real estate owned and repossessions
    258,885       1,234,995  
Provision for other real estate owned
    440,805        
Decrease in accrued interest receivable
    61,345       692,372  
Increase in cash surrender value -life insurance
    (34,232 )     (30,156 )
Decrease (increase) in income tax receivable
    1,112,475       (803,397 )
Decrease in other assets
    277,522       965,928  
Increase (decrease) in accrued interest payable
    199,491       (141,173 )
Increase in other liabilities
    777,683       831,382  
Origination of mortgage loans for sale
    (23,115,786 )     (29,524,264 )
Proceeds from the sale of mortgage loans
    22,336,960       30,046,038  
Gain on sale of mortgage loans, net
    (462,230 )     (521,774 )
Decrease in net deferred tax asset
    15,332       1,346,832  
Other, net
    23,982       23,982  
 
Net cash provided by operating activities
    9,518,188       11,739,610  
 
Cash flows from investing activities:
               
Net decrease in loans
    20,636,247       27,991,681  
Purchase of available-for-sale debt securities
    (83,043,472 )     (140,268,118 )
Proceeds from maturities of available-for-sale debt securities
    19,097,740       98,037,862  
Proceeds from calls of available-for-sale debt securities
    25,508,000       28,780,100  
Proceeds from sales of FHLB stock
    1,077,100       595,200  
Purchases of premises and equipment
    (1,487,479 )     (239,112 )
Proceeds from sales of premises and equipment
    34,249       34,528  
Proceeds from sales of other real estate owned and repossessions
    3,421,481       4,802,109  
 
Net cash (used) provided in investing activities
    (14,756,134 )     19,734,250  
 
Cash flows from financing activities:
               
Net increase (decrease) in demand deposits
    10,390,244       (3,512,371 )
Net increase in interest-bearing transaction accounts
    6,971,783       38,040,414  
Net decrease in time deposits
    (1,952,085 )     (19,492,569 )
Net decrease in federal funds purchased and securities sold under agreements to repurchase
    (1,378,786 )     (1,476,597 )
Repayment of Federal Home Loan Bank advances
    (23,329,310 )     (11,967,528 )
Cash dividends paid — preferred stock
    (756,376 )     (756,375 )
Cash dividends paid — common stock
    (447,404 )     (946,430 )
 
Net cash provided by financing activities
    (10,501,934 )     (111,456 )
 
Net (decrease) increase in cash and cash equivalents
    (15,739,880 )     31,362,404  
Cash and cash equivalents, beginning of period
    50,979,800       24,665,695  
 
Cash and cash equivalents, end of period
  $ 35,239,920     $ 56,028,099  
 

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited) (continued)
                 
    Six Months Ended June 30,
    2011   2010
 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 5,760,750     $ 8,691,969  
Income taxes
  $     $ 200,000  
Supplemental schedule of noncash investing and financing activities:
               
Other real estate and repossessions acquired in settlement of loans
  $ 5,943,302     $ 11,750,040  
 
See accompanying notes to consolidated financial statements.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation and Principles of Consolidation
     The accompanying unaudited condensed consolidated financial statements include all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.
     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q, do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and related notes filed in our Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
     On July 1, 2011, our Company paid a special stock dividend of four percent to common shareholders of record at the close of business on May 12, 2011. For all periods presented, share information, including basic and diluted earnings per share have been adjusted retroactively to reflect this change.
     The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2010 Annual Report on form 10-K.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(2) Loans and Allowance for Loan Losses
     A summary of loans, by major class within our Company’s loan portfolio, at June 30, 2011 and December 31, 2010 are as follows:
                 
    June 30,   December 31,
    2011   2010
 
Commercial, financial, and agricultural
  $ 127,627,653     $ 131,382,467  
Real estate construction — residential
    28,646,137       31,834,174  
Real estate construction — commercial
    50,836,737       56,052,910  
Real estate mortgage — residential
    203,066,932       207,834,488  
Real estate mortgage — commercial
    428,971,600       439,068,622  
Installment and other consumer
    29,475,102       32,132,336  
Unamortized loan origination fees and costs, net
    174,656       167,466  
 
 
               
Total loans
  $ 868,798,817     $ 898,472,463  
 
     The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities of and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles.
     At June 30, 2011, loans of $439,441,000 were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit.
Allowance for loan losses
     The following table provides the balance in the allowance for loan losses at June 30, 2011 and December 31, 2010, and the related loan balance by impairment methodology. Loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, troubled debt restructurings, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb credit losses.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following is a summary of the allowance for loan losses at or for the three and six months ended June 30, 2011 as follows:
                                                                 
    For the Three Months Ended June 30, 2011
    Commercial,   Real Estate   Real Estate   Real Estate   Real Estate   Installment        
    Financial, and   Construction -   Construction -   Mortgage -   Mortgage -   Loans to        
(in thousands)   Agricultural   Residential   Commercial   Residential   Commercial   Individuals   Unallocated   Total
 
Allowance for loan losses:
                                                               
 
 
                                                               
Balance, beginning of period
  $ 2,257     $ 991     $ 1,356     $ 3,118     $ 3,709     $ 223     $ 748     $ 12,402  
 
Additions:
                                                               
Provision for loan losses
    313       (6 )     (276 )     306       1,264       62       220       1,883  
 
Deductions:
                                                               
Loans charged off
    45                   466       160       138             809  
Less recoveries on loans
    (8 )     (1 )     (250 )     (32 )     (24 )     (72 )           (387 )
 
Net loans charged off
    37       (1 )     (250 )     434       136       66             422  
 
Balance, end of period
  $ 2,533     $ 986     $ 1,330     $ 2,990     $ 4,837     $ 219     $ 968     $ 13,863  
 
                                                                 
    For the Six Months Ended June 30, 2011
    Commercial,   Real Estate   Real Estate   Real Estate   Real Estate   Installment        
    Financial, and   Construction -   Construction -   Mortgage -   Mortgage -   Loans to        
(in thousands)   Agricultural   Residential   Commercial   Residential   Commercial   Individuals   Unallocated   Total
 
Allowance for loan losses:
                                                               
 
 
                                                               
Balance, beginning of period
  $ 2,931     $ 2,067     $ 1,339     $ 3,922     $ 3,458     $ 231     $ 617     $ 14,565  
 
Additions:
                                                               
Provision for loan losses
    406       404       (259 )     533       2,091       107       351       3,633  
 
Deductions:
                                                               
Loans charged off
    873       1,547             1,539       741       247             4,947  
Less recoveries on loans
    (69 )     (62 )     (250 )     (74 )     (29 )     (128 )           (612 )
 
Net loans charged off
    804       1,485       (250 )     1,465       712       119             4,335  
 
Balance, end of period
  $ 2,533     $ 986     $ 1,330     $ 2,990     $ 4,837     $ 219     $ 968     $ 13,863  
 

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
     The tables provide other information regarding the allowance for loan losses and balance by type of allowance methodology at June 30, 2011 and December 31, 2010 as follows:
                                                                 
    Commercial,   Real Estate   Real Estate   Real Estate   Real Estate   Installment        
    Financial, and   Construction -   Construction -   Mortgage -   Mortgage -   Loans to        
(in thousands)   Agricultural   Residential   Commercial   Residential   Commercial   Individuals   Unallocated   Total
 
June 30, 2011
                                                               
 
 
                                                               
Allowance for loan losses:
                                                               
 
Individually evaluated for impairment
  $ 1,465     $ 45     $ 274     $ 515     $ 3,187     $     $     $ 5,486  
Collectively evaluated for impairment
    1,068       941       1,056       2,475       1,650       219       968       8,377  
 
Total
  $ 2,533     $ 986     $ 1,330     $ 2,990     $ 4,837     $ 219     $ 968     $ 13,863  
 
Loans outstanding:
                                                               
Individually evaluated for impairment
  $ 5,366     $ 832     $ 10,994     $ 6,767     $ 31,961     $     $     $ 55,920  
Collectively evaluated for impairment
    122,261       27,814       39,843       196,300       397,011       29,650             812,879  
 
Total
  $ 127,627     $ 28,646     $ 50,837     $ 203,067     $ 428,972     $ 29,650     $     $ 868,799  
 
 
                                                               
December 31, 2010
                                                               
 
 
                                                               
Allowance for loan losses:
                                                               
 
Individually evaluated for impairment
  $ 1,737     $ 1,553     $ 201     $ 1,117     $ 1,768     $     $     $ 6,376  
Collectively evaluated for impairment
    1,194       514       1,138       2,805       1,690       231       617       8,189  
 
Total
  $ 2,931     $ 2,067     $ 1,339     $ 3,922     $ 3,458     $ 231     $ 617     $ 14,565  
 
Loans outstanding:
                                                               
Individually evaluated for impairment
  $ 3,660     $ 3,586     $ 11,783     $ 8,040     $ 29,076     $     $     $ 56,145  
Collectively evaluated for impairment
    127,722       28,248       44,270       199,795       409,993       32,299             842,327  
 
Total
  $ 131,382     $ 31,834     $ 56,053     $ 207,835     $ 439,069     $ 32,299     $     $ 898,472  
 
     Loans, or portions of loans, are charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. Once the fair value for a collateral dependent loan has been determined, any impaired amount is typically charged off unless the loan has other income streams to support repayment. For impaired loans which have other income streams to support repayment, a specific reserve is established for the amount determined to be impaired.
          Impaired loans
     Impaired loans totaled $56,091,828 and $56,270,543 at June 30, 2011 and December 31, 2010 respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings.
     The categories of impaired loans at June 30, 2011 and December 31, 2010 are as follows:
                 
    June 30,   December 31,
    2011   2010
 
Non-accrual loans
  $ 49,543,857     $ 50,586,887  
Troubled debt restructurings continuing to accrue interest
    6,547,971       5,683,656  
 
Total impaired loans
  $ 56,091,828     $ 56,270,543  
 
     At June 30, 2011, loans classified as trouble debt restructurings (TDR) totaled $23,913,139, of which $17,365,168 were on non-accrual status and $6,547,971 were on accrual status. At December 31, 2010, loans classified as TDR totaled $22,080,431, of which $16,396,775 were on non-accrual status and $5,683,656 was on accrual status. Reserves allocated to troubled debt restructurings were $1,781,000 and $1,359,000 at June 30, 2011 and December 31, 2010, respectively.

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
     Interest income recognized on loans in non-accrual status and contractual interest that would be recorded had the loans performed in accordance with their original contractual terms is as follows:
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   2011   2010
 
Contractual interest due on non-accrual loans
  $ 612,472     $ 784,350     $ 1,218,908     $ 1,278,237  
Interest income recognized on loans in non-accrual status
    32,802       (9,134 )     32,840       4,220  
 
Net reduction in interest income
  $ 579,670     $ 793,484     $ 1,186,068     $ 1,274,017  
 
     The specific reserve component of our Company’s allowance for loan losses at June 30, 2011 and December 31, 2010 was determined by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows. The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $71,482 and $318,709 for the six months ended June 30, 2011 and June 30, 2010, respectively. Average recorded investment in impaired loans is calculated on a monthly basis during the period.

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
     The following table provides additional information about impaired loans at June 30, 2011 and December 31, 2010, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided:
                                                 
            Unpaid           Average   Interest Income Recognized
    Recorded   Principal   Related   Recorded   For the Period Ended
    Investment   Balance   Allowance   Investment   Three Months   Six Months
 
At June 30, 2011
                                               
With no related allowance recorded:
                                               
Commercial, financial and Agricultural
  $ 3,063,278     $ 3,148,134     $     $ 2,150,452     $ 11,074     $  
Real estate — construction residential
    659,870       824,500             1,731,871              
Real estate — construction commercial
    8,235,882       9,348,798             8,251,242              
Real estate — residential
    2,488,885       3,269,889             3,429,353       11,698       7,014  
Real estate — commercial
    12,796,159       14,527,062             9,977,051       18,040        
Consumer
    172,191       209,667             203,899       1,349        
 
Total
  $ 27,416,265     $ 31,328,050     $     $ 25,743,868     $ 42,161     $ 7,014  
 
With an allowance recorded:
                                               
Commercial, financial and Agricultural
  $ 2,302,712     $ 2,193,991     $ 1,465,198     $ 1,818,910     $ 4,400     $ 2,208  
Real estate — construction residential
    171,982       181,002       45,000       172,315              
Real estate — construction commercial
    2,758,396       4,013,396       274,000       2,067,649              
Real estate — residential
    4,277,926       4,385,847       514,978       3,998,773       54,472       27,140  
Real estate — commercial
    19,164,547       19,705,512       3,186,738       17,998,970       3,289       1,648  
 
Total
  $ 28,675,563     $ 30,479,748     $ 5,485,914     $ 26,056,617     $ 62,161     $ 30,996  
 
Total impaired loans
  $ 56,091,828     $ 61,807,798     $ 5,485,914     $ 51,800,485     $ 104,322     $ 38,010  
 
 
                                               
At December 31, 2010
                                               
With no related allowance recorded:
                                               
Commercial, financial and Agricultural
  $ 441,861     $ 629,296     $                          
Real estate — construction residential
    1,769,622       2,355,936                                
Real estate — construction commercial
    8,297,388       9,393,368                                
Real estate — residential
    2,463,735       2,950,560                                
Real estate — commercial
    12,939,973       14,869,833                                
Consumer
    125,858       132,688                                
 
Total
  $ 26,038,437     $ 30,331,681     $                          
 
With an allowance recorded:
                                               
Commercial, financial and Agricultural
  $ 3,217,995     $ 3,260,009     $ 1,737,159                          
Real estate — construction residential
    1,816,276       1,848,593       1,552,406                          
Real estate — construction commercial
    3,485,517       4,740,517       201,147                          
Real estate — residential
    5,576,292       5,669,041       1,117,141                          
Real estate — commercial
    16,136,025       16,215,862       1,767,893                          
 
