Hawthorn Bancshares, Inc. Annual Report 2012

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FY2012 Annual Report · Hawthorn Bancshares, Inc.

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(DL^9/9

2012

ANNUAL REPORT

SHAREHOLDERS

HAWTHORN BANCSHARES, INC.

Jefferson City, Missouri

April 1,2013

Dear Investors:

Hawthom Bancshares, like the general banking sector, is recovering slowly. Income levels, while positive, have not been restored to pre-
recession levels; but I am pleased to report that a recovery, albeit slow, is nonetheless occurring..

For 2012, Hawthom reported a net profit of $2.8 million compared to $2.9 million for 2011. Despite a slightly lower net profit, income
available to common shareholders improved for 2012 to Sl.O million compared to $0.9 million for 2011 due to our $12 miUion partial
repayment of debt associated with the U.S. Treasury's'Capital Purchase Program (commonly called TARP). On a per share basis, this equates
to a net profit of $0.21 per common share for 2012 compared to $0.18 for 2011.

Looking at our net interest margin from a historical perspective, net interest income has consistently exceeded $40 million since 2009 while
asset levels trended slightly lower. Essentially, Hawthorn's core operations remain sfrong as our net interest margin continues to fare well in
comparison to our peers. With the historically low rate environment and growing competition for quahty loans, the entire banking industry is
experiencing margin pressure and while Hawthom is experiencing some compression, the margiii for 2012 remained healthy. On a tax
equivalent basis, Hawthom's net interest margin for 2012 was 3.83%"compared to 3.92% for 2011 but exceeded our peer group's margin for
2012 of 3.69%. The lower net interest margin for 2012 was primarily the result of reduced eaming asset yields, while the volume of eaming
assets remained relatively steady.

Non-interest income for 2012 was $9.7 million compared to $9.2 million for 2011. The increase is primarily the result of a $ 1.5 milhon increase
in the gain on sales of mortgage loans due to higher real estate refinancing activity experienced during 2012 which was partially offset by a
$0.5 million decrease in real estate servicing income related to changes in the fair value of mortgage servicing rights. T^on-interest expense for
2012 was $38.7 million compared to $36.8 million for 2011. The largest contributors to the increase were salary and benefit expenses related to
opening a lending center in Liberty, Missouri and additional support staff.

Non-performing loans decreased $14.3 million to 4.65% of total loans at December 31, 2012, from 6.37% at December 31; 20fl. During the
year, net charge-offs were $7.9 million compared to $12.3 million for 2011. The allowance for loan losses at December 31, 2012 was $14.8
million, or 1.75% of outstanding loans, and 37.7% of non-performing loans compared to December 31, 2011, where the allowance:for loan
losses was $13.8 million,:or 1.64% of outstanding loans, and 25.7% of non-performing loans. As we evaluate our loan portfolio, we are not
seeing the same level of significant deterioration in our customers' circumstances that we have seen in the recent past. A significant portion of
our reserves is allocated to loans of customers who are working through their financial problems but have seen deterioration in the value of
their collateral.

On May 9, 2012, a $12 million partial repayment was made on the U.S. Treasury's Capital Purchase Program (commonly call TARP) fiinds of
$30.3 milhon. Plans are underway to repay without the need to raise additional capital the remaining $18.3 million debt prior to the December
2013 time frame when the interest rate on the TARP funds increases from 5% to 9%. At December 31, 2012, Hawthom's capital measurements
exceeded regulatory "well-rnanaged" thresholds despite slight reductions related to the aforementioned $12 million partial repayment. It is
ariticipated that the capital le'vfels will continue to exceed'Veil-managed''levels even after repaying the r e ^^

I am certainly not pleased with a 0.24% retum on average assets and a 1.40% retum on average common equity. 'We can, and will, do better!
As a shareholder, director and executive officer, I am committed to maintaining strong asset quality, improving eamings performance,
sustaining sound and proper capital levels and paying regular di-vidends. I am confident that our Company's 2013 profitability will improve as
repayment ofthe Company's debt occurs and fiirther sttengthening in asset quality is achieved.

David T. Tumer,
Chairman & Chief Executive Officer

A WORD CONCERNING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans,
objectives, future performance, and business of the Company, Hawthom Bancshares, Inc., and its subsidiaries, including,
without limitation:

•

statements that are not historical in nature, and

statements preceded by, followed by or that include the words "believes," "expects," "may," "will," "should," "could,"
"anticipates," "estunates," "intends" or shnilar expressions.

