Hawthorn Bancshares - 10-Q quarterly report FY

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, 2007

or


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 0-23636

HAWTHORN BANCSHARES, INC.

(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

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 9, 2007 the registrant had 4,174,495 shares of common stock,
par value $1.00 per share, outstanding.

Page 1 of 47 pages
Index to Exhibits located on page 43

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	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. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits
SIGNATURES
INDEX TO EXHIBITS
Certification
Certification
Certification
Certification


	June 30, 2007			December 31, 2006
ASSETS
Loans:	$	837,421,852		$	812,312,759
Less allowance for loan losses		9,110,277			9,015,378

Loans, net		828,311,575			803,297,381

Investments in available for sale debt securities, at fair value		171,639,308			183,566,135
Investments in equity securities, at cost		5,574,725			6,207,175
Federal funds sold and securities purchased under agreements to resell		24,894,925			9,922,961
Cash and due from banks		29,541,981			43,077,605
Premises and equipment		38,306,845			34,706,857
Other real estate owned and repossessed assets		2,636,434			2,734,500
Accrued interest receivable		8,445,818			8,773,686
Mortgage servicing rights		1,263,439			1,350,375
Goodwill		40,323,775			40,323,775
Intangible assets		3,277,238			3,753,877
Cash surrender value — life insurance		1,788,505			1,750,420
Other assets		4,103,468			3,247,150

Total assets	$	1,160,108,036		$	1,142,711,897


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Demand deposits	$	138,815,640		$	138,885,883
Time deposits		778,342,093			760,978,851

Total deposits		917,157,733			899,864,734

Federal funds purchased and securities sold under agreements to repurchase		25,597,657			29,460,492
Interest-bearing demand notes to U.S. Treasury		—			1,735,638
Subordinated notes		49,486,000			49,486,000
Other borrowed money		49,387,760			47,368,315
Accrued interest payable		4,683,655			4,366,250
Other liabilities		6,220,854			5,485,878

Total liabilities		1,052,533,659			1,037,767,307

Stockholders’ equity:
Common stock — $1 par value; 15,000,000 shares authorized; 4,298,353 issued		4,298,353			4,298,353
Surplus		22,352,702			22,248,319
Retained earnings		84,350,072			81,431,713
Accumulated other comprehensive loss, net of tax		(799,659	)		(381,286	)
Treasury stock, 127,090 and 128,506 shares at cost		(2,627,091	)		(2,652,509	)

Total stockholders’ equity		107,574,377			104,944,590

Total liabilities and stockholders’ equity	$	1,160,108,036		$	1,142,711,897

See accompanying notes to unaudited condensed consolidated financial statements.

2

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Interest income:
Interest and fees on loans	$	15,958,870	$	15,756,514	$	31,518,184	$	30,480,993
Interest on debt securities:
Taxable		1,421,368		1,375,081		2,967,180		2,775,951
Nontaxable		498,992		477,003		999,899		961,136
Interest on federal funds sold and securities purchased under agreements to resell		145,538		213,606		457,856		307,160
Interest on interest-bearing deposits		11,366		30,709		46,220		57,000
Dividends and interest on equity securities		101,038		76,908		178,516		140,447

Total interest income		18,137,172		17,929,821		36,167,855		34,722,687


Interest Expense:
NOW accounts		315,089		391,007		660,871		781,576
Savings accounts		67,504		75,885		136,159		153,659
Money market accounts		1,354,347		1,258,016		2,678,094		2,392,022
Certificates of deposit:
$100,000 and over		1,716,956		1,207,225		3,426,560		2,265,353
Other time deposits		3,701,396		2,992,934		7,259,540		5,706,995
Federal funds purchased and securities sold under agreements to repurchase		356,642		486,090		703,005		996,951
Subordinated notes		898,022		874,000		1,790,733		1,715,739
Advances from Federal Home Loan Bank		640,125		801,416		1,281,444		1,403,939
Other borrowed money		2,074		8,699		10,732		13,358

Total interest expense		9,052,155		8,095,272		17,947,138		15,429,592


Net interest income		9,085,017		9,834,549		18,220,717		19,293,095

Provision for loan losses		154,216		310,500		379,216		628,000


Net interest income after provision for loan losses		8,930,801		9,524,049		17,841,501		18,665,095

Continued on next page

3

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007			2006
Noninterest income:
Service charges on deposit accounts	$	1,305,612	$	1,516,875	$	2,585,567		$	2,877,705
Trust department income		192,179		228,369		428,551			408,079
Mortgage loan servicing fees, net		94,823		109,594		189,792			224,276
Gain on sale of mortgage loans, net		212,208		89,600		341,503			201,834
Loss on sales and calls of debt securities		—		—		(1,747	)		(18,351	)
Other		1,044,819		304,742		1,829,544			581,548

Total noninterest income		2,849,641		2,249,180		5,373,210			4,275,091


Noninterest expense:
Salaries and employee benefits		4,847,063		4,342,902		9,669,763			8,688,148
Occupancy expense		485,515		447,824		992,295			900,166
Furniture and equipment expense		579,607		542,858		1,159,796			1,062,485
Advertising and promotion		249,356		204,501		428,965			387,338
Postage, printing and supplies		292,440		291,546		559,286			583,919
Legal, examination, and professional fees		600,166		318,866		911,090			613,089
Processing expense		285,354		302,237		553,806			515,020
Amortization of intangible assets		230,585		258,148		476,639			533,845
Other		875,075		748,585		1,827,502			1,485,049

Total noninterest expense		8,445,161		7,457,467		16,579,142			14,769,059


Income before income taxes		3,335,281		4,315,762		6,635,569			8,171,127

Income taxes		972,253		1,382,577		1,965,874			2,549,335


Net income	$	2,363,028	$	2,933,185	$	4,669,695		$	5,621,792


Basic earning per share	$	0.57	$	0.70	$	1.12		$	1.35
Diluted earnings per share	$	0.56	$	0.70	$	1.11		$	1.34

Weighed average shares of common stock outstanding
Basic		4,170,003		4,169,847		4,169,925			4,169,847
Diluted		4,214,670		4,202,079		4,218,223			4,202,891

Dividends per share:
Declared	$	0.21	$	0.21	$	0.42		$	0.42
Paid	$	0.21	$	0.21	$	0.42		$	0.42

See accompanying notes to unaudited condensed consolidated financial statements.

4

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
	2007			2006
Cash flow from operating activities:
Net income	$	4,669,695		$	5,621,792
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		379,216			628,000
Depreciation expense		952,255			887,099
Net (accretion) amortization of debt securities premiums and discounts		(22,215	)		24,181
Amortization of intangible assets		476,639			533,845
Stock based compensation expense		106,678			102,567
Decrease (increase) in accrued interest receivable		327,868			(398,597	)
Increase in cash surrender value — life insurance		(38,085	)		(27,615	)
(Increase) decrease in other assets		(326,322	)		488,926
Increase in accrued interest payable		317,405			680,681
Increase in other liabilities		734,976			9,742
Loss on sales and calls of debt securities		1,747			18,351
Origination of mortgage loans for sale		(16,508,000	)		(10,831,923	)
Proceeds from the sale of mortgage loans held for sale		16,849,503			11,033,757
Gain on sale of mortgage loans		(341,503	)		(201,834	)
Loss on disposition of premises and equipment		1,064			22,989
Other, net		(192,512	)		(593,819	)

Net cash provided by operating activities		7,388,409			7,998,142


Cash flow from investing activities:
Net increase in loans		(26,195,306	)		(21,463,240	)
Purchase of available-for-sale debt securities		(32,750,173	)		(94,746,721	)
Proceeds from maturities of available-for-sale debt securities		27,229,313			84,743,761
Proceeds from calls of available-for-sale debt securities		9,888,600			610,038
Proceeds from sales of available-for-sale debt securities		6,910,634			1,985,020
Purchase of equity securities		(344,400	)		(1,008,150	)
Proceeds from sales of equity securities		976,850			495,500
Purchase of premises and equipment		(4,571,307	)		(1,446,926	)
Proceeds from sales of premises and equipment		18,000			32,250
Proceeds from sales of other real estate owned and repossessions		899,962			83,501

Net cash used in investing activities		(17,937,827	)		(30,714,967	)

Continued on next page

5

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)


	Six Months Ended June 30,
	2007			2006
Cash flow from financing activities:
Net (decrease) increase in demand deposits	$	(70,243	)	$	8,347,769
Net increase (decrease) in interest-bearing transaction accounts		16,503,724			(3,992,022	)
Net increase in time deposits		859,518			13,038,357
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(3,862,835	)		9,089,170
Net decrease in interest-bearing demand notes to U.S. Treasury		(1,735,638	)		(650,763	)
Proceeds from Federal Home Loan Bank advances		73,000,000			123,624,684
Repayment of Federal Home Loan Bank advances		(70,980,555	)		(117,924,606	)
Cash dividends paid		(1,751,336	)		(1,751,336	)
Sale of treasury stock		23,123			—

Net cash provided by financing activities		11,985,758			29,781,253


Net increase in cash and cash equivalents		1,436,340			7,064,428
Cash and cash equivalents, beginning of period		53,000,566			47,730,549

Cash and cash equivalents, end of period	$	54,436,906		$	54,794,977


Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest	$	17,629,733		$	14,748,911
Income taxes		1,552,000			2,660,000

Supplemental schedule of noncash investing activities -
Other real estate and repossessions acquired in settlement of loans	$	801,896		$	250,620

See accompanying notes to unaudited condensed consolidated financial statements.