Total
  $ 30,232,106     $ 31,734,022     $ 6,375,746                          
 
Total impaired loans
  $ 56,270,543     $ 62,065,703     $ 6,375,746                          
 

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
     It is our Company’s policy to discontinue the accrual of interest income on loans when management believes that the borrower’s financial condition, after consideration of business conditions and collection efforts, is such that the collection of interest is doubtful, or upon which principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.
     Age Analysis of Past Due and Non-Accrual Loans
                                         
    Current or           90 Days        
    Less Than           Past Due        
    30 Days   30 - 89 Days   And Still        
    Past Due   Past Due   Accruing   Non-Accrual   Total
 
June 30, 2011
                                       
Commercial, Financial, and Agricultural
  $ 123,586,765     $ 737,482     $     $ 3,303,406     $ 127,627,653  
Real Estate Construction — Residential
    27,814,284                   831,853       28,646,137  
Real Estate Construction — Commercial
    39,833,780       8,679             10,994,278       50,836,737  
Real Estate Mortgage — Residential
    197,059,787       1,391,903       98,631       4,516,611       203,066,932  
Real Estate Mortgage — Commercial
    398,975,412       270,671             29,725,518       428,971,601  
Installment and Other Consumer
    28,977,502       499,973       91       172,191       29,649,757  
 
Total
  $ 816,247,530     $ 2,908,708     $ 98,722     $ 49,543,857     $ 868,798,817  
 
 
                                       
December 31, 2010
                                       
Commercial, Financial, and Agricultural
  $ 127,315,586     $ 534,865     $     $ 3,532,016     $ 131,382,467  
Real Estate Construction — Residential
    28,200,876       47,400             3,585,898       31,834,174  
Real Estate Construction — Commercial
    45,511,088       474,934             10,066,888       56,052,910  
Real Estate Mortgage — Residential
    199,386,784       2,775,654             5,672,050       207,834,488  
Real Estate Mortgage — Commercial
    409,906,845       1,557,599             27,604,178       439,068,622  
Installment and Other Consumer
    31,784,217       356,812       32,916       125,857       32,299,802  
 
Total
  $ 842,105,396     $ 5,747,264     $ 32,916     $ 50,586,887     $ 898,472,463  
 
     The following table provides information about the credit quality of the loan portfolio using our Company’s internal rating system reflecting management’s risk assessment. Loans are placed on watch status when (1) one or more weaknesses which could jeopardize timely liquidation exits; or (2) the margin or liquidity of an asset is sufficiently tenuous that adverse trends could result in a collection problem. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that our Company may sustain some loss if the deficiencies are not corrected. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists such that payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection.

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
                                                         
            Real Estate   Real Estate   Real Estate   Real Estate        
            Construction -   Construction -   Mortgage -   Mortgage -   Installment and    
    Commercial   Residential   Commercial   Residential   Commercial   other Consumer   Total
 
At June 30, 2011
                                                       
Watch
  $ 22,626,495     $ 8,109,338     $ 9,392,484     $ 13,097,712     $ 30,453,623     $ 419,571     $ 84,099,223  
Substandard
    4,412,920       829,405       1,991,878       4,163,925       14,582,568       411,775       26,392,471  
Non-accrual
    3,303,406       831,853       10,994,278       4,516,611       29,725,518       172,191       49,543,857  
 
Total
  $ 30,342,821     $ 9,770,596     $ 22,378,640     $ 21,778,248     $ 74,761,709     $ 1,003,537     $ 160,035,551  
 
 
                                                       
At December 31, 2010
                                                       
Watch
  $ 21,981,367     $ 7,519,394     $ 9,400,584     $ 9,184,659     $ 35,050,206     $ 564,489     $ 83,700,699  
Substandard
    2,840,703       757,637       4,242,934       4,423,219       12,635,163       441,514       25,341,170  
Non-accrual
    3,532,016       3,585,898       10,066,888       5,672,050       27,604,178       125,857       50,586,887  
 
Total
  $ 28,354,086     $ 11,862,929     $ 23,710,406     $ 19,279,928     $ 75,289,547     $ 1,131,860     $ 159,628,756  
 
(3)   Real Estate Acquired in Settlement of Loans
                 
    June 30,   December 31,
    2011   2010
 
Commercial
  $     $ 67,421  
Real estate mortgage — construction
    12,803,203       13,229,199  
Real estate mortgage
    9,149,815       6,254,221  
 
Total
  $ 21,953,018     $ 19,550,841  
Less valuation allowance for other real estate owned
    (6,536,607 )     (6,158,433 )
 
Total
  $ 15,416,411     $ 13,392,408  
 
 
               
Balance at December 31, 2010
          $ 19,550,841  
Additions, net of charge-offs
            5,583,613  
Proceeds from sales
            (3,123,105 )
Net loss on sales
            (58,331 )
 
Total other real estate owned
          $ 21,953,018  
Less valuation allowance for other real estate owned
            (6,536,607 )
 
Balance at June 30, 2011
          $ 15,416,411  
 
     Activity in the valuation allowance for other real estate owned in settlement of loans for the three and six months ended June 30, 2011 and 2010, respectively, is summarized as follows:
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   2011   2010
 
Balance, beginning of period
  $ 6,319,098     $     $ 6,158,433     $  
Provision for other real estate owned
    280,140             440,805        
Charge-offs
    (62,631 )           (62,631 )      
 
Balance, end of period
  $ 6,536,607     $     $ 6,536,607     $  
 

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(4)   Investment Securities
     A summary of investment securities by major category, at fair value, consisted of the following at June 30, 2011 and December 31, 2010.
                 
    June 30,   December 31,
    2011   2010
 
U.S. treasury
  $ 2,048,203     $ 1,027,891  
Government sponsored enterprises
    67,212,769       53,341,551  
Asset-backed securities
    118,939,994       90,176,241  
Obligations of states and political subdivisions
    31,496,317       34,431,867  
 
Total available for sale securities
  $ 219,697,283     $ 178,977,550  
 
     All of our Company’s investment securities are classified as available for sale, as discussed in more detail below. Asset backed securities include agency mortgage-backed securities, which are guaranteed by government sponsored entities and government agencies such as the FHLMC, FNMA and GNMA.
     Investment securities which are classified as restricted equity securities primarily consist of Federal Home Loan Bank Stock and our Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of $5,064,850 and $6,141,950, as of June 30, 2011 and December 31, 2010, respectively.
     The amortized cost and fair value of debt securities classified as available-for-sale at June 30, 2011 and December 31, 2010 are as follows:
                                 
            Gross   Gross    
    Amortized   unrealized   unrealized    
    cost   gains   losses   Fair value
 
June 30, 2011
                               
U.S Treasury
  $ 1,999,561     $ 48,642     $     $ 2,048,203  
Government sponsored enterprises
    66,792,397       524,211       103,839       67,212,769  
Asset-backed securities
    115,927,700       3,093,068       80,775       118,939,993  
Obligations of states and political subdivisions
    30,609,854       907,160       20,696       31,496,318  
 
Total available for sale securities
  $ 215,329,512     $ 4,573,081     $ 205,310     $ 219,697,283  
 
 
                               
December 31, 2010
                               
U.S Treasury
  $ 999,823     $ 28,068     $     $ 1,027,891  
Government sponsored enterprises
    53,516,545       327,051       502,045       53,341,551  
Asset-backed securities
    88,634,760       1,905,377       363,896       90,176,241  
Obligations of states and political subdivisions
    34,146,782       555,240       270,155       34,431,867  
 
Total available for sale securities
  $ 177,297,910     $ 2,815,736     $ 1,136,096     $ 178,977,550  
 

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
     The amortized cost and fair value of debt securities classified as available-for-sale at June 30, 2011, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
                 
    Amortized   Fair
    cost   value
 
Due in one year or less
  $ 3,794,942     $ 3,832,846  
Due after one year through five years
    75,790,661       76,597,778  
Due after five years through ten years
    17,310,704       17,771,625  
Due after ten years
    2,505,505       2,555,041  
 
 
    99,401,812       100,757,290  
Asset-backed securities
    115,927,700       118,939,993  
 
Total
  $ 215,329,512     $ 219,697,283  
 
     Debt securities with carrying values aggregating approximately $170,372,000 and $148,099,000 at June 30, 2011 and December 31, 2010, respectively, were pledged to secure public fund deposits, federal funds purchased lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve, and for other purposes as required or permitted by law.
     Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010, were as follows:
                                                         
    Less than 12 months   12 months or more           Total
                                    Number of        
    Fair   Unrealized   Fair   Unrealized   Investment   Fair   Unrealized
At June 30, 2011   Value   Losses   Value   Losses   Positions   Value   Losses
 
Government sponsored enterprises
  $ 13,295,901     $ (103,839 )   $     $       12     $ 13,295,901       (103,839 )
Asset-backed securities
    10,382,348       (80,775 )                 10       10,382,348     $ (80,775 )
Obligations of states and political subdivisions
    1,122,000       (20,696 )                 6       1,122,000       (20,696 )
 
 
  $ 24,800,249     $ (205,310 )   $     $       28     $ 24,800,249     $ (205,310 )
 
                                                         
    Less than 12 months   12 months or more           Total
                                    Number of        
    Fair   Unrealized   Fair   Unrealized   Investment   Fair   Unrealized
At December 31, 2010   Value   Losses   Value   Losses   Positions   Value   Losses
 
Government sponsored enterprises
  $ 20,504,526     $ (502,045 )   $     $       19     $ 20,504,526       (502,045 )
Asset-backed securities
    21,177,793       (363,896 )                 20       21,177,793     $ (363,896 )
Obligations of states and political subdivisions
    8,038,946       (270,155 )                 29       8,038,946       (270,155 )
 
 
  $ 49,721,265     $ (1,136,096 )   $     $       68     $ 49,721,265     $ (1,136,096 )
 
     Our Company’s available for sale portfolio consisted of approximately 358 securities at June 30, 2011. None of these securities had been in the loss position for 12 months or longer. The $205,000 unrealized loss included in other comprehensive income at June 30, 2011 was caused by interest rate fluctuations. Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments were not considered other-than-temporarily impaired.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
     Our Company’s available for sale portfolio consisted of approximately 333 securities at December 31, 2010. None of these securities had been in the loss position for 12 months or longer. The $1,136,000 unrealized loss included in other comprehensive income at December 31, 2010 was caused by interest rate fluctuations. Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments were not considered other-than-temporarily impaired.
     During the six months ended June 30, 2011 and 2010, there were no proceeds from sales of securities and no components of investment securities gains and losses which have been recognized in earnings.
(5)   Intangible Assets
     A summary of other intangible assets at June 30, 2011 and December 31, 2010, respectively is as follows:
                                                 
    June 30, 2011   December 31, 2010
    Gross                   Gross        
    Carrying   Accumulated   Net   Carrying   Accumulated   Net
    Amount   Amortization   Amount   Amount   Amortization   Amount
 
Amortizable intangible assets:
                                               
Core deposit intangible
  $ 4,795,224     $ (4,044,428 )   $ 750,796     $ 7,060,224     $ (6,082,715 )   $ 977,509  
Mortgage servicing rights
    3,084,915       (813,000 )     2,271,915       3,067,368       (711,378 )     2,355,990  
 
Total intangible assets
  $ 7,880,139     $ (4,857,428 )   $ 3,022,711     $ 10,127,592     $ (6,794,093 )   $ 3,333,499  
 
     Changes in the net carrying amount of other intangible assets for the three months ended June 30, 2011 are as follows:
                 
    Core Deposit   Mortgage
    Intangible   Servicing
    Asset   Rights
 
Balance at December 31, 2010
  $ 977,509     $ 2,355,990  
Additions
          220,554  
Amortization
    (226,713 )     (304,629 )
 
Balance at June 30, 2011
  $ 750,796     $ 2,271,915  
 
     Mortgage servicing rights (MSRs) are amortized over the shorter of 7 years or the life of the loan. They are periodically reviewed for impairment and if impairment is indicated, recorded at fair value. At June 30, 2011 and December 31, 2010, no temporary impairment was recognized. The fair value of MSRs is based on the present value of expected cash flows, as further discussed in Fair Value of Financial Instruments. Mortgage loans serviced for others totaled approximately $300,040,000 and $298,325,000 at June 30, 2011 and December 31, 2010, respectively. Included in other noninterest income were real estate servicing fees for the three months ended June 30, 2011 and 2010 of $211,000, and $204,000, respectively, and for the six months ended June 30, 2011 and 2010 of $390,000 and $396,000, respectively.

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
     The aggregate amortization expense of intangible assets subject to amortization for the three and six months ended June 30, 2011 and 2010 is as follows:
                                 
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
Aggregate amortization expense   2011   2010   2011   2010
 
Core deposit intangible asset
  $ 108,687     $ 139,906     $ 226,713     $ 290,425  
Mortgage servicing rights
    155,390       152,102       304,629       286,976  
     Our Company’s amortization expense on intangible assets in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions. The following table shows the estimated future amortization expense based on existing asset balances and the interest rate environment as of June 30, 2011 for the next five years:
                 
    Core Deposit   Mortgage
    Intangible   Servicing
    Asset   Rights
 
2011
  $ 208,050     $ 230,000  
2012
    408,062       435,000  
2013
    134,684       354,000  
2014
          288,000  
2015
          235,000  
(6)   Income Taxes
     Our Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. At June 30, 2011 and December 31, 2010, our Company had $221,000 of gross unrecognized tax benefits that if recognized would affect the effective tax rate. Our Company believes that during 2011 it is reasonably possible that there would be a reduction of $221,000 in gross unrecognized tax benefits as a result of the lapse of statute of limitations for the 2007 tax year. At June 30, 2011, total interest accrued on unrecognized tax benefits was approximately $40,000. As of June 30, 2011, there were no federal or state income tax examinations in process.
     The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not our Company will realize the benefits of these temporary differences at June 30, 2011 and, therefore, has not established a valuation reserve.
     Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 32.0% and 28.5% for the three months ended June 30, 2011 and 2010, and 32.0% and 28.1% for the six months ended June 30, 2011 and 2010, respectively. The effective tax rate for the three and six months ended June 30, 2011 reflects a decrease in tax-exempt income as a percentage of total taxable income.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7)   Employee Benefit Plans
     Employee benefits charged to operating expenses are summarized in the table below.
                                 