Forward-looking statements' are not guarantees of future performance or results. They involve risks, uncertainties and
assumptions. Actual resuhs may differ materially from those contemplated by the forward-lookmg statements due to, among
others, the following factors:

•

• "icompetitive pressures, among financial services companies may increase significantly,

• changes in the interest rate environment may reduce interest margins,

• ' general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely

affect the quality of loans and other assets,

•'

increases in non-performing assets in the loan portfolios and adverse economic conditioris may necessitate mcreases to
the provisions for loan losses,

• costs or difficulties related to the integration ofthe business of the Company and its acquisition targets may be greater

than expected,

•
• < engaged, and

legislative or regulatory changes may adversely affect the business in which the Compiany and its subsidiaries are

•

" '

• changes may occur in the securities markets.

The Dodd;Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, was enacted on
My 21, 2010. Provisions ofthe Act address many issues including, but not limited to, capital, interchange fees, comphance
and risk management, debit card overdraft fees, the establishment of a new consumer regulator, healthcare, incentive
compensation, expanded disclosures and corporate govemance. While many of the new regulations under the Act are expected
to primarily impact financial institutions with assets greater than $10 billion, the Company expects these riew regulations could
reduce the revenues and increase the expenses in the future. Management is currently assessing the impact ofthe Act and of
the regulations anticipated to be promulgated under the Act.

We have described under the caption "Risk Factors" in the Annual Report on Form 10-Rfor the year ended December
31, 2012, and in other reports that we file with the SEC from time to time, additional factors that could cause actual results to be
materially different from those described in the forward-looking statemaits. Other factbrs that we have not identified in this
report could also have this effect. You are cautioried not to put undue reliance on any foiward-looking statements, which speak
only as of the date they were made.

HAWTHORN BANCSHARES, INC.

' '\; MANAGEMENT'S DISCUSSION AND ANALYSIS OF

^ : / ; ; ''

CONSOLIDATED FINANCIAL CdNDITlON AND RESULTS OF OPERATIONS

Overview

:.\-

• •"••

- •

Through the branch network of hs subsidiary bank, the Company provides a broad range of commercial and personal
banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other
demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. The Company also
provides a wide range of lending services, ihcliidihg real estate, commercial, installment, and other consumer loans. Other
financial
services that the Company provides include automated teller machines, tmst services, credit-related insurance, and
safe-deposit boxes. The geographic areas in which we provide products and services include the communities in and-
surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee's Summit, Missouri.

The Company's primary source of revenue is net interest income derived primarily from lending and deposit taking
acti-vities. A secondary source of revenue is investment income. The Company also derives income from trust, brokerage, credit
,
card and mortgage banking activities and,service charge income.

.Much of the Company's business is commercial, commercial real estate development, and mortgage lending: T he
Company has experienced soft loan demand in the communhies -within which we operate during the current economic
slowdown. The Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of
home purchases and refinancings.

. The success of the Company's growth sttategy depends primarily on theability ofthe banking subsidiary t o g e n e r a te
an increasing level ofloans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-'
interest expenses relative to revenues generated. The Cgmpany's financial performance also depends, in part, on the ability to
manage various portfolios and to successfully introduce additional financial products and services by expanding new and
existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the,success
ofthe Company's growth sfrategy depends on the ability to maintain sufficient regulatory capital levels during periods in, which
general economic condhions are unfavorable and despite economic conditions being beyond its conttol.

Hawthom Bank (the Bank), the Company's subsidiary bank, is a full-service bank conducting a general banking
business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a
wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment personal
loans, installment loans and credit card accounts. In addition, the Bank provides frust services.

The deposit accounts o f t he Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent
provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance.
Periodic examinations ofthe Bank are conducted by representatives o f t he FDIC and the Missouri Division of Finance. Such
regulations, supervision and examinations are principally for the benefit of depositors, rather than for the 'benefit of
shareholders. The Company is subject to supervision and examination by the Federal Reserve Board.

S E L E C T ED C O N S O L I D A T ED F I N A N C I AL D A TA

The following table presents selected consolidated,finaricial information" for the Company as of and for each of the
financial-data should be read in conjunction with

years in the five-years ended December 3f, 2012. The selected consolidated
the Consolidated Financial Statements of the'Company, including the related notes, presented elsewhere herein.