6

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and Six Months Ended June 30, 2007 and 2006

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. Certain amounts in the 2006 condensed consolidated financial statements have been reclassified to conform to the 2007 condensed consolidated presentation. Such reclassifications have no effect on previously reported net income or stockholders’ equity. Operating results for the period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

These unaudited condensed consolidated interim financial statements should be read in conjunction with our Company’s audited consolidated financial statements included in its 2006 Annual Report to Shareholders under the caption “Consolidated Financial Statements” and incorporated by reference into its Annual Report on Form 10-K for the year ended December 31, 2006 as Exhibit 13.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed and omitted. These financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our Company’s consolidated financial position as of June 30, 2007 and the consolidated statement of earnings for the three and six month-periods ended June 30, 2007 and cash flows for the six months ended June 30, 2007.

7

Earnings per Share

The following table reflects, for the three and six month periods ended June 30, 2007 and 2006, the numerators (net income) and denominators (average shares outstanding) for the basic and diluted net income per share computations:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Net income, basic and diluted	$	2,363,028	$	2,933,185	$	4,669,695	$	5,621,792


Average shares outstanding		4,170,003		4,169,847		4,169,925		4,169,847
Effect of dilutive stock options		44,667		32,232		48,298		33,044

Average shares outstanding including dilutive stock options		4,214,670		4,202,079		4,218,223		4,202,891


Basic earning per share	$	0.57	$	0.70	$	1.12	$	1.35
Diluted earnings per share	$	0.56	$	0.70	$	1.11	$	1.34

For the three months ended June 30, 2007 and 2006, 3,259 and 5,838 of shares, respectively, are excluded in the calculation because their effect would be anti-dilutive. For the six months ended June 30, 2007 and 2006, 1,283 and 5,211 of shares, respectively, are excluded in the calculation because their effect would be anti-dilutive.

Stock Option Plans

Total stock-based compensation expense was $61,000 ($40,000 after tax) and $107,000 ($70,000 after tax) for the three and six-month periods ended June 30, 2007, respectively.

Total stock-based compensation expense was $42,000 ($28,000 after tax) and $103,000 ($68,000 after tax) for the three and six-month periods ended June 30, 2006, respectively.

As of June 30, 2007, the total unrecognized compensation expense related to non-vested stock awards was $627,000 and the related weighted average period over which it is expected to be recognized is approximately 2.3 years.

8

The following table summarizes our Company’s stock option activity for the six-month period ended June 30, 2007:


								Weighted
				Weighted		Aggregate		Average
				Average		Intrinsic		Contractual
				Exercise		Value		Term
	Options			Price		(000)		(in years)
Outstanding, January 1, 2007		202,738		$	24.54
Granted		48,104			33.50
Exercised		(1,416	)		16.33
Expired		—			—
Forfeited		(1,186	)		28.45

Outstanding, June 30, 2007		248,240			26.30	$	1,430		7.0

Exercisable, June 30, 2007		144,013			20.30		1,297		5.6

Options outstanding at June 30, 2007 had an intrinsic value of $1,430,000. Options exercisable at June 30, 2007 had an intrinsic value of approximately $1,297,000. On April 27, 2007, 48,104 stock options were granted.

The weighted average grant date fair values of stock options granted during the quarter ended June 30, 2007 and the weighted average significant assumptions used to determine those fair values, using the Black-Scholes option-pricing model, are as follows:


Options granted during 2007:
Grant date fair value per option	$	7.13
Significant assumptions:
Risk-free interest rate at grant date		4.49	%
Expected annual dividend yield		2.50	%
Expected stock price volatility		20.00	%
Expected life to exercise (years)		6.25

9

Comprehensive Income

Comprehensive income for the three and six-month periods ended June 30, 2007 and 2006 is summarized as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Net income	$	2,363,028		$	2,933,185		$	4,669,695		$	5,621,792
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) on debt and equity securities available-for-sale, net of tax		(676,768	)		(804,648	)		(442,371	)		(1,092,462	)
Adjustment for loss on sales and calls of debt and equity securities, net of tax		—			—			1,136			11,928
Defined benefit pension plans:
Amortization of prior service cost included in net periodic pension cost, net of tax		11,431			—			22,862			—

Total other comprehensive income (loss)		(665,337	)		(804,648	)		(418,373	)		(1,080,534	)

Comprehensive income	$	1,697,691		$	2,128,537		$	4,251,322		$	4,541,258

Intangible Assets

The gross carrying amount and accumulated amortization of our Company’s amortized intangible assets as of June 30, 2007 and December 31, 2006 is as follows:


	June 30, 2007					December 31, 2006
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortized intangible assets:
Core deposit intangible	$	7,060,224		(3,782,986	)	$	7,060,224		(3,306,347	)

The aggregate amortization expense of core deposit intangible subject to amortization for the three and six-month periods ended June 30, 2007 and 2006 is as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Aggregate amortization expense	$	230,585		258,148	$	476,639		533,845

10

The estimated amortization expense for the next five years is as follows:


Estimated amortization expense:
For the six months ending December, 2007	$	445,698
For year ending 2008		701,443
For year ending 2009		626,111
For year ending 2010		526,477
For year ending 2011		434,763

Mortgage Servicing Rights

Mortgage loans serviced for others totaled approximately $210,636,000 and $218,205,000 at June 30, 2007 and 2006, respectively. Mortgage servicing rights totaled approximately $1,263,000 and $1,487,000 at June 30, 2007 and 2006, respectively.

Changes in the balance of servicing assets related to the loans serviced by The Exchange National Bank of Jefferson City for the periods indicated are as follows:


	June 30,
	2007			2006
Balance, beginning of period	$	1,350,375			1,536,331
Originated mortgage servicing rights		138,019			103,784
Amortization		(224,955	)		(205,888	)

Balance, end of period	$	1,263,439			1,434,227


Mortgage loans serviced	$	210,636,388			218,204,948


Mortgage servicing rights as a percentage of loans serviced		0.60	%		0.66	%

Our Company’s mortgage servicing rights are amortized in proportion to the related estimated net servicing income over the estimated lives of the related mortgages, which is seven years. Changes in mortgage servicing rights, net of amortization, for the periods indicated are as follows:


Estimated amortization expense:
For the six months ending December 31, 2007	$	114,000
For year ending 2008		295,000
For year ending 2009		223,000
For year ending 2010		151,000
For year ending 2011		126,000

11

Income Taxes

On January 1, 2007, our Company adopted the provisions of FIN 48. As of January 1, 2007 our Company had $1,015,000 of gross unrecognized tax benefits of which $683,000 would impact the effective tax rate, if recognized. If these tax benefits are not recognized, the result would be cash tax payments. Our Company expects a reduction of $234,000 in gross unrecognized tax benefits during the remaining six-month period ending December 31, 2007 as a result of the statute of limitations closing for the 2003 tax year. The unrecognized tax benefits are related to various federal and state tax positions.

In addition, our Company accrues interest and, if applicable, penalties related to unrecognized tax positions as a component of income tax expense. As of January 1, 2007, interest accrued was approximately $124,000. No additional interest was accrued during the six months ended June 30, 2007

Our Company and subsidiaries file income tax returns in the U. S. federal jurisdiction and the state of Missouri. Management believes the accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. This assessment relies on estimates and assumptions. Our Company’s federal and state income tax returns for 2003 to 2006 are open tax years. As of June 30, 2007, there were no federal or state income tax examinations in process.