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
 
Payroll taxes
  $ 264,350     $ 283,673     $ 578,879     $ 605,640  
Medical plans
    434,470       393,503       876,789       798,355  
401k match
    67,414       73,776       135,013       153,788  
Pension plan
    227,592       216,298       455,185       432,597  
Profit-sharing
    16,000             39,000       72,470  
Other
    58,405       32,688       99,968       74,016  
 
Total employee benefits
  $ 1,068,231     $ 999,938     $ 2,184,834     $ 2,136,866  
 
     Our Company’s profit-sharing plan includes a matching 401k portion, in which our Company matches the first 3% of eligible employee contributions. Our Company made annual contributions in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for Federal income tax purposes, for each of the years shown. In addition, employees were able to make additional tax-deferred contributions.
     Pension
     Our Company also provides a noncontributory defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under our Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. Our Company made a $554,000 contribution to the defined benefit plan in 2010, and the minimum required contribution for 2011 is estimated to be $997,000. Our Company has contributed $767,000 to the plan for the year.
     The following items are components of net pension cost for the periods indicated:
                 
    Estimated   Actual
    2011   2010
 
Service cost—benefits earned during the year
  $ 930,691     $ 844,178  
Interest costs on projected benefit obligations
    603,903       556,047  
Expected return on plan assets
    (702,852 )     (613,982 )
Amortization of prior service cost
    78,628       78,628  
   
Net periodic pension expense
  $ 910,370     $ 864,871  
 
 
               
Pension expense — three months ended June 30, (actual)
  $ 227,593     $ 216,299  
 
Pension expense — six months ended June 30, (actual)
  $ 455,185     $ 432,597  
 

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(8)   Stock Compensation
     Our Company’s stock option plan provides for the grant of options to purchase up to 506,188 shares of our Company’s common stock to officers and other key employees of our Company and its subsidiaries. All options have been granted at exercise prices equal to fair value and vest over periods ranging from four to five years, except options issued in 2008 to acquire 10,705 shares that vested immediately.
     The following table summarizes our Company’s stock option activity:
                                 
                    Weighted    
            Weighted   Average   Aggregate
    Number   Average   Contractual   Intrinsic
    of   Exercise   Term   Value
    Shares   Price   (in years)   (000)
 
Outstanding at January 1, 2011 *
    260,466     $ 24.44                  
Granted
                           
Exercised
                           
Forfeited
                           
Expired
                           
 
 
                               
Outstanding at June 30, 2011
    260,466     $ 24.44       4.0     $  
 
Exercisable at June 30, 2011
    227,635     $ 24.69       3.7     $  
 
*   Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2011.
     Total stock-based compensation expense for the three months ended June 30, 2011 and 2010, was $12,000 and $19,000, respectively, and for the six months ended June 30, 2011 and 2010 was $34,000 and $48,000, respectively. As of June 30, 2011, the total unrecognized compensation expense related to non-vested stock awards was $123,000 and the related weighted average period over which it is expected to be recognized is approximately three years.
(9)   Comprehensive Income
     Activity in other comprehensive income for the six months ended June 30, 2011 and 2010 is shown in the Consolidated Statements of Stockholders’ Equity and Comprehensive Income. The first component of other comprehensive income is the unrealized holding gains and losses on available for sale securities. Our Company did not have any other-than temporary impairment (OTTI) as required to be reported under current accounting guidance for OTTI on debt securities during the periods reported. Under this guidance, credit-related losses on debt securities with OTTI are recorded in current earnings, while the noncredit- related portion of the overall gain or loss in fair value is recorded in other comprehensive income. The second component of other comprehensive income is pension gains and losses that arise during the period but are not recognized as components of net periodic benefit cost, and corresponding adjustments when these gains and losses are subsequently amortized to net periodic benefit cost.
(10)   Preferred Stock
     On December 19, 2008, our Company announced its participation in the U.S. Treasury Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. This program is designed to attract broad participation by banking institutions to help stabilize the financial system by encouraging lending. Our Company has used the funds received, as discussed below, to continue to provide loans to its customers and to look for ways to deploy additional funds to benefit the communities in our Company’s market area.

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
     Participation in this program included our Company’s issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 276,090 shares of common stock (see below for additional information) to the U.S. Department of Treasury in exchange for $30,255,000. The proceeds received were allocated between the preferred stock and the common stock warrant based upon their relative fair values. This resulted in the recording of a discount on the preferred stock upon issuance that reflects the value allocated to the warrant. The discount on the preferred stock will be accreted over five years, consistent with managements’ estimate of the life of the preferred stock. Such accretion will be treated as additional dividends on the preferred stock. The allocated carrying values of the senior preferred stock and common stock warrant at June 30, 2011 were $29,079,000 and $2,382,000, respectively.
     The preferred shares carry a 5% cumulative dividend for the first five years and 9% thereafter if not redeemed. The preferred shares are redeemable after three years at par plus accrued dividends, or before three years if our Company raises Tier 1 capital in an amount equal to the preferred stock issued. The preferred stock generally does not have any voting rights, subject to an exception in the event our Company fails to pay dividends on the preferred stock for six or more quarterly periods, whether or not consecutive. Under such circumstances, the Treasury Department will be entitled to vote to elect two directors to the board until all unpaid dividends have been paid or declared and set apart for payment. Our Company is prohibited from paying any dividends with respect to shares of common stock unless all accrued and unpaid dividends are paid in full on the senior preferred stock for all past dividend periods. The Treasury Department may also transfer the senior preferred stock to a third party at any time.
     The common stock warrant is exercisable immediately with a ten year term, in whole or in part, at an exercise price of $16.44 per share. The preferred stock and warrant are classified as stockholders’ equity in the consolidated balance sheet and qualify, for regulatory capital purposes, as Tier I capital. For the six months ended June 30, 2011, our Company had declared and paid $756,000 of dividends and amortized $238,000 of accretion of the discount on preferred stock.
(11)   Earnings per Share
     Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the year. The calculations of basic and diluted earnings per share are as follows:

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
                                       
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
 
Basic earnings per common share:
                               
Net income
  $ 1,408,494     $ 782,466     $ 2,362,111     $ 1,276,234  
Less:
                               
Preferred stock dividends
    382,390       382,390       752,173       752,173  
Accretion of discount on preferred stock
    119,118       119,118       238,237       238,237  
 
Net income available to common shareholders
  $ 906,986     $ 280,958     $ 1,371,701     $ 285,824  
 
Basic earnings per share
  $ 0.19     $ 0.06     $ 0.29     $ 0.06  
 
 
                               
Diluted earnings per common share:
                               
 
                               
Net income
  $ 1,408,494     $ 782,466     $ 2,362,111     $ 1,276,234  
Less:
                               
Preferred stock dividends
    382,390       382,390       752,173       752,173  
Accretion of discount on preferred stock
    119,118       119,118       238,237       238,237  
 
Net income available to common shareholders
  $ 906,986     $ 280,958     $ 1,371,701     $ 285,824  
 
Average shares outstanding
    4,652,994       4,652,994       4,652,994       4,652,994  
Effect of dilutive stock options
                       
 
Average shares outstanding including dilutive stock options
    4,652,994       4,652,994       4,652,994       4,652,994  
 
Diluted earnings per share
  $ 0.19     $ 0.06     $ 0.29     $ 0.06  
 
     Under the treasury stock method, outstanding stock options are dilutive when the average market price of our Company’s common stock, when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when our Company has a loss from continuing operations available to common shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.
     The following options to purchase shares during the three and six months ended June 30, 2011 and 2010, respectively, were not included in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
 
Anti-dilutive shares — option shares
    260,466       298,382       260,466       298,382  
Anti-dilutive shares — warrant shares
    276,090       276,090       276,090       276,090  
 

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(12) Fair Value Measurements
     Our Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of the six months ended June 30, 2011 and 2010, there were no transfers into or out of Level 2.
     The fair value hierarchy is as follows:
Level 1 — Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 — Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using our Company’s best information and assumptions that a market participant would consider.
     ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability has significantly decreased and on identifying circumstances when a transaction may not be considered orderly.
     Our Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred.
Valuation methods for instruments measured at fair value on a recurring basis
     Following is a description of our Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:
Available-for-sale securities
     Available-for-sale securities are recorded at fair value on a recurring basis. Available-for-sale securities is the only balance sheet category our Company is required, in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), to carry at fair value on a recurring basis. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, our Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

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Table of Contents

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
                                 
            Fair Value Measurements Using
            Quoted Prices        
            in Active        
            Markets for   Other   Significant
            Identical   Observable   Unobservable
            Assets   Inputs   Inputs
Description   Fair Value   (Level 1)   (Level 2)   (Level 3)
 
June 30, 2011
                               
U.S. treasury
  $ 2,048,203     $     $ 2,048,203     $  
Government sponsored enterprises
    67,212,769             67,212,769        
Asset-backed securities
    118,939,994             118,939,994        
Obligations of states and political subdivisions
    31,496,317             31,496,317        
 
Total
  $ 219,697,283             $ 219,697,283     $  
 
December 31, 2010
                               
U.S. treasury
  $ 1,027,891     $     $ 1,027,891     $  
Government sponsored enterprises
    53,341,551             53,341,551        
Asset-backed securities
    90,176,241             90,176,241        
Obligations of states and political subdivisions
    34,431,867             34,431,867        
 
Total
  $ 178,977,550             $ 178,977,550     $  
 
Valuation methods for instruments measured at fair value on a nonrecurring basis
     Following is a description of our Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:
Impaired Loans
     Our Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of June 30, 2011, our Company identified $28.7 million in impaired loans that had specific allowances for losses aggregating $5.5 million. Related to these loans, there was $3.8 million in charge-offs recorded during 2011.
Other Real Estate Owned and Repossessed Assets
     Other real estate owned and repossessed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. Our Company relies on external appraisals and assessment of property values by our internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
                                         
            Fair Value Measurements Using
            Quoted Prices            
            in Active            
            Markets for   Other   Significant    
            Identical   Observable   Unobservable    
            Assets   Inputs   Inputs   Total Gains
Description   Fair Value   (Level 1)   (Level 2)   (Level 3)   (Losses)*
 
June 30, 2011
                                       
Impaired loans:
                                       
Commercial, financial, & agricultural
  $ 837,514     $     $     $ 837,514     $ (860,168 )
Real estate construction — residential
    126,982                   126,982       (1,493,046 )
Real estate construction — commercial
    2,484,396                   2,484,396        
Real estate mortgage — residential
    3,762,948                   3,762,948       (1,161,539 )
Real estate mortgage — commercial
    15,977,809                   15,977,809       (315,062 )
 
Total
  $ 23,189,649     $     $     $ 23,189,649     $ (3,829,815 )
 
Other real estate owned and repossessed assets
  $ 15,768,518     $     $     $ 15,768,518     $ (1,147,963 )
 
December 31, 2010
                                       
Impaired loans:
                                       
Commercial, financial, & agricultural
  $ 1,480,836     $     $     $ 1,480,836     $ (1,634,544 )
Real estate construction — residential
    263,870                   263,870       (863,399 )
Real estate construction — commercial
    3,284,371                   3,284,371       (4,496,156 )
Real estate mortgage — residential
    4,459,151                   4,459,151       (3,971,927 )
Real estate mortgage — commercial
    14,368,132                   14,368,132       (3,626,892 )
 
Total
  $ 23,856,360     $     $     $ 23,856,360     $ (14,592,918 )
 
Other real estate owned and repossessed assets
  $ 14,009,017     $     $     $ 14,009,017     $ (3,528,011 )
 
*   Total gains (losses) reported for other real estate owned and repossessed assets includes charge offs and net losses taken during the periods reported.
(13) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
Loans
The fair value of loans is estimated based on the discounted value of contractual cash flows. The discount rate is estimated using current offering rates applicable to each category of such financial instruments. The net carrying amount of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.
Investment Securities
A detailed description of the fair value measurement of the debt instruments in the available for sale sections of the investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities.
Federal Funds Sold, Cash, and Due from Banks
For federal funds sold, cash, and due from banks, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Mortgage Servicing Rights
The fair value of mortgage servicing rights is based on the discounted value of contractual cash flows utilizing servicing rate, constant prepayment rate, servicing cost, and discount rate factors.
Accrued Interest Receivable and Payable
For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury
For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.
Other Borrowings
The fair value of subordinated notes and other borrowings, Federal Home Loan borrowings, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of the carrying amounts and fair values of our Company’s financial instruments for the periods stated is as follows:
                                 
    June 30, 2011   December 31, 2010
    Carrying   Fair   Carrying   Fair
    amount   value   amount   value
 
Assets:
                               
Loans
  $ 854,935,767     $ 858,243,000     $ 883,907,596     $ 889,291,000  
Investment in debt securities
    219,697,283       219,697,283       178,977,550       178,977,550  
Federal fund sold and securities purchased under agreements to resell
    171,338       171,338       125,815       125,815  
Cash and due from banks
    35,068,582       35,068,582       50,853,985       50,853,985  
Mortgage servicing rights
    2,271,915       2,942,000       2,355,990       3,027,000  
Accrued interest receivable
    5,672,339       5,672,339       5,733,684       5,733,684  
 
 
  $ 1,117,817,224     $ 1,121,794,542     $ 1,121,954,620     $ 1,128,009,034  
 
Liabilities:
                               
Deposits:
                               
Demand
  $ 148,139,814     $ 148,139,814     $ 137,749,571     $ 137,749,571  
NOW
    176,363,696       176,363,696       160,225,356       160,225,356  
Savings
    61,188,402       61,188,402       54,722,129       54,722,129  
Money market
    148,321,087       148,321,087       164,190,054       164,190,054  
Time
    428,059,598       435,753,000       429,775,546       437,996,000  
Federal funds purchased and securities sold under agreements to repurchase
    28,689,667       28,689,667       30,068,453       30,068,453  
Subordinated notes
    49,486,000       21,366,000       49,486,000       21,105,000  
Other borrowings
    43,656,668       45,224,000       66,985,978       69,329,000  
Accrued interest payable
    1,690,994       1,690,994       1,491,503       1,491,503  
 
 
  $ 1,085,595,926     $ 1,066,736,660     $ 1,094,694,590     $ 1,076,877,066  
 
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. Our Company believes such commitments have been made on terms which are competitive in the markets in which it operates.
Limitations
The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. Because no market exists for a portion of our Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.