Income Statement Data
(In thousands, except per share data)

Interest income
Interest expense
Net interest income
ProvisionTor loan losses
Net interest income after

provision for loaii losses

Non-interest income
Gain on sale of investment securities
Total non-interest incoine
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss) :..^
Less: preferred stock dividends
andaccretion of discount on
. prefen-ed stock
.,
Net income (loss) available to
: common shareholders

;

49,114 $

•- ^ ^

:. 7,905V.
: 41,209 ••
8,900

' 3 2 , 3 09
9,700
26
9,726
38,667
3,368
546
-2,822
1,125

•

. 'i'

2012

2011

2010

2009

2008

53,469 $
..
! 10,853
•"42,616V',
1 1 , 5 23
-

' • ] • • '•

58,739 $ ":
15,753
42,986

63,562,$
..:22,974:,;^;.:
40,588 '
8,354 •

69,715

•31,093
• '9,200
0
• 9i200

36,845 -^
3;448 "

5 9 1. r.t.;'

.o:

•
•-..:•: 2 , 8 5 7 .'
' 1,513^

27,731
10,481,.

0
-10,481

'
,'
'

44,85f • •
(6,639) : '"•
(3,087).
(3,552)-:-
1,513

32,234- ^

•:",'10,702
6 06

••; ,
••' !,

' ^^41,308 >•
36,730
•' 6,812
1,856
4,956
L517
•

477 . "

K31,599
'38,116
8,211

• 29,905
9,294

9,297
75,975
(36,773)
.(6,146)
(30,627)
50

'>>
„ . ,: 16

;,,,.

659

: 1.038 $

-
,
••

.476 .
.

•
-

8 6 8 $:

.;r476 .,,
. . . • • ' : :'
(5.541) >$: •

-;
" 9 4 9$
940

'"'•' ^-''"''

913 $•

' 9 04

1,136$
1,385

2.962 $

(30^693)

'
'
2 , 2 7 0 $'
'
2;6fe6

• -•'

'
3,486
' 3 , 4 8 6 ' ''

33.63% •

105.18%

NM •• • •

76.64%

.. NM

''• '

•

'' "• .'' --

0.21 :$-
0.21

0.-18 $
0.18

4,839,114

( f l 5) $
( f l 5)
:>

>
4,839,114

,0.61 $
:0;61

4,839,114

4,839.114

(6.31)
(6.31)

'..,.-'
:4,861,'630 '
r'^'
4,861,630:-

Dividends on Common Stock
Declared
Paid
Ratio of total dividends

declared to net income

P er S h a re D a ta
Basic eamings (loss):per common share
Diluted eamings (loss) per common share
Basic weighted average shares of
common stock outstanding

Diluted weighted average shares of

common stock outstanding

NM - not meaningfiil

In thousands)

2012

2011

2010

2009

2008

Salance Sheet Data (at year end)
Total assets
!^ans
tavestment securities
Total deposits
5ubordinatednotes
Federal Home Loan Bank advances
[Common stockholders'equity
Total stockholders' equity

Balance Sheet Data (average balances)
Total assets
L^ans
Investment securities
Total deposits
Subordinated notes
Federal Home Loan Bank advances
Common stockholders' equity
Total stockholders' equity

KeyRatios

Earnings Ratios
Return (loss) on average total assets
Return (loss) on average

common stockholders' equity

Efficiency ratio (3)

Asset Quality Ratios
Allowance for loan losses to loans
Nonperforming loans to loans (1)
Allowance for loan losses to
nonperlbrming loans (1)
Nonperforming assets to loans
and foreclosed assets (2)

Net loan charge-offs to average loans

Capital Ratios
Average stockholders' equity to

average total assets

Period-end common stockholders' equity to

period-end assets

Period-end stockholders' equity to

period-end assets

Total risk-based capital ratio
Tier 1 risk-based capital ratio
-
Leverage ratio

1,181,606
846,984'
200,246
991,275
49,486
20,126
74,243
92.220

1,176,384
843,022
220,832
971,767
49,486
27,961
74,245
96,176

0.24

1.40
75.90

L171,161
'842,931
-^•213,806
958,224
••• 49,486
28,410
73,258
102J76

1,187,410
,865,214
209,077
957,965
49,486
42,230
75,390
104,455

;

1,200,172 •
898,472 •
-.178,978
946,663-
49,486
66,986
72,647
101,488

L236,471
991,614
152,927
956;323 ^

• 49,486
79,317
79,406
107.771

.;v
'

$ ' 4,279,699
1,009,104
149,401
955,296
49,486
129,057
78,530
106,418

(

1,236,841
949,457
165,213 .