Sale of Bank Charters

As a result of our Company’s plan to consolidate our four bank subsidiaries under one charter, our Company sold the bank charter of Osage Valley Bank on March 16, 2007 for $425,000 and the bank charter of Bank 10 on June 22, 2007 for $450,000. These amounts are included in Other Noninterest Income in the accompanying financial statements.

Further, our Company has an agreement to sell the bank charter of Exchange National Bank for $325,000 on or about October 4, 2007. At that time all bank subsidiaries will have been merged into and operating under the single bank charter of Hawthorn Bank.

12

Defined Benefit Retirement Plan

Our Company provides a noncontributory defined benefit pension plan for all full-time employees over the age of 21 who have completed at least on year of qualified service.

Pension expense for the periods indicated is as follows:


	Estimated			Actual
	2007			2006
Service cost — benefits earned during the year	$	797,675		$	620,564
Interest cost on projected benefit obligations		364,493			318,142
Expected return on plan assets		(377,180	)		(369,164	)
Amortization of prior service cost		78,628			78,628
Amortization of net gains		(8,279	)		(2,601	)

Pension expense — Annual	$	855,337		$	645,569


Pension expense — three months ended June 30 (actual)	$	213,834		$	166,760


Pension expense — six months ended June 30 (actual)	$	427,668		$	333,519

Under the provisions of the Pension Protection Act of 2006 our Company may make a contribution to the defined benefit pension plan during 2007.

Segment reporting

Through the respective branch network, Exchange National Bank and Hawthorn Bank provide similar products and services in two defined geographic areas. The products and services offered include 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. Loans include real estate, commercial, installment and other consumer loans. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City and Kansas City, Missouri. The products and services are offered to customers primarily within their respective geographical areas. The business segments results that follow are consistent with our Company’s internal reporting system which is consistent, in all material respects, with accounting principles generally accepted in the United States of America and practices prevalent in the banking industry.

13


	June 30, 2007
	The Exchange
	National
	Bank of		Hawthorn		Corporate
	Jefferson City		Bank		and other			Total
Balance sheet information:
Loans, net of allowance for loan losses	$	369,053,429	$	459,258,146	$	—		$	828,311,575
Debt and equity securities		73,190,804		102,537,229		1,486,000			177,214,033
Goodwill		4,382,098		35,941,677		—			40,323,775
Intangible assets		—		3,277,238		—			3,277,238
Total assets		498,942,177		659,380,017		1,785,842			1,160,108,036
Deposits		406,521,156		521,968,826		(11,332,249	)		917,157,733
Stockholders’ equity	$	51,762,880	$	94,152,540	$	(38,341,043	)	$	107,574,377


	December 31, 2006
	The Exchange
	National
	Bank of		Hawthorn		Corporate
	Jefferson City		Bank		and other			Total
Balance sheet information
Loans, net of allowance for loan losses	$	350,563,084	$	452,734,297	$	—		$	803,297,381
Debt and equity securities		85,177,657		103,109,653		1,486,000			189,773,310
Goodwill		4,382,098		35,941,677		—			40,323,775
Intangible assets		—		3,753,877		—			3,753,877
Total assets		475,048,886		666,138,165		1,524,846			1,142,711,897
Deposits		384,413,021		524,228,167		(8,776,454	)		899,864,734
Stockholders’ equity	$	51,168,606	$	83,080,439	$	(29,304,455	)	$	104,944,590

14


	Three Months Ended June 30, 2007
	The Exchange
	National
	Bank of		Hawthorn		Corporate
	Jefferson City		Bank		and other			Total
Statement of earnings:
Total interest income	$	8,158,762	$	9,951,443	$	26,967		$	18,137,172
Total interest expense		3,538,844		4,635,328		877,983			9,052,155

Net interest income		4,619,918		5,316,115		(851,016	)		9,085,017
Provision for loan losses		150,000		4,216		—			154,216
Noninterest income		1,048,260		1,351,381		450,000			2,849,641
Noninterest expense		2,791,297		4,477,428		1,176,436			8,445,161
Income taxes		883,650		607,779		(519,176	)		972,253

Net income (loss)	$	1,843,231	$	1,578,073	$	(1,058,276	)	$	2,363,028


	Three Months Ended June 30, 2006
	The Exchange
	National
	Bank of		Hawthorn		Corporate
	Jefferson City		Bank		and other			Total
Statement of earnings:
Total interest income	$	8,089,318	$	9,814,258	$	26,245		$	17,929,821
Total interest expense		3,319,994		3,921,019		854,259			8,095,272

Net interest income		4,769,324		5,893,239		(828,014	)		9,834,549
Provision for loan losses		225,000		85,500		—			310,500
Noninterest income		1,102,531		1,164,663		(18,014	)		2,249,180
Noninterest expense		2,895,649		4,389,082		172,736			7,457,467
Income taxes		888,200		807,667		(313,290	)		1,382,577

Net income (loss)	$	1,863,006	$	1,775,653	$	(705,474	)	$	2,933,185

15


	Six Months Ended June 30, 2007
	The Exchange
	National
	Bank of		Hawthorn		Corporate
	Jefferson City		Bank		and other			Total
Statement of earnings:
Total interest income	$	16,168,967	$	19,945,114	$	53,774		$	36,167,855
Total interest expense		7,006,840		9,189,350		1,750,948			17,947,138

Net interest income		9,162,127		10,755,764		(1,697,174	)		18,220,717
Provision for loan losses		300,000		79,216		—			379,216
Noninterest income		2,081,238		2,434,836		857,136			5,373,210
Noninterest expense		5,602,977		8,875,465		2,100,700			16,579,142
Income taxes		1,729,450		1,205,450		(969,026	)		1,965,874

Net income (loss)	$	3,610,938	$	3,030,469	$	(1,971,712	)	$	4,669,695


	Six Months Ended June 30, 2006
	The Exchange
	National
	Bank of		Hawthorn		Corporate
	Jefferson City		Bank		and other			Total
Statement of earnings:
Total interest income	$	15,830,391	$	18,840,775	$	51,521		$	34,722,687
Total interest expense		6,374,107		7,378,775		1,676,710			15,429,592

Net interest income		9,456,284		11,462,000		(1,625,189	)		19,293,095
Provision for loan losses		450,000		178,000		—			628,000
Noninterest income		2,082,042		2,229,969		(36,920	)		4,275,091
Noninterest expense		5,758,746		8,676,298		334,015			14,769,059
Income taxes		1,715,600		1,481,525		(647,790	)		2,549,335

Net income (loss)	$	3,613,980	$	3,356,146	$	(1,348,334	)	$	5,621,792

16

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE WORDS “SHOULD”, “EXPECT”, “ANTICIPATE”, “BELIEVE”, “INTEND”, “MAY”, “HOPE”, “FORECAST” AND SIMILAR EXPRESSIONS MAY IDENTIFY FORWARD LOOKING STATEMENTS. IN PARTICULAR, STATEMENTS CONCERNING OUR COMPANY’S ABILITY TO EXPAND ITS PRESENCE IN THE KANSAS CITY, MISSOURI METROPOLITAN MARKET, CONCERNING OUR EXPECTED CONTRIBUTIONS TO ANY OF OUR BANK’S BENEFIT PLANS, CONCERNING OUR AMORTIZATION OF CORE DEPOSIT INTANGIBLES OR OTHER ASSETS, CONCERNING OUR INTENT AND ABILITY TO HOLD SECURITIES UNTIL MATURITY, THAT THE PERIODIC REVIEW OF OUR LOAN PORTFOLIO KEEPS MANAGEMENT INFORMED OF POSSIBLE LOAN PROBLEMS AND THAT THE ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON SPECIFIC CREDITS ARE ALL FORWARD-LOOKING STATEMENTS. OUR COMPANY’S ACTUAL RESULTS, FINANCIAL CONDITION, OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION, OR BUSINESS, OR FROM THE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS CONDITIONS SPECIFICALLY AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS HAVING A SPECIFIC IMPACT ON OUR COMPANY INCLUDING, BUT NOT LIMITED TO, FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND REGULATIONS APPLICABLE TO OUR COMPANY AND CHANGES THEREIN; COMPETITIVE CONDITIONS IN THE MARKETS IN WHICH OUR COMPANY CONDUCTS ITS OPERATIONS, INCLUDING COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER RESOURCES THAN OUR COMPANY, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS AND SERVICES NOT OFFERED BY OUR COMPANY; AND THE ABILITY OF OUR COMPANY TO RESPOND TO CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES WERE DISCUSSED UNDER THE CAPTION “FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS,” IN OUR COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006, AS WELL AS THOSE DISCUSSED ELSEWHERE IN OUR COMPANY’S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

17

Overview

This overview of management’s discussion and analysis highlights selected information in this report and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire report. These have an impact on our Company’s financial condition and results of operation.