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HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(14) Pending Litigation
     Our Company and its subsidiaries are defendants in various legal actions incidental to our Company’s past and current business activities. At June 30, 2011 and December 31, 2010, our Company’s consolidated balance sheets included liabilities for these legal actions of $265,000 and $275,000, respectively. Based on our Company’s analysis, and considering the inherent uncertainties associated with litigation, we do not believe that it is reasonably possible that these legal actions will materially adversely affect our Company’s consolidated financial statements or results of operations in the near term.
     On November 18, 2010, a suit was filed against Hawthorn Bank in the Circuit Court of Jackson County for the Eastern Division of Missouri by a customer alleging that the fees associated with the Bank’s automated overdraft program in connection with its debit card and ATM cards constitute unlawful interest in violation of Missouri’s usury laws. The suit seeks class-action status for Bank customers who have paid overdraft fees on their checking accounts. The Bank has filed for a motion to dismiss the suit. At this early stage of the litigation, it is not possible for management of the Bank to determine the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.
     On December 17, 2009, a suit was filed against Hawthorn Bank in Circuit Court of Jackson County for the Eastern Division of Missouri state court by a customer alleging that the Bank had not followed through on its commitment to fund a loan request. A jury found in favor of the customer and as of June 30, 2011 our Company was carrying a liability of $195,000 representing the balance of its estimated obligation. Our Company is currently in the early stages of the appeals process and the probable outcome is presently not determinable.
     On May 10, 2011, a suit was filed against Hawthorn Bank in the Circuit Court of Cole County by a customer alleging that the Bank had not properly disclosed information in a sale of foreclosed property. Our Company is carrying a liability of $70,000 representing the balance of its estimated obligation.

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Item 2 Management’s Discussion and Analysis of Financial Condition
And Results of Operations
Forward-Looking Statements
          This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of our Company and its subsidiaries, including, without limitation:
    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.
          Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
    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 our Company and its acquisition targets may be greater than expected,
 
    legislative or regulatory changes may adversely affect the business in which our Company and its subsidiaries are engaged, including those discussed below in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and
 
    changes may occur in the securities markets.
          The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, was enacted on July 21, 2010. Provisions of the Act address many issues including, but not limited to, capital, interchange fees, compliance and risk management, debit card overdraft fees, the establishment of a new consumer regulator, healthcare, incentive compensation, expanded disclosures and corporate governance. While many of the new regulations under the Act are expected to primarily impact financial institutions with assets greater than $10 billion, our Company expects these new regulations could reduce our revenues and increase our expenses in the future. Management is currently assessing the impact of the Act and of the regulations anticipated to be promulgated under the Act.
          We have described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 and in other reports that we file with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that we have not identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.
Overview
          Our Company, Hawthorn Bancshares, Inc., is a community-based, financial institution bank holding company headquartered in Lee’s Summit, Missouri. Our Company was incorporated under the laws of the State of Missouri on October 23, 1992 as Exchange National Bancshares, Inc. and changed its name to Hawthorn Bancshares, Inc. in August 2007. Our Company owns all of the issued and outstanding capital stock of Union State Bancshares, Inc., which in turn owns all of the issued and outstanding capital stock of Hawthorn Bank. Our Company conducts operations primarily through our Bank. Our Bank, a state charted bank, had $1.20 billion in assets at June 30, 2011, and 24 full-service banking offices, including its principal office in Jefferson City, Missouri. Our Bank is committed to providing the most up-to-date financial products and services and delivering these products and services to our market area with superior customer service.
          Through our branch network, our Bank provides a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. We also provide a wide range of lending

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services, including real estate, commercial, installment, and other consumer loans. Other financial services that we provide include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The geographic areas in which we provide our products and services include the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. The products and services are offered to customers primarily within these geographical areas.
          Our Company’s primary source of revenue is net interest income derived primarily from lending and deposit taking activities. A secondary source of revenue is investment income. Our Company also derives income from trust, brokerage, credit card and mortgage banking activities and service charge income.
CRITICAL ACCOUNTING POLICIES
          The following accounting policies are considered most critical to the understanding of our Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such polices affect our reported and expected financial results.
Allowance for Loan Losses
          We have identified the accounting policy related to the allowance for loan losses as critical to the understanding of our Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on our business operations is discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of our Company.
Other Real Estate Owned and Repossessed Assets
          Other real estate owned and repossessed assets consist of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the lower of the loan balance or fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. Our Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The write-downs are recorded as other real estate expense. Our Company establishes a valuation allowance related to other real estate owned on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the “cost” of a parcel of other real estate.
Valuation of Investment Securities
          At the time of purchase, debt securities are classified into one of two categories: available-for-sale or held-to-maturity. Held-to-maturity securities are those securities which our Company has the positive intent and ability to hold until maturity. All debt securities not classified as held-to-maturity are classified as available-for-sale. Our Company’s securities are classified as available-for-sale and are carried at fair value. Changes in fair value, excluding certain losses associated with other-than-temporary impairment, are reported in other comprehensive income, net of taxes, a component of stockholders’ equity. Securities are periodically evaluated for other-than-temporary impairment in accordance with guidance provided in the FASB ASC Topic 320, Investments — Debt and Equity Securities. For those securities with other-than-temporary impairment, the entire loss in fair value is required to be recognized in current earnings if our Company intends to sell the securities or believes it more likely than not that it will be required to sell the security before the anticipated recovery.

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If neither condition is met, but our Company does not expect to recover the amortized cost basis, our Company determines whether a credit loss has occurred, which is then recognized in current earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
Premiums and discounts are amortized using the interest method over the lives of the respective securities, with consideration of historical and estimated prepayment rates for mortgage-backed securities, as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings based on the specific identification method for determining the cost of securities sold.
Income Taxes
          Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing our Company’s future tax consequences of events that have been recognized in our consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forward, and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, our Company would adjust the recorded value of our deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Given the sensitivity of our Company’s financial performance to changes in net interest margins and increasing reserves associated with loan losses and other real estate owned, sustained negative financial performance could provide sufficient negative evidence to necessitate a deferred tax asset valuation allowance. In addition, our Company is subject to the continuous examination of our tax returns by the Internal Revenue Service and other taxing authorities. Our Company accrues for interest related to income taxes in income tax expense. Total interest expense recognized was $9,000 and $19,000 as of June 30, 2011 and 2010, respectively. As of June 30, 2011 and December 31, 2010, total accrued interest was $40,000 and $31,000, respectively.

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SELECTED CONSOLIDATED FINANCIAL DATA
          The following table presents selected consolidated financial information for our Company as of and for each of the three and six months ended June 30, 2011 and 2010, respectively. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of our Company, including the accompanying notes, presented elsewhere herein.
Selected Financial Data
                                 
    Three Months   Six Months
    Ended   Ended
    June 30,   June 30,
(In thousands, except per share data)   2011   2010   2011   2010
 
Per Share Data
                               
 
Basic earnings per common share
  $ 0.19     $ 0.06     $ 0.29     $ 0.06  
Diluted earnings per common share
    0.19       0.06       0.29       0.06  
Dividends paid on preferred stock
    378       378       756       756  
Amortization of discount on preferred stock
    119       119       238       238  
Dividends paid on common stock
    223       473       447       946  
Book value per common share
                    16.18       17.24  
Market price per common share
                    8.27       11.59  
 
Selected Ratios
                               
 
(Based on average balance sheets)
                               
Return on average total assets
    0.47 %     0.25 %     0.40 %     0.21 %
Return on average common stockholders’ equity
    4.93 %     1.41 %     3.75 %     0.72 %
Average common stockholders’ equity to average total assets
    6.17 %     6.39 %     6.14 %     6.38 %
(Based on end-of-period data)
                               
Efficiency ratio (1)
    69.51 %     76.08 %     72.12 %     75.15 %
Period-end common stockholders’ equity to period-end assets
                    6.30 %     6.47 %
Period-end stockholders’ equity to period-end assets
                    8.73 %     8.78 %
Total risk-based capital ratio
                    17.54       17.07  
Tier 1 risk-based capital ratio
                    14.76       14.54  
Leverage ratio
                    11.31       11.31  
 
(1)   Efficiency ratio is calculated as non-interest expense as a percent of revenue. Total revenue includes net interest and non-interest income.

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RESULTS OF OPERATIONS ANALYSIS
          Our Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, our Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.
                                                                 
    Three months ended   Six months ended
    June 30,   June 30,
(Dollars in thousands)   2011   2010   $ Change   % Change   2011   2010   $ Change   % Change
 
Net interest income
  $ 10,782     $ 11,114     $ (332 )   $ (3.0 )   $ 21,263     $ 21,425     $ (162 )   $ (0.8 )%
Provision for loan losses
    1,883       2,150       (267 )     (12.4 )     3,633       4,655       (1,022 )     (22.0 )
Noninterest income
    2,178       2,450       (272 )     (11.1 )     4,231       4,455       (224 )     (5.0 )
Noninterest expense
    9,008       10,320       (1,312 )     (12.7 )     18,386       19,450       (1,064 )     (5.5 )
Income before income taxes
    2,069       1,094       975       89.1       3,474       1,775       1,699       95.7  
 
Income tax expense
    661       312       349       111.9       1,112       499       613       122.8  
 
Net income
  $ 1,408     $ 782     $ 626     $ 80.1     $ 2,362     $ 1,276     $ 1,086     $ 85.1 %
 
Less: preferred dividends
    382       382                   752       752              
and accretion of discount
    119       119                   238       238              
 
Net income available to common shareholders
  $ 907     $ 281     $ 626     $ 80.1     $ 1,372     $ 286     $ 1,086     $ 85.1 %
 
          Our Company’s consolidated net income of $1,408,000 for the three months ended June 30, 2011 increased $626,000 compared to net income of $782,000 for the three months ended June 30, 2010. Our Company recorded preferred stock dividends and accretion on preferred stock of $501,000 for the three months ended June 30, 2011, resulting in $907,000 of net income available for common shareholders compared to net income of $281,000 for the three months ended June 30, 2010. Diluted earnings per share increased from $0.06 per common share to $0.19 per common share. The provision for loan losses decreased $267,000, or 12.4%, from June 30, 2010 to June 30, 2011 and noninterest expense decreased $1,312,000, or 12.7%. Other real estate expenses and impairment losses incurred on foreclosed properties decreased from $1,506,000 for the three months ended June 30, 2010 to $550,000 for the three months ended June 30, 2011. Our Company’s net interest income, on a tax equivalent basis, decreased $341,000, or 3.0%, to $10,935,000 for the three months ended June 30, 2011 compared to $11,276,000 for the three months ended June 30, 2010 primarily due to a $56,916,000 decrease in average earning assets. The annualized return on average assets was 0.47%, the annualized return on average common stockholders’ equity was 4.93%, and the efficiency ratio was 69.5% for the three months ended June 30, 2011. Net interest margin increased from 3.88% to 3.95%.
          Our Company’s consolidated net income of $2,362,000 for the six months ended June 30, 2011 increased $1,086,000 compared to net income of $1,276,000 for the six months ended June 30, 2010. Our Company recorded preferred stock dividends and accretion on preferred stock of $990,000 for the six months ended June 30, 2011, resulting in $1,372,000 of net income available for common shareholders compared to net income of $286,000 for the six months ended June 30, 2010. Diluted earnings per share increased from $0.06 per common share to $0.29 per common share. Our Company’s earnings positively reflected a decrease in other real estate expense and impairment expenses included in noninterest expense from $1,041,000 for the six months ended June 30, 2011 compared to $2,013,000 for the six months ended June 30, 2010. Although the provision for loan losses decreased $1,022,000, or 22.0%, from June 30, 2010 to June 30, 2011, net income continued to be negatively impacted by the higher provisions experienced by our Company during this current economy. Our Company’s net interest income, on a tax equivalent basis, decreased $197,000, or 1.0%, to $21,575,000 for the six months ended June 30, 2011 compared to $21,772,000 for the six months ended June 30, 2010 primarily due to a $56,219,000 decrease in average earning assets. The annualized return on average assets was 0.40%, the annualized return on average common stockholders’ equity was 3.75%, and the efficiency ratio was 72.1% for the six months ended June 30, 2011. Net interest margin increased from 3.74% to 3.90%.
          Total assets at June 30, 2011 were $1,194,707,000 compared to $1,200,172,000 at December 31, 2010, a decrease of $5,465,000, or 0.5%. On July 1, 2011, our Company distributed a four percent stock dividend for the second consecutive year to common shareholders of record at the close of business May 12, 2011. For all periods presented, share information, including basic and diluted earnings per share, have been adjusted retroactively to reflect the stock dividend.

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Average Balance Sheets
          The following tables present average balance sheets, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three and six month periods ended June 30, 2011 and June 30, 2010.
                                                 
    The Three Months Ended June 30,
(Dollars In thousands)   2011   2010
            Interest   Rate           Interest   Rate
    Average   Income/   Earned/   Average   Income/   Earned/
    Balance   Expense(1)   Paid(1)   Balance   Expense(1)   Paid(1)
 
ASSETS
                                               
Loans: (2) (4)
                                               
Commercial
  $ 127,749     $ 1,754       5.51 %   $ 144,193     $ 2,016       5.61 %
Real estate construction — residential
    29,118       436       6.01       39,211       506       5.18  
Real estate construction — commercial
    51,659       562       4.36       77,201       774       4.02  
Real estate mortgage — residential
    202,758       2,898       5.73       229,888       3,223       5.62  
Real estate mortgage — commercial
    430,919       5,842       5.44       435,181       6,422       5.92  
Consumer
    30,004       527       7.05       35,876       723       8.08  
Investment in securities: (3)
                                               
U.S. treasury
    1,869       8       1.72       1,000       5       2.01  
Government sponsored enterprises
    68,494       330       1.93       45,209       312       2.77  
Asset backed securities
    116,684       994       3.42       84,481       786       3.73  
State and municipal
    31,266       389       4.99       31,882       441       5.55  
Restricted Investments
    5,267       41       3.12       6,247       35       2.25  
Federal funds sold
    165                   145              
Interest bearing deposits in other financial institutions
    13,522       12       0.36       35,876       22       0.25  
 
Total interest earning assets
    1,109,474       13,793       4.99       1,166,390       15,265       5.25  
All other assets
    99,251                       96,857                  
Allowance for loan losses
    (12,773 )                     (13,835 )                
 
Total assets
  $ 1,195,952                     $ 1,249,412                  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
NOW accounts
  $ 184,459     $ 258       0.56 %   $ 179,887     $ 257       0.57 %
Savings
    60,502       35       0.23       52,789       32       0.24  
Money market
    151,436       154       0.41       168,671       265       0.63  
Time deposits of $100,000 and over
    128,363       433       1.35       131,508       651       1.99  
Other time deposits
    295,426       1,316       1.79       320,546       1,851       2.32  
 
Total time deposits
    820,186       2,196       1.07       853,401       3,056       1.44  
Federal funds purchased and securities sold under agreements to repurchase
    27,574       13       0.19       33,023       19       0.23  
Subordinated notes
    49,486       323       2.62       49,486       323       2.62  
Other borrowed money
    47,984       326       2.73       68,575       591       3.46  
 
Total interest bearing liabilities
    945,230       2,858       1.21       1,004,485       3,989       1.59  
Demand deposits
    142,363                       129,448                  
Other liabilities
    5,509                       7,145                  
 
Total liabilities
    1,093,102                       1,141,078                  
Stockholders’ equity
    102,850                       108,334                  
 
Total liabilities and stockholders’ equity
  $ 1,195,952                     $ 1,249,412                  
 
Net interest income (FTE)
          $ 10,935                     $ 11,276          
 
Net interest spread
                    3.78 %                     3.66 %
Net interest margin
                    3.95 %                     3.88 %
 
(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 $152,000 and $162,000 for the three months ended June 30, 2011 and 2010, respectively.
 
(2)   Non-accruing loans are included in the average amounts outstanding.
 
(3)   Average balances based on amortized cost.
 
(4)   Fees and costs on loans are included in interest income.

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    The Six Months Ended June 30,
(Dollars In thousands)   2011   2010
            Interest   Rate           Interest   Rate
    Average   Income/   Earned/   Average   Income/   Earned/
    Balance   Expense(1)   Paid(1)   Balance   Expense(1)   Paid(1)
 
ASSETS
                                               
Loans: (2) (4)
                                               
Commercial
  $ 128,364     $ 3,491       5.48 %   $ 146,211     $ 4,010       5.53 %
Real estate construction — residential
    30,709       853       5.60       38,979       1,015       5.25  
Real estate construction — commercial
    53,463       1,166       4.40       77,234       1,431       3.74  
Real estate mortgage — residential
    204,044       5,813       5.75       230,817       6,473       5.66  
Real estate mortgage — commercial
    431,838       11,950       5.58       441,870       12,766       5.83  
Consumer
    30,383       1,062       7.05       36,135       1,418       7.91  
Investment in securities: (3)
                                               
U.S. treasury
    1,451       13       1.81       542       5       1.86  
Government sponsored enterprises
    65,685       679       2.08       45,670       645       2.85  
Asset backed securities
    108,801       1,784       3.31       80,971       1,505       3.75  
State and municipal
    32,427       608       3.78       34,294       934       5.49  
Restricted Investments
    5,546       84       3.05       6,486       85       2.64  
Federal funds sold
    149                   169              
Interest bearing deposits in other financial institutions
    23,721       32       0.27       33,422       36       0.22  
 
Total interest earning assets
    1,116,581       27,535       4.97       1,172,800       30,323       5.21  
All other assets
    99,110                       95,365                  
Allowance for loan losses
    (13,670 )                     (14,377 )                
 
Total assets
  $ 1,202,021                     $ 1,253,788                  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
NOW accounts
  $ 187,155     $ 534       0.58 %   $ 178,321     $ 533       0.60 %
Savings
    58,838       70       0.24       51,047       64       0.25  
Money market
    154,636       328       0.43       169,081       588       0.70  
Time deposits of $100,000 and over
    125,909       896       1.44       133,827       1,720       2.59  
Other time deposits
    298,819       2,738       1.85       323,733       3,491       2.17  
 
Total time deposits
    825,357       4,566       1.12       856,009       6,396       1.51  
Federal funds purchased and securities sold under agreements to repurchase
    28,776       26       0.18       33,377       40       0.24  
Subordinated notes
    49,486       643       2.62       49,486       848       3.46  
Other borrowed money
    52,432       725       2.79       73,081       1,267       3.50  
 
Total interest bearing liabilities
    956,051       5,960       1.26       1,011,953       8,551       1.70  
Demand deposits
    138,306                       126,290                  
Other liabilities
    4,974                       7,108                  
 
Total liabilities
    1,099,331                       1,145,351                  
Stockholders’ equity
    102,690                       108,437                  
 
Total liabilities and stockholders’ equity
  $ 1,202,021                     $ 1,253,788                  
 
Net interest income (FTE)
          $ 21,575                     $ 21,772          
 
Net interest spread
                    3.71 %                     3.51 %
Net interest margin
                    3.90 %                     3.74 %
 
(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 $312,000 and $347,000 for the six months ended June 30, 2011 and 2010, respectively.
 
(2)   Non-accruing loans are included in the average amounts outstanding.
 
(3)   Average balances based on amortized cost.
 
(4)   Fees and costs on loans are included in interest income.

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Comparison of the three and six months ended June 30, 2011 and 2010, respectively.
          Financial results for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 included a decrease in net interest income, on a tax equivalent basis, of $341,000, or 3.0%, and $197,000, or 1.0%, respectively. Average interest-earning assets decreased $56,916,000, or 4.9% to $1,109,474,000 for the three months ended June 30, 2011 compared to $1,166,390,000 for the three months ended June 30, 2010 and average interest bearing liabilities decreased $59,255,000, or 5.9%, to $945,230,000 for the three months ended June 30, 2011 compared to $1,004,485,000 for the three months ended June 30, 2010. Average interest-earning assets decreased $56,219,000, or 4.8% to $1,116,581,000 for the six months ended June 30, 2011 compared to $1,172,800,000 for the six months ended June 30, 2010 and average interest bearing liabilities decreased $55,902,000, or 5.5%, to $956,051,000 for the six months ended June 30, 2011 compared to $1,011,953,000 for the six months ended June 30, 2010.
          Average loans outstanding decreased $89,343,000 or 9.3% to $872,207,000 for the three months ended June 30, 2011 compared to $961,550,000 for the three months ended June 30, 2010. Average loans outstanding decreased $92,445,000 or 9.5% to $878,801,000 for the six months ended June 30, 2011 compared to $971,246,000 for the six months ended June 30, 2010. See the “Lending and Credit Management” section of this discussion for further discussion of changes in the composition of our lending portfolio.
The following is a summary of the changes in average loan balance by major class within our Company’s loan portfolio:
                                                                 
    Three months ended   Six months ended
    June 30,   June 30,
(Dollars in thousands)   2011   2010   $ Change%   Change   2011   2010   $ Change   %Change
 
Average loans:
                                                               
Commercial
  $ 127,749     $ 144,193     $ (16,444 )     (11.4 )%   $ 128,364     $ 146,211     $ (17,847 )     (12.2 )%
Real estate construction — residential
    29,118       39,211       (10,093 )     (25.7 )     30,709       38,979       (8,270 )     (21.2 )
Real estate construction — commercial
    51,659       77,201       (25,542 )     (33.1 )     53,463       77,234       (23,771 )     (30.8 )
Real estate mortgage — residential
    202,758       229,888       (27,130 )     (11.8 )     204,044       230,817       (26,773 )     (11.6 )
Real estate mortgage — commercial
    430,919       435,181       (4,262 )     (1.0 )     431,838       441,870       (10,032 )     (2.3 )
Consumer
    30,004       35,876       (5,872 )     (16.4 )     30,383       36,135       (5,752 )     (15.9 )
 
Total
  $ 872,207     $ 961,550     $ (89,343 )     (9.3 )%   $ 878,801     $ 971,246     $ (92,445 )     (9.5 )%
 
          Average investment securities and federal funds sold increased $55,761,000 or 34.3% to $218,478,000 for the three months ended June 30, 2011 compared to $162,717,000 for the three months ended June 30, 2010. Average investment securities and federal funds sold increased $46,867,000 or 29.0% to $208,513,000 for the six months ended June 30, 2011 compared to $161,646,000 for the six months ended June 30, 2010.
          Average interest bearing deposits in other financial institutions decreased $22,354,000 to $13,522,000 for the three months ended June 30, 2011 compared to $35,876,000 for the three months ended June 30, 2010. Average interest bearing deposits in other financial institutions decreased $9,701,000 to $36,226,000 for the six months ended June 30, 2011 compared to $33,422,000 for the six months ended June 30, 2010. The overall decrease in average interest bearing liabilities was due to a decrease in time deposits and other borrowed money. The decrease in average other borrowed money during 2011 compared to 2010 reflects a net decrease in Federal Home Loan Bank advances. See the Liquidity Management section below for further discussion.
Rate and volume analysis
          The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, indentifying changes related to volumes and rates for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.

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    Three Months Ended June 30,   Six Months Ended June 30,
    2011 vs. 2010   2011 vs. 2010
            Change due to           Change due to
    Total   Average   Average   Total   Average   Average
(Dollars In thousands)   Change   Volume   Rate   Change   Volume   Rate
 
Interest income on a fully taxable equivalent basis:
                                               
Loans: (1) (3)
                                               
Commercial
  $ (262 )   $ (226 )   $ (36 )   $ (519 )   $ (485 )   $ (34 )
Real estate construction — residential
    (70 )     (143 )     73       (162 )     (226 )     64  
Real estate construction — commercial
    (212 )     (273 )     61       (265 )     (490 )     225  
Real estate mortgage — residential
    (325 )     (386 )     61       (660 )     (761 )     101  
Real estate mortgage — commercial
    (580 )     (62 )     (518 )     (816 )     (286 )     (530 )
Consumer
    (196 )     (109 )     (87 )     (356 )     (211 )     (145 )
Investment securities:
                                               
U.S. treasury
    3       3             8       8        
Government sponsored entities
    18       130       (112 )     34       236       (202 )
Asset backed securities
    208       279       (71 )     279       472       (193 )
State and municipal(2)
    (52 )     (9 )     (43 )     (326 )     (49 )     (277 )
Restricted Investments
    6       (6 )     12       (1 )     (13 )     12  
Federal funds sold
                                   
Interest bearing deposits in other financial institutions
    (10 )     (18 )     8       (4 )     (11 )     7  
 
Total interest income
    (1,472 )     (820 )     (652 )     (2,788 )     (1,816 )     (972 )
 
Interest expense:
                                               
NOW accounts
    1       7       (6 )     1       25       (24 )
Savings
    3       5       (2 )     6       10       (4 )
Money market
    (111 )     (25 )     (86 )     (260 )     (46 )     (214 )
Time deposits of 100,000 and over
    (218 )     (16 )     (202 )     (824 )     (97 )     (727 )
Other time deposits
    (535 )     (137 )     (398 )     (753 )     (255 )     (498 )
Federal funds purchased and securities sold under agreements to repurchase
    (6 )     (3 )     (3 )     (14 )     (6 )     (8 )
Subordinated notes
                      (205 )           (205 )
Other borrowed money
    (265 )     (155 )     (110 )     (542 )     (316 )     (226 )
 
Total interest expense
    (1,131 )     (324 )     (807 )     (2,591 )     (685 )     (1,906 )
 
Net interest income on a fully taxable equivalent basis
  $ (341 )   $ (496 )   $ 155     $ (197 )   $ (1,131 )   $ 934  
 
 
(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 $152,000 and $162,000 for the three months ended June 30, 2011 and 2010, respectively, and $312,000 and $347,000 for the six months ended June 30, 2011 and 2010, respectively.
 
(2)   Non-accruing loans are included in the average amounts outstanding.
 
(3)   Fees and costs on loans are included in interest income.
          Net interest income on a fully taxable equivalent basis decreased $341,000, or 3.0%, and 197,000, or 1.0%, to $10,935,000 and $21,575,000 for the three and six months ended June 30, 2011, respectively, compared to $11,276,000 and $21,772,000 for the three and six months ended June 30, 2010, respectively. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) increased from 3.88% for the three months ended June 30, 2010 to 3.95% for the three months ended June 30, 2011 and increased from 3.74% to 3.90% for the six months ended June 30, 2010 compared to the six months ended June 30, 2011, respectively. Our Company’s net interest spread increased to 3.78% for the three months ended June 30, 2011 from 3.66% for the three months ended June 30, 2010 and increased to 3.71% for the six months ended June 30, 2011 compared to 3.51% for the six months ended June 30, 2010.