Business Strategy: On December 1, 2006, our Company announced its development of a strategic plan. The plan included consolidating Exchange National Bank, Citizens Union State Bank, Osage Valley Bank and Bank 10 into a single bank under a Missouri state trust charter. The plan also included the selection of a new name for our Company and the combined subsidiary banks. Management believes the re-branding of the consolidated bank under a single name and logo eliminates any confusion that comes from operating under four separate bank identities and distinguishes our Company from any other bank in Missouri and the central states region.

On March 16, 2007 Osage Valley Bank and Citizens Union State Bank were combined. On April 20, 2007, our Company issued a press release announcing that Hawthorn Bank had been selected as the new name for its combined subsidiary banks. As of April 23, 2007 Citizens Union State Bank began using the name “Hawthorn Bank”. At the June 13, 2007 annual board meeting our Company’s shareholders approved to change our name from Exchange National Bancshares, Inc. to Hawthorn Bancshares, Inc. On June 22, 2007 Hawthorn Bank and Bank 10 were combined. Management intends to complete the consolidation process before December 31, 2007 when Exchange National Bank combines with Hawthorn Bank.

Material Challenges and Risks: Our Company may experience difficulties managing growth and effectively integrating newly established branches. As part of our general strategy, our Company may continue to acquire banks and establish de novo branches that we believe provide a strategic fit. To the extent that our Company does grow, there can be no assurances that we will be able to adequately and profitably manage such growth. The successes of our Company’s growth strategy will depend primarily on the ability of our banking subsidiaries to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. Our Company’s financial performance also depends, in part, on our ability to manage various portfolios and to successfully introduce additional financial products and services. Furthermore, the success of our Company’s growth strategy will depend on our ability to maintain sufficient regulatory capital levels and on general economic conditions that are beyond our control.

18

Revenue Source: Through the respective branch network, Exchange National Bank and Hawthorn Bank provide similar products and services in two defined geographic areas. The products and services offered include 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. Loans include real estate, commercial, installment, and other consumer loans. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated primarily from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City and Kansas City, Missouri. The products and services are offered to customers primarily within their respective geographical areas. The business segment results are consistent with our Company’s internal reporting system which is consistent, in all material respects, with generally accepted accounting principles and practices prevalent in the banking industry.

Much of our Company’s business is commercial, commercial real estate development, and mortgage lending. Our Company has experienced continued strong loan demand in the communities within which we operate even during economic slowdowns. Our Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing.

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.

Our Company has prepared the unaudited condensed consolidated financial statements 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.

Critical Accounting Policies: The impact and any associated risks related to the Company’s critical accounting policies on business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Management believes there have been no material changes to our critical accounting policies.

19

Results of Operations

Net income for the three months ended June 30, 2007 of $2,363,000 decreased $570,000 when compared to the second quarter of 2006. Diluted earnings per common share for the second quarter of 2007 of $0.56 decreased 14 cents or 20.0% when compared to the second quarter of 2006.

Net income for the six months ended June 30, 2007 of $4,670,000 decreased $952,000 when compared to the same period in 2006. Diluted earnings per common share for the first six months of 2007 of $1.11 decreased 23 cents or 17.1% when compared to the same period in 2006.

Net interest income (on a tax equivalent basis) was $9,324,000, or 3.66% of average earning assets, for the three months ended June 30, 2007, compared to $10,081,000, or 3.90% of average earning assets, for the same period in 2006. While the yield on earning assets increased 19 basis points from 7.03% for the three months ended June 30, 2006 to 7.22% for the three months ended June 30, 2007, the average rate paid on interest-bearing liabilities increased 49 basis points from 3.57% for the three months ended June 30, 2006 to 4.06% for the three months ended June 30, 2007.

Net interest income (on a tax equivalent basis) was $18,706,000, or 3.71% of average earning assets, for the six months ended June 30, 2007, compared to $19,796,000, or 3.86% of average earning assets, for the same period in 2006. While the yield on earning assets increased 39 basis points from 6.87% for the six months ended June 30, 2006 to 7.26% for the six months ended June 30, 2007, the average rate paid on interest-bearing liabilities increased 64 basis points from 3.42% for the six months ended June 30, 2006 to 4.06% for the six months ended June 30, 2007.

Average interest-earning assets for the three months ended June 30, 2007 were $1,020,642,000, a decrease of $15,725,000 or 1.5%, compared to average interest-earning assets of $1,036,367,000 for the same period of 2006. Average loans outstanding decreased approximately $225,000 while other earning assets decreased $15,500,000. The decrease in other earning assets reflects a decrease in the amount of investments required to secure public funds on deposit with our Company.

Average interest-earning assets for the six months ended June 30, 2007 were $1,018,100,000, a decrease of $15,258,000 or 1.5%, compared to average interest-earning assets of $1,033,358,000 for the same period of 2006. Average loans outstanding decreased approximately $8,983,000 while other earning assets decreased $6,275,000. The decrease in other earning assets reflects a decrease in the amount of investments required to secure public funds on deposit with our Company.

20

Net Interest Income

Fully taxable equivalent net interest income decreased $757,000 or 7.5% and $1,090,000 or 5.5% for the three and six month periods ended June 30, 2007 compared to the same period in 2006. The decrease in net interest income for the periods ended June 30, 2007 compared to the periods ended June 30, 2006 was the result of both decreased earning assets and decreased net interest margin. Management anticipates that our Company will continue to experience downward pressure on our net interest margin in the near future due to the competitive environment in which we operate.

21

The following table presents average balance sheets, net interest income, average yields of earning assets, and average costs of interest bearing liabilities on a fully taxable equivalent basis for the three month periods ended June 30, 2007 and 2006.

(Dollars expressed in thousands)


	Three Months Ended								Three Months Ended
	June 30, 2007								June 30, 2006
				Interest		Rate						Interest		Rate
	Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense/1/		Paid/1/			Balance			Expense/1/		Paid/1/
ASSETS

Loans:/2/ /3/	$	829,365		$	16,174		7.82	%	$	829,590		$	15,791		7.63	%
Investment in debt and equity securities :/4/
Government sponsored enterprises		119,097			1,396		4.70			127,046			1,349		4.26
State and municipal		54,795			548		4.01			52,624			714		5.44
Other		6,103			101		6.64			7,089			78		4.41
Federal funds sold		10,320			146		5.67			17,341			213		4.93
Interest-bearing deposits		962			11		4.59			2,677			31		4.64


Total interest earning assets		1,020,642			18,376		7.22			1,036,367			18,176		7.03

All other assets		126,898								123,989
Allowance for loan losses		(9,096	)							(9,285	)

Total assets	$	1,138,444							$	1,151,071


LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts	$	103,167		$	315		1.22	%	$	111,648		$	391		1.40	%
Savings accounts		48,096			68		0.57			53,495			76		0.57
Money market		153,395			1,354		3.54			154,104			1,258		3.27
Deposits of $100 and over		140,748			1,717		4.89			116,662			1,207		4.15
Other time deposits		319,104			3,701		4.65			312,462			2,993		3.84

Total time deposits		764,510			7,155		3.75			748,371			5,925		3.18
Federal funds purchased and securities sold under agreements to repurchase		32,534			357		4.40			45,460			486		4.29
Interest-bearing demand notes to US Treasury		144			2		5.57			720			9		5.01
Subordinated notes		49,486			898		7.28			49,486			874		7.08
Advances from Federal Home Loan Bank		46,711			640		5.50			65,236			801		4.92

Total interest-bearing liabilities		893,385			9,052		4.06			909,273			8,095		3.57
Demand deposits		126,186								133,501
Other liabilities		10,831								8,491

Total liabilities		1,030,402								1,051,265
Stockholders’ equity		108,042								99,806

Total liabilities and stockholders’ equity	$	1,138,444							$	1,151,071


Net interest income				$	9,324							$	10,081


Net interest margin/5/							3.66	%							3.90	%


/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 $239,000 in 2007 and $247,000 in 2006.

/2/		Non-accruing loans are included in the average amounts outstanding.