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     While our Company was able to decrease the rate paid on interest bearing liabilities to 1.21% and 1.26% for the three and six months ended June 30, 2011, respectively, from 1.59% and 1.70% for the three and six months ended June 30, 2010, respectively, these decreases were partially offset by the decrease in the rates earned on interest bearing assets from 5.25% and 5.21% for the three and six months ended June 30, 2010, respectively, to 4.99% and 4.97% for the three and six months ended June 30, 2011, respectively.
Non-interest Income and Expense
Non-interest income for the three and six months ended June 30, 2011 and 2010 were as follows:
                                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
                    $   %                   $   %
(Dollars in thousands)   2011   2010   Change   Change   2011   2010   Change   Change
 
Non-interest Income
                                                               
Service charges on deposit accounts
  $ 1,419     $ 1,427     $ (8 )     (0.6 )%   $ 2,730     $ 2,723     $ 7       0.3 %
Trust department income
    229       201       28       13.9       424       379       45       11.9  
Gain on sales of mortgage loans, net
    216       297       (81 )     (27.3 )     462       522       (60 )     (11.5 )
Other
    314       525       (211 )     (40.2 )     615       831       (216 )     (26.0 )
 
Total non-interest income
  $ 2,178     $ 2,450     $ (272 )     (11.1 )%   $ 4,231     $ 4,455     $ (224 )     (5.0 )%
 
 
                                                               
Non-interest income as a % of total revenue *
    16.8 %     18.1 %                     16.6 %     17.2 %                
Total revenue per full time equivalent employee
  $ 38.3     $ 38.6                     $ 75.4     $ 73.7                  
 
 
*   Total revenue is calculated as net interest income plus non-interest income
          Noninterest income decreased $272,000 or 11.1% to $2,178,000 for the three months ended June 30, 2011 compared to $2,450,000 for the three months ended June 30, 2010. The decrease was primarily the result of a $211,000 decrease in other income and an $81,000 decrease in the gains on sales of mortgage loans. Other income decreased primarily due to a $167,000 nonmaterial correction to credit card income during the three months ended June 30, 2010. During the three months ended June 30, 2011, our Company experienced a slight decrease in refinancing activity impacting both the volume of loans sold and gains recognized compared to the three months end June 30, 2010.
          Noninterest income decreased $224,000 or 5.0% to $4,231,000 for the six months ended June 30, 2011 compared to $4,455,000 for the six months ended June 30, 2010. The decrease was primarily the result of a $216,000 decrease in other income, a $60,000 decrease in the gains on sales of mortgage loans, partially offset by a $45,000 increase in trust department income. As mentioned above, other income decreased primarily due to a $167,000 nonmaterial correction to credit card income during the three months ended June 30, 2010. Refinancing activity began to decline during the second quarter of 2011 impacting both the volume of loans sold and gains recognized compared to the six months ended June 30, 2010.
          Our Company was servicing $300,040,000 of mortgage loans at June 30, 2011 compared to $298,325,000 at December 31, 2010, and $273,237,000 at June 30, 2010. Our Company had no sales of debt securities during the three and six months ended June 30, 2011 and 2010.

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Non-interest expense for the three and six months ended June 30, 2011 and 2010 were as follows:
                                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
                    $   %                   $   %
(Dollars in thousands)   2011   2010   Change   Change   2011   2010   Change   Change
 
Non-interest Expense
                                                               
Salaries
  $ 3,265     $ 3,550     $ (285 )     (8.0 )%   $ 6,826     $ 7,070     $ (244 )     (3.5 )%
Employee benefits
    1,068       1,000       68       6.8       2,185       2,137       48       2.2  
Occupancy expense, net
    585       605       (20 )     (3.3 )     1,223       1,227       (4 )     (0.3 )
Furniture and equipment expense
    509       535       (26 )     (4.9 )     1,016       1,027       (11 )     (1.1 )
FDIC insurance assessment
    396       435       (39 )     (9.0 )     875       845       30       3.6  
Legal, examination, and professional fees
    307       336       (29 )     (8.6 )     798       583       215       36.9  
Advertising and promotion
    270       297       (27 )     (9.1 )     502       575       (73 )     (12.7 )
Postage, printing, and supplies
    296       286       10       3.5       564       574       (10 )     (1.7 )
Processing expense
    813       857       (44 )     (5.1 )     1,635       1,707       (72 )     (4.2 )
Other real estate expense
    548       1,506       (958 )     (63.6 )     1,041       2,013       (972 )     (48.3 )
Other
    951       913       38       4.2       1,721       1,692       29       1.7  
 
Total non-interest expense
  $ 9,008     $ 10,320     $ (1,312 )     (12.7 )%   $ 18,386     $ 19,450     $ (1,064 )     (5.5 )%
 
Efficiency ratio*
    69.5 %     76.1 %                     72.1 %     75.2 %                
Salaries and benefits as a % of total non-interest expense *
    48.1 %     44.1 %                     49.0 %     47.3 %                
Number of full-time equivalent employees
    338       351                       338       351                  
 
          Noninterest expense decreased $1,312,000, or 12.7%, to $9,008,000 for the three months ended June 30, 2011 compared to $10,320,000 for the three months ended June 30, 2010. The decrease primarily resulted from a $958,000, or 63.6%, decrease in other real estate expenses and a $285,000, or 8.0%, decrease in salary expense for the three months ended June 30, 2011. Our Company recorded $1,172,000 in impairment losses on foreclosed property, included in other real estate expenses during the three months ended June 30, 2010. In December of 2010, our company established an allowance for other real estate owned for estimated impaired losses on foreclosed properties. A $280,000 provision for other real estate owned, included in other real estate expense, was recorded for these estimated impaired losses during the three months ended June 30, 2011. Other expenses on foreclosed properties also decreased from $364,000 during the three months ended June 30, 2010 compared to $193,000 during the three months ended June 30, 2011. A decrease in the number of employees and an adjustment to the estimated accrued salary expense during the three months ended June 30, 2011 resulted in a decrease in overall salary expense compared to the three months ended June 30, 2010. Stock option compensation expense, included in salary expense, also decreased $7,000 to $12,000 during the three months ended June 30, 2011 compared to $19,000 during the three months ended June 30, 2010.
          Noninterest expense decreased $1,064,000, or 5.5%, to $18,386,000 for the six months ended June 30, 2011 compared to $19,450,000 for the six months ended June 30, 2010. The decrease primarily resulted from a $972,000, or 48.3%, decrease in other real estate expenses, and a $244,000, or 3.5%, decrease in salary expense. This decrease was partially offset by a $215,000, or 36.9%, increase in legal, examination, and professional fees. Our Company recorded $1,235,000 in impairment losses on foreclosed property, included in other real estate expense, during the six months ended June 30, 2010. A $441,000 provision for other real estate owned, included in other real estate expense, was recorded for estimated impaired losses on foreclosed properties during the six months ended June 30, 2011. Other expenses on foreclosed properties also decreased from $710,000 during the six months ended June 30, 2010 compared to $457,000 during the six months ended June 30, 2011. As mentioned above, a decrease in the number of employees and an adjustment to the estimated accrued salary expense during the six months ended June 30, 2011 resulted in a decrease in overall salary expense compared to the six months ended June 30, 2010. Stock option compensation expense, included in salary expense, also decreased $15,000 to $34,000 during the six months ended June 30, 2011 compared to $49,000 during the six months ended June 30, 2010. The increase in legal, examination, and professional fees included a $25,000 increase in legal fees, $47,000 increase in audit fees, and a $149,000 increase in consulting fees. The increase in the legal fees primarily relates to fees incurred on pending litigation. See Note 14 to the condensed consolidated financial statements for further explanation. The increase in audit fees reflects a review of our Company’s loan files for Home Loan Mortgage Act compliance, and the increase in consulting fees was primarily due to a human resource best practices and profitability consulting project.

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Income taxes
          Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements was 32.0% for both the three and six months ended June 30, 2011 compared to 28.1% and 28.5% for the three and six months ended June 30, 2010, respectively. The higher effective tax rate for the three and six months ended June 30, 2011 reflects a decrease in tax-exempt income as a percentage of total taxable income.
Lending and Credit Management
          Interest earned on the loan portfolio is a primary source of interest income for our Company. Net loans represented 71.6% of total assets as of June 30, 2011 compared to 73.7% as of December 31, 2010.
          Lending activities are conducted pursuant to an established loan policy approved by our Bank’s Board of Directors. The Bank’s credit review process is comprised of a regional loan committee with an established approval limit. In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised of senior managers of the Bank.
A summary of loans, by major class within our Company’s loan portfolio as of the dates indicated are as follows:
                                 
    June 30,   December 31,
    2011   2010
(In thousands)   Amount   %   Amount   %
Commercial, financial, and agricultural
  $ 127,628       14.7 %   $ 131,382       14.6 %
Real estate construction — residential
    28,646       3.3       31,834       3.5  
Real estate construction — commercial
    50,837       5.9       56,053       6.2  
Real estate mortgage — residential
    203,067       23.4       207,835       23.1  
Real estate mortgage — commercial
    428,972       49.4       439,069       48.9  
Installment loans to individuals
    29,475       3.3       32,132       3.6  
Deferred fees and costs, net
    174             167        
 
Total loans
  $ 868,799       100.0 %   $ 898,472       100 %
 
          Our Company’s loan portfolio decreased $29,674,000, or 3.3% from December 31, 2010 to June 30, 2011, primarily due to repayments, charge-offs and transfers to other real estate owned. During the first six months of 2011 our Company experienced reduced loan demand, thus loan pay-downs and payoffs exceeded new originations. This decrease was seen throughout our Company’s loan portfolio. Gross loans charged-off of $4,947,000 and $5,943,000 of assets transferred from loans to other real estate owned and repossessed assets contributed to this decline.
          During the current down-turn in the economy, management continues to focus on the improvement of asset quality. Management has tightened underwriting standards and is focused on lending to credit worthy borrowers with the capacity to service the debts. Where appropriate, management actively works with existing borrowers to modify loan terms and conditions in order to assist the borrowers in servicing their debt obligations to our Company. The decrease in lending activities in the real estate construction market also reflects the slowdown in the housing industry and residential construction industry as well as foreclosures on various residential construction properties. Construction lending will continue to be closely monitored.
          Our Company does not participate in extending credit to sub-prime residential real estate markets. Our Company extends credit to its local community market through traditional real estate mortgage products.
          Our Company does not lend funds for the type of transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, our Company does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table. Our Company does not have any interest-earning assets which would have been included in nonaccrual, past due, or restructured loans if such assets were loans.
          Our Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers, but are not funded until our Company has a non-recourse purchase commitment from the secondary market at a predetermined price. During the first six

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months of 2011 our Company sold $22,337,000 of loans to investors. At June 30, 2011 our Company was servicing approximately $300,040,000 of loans sold to the secondary market.
          Real estate mortgage loans retained in our Company’s portfolio generally include provisions for rate adjustments at one to three year intervals. Commercial loans and real estate construction loans generally have maturities of less than one year. Installment loans to individuals are primarily fixed rate loans with maturities from one to five years.
          Management along with senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Currently, loans in excess of $2,000,000 in aggregate and all adversely classified credits identified by management as containing more than usual risk are reviewed. In addition, loans below the above scope are reviewed on a sample basis. On a monthly basis, the senior loan committee reviews and reports to the Board of Directors past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans should be considered impaired. Management follows the guidance provided in the FASB’s ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, allowances are estimated based on the fair value as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered adequate by management for probable losses inherent in the loan portfolio.
Provision and Allowance for Loan Losses
          The provision for loan losses decreased $267,000 or 12.1% to $1,883,000 for the three months ended June 30, 2011 compared to $2,150,000 for the three months ended June 30, 2010 and decreased $1,022,000 or 22.0% to $3,633,000 for the six months ended June 30, 2011 compared to $4,655,000 for the six months ended June 30, 2010.
          The current economy has contributed to the deterioration of collateral values. The economic downturn and elevated unemployment rates in our market area have impaired the ability for certain of our customers to make payments on our loans in accordance with contractual terms.
          Our Company has taken an active approach to obtain current appraisals and has adjusted the provision to reflect the amounts management determined necessary to maintain the allowance for loan losses at a level adequate to cover probable losses in the loan portfolio. The allowance for loan losses decreased to $13,863,000 or 1.6% of loans outstanding at June 30, 2011 compared to $14,565,000 or 1.6% of loans outstanding at December 31, 2010. Charge offs taken during the first six months of 2011 and 2010 contributed to the decrease in the allowance for loan losses.
The following table summarizes loan loss experience for the years indicated:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
(Dollars in thousands)   2011   2010   2011   2010
 
Analysis of allowance for loan losses:
                               
Balance beginning of year
  $ 12,402     $ 14,658     $ 14,565     $ 14,797  
Net loan charge-offs:
                               
Commercial, financial, and agricultural
    37       612       804       1,104  
Real estate construction — residential
    (1 )     (22 )     1,485       259  
Real estate construction — commercial
    (250 )     22       (250 )     101  
Real estate mortgage — residential
    434       1,591       1,465       3,319  
Real estate mortgage — commercial
    136       2,319       712       2,337  
Installment loans to individuals
    66       54       119       100  
 
Total net charge-offs
    422       4,576       4,335       7,220  
 
Provision for loan losses
    1,883       2,150       3,633       4,655  
 
Balance at June 30,
  $ 13,863     $ 12,232     $ 13,863     $ 12,232  
 

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          As shown in the table above, our Company experienced net loan charge-offs of $422,000 for the three months ended June 30, 2011 compared to $4,576,000 for the three months ended June 30, 2010. The $4,154,000 net decrease was primarily due to a $1,157,000 decrease in net charge offs on real estate mortgage — residential properties, and a $2,183,000 decrease in real estate mortgage — commercial properties from June 30, 2010 to June 30, 2011, respectively. The decrease in net charge-offs for the three months ended June 30, 2011 was primarily due to significant write-downs taken during the three months ended June 30, 2010 on foreclosed properties to reflect current collateral values. These write-downs related to two significant loan relationships collateralized by section eight properties. Our Company also received a $250,000 recovery from a judgment on a real estate construction — commercial property during the three months ended June 30, 2011.
          As shown in the table above, our Company experienced net loan charge-offs of $4,335,000 for the six months ended June 30, 2011 compared to $7,220,000 for the six months ended June 30, 2010. The $2,885,000 net decrease was primarily due to a $1,854,000 decrease in net charge offs on real estate mortgage — residential properties, and a $1,625,000 decrease in real estate mortgage — commercial properties, partially offset by a $1,226,000 increase in net charge offs on real estate construction — residential properties from June 30, 2010 to June 30, 2011, respectively. As mentioned above, the decrease in net charge-offs for the six months ended June 30, 2011 was primarily due to significant write-downs taken on foreclosed properties to reflect current collateral values during the six months ended June 30, 2010. These write-downs related to two significant loan relationships collateralized by section eight properties. The increase in real estate construction — residential net charge-offs for the six months ended June 30, 2011 was primarily due to charge offs taken on two credits that management had specifically reserved $2,000,000 as of December 31, 2010. Since these two credits were fully reserved as of December 31, 2010, no additional provision for these credits was required during the first six months of 2011, and as a result, total net charge-offs exceeded the provision for loan losses during the six months of 2011. The ratio of annualized total net loan charge-offs to total average loans was 0.49% at June 30, 2011 compared to 1.63% at December 31, 2010.
          Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and restructured loans totaled $56,191,000 or 6.47% of total loans at June 30, 2011 compared to $56,303,000 or 6.27% of total loans at December 31, 2010.

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The following table summarizes our Company’s nonperforming assets at the dates indicated:
                   
    June 30,   December 31,  
(Dollars in thousands)   2011   2010  
   
Nonaccrual loans:
                 
Commercial, financial, and agricultural
  $ 3,303     $ 3,532    
Real estate construction — residential
    832       3,586    
Real estate construction — commercial
    10,994       10,067    
Real estate mortgage — residential
    4,517       5,672    
Real estate mortgage — commercial
    29,726       27,604    
Installment loans to individuals
    172       126    
   
Total nonaccrual loans
    49,544       50,587    
   
 
Loans contractually past — due 90 days or more and still accruing:
                 
Commercial, financial, and agricultural
             
Real estate construction — residential
             
Real estate construction — commercial
             
Real estate mortgage — residential
    98          
Real estate mortgage — commercial
             
Installment loans to individuals
    1       33    
   
 
Total loans contractually past — due 90 days or more and still accruing
    99       33    
 
Troubled debt restructurings — accruing
    6,548       5,683    
 
Total nonperforming loans
    56,191       56,303    
Other real estate
    15,416       13,393    
Repossessions
    352       616    
   
Total nonperforming assets
  $ 71,959     $ 70,312    
   
 
                 
Loans
  $ 868,799     $ 898,472    
Allowance for loan losses to loans
    1.60 %     1.62 %  
Nonperforming loans to loans
    6.47 %     6.27 %  
Allowance for loan losses to
                 
nonperforming loans
    24.67 %     25.87 %  
Nonperforming assets to loans and foreclosed assets
    8.13 %     7.71 %  
   
          It is our Company’s policy to discontinue the accrual of interest income on loans when management believes that the borrower’s financial condition, after consideration of business conditions and collection efforts, is such that the collection of interest is doubtful, or upon which principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was approximately $1,219,000 and $1,278,000 for the six months ended June 30, 2011 and 2010, respectively. Approximately $33,000 and $4,000 was actually recorded as interest income on such loans for the six months ended June 30, 2011 and 2010, respectively.
          Total non-accrual loans at June 30, 2011 decreased $1,043,000 from December 31, 2010. The decrease resulted mainly from a decrease of $2,754,000 and $1,155,000, respectively, in real estate construction — residential and in real estate mortgage — residential non-accrual loans. During the first six months of 2011 our Company charged off three significant loan relationships and is continuing to see an increase in foreclosures. Partially offsetting this decrease was a $2,121,000 increase in Real estate mortgage — commercial nonaccrual loans primarily due to one significant loan relationship.
          Loans past due 90 days and still accruing interest increased $66,000 from $33,000 at December 31, 2010 to $99,000 at June 30, 2011. Foreclosed real estate and other repossessions increased $1,759,000 from $14,009,000 at December 31, 2010 to $15,768,000 at June 30, 2011.

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          The increase in the levels of charge offs has contributed to the decrease in the ratio of allowance for loan losses to nonperforming loans from 25.87% at December 31, 2010 to 24.67% at June 30, 2011. As mentioned previously, management charged off approximately $2,000,000 of loans during the first quarter of 2011 that were fully reserved as of December 31, 2010. As a result, the allowance for loan losses to loans outstanding declined from 1.62% at December 31, 2010 to 1.42% at June 30, 2011.
          At June 30, 2011, loans classified as troubled debt restructurings (TDR) totaled $23,913,000, of which $17,365,000 was on non-accrual status and $6,548,000 was on accrual status. At December 31, 2010, loans classified as TDR totaled $22,080,000, of which $16,397,000 was on non-accrual status and $5,683,000 was on accrual status. Our Company has experienced an increase in its loan delinquencies much like the rest of the banking industry as current economic conditions negatively impact our borrowers’ ability to keep their debt payments current.
The following table summarizes our Company’s TDR’s at the dates indicated:
                                                 
    June 30, 2011   December 31, 2010
    Number of   Recorded   Specific   Number of   Recorded   Specific
(Dollars in thousands)   contracts   Investment   Reserves   contracts   Investment   Reserves
 
Accruing TDRs
                                               
Commercial, financial and agricultural
    8     $ 2,063     $ 121       3     $ 128     $ 20  
Real estate construction — commercial
                      1       1,716       95  
Real estate mortgage — residential
    19       2,250       40       20       2,364       82  
Real estate mortgage — commercial
    3       2,235             4       1,475       14  
 
Total
    30     $ 6,548     $ 161       28     $ 5,683     $ 211  
 
 
                                               
TDRs — Non-accruals
                                               
Commercial, financial and agricultural
    2     $ 89     $ 59       5     $ 871.00     $ 76  
Real estate construction — commercial
    2       1,183             2       1,210        
Real estate mortgage — residential
    10       1,762       135       6       1,092       67  
Real estate mortgage — commercial
    10       14,331       1,426       5       13,224       1,005  
 
Total
    24     $ 17,365     $ 1,620       18     $ 16,397     $ 1,148  
 
 
                                               
Total TDRs
    54     $ 23,913     $ 1,781       46     $ 22,080     $ 1,359  
 
          The allowance for loan losses is available to absorb probable loan losses regardless of the category of loans to be charged off. The allowance for loan losses consists of asset-specific reserves, and general reserves based on expected loss estimates and unallocated reserves.
          The asset-specific component applies to loans evaluated individually for impairment and is based on management’s best estimate of proceeds from liquidating collateral. The majority of our nonperforming loans are secured by real estate collateral. The actual timing and amount of repayments and the ultimate realizable value of the collateral may differ from management’s estimate.
          The expected loss component is determined by applying percentages to pools of loans by asset type. These percentages are determined by using historical loss percentages. These expected loss estimates are sensitive to changes in delinquency status, realizable value of collateral, and other risk factors.
          The unallocated portion of the allowance is based on management’s evaluation of conditions that are not directly reflected in the determination of the asset-specific component and the expected loss component discussed above. The evaluation of inherent loss with respect to these qualitative conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. Conditions evaluated in connection with the unallocated portion of the allowance include general economic and business conditions affecting our key lending areas, credit quality trends (including trends in substandard loans expected to result from existing conditions), collateral values, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of our internal loan review department.
          Management believes that based on detailed analysis of each credit risk inherent to our loan portfolio and the value of any associated collateral, that the allowance for loan losses at June 30, 2011 is adequate to cover probable losses.

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          The underlying assumptions, estimates and assessments used by management to determine these components are continually evaluated and updated to reflect management’s current view of overall economic conditions and relevant factors impacting credit quality and inherent losses. Changes in such estimates could significantly impact the allowance and provision for credit losses. Our Company could experience credit losses that are different from the current estimates made by management.
The following table is a summary of the allocation of the allowance for loan losses as of the dates indicated:
                 
    June 30,   December 31,
(Dollars in thousands)   2011   2010
 
Allocation of allowance for loan losses at end of period:
               
Commercial, financial, and agricultural
  $ 2,533     $ 2,931  
Real estate construction — residential
    986       2,067  
Real estate construction — commercial
    1,330       1,339  
Real estate mortgage — residential
    2,990       3,922  
Real estate mortgage — commercial
    4,837       3,458  
Installment loans to individuals
    219       231  
Unallocated
    968       617  
 
Total
  $ 13,863     $ 14,565  
 
          Our Company’s allowance for loan losses decreased $702,000 from December 31, 2010 to June 30, 2011. The decline of the allowance for loan losses was primarily seen in the allocation for real estate construction — residential loans and the allocation of commercial, financial, and agricultural loans as they decreased $1,081,000, and $398,000, respectively, resulting from charge offs taken on two loans that were fully reserved for at December 31, 2010. Also contributing to this overall decrease in the allowance was a $932,000 decrease in the real estate mortgage — residential allocation due to a loan that was reserved for at December 31, 2010 was foreclosed on and sold during the first three months of 2011. Partially offsetting this decrease was $1,379,000 increase the allocation of real estate mortgage — commercial loans primarily resulting from two loan relationships.
The following table is a summary of the general and specific allocations within the allowance for loan losses:
                 
    June 30,   December 31,
(Dollars in thousands)   2011   2010
 
Allocation of allowance for loan losses:
               
Specific reserve allocation for impaired loans
  $ 5,486     $ 6,376  
General reserve allocation for all other non-impaired loans
    8,377       8,189  
 
Total
  $ 13,863     $ 14,565  
 
          Management has established procedures that result in specific allowance allocations for any estimated incurred loss. For loans not considered impaired, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.
          The asset-specific reserve component of our allowance for loan losses at June 30, 2011 was determined by using fair values of the underlying collateral through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. The expected loss component of our allowance for loan losses at June 30, 2011 was determined by calculating historical loss percentages for various loan categories over the previous twelve quarters. Management determined that the previous twelve quarters were reflective of the loss characteristics of our Company’s loan portfolio during the recent economic downturn. These historical loss percentages were then applied to the various categories of loans to determine an expected loss requirement for the current portfolio. At June 30, 2011, the asset-specific reserve component decreased $890,000 due to a comparable decrease in the volume of impaired loans as well as the charge-off of two credits during the first quarter of 2011 that management had specifically reserved approximately $2,000,000 as of December 31, 2010. During the same period, the general reserve component increased from $8,189,000 at December 31, 2010 to $8,377,000 at June 30, 2011 due to usage of a historical loss experience reflective of our Company’s loss characteristics.
          The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the impairment

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amount is calculated, a specific reserve allocation is recorded. At June 30, 2011, $5,486,000 of our Company’s allowance for loan losses was allocated to impaired loans totaling approximately $56,092,000 compared to $6,376,000 of our Company’s allowance for loan losses allocated to impaired loans totaling approximately $56,271,000 at December 31, 2010. Based upon detailed analysis of all impaired loans, management has determined that $27,416,000, or 49%, of impaired loans require no reserve allocation at June 30, 2011 compared to $26,038,000, or 46%, at December 31, 2010.
          As of June 30, 2011 and December 31, 2010 approximately $19,845,000 and $19,239,000, respectively, of loans not included in the nonaccrual table above or identified by management as being impaired were classified by management as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. The $606,000 increase in classified loans is the result of several borrowers who have experienced cash flow problems and as well as some deterioration in collateral value. Management believes the general allowance was sufficient to cover the risks and probable losses related to such loans at June 30, 2011 and December 31, 2010.
          At June 30, 2011, management determined that $12,895,000 of the $13,863,000 total allowance for loan comprised of the asset-specific and expected loss components and $968,000 was unallocated. This is compared to $13,948,000 of the $14,565,000 total allowance for loan losses allocated to the asset-specific and expected loss components and $617,000 that was unallocated at December 31, 2010. The increase in the portion of the allowance for loan losses related to non asset-specific reserves is the result of management analyzing and assessing this portion of the allowance for loan losses on a detailed level by homogeneous loan categories for loans not considered impaired. Such analysis measured reserve requirements based on historical loss experiences of loans in those individual categories. Such reserve methodology considers the loss experience for certain types of loans and loan grades for the past twelve quarters.
Liquidity and Capital Resources
Liquidity Management
          The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet the demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by our Company, management prefers to focus on transaction accounts and full service relationships with customers. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than the market rate.
          Our Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for our Company’s liquidity position and profile. A combination of daily, weekly and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital and exposure to contingent draws on our Company’s liquidity.
          Our Company has a number of sources of funds to meet liquidity needs on a daily basis. Our Company’s most liquid assets are comprised of available for sale investment securities, federal funds sold, and securities purchased under agreements to resell, and excess reserves held at the Federal Reserve as follows:
                 
    June 30,   December 31,
(dollars in thousands)   2011   2010
 
Federal funds sold
  $ 171     $ 126  
Federal Reserve — excess reserves
    16,368       29,286  
Available for sale investments securities
    219,697       178,978  
 
Total
  $ 236,236     $ 208,390  
 
          Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available for sale investment portfolio was $219,697,000 at June 30, 2011 and included an unrealized net gain of $4,368,000. The portfolio includes maturities of approximately $8,930,000 over the next twelve months, which offer resources to meet either new loan demand or reductions in our Company’s deposit base.