/3/		Fees on loans are included in average amounts outstanding.

/4/		Average balances based on amortized cost.

/5/		Net interest income divided by average total interest earning assets .

22

The following table presents average balance sheets, net interest income, average yields of earning assets, and average costs of interest bearing liabilities on a fully taxable equivalent basis for the six month periods ended June 30, 2007 and 2006.

(Dollars expressed in thousands)


	Six Months Ended								Six Months Ended
	June 30, 2007								June 30, 2006
				Interest		Rate						Interest		Rate
	Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense/1/		Paid/1/			Balance			Expense/1/		Paid/1/
ASSETS

Loans:/2/ /3/	$	816,541		$	31,952		7.89	%	$	825,524		$	30,553		7.46	%
Investment in debt and equity securities :/4/
Government sponsored enterprises		121,980			2,917		4.82			131,952			2,720		4.16
State and municipal		54,304			1,101		4.09			53,102			1,442		5.48
Other		6,210			179		5.81			7,129			147		4.16
Federal funds sold		17,308			458		5.34			12,980			307		4.77
Interest-bearing deposits		1,757			46		5.28			2,671			57		4.30


Total interest earning assets		1,018,100			36,653		7.26			1,033,358			35,226		6.87

All other assets		125,753								123,532
Allowance for loan losses		(9,070	)							(9,267	)

Total assets	$	1,134,783							$	1,147,623


LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts	$	105,219		$	661		1.27	%	$	112,345		$	782		1.40	%
Savings accounts		48,158			136		0.57			54,299			154		0.57
Money market		152,775			2,678		3.53			155,636			2,392		3.10
Deposits of $100 and over		140,430			3,426		4.92			116,064			2,265		3.94
Other time deposits		316,894			7,260		4.62			311,495			5,707		3.69

Total time deposits		763,476			14,161		3.74			749,839			11,300		3.04
Federal funds purchased and securities sold under agreements to repurchase		31,815			703		4.46			48,722			997		4.13
Interest-bearing demand notes to US Treasury		413			11		5.37			601			13		4.36
Subordinated notes		49,486			1,791		7.30			49,486			1,716		6.99
Advances from Federal Home Loan Bank		47,324			1,281		5.46			61,202			1,404		4.63

Total interest-bearing liabilities		892,514			17,947		4.06			909,850			15,430		3.42
Demand deposits		126,211								130,517
Other liabilities		9,935								8,398

Total liabilities		1,028,660								1,048,765
Stockholders’ equity		106,123								98,858

Total liabilities and stockholders’ equity	$	1,134,783							$	1,147,623


Net interest income				$	18,706							$	19,796


Net interest margin/5/							3.71	%							3.86	%


/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 $485,000 in 2007 and $503,000 in 2006.

/2/		Non-accruing loans are included in the average amounts outstanding.

/3/		Fees on loans are included in average amounts outstanding.

/4/		Average balances based on amortized cost.

/5/		Net interest income divided by average total interest earning assets.

23

The following table presents, on a fully taxable equivalent basis, an analysis of changes in net interest income resulting from changes in average volumes of earning assets and interest bearing liabilities and average rates earned and paid. 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.

(Dollars expressed in thousands)


	Three Months Ended June 30, 2007
	Compared to
	Three Months Ended June 30, 2007
	Total			Change due to
	Change			Volume /3/			Rate /4/
Interest income on a fully taxable equivalent basis:

Loans:/1/	$	383			(4	)		387
Investment in debt and equity securities :/3/
Government sponsored enterprises		47			(87	)		134
State and municipal		(166	)		28			(194	)
Other		23			(12	)		35
Federal funds sold		(67	)		(95	)		28
Interest-bearing deposits		(20	)		(20	)		—


Total interest income		200			(190	)		390

Interest expense:
NOW accounts	$	(76	)		(28	)		(48	)
Savings accounts		(8	)		(8	)		—
Money market		96			(6	)		102
Deposits of $100 and over		510			273			237
Other time deposits		708			65			643
Federal funds purchased and securities sold under agreements to repurchase		(129	)		(142	)		13
Interest-bearing demand notes of U.S. Treasury		(7	)		(8	)		1
Subordinated debentures		24			—			24
Other borrowed money		(161	)		(245	)		84


Total interest expense		957			(99	)		1,056


Net interest income on a fully taxable equivalent basis	$	(757	)		(91	)		(666	)


/1/		Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate. Such adjustments were $239,000 in 2007 and $247,000 in 2006.

/2/		Non-accruing loans are included in the average amounts outstanding.

/3/		Change in volume multiplied by yield/rate of prior period.

/4/		Change in yield/rate multiplied by volume of prior period.

24

The following table presents, on a fully taxable equivalent basis, an analysis of changes in net interest income resulting from changes in average volumes of earning assets and interest bearing liabilities and average rates earned and paid. 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.


	Six Months Ended June 30, 2007
	Compared to
	Six Months Ended June 30, 2006
	Total			Change due to
	Change			Volume /3/			Rate /4/
Interest income on a fully taxable equivalent basis:

Loans:/1/	$	1,399			(335	)		1,734
Investment in debt and equity securities :/3/
Government sponsored enterprises		197			(217	)		414
State and municipal		(341	)		32			(373	)
Other		32			(21	)		53
Federal funds sold		151			111			40
Interest-bearing deposits		(11	)		(22	)		11


Total interest income		1,427			(452	)		1,879

Interest expense:
NOW accounts	$	(121	)		(48	)		(73	)
Savings accounts		(18	)		(17	)		(1	)
Money market		286			(45	)		331
Deposits of $100 and over		1,161			530			631
Other time deposits		1,553			101			1,452
Federal funds purchased and securities sold under agreements to repurchase		(294	)		(369	)		75
Interest-bearing demand notes of U.S. Treasury		(2	)		(5	)		3
Subordinated debentures		75			—			75
Other borrowed money		(123	)		(350	)		227


Total interest expense		2,517			(203	)		2,720


Net interest income on a fully taxable equivalent basis	$	(1,090	)		(249	)		(841	)


/1/		Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate. Such adjustments were $485,000 in 2007 and $503,000 in 2006.

/2/		Non-accruing loans are included in the average amounts outstanding.

/3/		Change in volume multiplied by yield/rate of prior period.

/4/		Change in yield/rate multiplied by volume of prior period.

25

THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006

Our Company’s primary source of earnings is net interest income, which is the difference between the interest earned on interest earning assets and the interest paid on interest bearing liabilities. Net interest income on a fully taxable equivalent basis decreased $757,000 or 7.5% to $9,324,000 or 3.7% of average earning assets for the second quarter of 2007 compared to $10,081,000 or 3.9% of average earning assets for the same period of 2006. The provision for loan losses was $154,000 and $311,000 for the three months ended June 30, 2007 and 2006 respectively. Net charge-offs were $207,000 for the second quarter of 2007 compared to $361,000 for the second quarter of 2006. The decrease in the provision for loan losses for the second quarter of 2007 compared to second quarter 2006 reflects the expected loss in the loan portfolio based upon managements’ analysis of the risk in the portfolio. See Lending and Credit Management in this report for further discussion of second quarter 2007 charge-offs.

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Noninterest income and noninterest expense for the three-month periods ended June 30, 2007 and 2006 were as follows:

(Dollars expressed in thousands)


	Three Months Ended
	June 30,				Increase (decrease)
	2007		2006		Amount			%
Noninterest Income

Service charges on deposit accounts	$	1,306	$	1,517	$	(211	)		(13.9	)%
Trust department income		192		228		(36	)		(15.8	)
Mortgage loan servicing fees, net		95		109		(14	)		(12.8	)
Gain on sale of mortgage loans		212		90		122			135.6
Other		1,045		305		740			242.6

	$	2,850	$	2,249	$	601			26.7	%


Noninterest Expense

Salaries and employee benefits	$	4,847	$	4,343	$	504			11.6	%
Occupancy expense		486		448		38			8.5
Furniture and equipment expense		580		543		37			6.8
Advertising and promotion		249		205		44			21.5
Postage, printing and supplies		292		291		1			0.3
Legal, examination, and professional fees		600		319		281			88.1
Processing expense		285		302		(17	)		(5.6	)
Amortization — CDI		231		258		(27	)		(10.5	)
Other		875		748		127			17.0

	$	8,445	$	7,457	$	988			13.2	%

Noninterest income increased $601,000 or 26.7% to $2,850,000 for the second quarter of 2007 compared to $2,249,000 for the same period of 2006. Service charges on deposit accounts decreased $211,000 or 13.9% as a result of decreased overdraft and insufficient check fee income, ATM fee income, and debit card fee income. Trust department income decreased $36,000 or 15.8% due to timing of collections of trust distribution fees. Gain on sale of mortgage loans increased $122,000 or 135.6% due to an increase in volume of loans originated and sold to the secondary market from approximately $4,693,000 in the second quarter of 2006 to approximately $7,249,000 for the second quarter of 2007. Other noninterest income increased $740,000 or $242.6%. $450,000 of the increase represents the amount received from the sale of Bank 10’s state bank charter and $254,000 of the increase reflects recovery of prior years’ legal costs as a result of settlement of a lawsuit in our Company’s favor.

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Noninterest expense increased $988,000 or 13.2% to $8,445,000 for the second quarter of 2007 compared to $7,457,000 for the second quarter of 2006. Salaries and benefits increased $504,000 or 11.6%, advertising and promotion increased $44,000 or 21.5%, legal, examination, and professional fees increased $281,000 or 88.1% and other noninterest expense increased $127,000 or 17.0%. The $504,000 increase in salaries and employees benefits reflects normal salary increases, additional personnel resulting from staffing for a newly opened branch facility, in Columbia, Missouri and additional holding company personnel required for the implementation of our Company’s strategic plan. The $44,000 increase in advertising and promotion reflects nonrecurring costs associated with the re-branding of our Company’s name and logo. The $281,000 increase in legal, examination, and professional fees reflects costs incurred during the re-branding and merger of Hawthorn Bank and Bank 10. The $127,000 net increase in other noninterest expense reflects expenses in various other categories including, but not limited to, higher directors fees, travel, meals & entertainment, loan collection expenses and other insurance partially offset by lower expenses in correspondent bank charges and donations.

Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements were 29.2% for the second quarter of 2007 compared to 32.0% for the second quarter of 2006. The decrease in the effective income tax rate reflects a reduction in income subject to state bank taxes.

SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006

Our Company’s primary source of earnings is net interest income, which is the difference between the interest earned on interest earning assets and the interest paid on interest bearing liabilities. Net interest income on a fully taxable equivalent basis decreased $1,090,000 or 5.5% to $18,706,000 or 3.7% of average earning assets for the first six months ended of 2007 compared to $19,796,000 or 3.9% of average earning assets for the same period of 2006. The provision for loan losses was $379,000 and $628,000 for the six months ended June 30, 2007 and 2006 respectively. Net charge-offs were $284,000 for the first six months of 2007 compared to $378,000 for the same period in 2006. The decrease in the provision for loan losses for the first six months of 2007 compared to first six months of 2006 reflects the expected loss in the loan portfolio based upon managements’ analysis of the risk in the portfolio. See Lending and Credit Management in this report for further discussion of second quarter 2007 charge-offs.

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Noninterest income and noninterest expense for the six-month periods ended June 30, 2007 and 2006 were as follows:

(Dollars expressed in thousands)


	Six Months Ended
	June 30,						Increase (decrease)
	2007			2006			Amount			%
Noninterest Income

Service charges on deposit accounts	$	2,586		$	2,878		$	(292	)		(10.1	)%
Trust department income		429			408			21			5.1
Mortgage loan servicing fees, net		190			224			(34	)		(15.2	)
Gain on sale of mortgage loans		341			202			139			68.8
Loss on sales and calls of debt securities		(2	)		(18	)		16			(88.9	)
Other		1,829			581			1,248			214.8

	$	5,373		$	4,275		$	1,098			25.7	%


Noninterest Expense

Salaries and employee benefits	$	9,670		$	8,688		$	982			11.3	%
Occupancy expense		992			900			92			10.2
Furniture and equipment expense		1,160			1,062			98			9.2
Advertising and promotion		429			387			42			10.9
Postage, printing and supplies		559			584			(25	)		(4.3	)
Legal, examination, and professional fees		911			613			298			48.6
Processing expense		554			515			39			7.6
Amortization — CDI		477			534			(57	)		(10.7	)
Other		1,827			1,486			341			22.9

	$	16,579		$	14,769		$	1,810			12.3	%

Noninterest income increased $1,098,000 or 25.7% to $5,373,000 for the first six months of 2007 compared to $4,275,000 for the same period of 2006. Service charges on deposit accounts decreased $292,000 or 10.1% as a result of decreased overdraft and insufficient check fee income, ATM fee income, and debit card fee income. Trust department income increased $21,000 or 5.1% due to the collection of additional trust distribution fees. Gain on sale of mortgage loans increased $139,000 or 68.8% due to an increase in volume of loans originated and sold to the secondary market from approximately $10,832,000 in the first six months of 2006 to approximately $16,508,000 for the first six months of 2007. Our Company recognized $2,000 in loss on sales and calls of debt securities during the second quarter of 2007 versus losses of $18,000 during the second quarter of 2006. Other noninterest income increased $1,248,000 or $214.8%. $875,000 of the increase represents the amount received from the sale of Osage Valley Bank and Bank 10’s state bank charter and $254,000 of the increase reflects recovery of prior years’ legal costs as a result of settlement of a lawsuit in our Company’s favor.

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Noninterest expense increased $1,810,000 or 12.3% to $16,579,000 for the first six months of 2007 compared to $14,769,000 for the first six months of 2006. Salaries and benefits increased $982,000 or 11.3%, advertising and promotion increased $42,000 or 10.9%, legal, examination, and professional fees increased $298,000 or 48.6%, and other noninterest expense increased $341,000 or 22.9%. The $982,000 increase in salaries and employees benefits reflects normal salary increases, additional personnel resulting from staffing for a newly opened branch facility, in Columbia, Missouri, and additional holding company personnel required for the implementation of our Company’s strategic plan. The $42,000 increase in advertising and promotion reflects nonrecurring costs associated with the re-branding of our Company’s name and logo. The $298,000 increase in legal, examination, and professional fees reflects costs incurred during the re-branding and merger of Hawthorn Bank and Bank 10. The $341,000 net increase in other noninterest expense reflects expenses in various other categories including, but not limited to, higher directors fees, travel, meals & entertainment, loan collection expenses and other insurance partially offset by lower expenses in correspondent bank charges and donations.

Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements were 29.6% for the first six months of 2007 compared to 31.2% for the fist six months of 2006. The decrease in the effective income tax rate reflects a reduction in income subject to state bank taxes.

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for our Company. Net loans represented 71.4% of total assets as of June 30, 2007 compared to 70.3% as of December 31, 2006 and 71.0% as of June 30, 2006.

Lending activities are conducted pursuant to written loan policies approved by our Banks’ Boards of Directors. Larger credits are reviewed by our Banks’ Discount Committees. These committees are comprised of members of senior management.

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. At June 30, 2007, our Company was servicing approximately $210,636,000 of loans sold to the secondary market.

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.

The provision for loan losses is based on management’s evaluation of the loan portfolio in light of national and local economic conditions, changes in the composition and volume of the loan portfolio, changes in the volume of past due and nonaccrual loans, value of underlying collateral and other relevant factors. The allowance for loan losses which is reported as a deduction from loans is available for loan charge-offs. This allowance is increased by the provision charged to expense and is reduced by loan charge-offs net of loan recoveries.

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Management formally reviews all loans in excess of certain dollar amounts (periodically established) at least annually. In addition, on a monthly basis, management reviews past due, “classified”, and “watch list” loans in order to classify or reclassify loans as “loans requiring attention,” “substandard,” “doubtful,” or “loss”. During that review, management also determines which loans should be considered to be “impaired”. Management follows the guidance provided in Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114) 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. Once a loan has been identified as impaired management generally measures impairment based upon the fair value of the underlying collateral. Management believes, but there can be no assurance, that these procedures keep management informed of possible 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.

The allowance for loan losses was decreased by net loan charge-offs of $77,000 and $207,000 for the first and second quarter of 2007 compared to $17,000 and $378,000, respectively for the first and second quarter of 2006. The allowance for loan losses was increased by a provision charged to expense of $225,000 for the first quarter of 2007 and $154,000 for the second quarter of 2007. That compares to a provision of $318,000 for the first quarter of 2006 and $311,000 for the second quarter of 2006.