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          Our Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchased lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes as required or permitted by law.
At June 30, 2011 and December 31, 2010, total investment securities pledged for these purposes were as follows:
                 
    June 30,   December 31,
(dollars in thousands)   2011   2010
 
Investment securities pledged for the purpose of securing:
               
Federal Reserve Bank borrowings
  $ 2,051     $ 3,262  
Repurchase agreements
    31,065       45,929  
Other deposits
    137,256       98,908  
 
Total pledged, at fair value
  $ 170,372     $ 148,099  
 
          At June 30, 2011 and December 31, 2010, our Company’s unpledged securities in the available for sale portfolio totaled approximately $49,325,000 and $30,879,000, respectively.
          Liquidity is also available from our Company’s base of core customer deposits, defined as demand, interest, checking, savings, and money market deposit accounts. At June 30, 2011, such deposits totaled $534,013,000 and represented 55.5% of our Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of our Company through long lasting relationships. Time deposits and certificates of deposit of $100,000 and over totaled $428,060,000 at June 30, 2011. These accounts are normally considered more volatile and higher costing representing 44.5% of total deposits at June 30, 2011.
                 
    June 30,   December 31,
(dollars in thousands)   2011   2010
 
Core deposit base:
               
Non-interest bearing demand
  $ 148,140     $ 137,750  
Interest checking
    176,364       160,225  
Savings and money market
    209,509       218,912  
 
Total
  $ 534,013     $ 516,887  
 
          Other components of liquidity are the level of borrowings from third party sources and the availability of future credit. Our Company’s outside borrowings are comprised of securities sold under agreements to repurchase, FHLB advances, and subordinated notes as follows:
                 
    June 30,   December 31,
(dollars in thousands)   2011   2010
 
Borrowings:
               
Securities sold under agreements to repurchase
  $ 28,689     $ 30,068  
FHLB advances
    43,657       66,986  
Subordinated notes
    49,486       49,486  
 
Total
  $ 121,832     $ 146,540  
 
          Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which our Company maintains approved credit lines. As of June 30, 2011, under agreements with these unaffiliated banks, the Bank may borrow up to $15,650,000 in federal funds on an unsecured basis and $22,153,000 on a secured basis. There were no federal funds purchased outstanding at June 30, 2011. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of our Company’s investment portfolio. At June 30, 2011 there was $28,689,000 in repurchase agreements. Our Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window; although no such borrowings were outstanding at June 30, 2011. The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. As of June 30, 2011, the Bank had $43,657,000 in outstanding borrowings with the FHLB. In addition, our Company has $49,486,000 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

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          Our Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and borrow from these entities. Based on the type and value of collateral pledged, our Company may draw advances against this collateral. The following table reflects the advance equivalent of the assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to our Company at June 30, 2011:
                         
            Federal    
(dollars in thousands)   FHLB   Reserve   Other
 
Advance equivalent
  $ 263,199     $ 2,051     $ 25,402  
Advances outstanding
    (43,657 )            
Letters of credit issued
    (206 )            
 
Total
  $ 219,336     $ 2,051     $ 25,402  
 
Sources and Uses of Funds
          As our Company sees loan demand decline and overnight borrowing rates remain at historic lows, management has expanded the investment portfolio to keep excess cash minimized. A deposit reclassification program was implemented in January of 2011 that lowered the Federal Reserve account requirement, improving liquidity, and enabling our Company to lower cash balances maintained at the Federal Reserve and invest in higher yielding securities.
          Cash and cash equivalents were $35,240,000 at June 30, 2011 compared to $50,980,000 at December 31, 2010. The $15,740,000 decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of our Company, as shown in the accompanying consolidated statement of cash flows for the six months ended June 30, 2011. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $9,518,000 for the six months ended June 30, 2011.
          Investing activities consisting mainly of purchases, sales and maturities of available for sale securities, and changes in the level of the loan portfolio, used total cash of $14,756,000. The cash outflow primarily consisted of $83,043,000 of purchases of investment securities, partially offset by a $20,636,000 decrease in the loan portfolio, $44,606,000 in proceeds from maturities, calls, and pay-downs of investment securities, and $3,421,000 in proceeds from sales of other real estate owned and repossessions.
          Financing activities used total cash of $10,502,000, resulting primarily from $23,329,000 of repayments of FHLB advances, a decrease of $1,379,000 of federal funds purchased and securities sold under agreements to repurchase, and a $1,952,000 decrease in time deposits, partially offset by a net $17,362,000 increase in demand deposits and interest-bearing transaction accounts. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2011.
          In the normal course of business, our Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through our Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of our Company’s liquidity. In the section entitled, Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements, below we disclose that our Company had $98,572,000 in unused loan commitments and standby letters of credit as of June 30, 2011. While this commitment level would be difficult to fund given our Company’s current liquidity resources, we know that the nature of these commitments are such that the likelihood of such a funding demand is very low.
          Our Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. Our Company’s ongoing liquidity needs primarily include funding its operating expenses and paying cash dividends to its common and preferred shareholders. During the six months ended June 30, 2011 and 2010, respectively, our Company paid cash dividends to its common and preferred shareholders totaling $1,204,000 and $1,703,000. A large portion of our Company’s liquidity is obtained from the Bank in the form of dividends. For the six months ended June 30, 2011 the Bank declared and paid $1,500,000 to our Company. For the six months ended June 30, 2010, the Bank did not declare or pay dividends. At June 30, 2011 and December 31, 2010, our Company had cash and cash equivalents totaling $11,740,000 and $12,449,000, respectively.

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Capital Management
          Our Company and our Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our Company’s consolidated financial statements. Under capital adequacy guidelines, our Company and our Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of our Company and our Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
          Quantitative measures established by regulations to ensure capital adequacy require our Company and our Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of June 30, 2011 and December 31, 2010, our Company and our Bank each met all capital adequacy requirements to which they were subject.
                                                 
                    Minimum     Well-Capitalized  
    Actual     Capital requirements     Capital Requirements  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
June 30, 2011 Total capital (to risk-weighted assets):
                                               
Company
  $ 160,674       17.54 %   $ 73,282       8.00 %            
Hawthorn Bank
    132,415       14.72       71,952       8.00     $ 89,940       10.00 %
 
Tier I capital (to risk-weighted assets):
                                               
Company
  $ 135,177       14.76     $ 36,641       4.00 %            
Hawthorn Bank
    121,146       13.47       35,976       4.00     $ 53,964       6.00 %
 
Tier I capital (to adjusted average assets):
                                               
Company
  $ 135,177       11.31     $ 35,849       3.00 %            
Hawthorn Bank
    121,146       10.31       35,249       3.00     $ 58,748       5.00 %
 
December 31, 2010 Total capital (to risk-weighted assets):
                                               
Company
  $ 159,510       17.05 %   $ 74,863       8.00 %            
Hawthorn Bank
    130,361       14.18       73,548       8.00     $ 91,834       10.00 %
 
Tier I capital (to risk-weighted assets):
                                               
Company
  $ 133,349       14.25     $ 37,431       4.00 %            
Hawthorn Bank
    118,837       12.93       36,774       4.00     $ 55,161       6.00 %
 
Tier I capital (to adjusted average assets):
                                               
Company
  $ 133,349       11.00     $ 36,360       3.00 %            
Hawthorn Bank
    118,837       9.99       35,685       3.00     $ 59,475       5.00 %
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Sensitivity
          Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. Our Company faces market risk in the form of interest rate risk through transactions other than trading activities. Our Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by our Company’s Asset/Liability Committee and approved by the Board of Directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as our Company feels it has no primary exposure to specific points on the yield curve. For the three months ended June 30, 2011 our Company utilized a 400 basis point immediate and gradual move in interest rates (both upward and downward) applied to both a parallel and proportional yield curve.

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          The following table represents estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of June 30, 2011:
                                                         
                                            Over    
                                            5 years or    
                                            no stated    
(Dollars in thousands)   Year 1   Year 2   Year 3   Year 4   Year 5   Maturity   Total
 
ASSETS
                                                       
Investment securities
  $ 53,745     $ 18,480     $ 47,317     $ 30,095     $ 27,083     $ 42,977     $ 219,697  
Interest-bearing deposits
    16,719                                     16,719  
Other restricted investments
    5,065                                     5,065  
Federal funds sold and securities purchased under agreements to resell
    171                                     171  
Loans
    488,414       157,598       146,156       24,427       26,425       25,779       868,799  
 
Total
  $ 564,114     $ 176,078     $ 193,473     $ 54,522     $ 53,508     $ 68,756     $ 1,110,451  
 
 
                                                       
LIABILITIES
                                                       
 
                                                       
Savings, Now deposits
  $     $     $ 166,119     $     $     $     $ 166,119  
Rewards checking, Super Now, money market deposits
    220,079                                             220,079  
Time deposits
    286,815       68,387       55,340       7,164       10,028             427,734  
Federal funds purchased and securities sold under agreements to repurchase
    28,690                                     28,690  
Subordinated notes
    49,486                                     49,486  
Other borrowed money
    25,382       8,254       10,021                         43,657  
 
Total
  $ 610,452     $ 76,641     $ 231,480     $ 7,164     $ 10,028     $     $ 935,765  
 
 
                                                       
Interest-sensitivity GAP
                                                       
Periodic GAP
  $ (46,338 )   $ 99,437     $ (38,007 )   $ 47,358     $ 43,480     $ 68,756     $ 174,686  
 
Cumulative GAP
  $ (46,338 )   $ 53,099     $ 15,092     $ 62,450     $ 105,930     $ 174,686     $ 174,686  
 
 
                                                       
Ratio of interest-earnings assets to interest-bearing liabilities
                                                       
Periodic GAP
    0.92       2.30       0.84       7.61       5.34       NM       1.19  
Cumulative GAP
    0.92       1.08       1.02       1.07       1.11       1.19       1.19  
 
Effects of Inflation
          The effects of inflation on financial institutions are different from the effects on other commercial enterprises since financial institutions make few significant capital or inventory expenditures which are directly affected by changing prices. Because bank assets and liabilities are virtually all monetary in nature, inflation does not affect a financial institution as much as do changes in interest rates. The general level of inflation does underlie the general level of most interest rates, but interest rates do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy.
          Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on our Company’s operations for the period ended June 30, 2011.

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Item 4. Controls and Procedures
          Our Company’s management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as defined in Rules 13a — 15(e) or 15d — 15(e) of the Securities Exchange Act of 1934 as of June 30, 2011. Based upon and as of the date of that evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
          There has been no change in our Company’s internal control over financial reporting that occurred during the period ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Impact of New Accounting Standards
          In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income. The amendments of ASU 2011-05 are effective for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-05 is not expected to have a material impact on our Company’s consolidated financial statements.
          In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to substantially converge the guidance in U.S. GAAP and IFRS on fair value measurements and disclosures. The amended guidance changes several aspects of the fair value measurement guidance ASC 820, Fair Value Measurement, and includes several new fair value disclosure requirements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a material impact on our Company’s consolidated financial statements.
          In April 2011, the FASB issued ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on our Company’s consolidated financial statements.
          In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The provisions of ASU No. 2011-02 provide a creditor additional guidance in determining whether a restructuring constitutes a troubled debt restructuring by concluding that both the following conditions exist (1) a creditor has granted a concession, and (2) the borrower is experiencing financial difficulties. A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20. The provisions of ASU No. 2011-02 will be effective for our Company’s reporting period ending September 30, 2011 and requires retrospective application to all restructurings occurring during 2011 along with additional required disclosures. The adoption of ASU No. 2011-02 is not expected to have a material impact on our Company’s consolidated financial statements.
          In July 2010, the FASB issued ASU No. 2010-20 — Receivables (ASC Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires expanded credit risk disclosures intended to provide investors with greater transparency regarding the allowance for credit losses and the credit quality of financing receivables. Under this ASU, companies are required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information, credit quality indicators, changes in the allowance for credit losses, and the nature and extent of troubled debt restructurings and their effect on the allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class based on the level of disaggregation that management uses when assessing its allowance for credit losses and managing its credit exposure. The

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disclosures as of the end of a reporting period are effective for annual periods ending on or after December 15, 2010. The disclosures about activity that occur during a reporting period are effective for annual reporting periods beginning on or after December 15, 2010. The interim disclosures required by this update are reported in the notes to our Company’s consolidated financial statements.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
          The information required by this Item is set forth in Note 14, Pending Litigation, in our Company’s condensed consolidated financial statements.
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. (Removed and Reserved)
None
Item 5. Other Information
None
Item 6.   Exhibits
     
Exhibit No.   Description
 
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).
 
   
3.1.1
  Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008, dated December 17, 2008 (filed as Exhibit 3.1.1 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
 
   
3.2
  Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on June 8, 2009 and incorporated herein by reference).
 
   
4.1
  Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 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).
 
   
4.2
  Specimen certificate representing shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008 (filed as Exhibit 4.2 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).
 
   
4.3
  Warrant to purchase shares of our Company’s $1.00 par value Common Stock, dated December 19, 2008 (filed as Exhibit 4.3 to our Company’s current report on Form 8-K on December 23, 2008 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
 
   
31.2
  Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.2
  Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Exhibit No.   Description
 
101
  Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
 
  HAWTHORN BANCSHARES, INC.
 
   
Date
   
 
   
August 15, 2011
  /s/ David T. Turner
 
 David T. Turner, Chairman of the Board and
 
  Chief Executive Officer (Principal Executive Officer)
 
   
August 15, 2011
  /s/ Richard G. Rose
 
 Richard G. Rose, Chief Financial Officer (Principal Financial
 
  Officer and Principal Accounting Officer)

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HAWTHORN BANCSHARES, INC.

INDEX TO EXHIBITS

June 30, 2011 Form 10-Q
             
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).     **  
 
           
3.1.1
  Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008, dated December 17, 2008 (filed as Exhibit 3.1.1 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).     **  
 
           
3.2
  Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on June 8, 2009 and incorporated herein by reference).     **  
 
           
4.1
  Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 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).     **  
 
           
4.2
  Specimen certificate representing shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008 (filed as Exhibit 4.2 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).     **  
 
           
4.3
  Warrant to purchase shares of our Company’s $1.00 par value Common Stock, dated December 19, 2008 (filed as Exhibit 4.3 to our Company’s current report on Form 8-K on December 23, 2008 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     58  
 
           
31.2
  Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     59  
 
           
32.1
  Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     60  
 
           
32.2
  Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     61  
 
           
101
  Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)     *  

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*   As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.
 
**   Incorporated by reference.

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