The balance of the allowance for loan losses was $9,110,000 at June 30, 2007 compared to $9,015,000 at December 31, 2006 and $9,335,000 at June 30, 2006. The allowance for loan losses as a percent of outstanding loans was 1.09% at June 30, 2007 compared to 1.11% at December 31, 2006 and 1.12% at June 30, 2006. Based upon an analysis of the probable losses in the loan portfolio management believes the current balance of the allowance for loan losses is at an adequate level.

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Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and restructured loans totaled $5,747,000 or 0.69% of total loans at June 30, 2007 compared to $5,066,000 or 0.62% of total loans at December 31, 2006. Detail of those balances plus other real estate and repossessions is as follows:

(Dollars expressed in thousands)


	June 30, 2007					December 31, 2006
			% of Gross					% of Gross
	Balance		Loans			Balance		Loans
Nonaccrual loans:
Commercial	$	2,805		0.34	%	$	2,495		0.31	%
Real estate:
Construction		1,241		0.15			1,657		0.20
Mortgage		825		0.10			644		0.08
Consumer		38		—			73		0.01

		4,909		0.59			4,869		0.60


Loans contractually past-due 90 days or more and still accruing:
Commercial		3		—			5		—
Real estate:
Construction		453		0.06			—		—
Mortgage		367		0.04			170		0.02
Consumer		15		—			22		—

		838		0.10			197		0.02


Restructured loans		—		—			—		—

Total nonperforming loans		5,747		0.69	%		5,066		0.62	%


Other real estate		2,636					2,720
Repossessions		—					15

Total nonperforming assets	$	8,383				$	7,801

The allowance for loan losses was 158.5% of nonperforming loans at June 30, 2007 compared to 177.9% of nonperforming loans at December 31, 2006.

It is our Company’s policy to discontinue the accrual of interest income on loans when the full collection of interest or principal is in doubt, or when the payment of interest or principal has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current. Interest on loans on nonaccrual status which would have been recorded under the original terms of those loans was approximately $413,000 and $573,000 for the six months ended June 30, 2007 and 2006, respectively. Approximately $335,000 and $16,000 was recorded as interest income on such loans for the six months ended June 30, 2007 and 2006, respectively.

A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due — both principal and interest — according to the contractual terms of the loan agreement. In addition to nonaccrual loans included in the table above, which were considered impaired, management has identified approximately $4,217,000 of additional loans as being impaired at June 30, 2007. The average balance of nonaccrual and other impaired loans for the first six months of 2007 was approximately $11,561,000. At June 30, 2007 the portion of the

32

allowance for loan losses allocated (both asset-specific and percentage) to impaired loans was $2,760,000 compared to $3,287,000 at December 31, 2006. The balance of impaired loans with no specific loan loss allocations was approximately $533,000 at June 30, 2007 compared to approximately $3,117,000 at December 31, 2006.

As of June 30, 2007 and December 31, 2006 approximately $4,894,000 and $7,102,000 of loans, respectively, not included in the nonaccrual table above or identified by management as being impaired were classified by management as having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. The decrease in loans having more than normal risk is primarily represented by one large commercial real estate credit which has paid down approximately $1,300,000 since 2006 year-end. A principal of $1,040,000 remains as of June 30, 2007. The remaining decrease is the result of payments on various other classified loans. In addition to the classified list, our Company also maintains an internal watch list of loans, which for various reasons, not all related to credit quality, management is monitoring more closely than the average loan in the portfolio. Loans may be added to this list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added as soon as any problem is detected which might affect the borrower’s ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, a deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Once the loan is placed on our Company’s watch list, its condition is monitored closely. Any further deterioration in the condition of the loan is evaluated to determine if the loan should be assigned to a higher risk category.

The allowance for loan losses is available to absorb probable loan losses regardless of the category of loan to be charged off. The allowance for loan losses consists of three components: asset-specific reserves, 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 discounted cash repayments and proceeds from liquidating 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 generally determined by applying percentages to pools of loans by asset type. These pre-established percentages are based upon standard bank regulatory classification percentages as well as average 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 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

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segments, bank regulatory examination results, and findings of our internal loan review department.

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.

At June 30, 2007, management allocated $7,483,000 of the $9,110,000 total allowance for loan losses to specific loans and loan categories and $1,627,000 was unallocated. At December 31, 2006, management allocated $8,012,000 of the $9,015,000 total allowance for loan losses to specific loans and loan categories and $1,003,000 was unallocated. Due to current economic conditions that may impact our borrowers’ ability to service their loans, management believes the increase in the unallocated portion of the allowance for loan losses is appropriate. Considering the size of several of our Company’s lending relationships and the loan portfolio in total, management believes that the June 30, 2007 overall allowance for loan losses is adequate.

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.

Financial Condition

Total assets increased $17,396,000 or 1.5% to $1,160,108,000 at June 30, 2007 compared to $1,142,712,000 at December 31, 2006. Total liabilities increased $14,766,000 or 1.4% to $1,052,533,000 compared to $1,037,767,000 at December 31, 2006. Stockholders’ equity increased $2,630,000 or 2.5% to $107,574,000 compared to $104,945,000 at December 31, 2006.

Loans increased $25,109,000 to $837,422,000 at June 30, 2007 compared to $812,313,000 at December 31, 2006. Commercial loans increased $4,517,000; real estate construction loans decreased $19,431,000; real estate mortgage loans increased $43,667,000; and consumer loans decreased $5,444,000. The decrease in construction loans and the increase in real estate mortgage loans primarily reflect the reclassification of completed construction loans to permanent real estate mortgage loans. The decrease in consumer loans reflects the low rates that existed in the consumer auto market that was fueled by manufacturers’ financing programs which generally tend to offer more favorable financing rates than our Company. Our Company chose to not aggressively pursue consumer auto loans during the periods presented and as such this portion of the loan portfolio declined.

Investment in debt securities classified as available-for-sale decreased $11,927,000 or 6.5% to $171,639,000 at June 30, 2007 compared to $183,566,000 at December 31, 2006. Investments classified as available-for-sale are carried at fair value. During 2007 the market valuation account decreased $669,000 to ($1,690,000) to reflect the fair value of available-for-

34

sale investments at June 30, 2007 and the net after tax decrease resulting from the change in the market valuation adjustment of $441,000 decreased the stockholders’ equity component to ($1,109,000) at June 30, 2007.

Investment in equity securities decreased $632,000 or 10.2% to $5,575,000 at June 30, 2007 compared to $6,207,000 at December 31, 2006. The decrease reflects sales of Federal Home Loan Bank stock resulting from the sale of the Osage Valley Bank and Bank 10’s charters offset by purchases of Federal Home Loan Bank stock due to additional Federal Home Loan Bank borrowings.

At December 31, 2006 the market valuation account for the available-for-sale investments of ($1,021,000) decreased the amortized cost of those investments to their fair value on that date and the net after tax increase resulting from the market valuation adjustment of ($668,000) was reflected as a separate component of stockholders’ equity.

Although all securities are classified as available-for-sale and have on occasion been sold prior to maturity to meet liquidity needs or to improve portfolio yields, management has the ability and intent to hold securities until maturity and expects that the securities will be redeemed at par. Therefore management does not consider any of the securities to be other than temporarily impaired.

Cash and cash equivalents, which consist of cash due from banks and Federal funds sold, increased $1,436,000 or 2.7% to $54,437,000 at June 30, 2007 compared to $53,001,000 at December 31, 2006. Further discussion of this increase may be found in the section of this report titled “Sources and Uses of Funds”.

Premises and equipment increased $3,600,000 or 10.4% to $38,307,000 at June 30, 2007 compared to $34,707,000 at December 31, 2006. The increase reflects purchases of premises and equipment of $4,571,000 offset by depreciation expense of $952,000. The increase in premises and equipment is the result of construction projects related to two new branches in Columbia, Missouri and Clinton, Missouri.

Total deposits increased $17,293,000 or 1.9% to $917,158,000 at June 30, 2007 compared to $899,865,000 at December 31, 2006. This increase in deposits primarily reflects an increase in public funds and growth in our banks in the Kansas City and Columbia, Missouri markets.

Federal funds purchased and securities sold under agreements to repurchase decreased $3,863,000 or 13.1% to $25,597,000 at June 30, 2007 compared to $29,460,000 at December 31, 2006.

Other borrowed money increased $2,020,000 or 4.2% to $49,388,000 at June 30, 2007 compared to $47,368,000 at December 31, 2006. The decrease reflects net borrowings of Federal Home Loan Bank advances.

The increase in stockholders’ equity reflects net income of $4,670,000 less dividends declared of $1,751,000, a $442,000 change in unrealized holding losses, net of taxes, on investment in debt and equity securities available-for-sale, $23,000 amortization of net gain and prior service cost for defined benefit plan, and a $107,000 increase, net of taxes, related to stock option compensation expense.

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No material changes in our Company’s liquidity or capital resources have occurred since December 31, 2006.

Liquidity

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 Banks’ Asset/Liability Committees (ALCO), primarily made up of senior management, have 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. The deposit base, consisting of consumer and commercial deposits and large dollar denomination ($100,000 and over) certificates of deposit, is a source of funds.

Other sources of funds available to meet daily needs include the sales of securities under agreements to repurchase. In addition, the Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As members of the FHLB, the Banks have access to credit products of the FHLB. At June 30, 2007, the amounts of available credit from the FHLB totaled $89,379,000. As of June 30, 2007, the Banks had $49,388,000 in outstanding borrowings with the FHLB. The Banks have federal funds purchased lines with correspondent banks totaling $60,000,000. Finally, our Company has a $20,000,000 line of credit with a correspondent bank. This line of credit had no balance in use as of June 30, 2007.

Sources and Uses of Funds

For the six months ended June 30, 2007 and 2006, net cash provided by operating activities was $7,388,000 and $7,998,000, respectively. $952,000 of the decrease in net cash provided by operating activities reflects a lower level of net income.

Net cash used in investing activities was $17,938,000 in 2007 versus $30,715,000 in 2006. The primary decrease in cash used in investing activities reflects lower purchases of debt securities during the first six months of 2007 partially offset by proceeds received by calls and sales of debt securities, an increase in purchases of premises and equipment for 3 new branch facilities, and an increase in loans.

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Net cash provided by financing activities was $11,986,000 in 2007 versus $29,781,000 in 2006. Our Company experienced a $70,000 decrease in demand deposits in 2007 compared to an $8,348,000 increase during the same period in 2006. Our Company experienced a $17,363,000 increase in interest bearing transactions accounts and time deposits in 2007 compared to a $9,046,000 increase during the same period in 2006. Our Company experienced a net increase in Federal Home Loan Bank borrowings of $5,700,000 during the first six month of 2006 compared $2,019,000 during the same time period 2007. In addition federal funds sold and securities sold under agreements to repurchase increased $9,089,000 in 2006 compared to a $3,863,000 decrease in 2007.

Impact of New Accounting Pronouncements

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 156). SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value. In addition, entities are permitted to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment. Beginning with fiscal year in which an entity adopts SFAS No. 156, it may elect to subsequently measure a class of servicing assets and liabilities at fair value. Post adoption, an entity may make this election as of the beginning of any fiscal year. An entity that elects to subsequently measure a class of servicing assets and liabilities at fair value should apply that election to all new and existing recognized servicing assets and liabilities within that class. The effect of remeasuring an existing class of servicing assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The statement also requires additional disclosures. Our Company has adopted SFAS No. 156 as of January 1, 2007 and elected to use the amortized cost method of accounting for financial assets. As a result, the adoption of SFAS No. 156 did not have a material impact on our Company’s financial position or results of operations.

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48, “Accounting for Uncertainty in Income Taxes”, an Interpretation of FAS No. 109, Accounting for Income Taxes (FIN 48). The Interpretation defines the threshold for recognizing the financial impact of uncertain tax provisions in accordance with FAS 109. An enterprise would be required to recognize, in its financial statements, the best estimate of the impact of a tax position only if that position is “more-likely-than-not” of being sustained on audit based solely on the technical merits of the position on the reporting date. In evaluating whether the probable recognition threshold has been met, the Interpretation would require the presumption that the tax position will be evaluated during an audit by taxing authorities. The term “more-likely-than-not” is defined as a likelihood of more than 50 percent. Individual tax positions that fail to meet the recognition threshold will generally result in either (a) a reduction in the deferred tax asset or an increase in a deferred tax liability or (b) an increase in a liability for income taxes payable or the reduction of an income tax refund receivable. The impact may also include both (a) and (b). This Interpretation also provides guidance on disclosure, accrual of interest and penalties, accounting in interim periods, and transition. The Interpretation is effective for

37

reporting periods after December 15, 2006. Our Company adopted the provisions of FIN 48 on January 1, 2007, and the adoption had no material impact on our Company’s financial position or results of operations. See Income Taxes in the notes to the financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. The changes to current practice resulting from the application of this statement relates to the definition of fair value, the methods used to estimate fair value, and the requirements for expanded disclosures about estimates of fair value. SFAS No. 157 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Our Company is currently evaluating the impact of the adoption of SFAS No. 157; however, it is not expected to have a material impact on our Company’s financial position or results of operations.

In September 2006, the Emerging Issues Task Force Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, was ratified. This EITF Issue addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying this Issue must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. For calendar year companies such as our Company, the Issue is effective beginning January 1, 2008. Our Company does not expect the adoption of the Issue to have a material effect on our Company’s consolidated financial statements.

In February 2007, the FASB issued FAS No. 159, The Fair Value for Financial Assets and Financial Liabilities-Including an amendment to FAS No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with FASB’s long-term measurement objectives for accounting for financial instruments. This Statement is effective for financial statements issued for the fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements. Our Company is currently evaluating the effects of this statement on its financial statements and has made a decision to not exercise the early adoption option provision of this statement.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our Company’s exposure to market risk is reviewed on a regular basis by our Banks’ Asset/Liability Committees and Boards of Directors. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize those risks. Tools used by our Banks’ management include the standard GAP report subject to different rate shock scenarios. At June 30, 2007, the rate shock scenario models indicated that annual net interest income could decrease or increase by as much as 12.6% should interest rates rise or fall, respectively, within 200 basis points from their current level over a one year period compared to 9.4% at December 31, 2006. However there are no assurances that the change will not be more or less than this estimate. Management further believes this is an acceptable level of risk.

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 of June 30, 2007. 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.

Other than consolidation of various subsidiary level controls, there has been no change in our Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

At the annual meeting of the shareholders of Hawthorn Bancshares, Inc. held on June 13, 2007, the shareholders reelected two Class III directors, namely, Kevin L. Riley and David T. Turner, to serve terms expiring at the annual meeting of shareholders in 2010, ratified the Board of Directors selection of KPMG LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2007, ratified the approval of the Company’s 2007 Omnibus Incentive Plan, and ratified the corporate name change to Hawthorn Bancshares, Inc. effective June 13, 2007. Class II Directors, namely, Julius F. Wall and Gus S. Wetzel, II, and Class I directors, namely Charles G. Dudenhoeffer, Jr., Phillip D. Freeman, and James E. Smith, continue to serve terms expiring at the annual meetings of shareholders in 2009 and 2008, respectively.

The following is a summary of votes cast. No broker non-votes were received except for 717,015 broker non-votes with respect to the ratification of the Omnibus Incentive Plan.


			Withhold
			Authority
	For		Against		Abstentions
Election of Directors:
Kevin L. Riley		2,872,174		434,033		N/A
David T. Turner		2,889,371		416,836		N/A

Ratification of KPMG LLP as independent registered public accounting firm		3,266,108		23,038		17,062

Ratification of Omnibus Incentive Plan		2,028,716		643,384		113,170

Ratification of corporate name change		2,516,392		758,032		31,778

Item 5. Other Information

None

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Item 6. Exhibits


Exhibit No.		Description
3.1		Articles of Incorporation of our Company (filed as Exhibit 3(a) to our Company’s Registration Statement on Form S-4 (Registration No. 33-54166) and incorporated herein by reference).

3.2		Bylaws of our Company (filed as Exhibit 3.2 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (Commission file number 0-23636) and incorporated herein by reference).

4		Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference).

31.1		Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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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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
		/s/ James E. Smith

August 9, 2007		James E. Smith, Chairman of the Board
		and Chief Executive Officer (Principal Executive Officer)

		/s/ Richard G. Rose

August 9, 2007		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, 2007 Form 10-Q


Exhibit No.	Description	Page No.
3.1	Articles of Incorporation of our Company (filed as Exhibit 3(a) to our Company’s Registration Statement on Form S-4 (Registration No. 33-54166) and incorporated herein by reference).		**

3.2	Bylaws of our Company (filed as Exhibit 3.2 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (Commission file number 0-23636) and incorporated herein by reference).		**

4	Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference).		**

31.1	Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		44

31.2	Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		45

32.1	Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		46

32.2	Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		47


**		Incorporated by reference.

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Hawthorn Bancshares - 10-Q quarterly report FY

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