. 967,970
49,486
70,456
80,735
109,323

1,258,381
1,002,830

151,907^
977,826.,,
49,486
78,626
79,828
107,938

1,251,496
963,252
156,870
914,218
. 49,486
124,025
112,307
113,375

0.24 %

(0.29) %

0.39 %

(2.45) %

1.15
71.11

(6.86)
83.89

3.71
71.61

. (27,33)
160,25

1.75 %
4.65

1.64 %,._ ,
6.37

. 1.62 %.-
..

6.27

1.49 %
4.27 .

1.26 %
2.46

37.70

7.23
0.93

25.73

8T1
1.42

25.87

7.71
1.63

34.94

5.08
0.62

50.94

3.21
0.50

8.18 %

: 8.80

8.84 .%,

,„

8.58 %. .,

9,06 %

,6.28

7.80
16.83
13.58
10.37

6.26

8.76
18.03
15.16
11.52

6;05

. •

,6.42

8.46
17.05
14.25
11.00 ,

8.72
16.49
14.01
11.35

6 . 1 4 "'

8.32
16.01
13.55
,10.80

(1) Nonperforming loans consist of nonaccrual loans, troubled debt restructurings, and loans contractually past due 90 days or more

and still accruing interest.

(2) Nonperforming assets consist of nonperforming loans and foreclosed assets.
(3) Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue includes net interest income and non-

interest income.

CRITICAL ACCOUNTING POLICIES

The following accounting policies are considered most critical to the understanding of the Company's financial
condition and results of operations. These criticalaccounting policies requhe management's most difficult, subjective and
complex judgments about matters that are inherently uncertain; Because these, estimates and judgments are based on current,
circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different
assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially
different fmancial condition and/or results of operations could reasonably be expected. The impact and any associated risks,
related to the critical accounting policies on the business operations are discussed throughout Management's Discussion and
Analysis of Financial Condition and Results of Operations, where such policies affect the reported and expected financial
... ',
results.

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan losses as critical to the
understanding ofthe Conipany's results of operations, since the apphcation ofthis policy requires significant management
assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying
circumstances were td change. Further discussion ofthe methodology used in establishing the allowance and the impact ofany
associated risks related to these policies on the business operations is provided in Note 1 to the Company's consolidated
financial statements and is also discussed in the Lending and Credit Management section below. Many ofthe loans are deemed
collatera;! dependent for purposes ofthe measurement ofthe impairment loss, thus the fair value ofthe imderlying collateral and
sensitivity of such fair values due to-changing market conditions, supply and demand, condition of the collateral and other
factors can be volatile over periods of time; Such volatility can have an impact on the financial performance of the Company.

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or
refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been
recognized in the Company's financial statements or tax retums. Judgment is required in addressing the Company's future tax
consequences of events that have been recognized in the consolidated financial statements or tax retums such as realization of
the effects of temporary differences, net operating loss carry forwards and changes in tax laws or interpretations thereof A
valuation allowance is established when ih the judgment of management, it is more likely than not that'such deferred tax assets
will not become realizable. In this case, the Company would adjust the recorded value ofthe deferred tax asset, which would
result in a direct charge to income tax expense in the period that the determination was made. Likewise, the Company would
reverse the valuation allowance when it is expected to realize the deferred tax asset. In addition, the Company is subject to the
contmuous examination of its tax retums by the Intemal Revenue Ser-vice and other taxing authorities. The Cbmpariy accrues
for penalties and interest related to income taxes in income tax expense.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure.
This collateral comprises of commercial and residential real estate and other non-real estate property, including autos,
manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the
fair value ofthe collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan
losses. The Company relies on external appraisals and assessment of property values by intemal staff In the case of non-real
estate collateral, reliance is placed on a variety of sources, including extemal estimates of value and judgment based on
experience and expertise of intemal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets
may be written dovm to reflect a new cost basis. The write-downs are recorded as other real estate expense. The Company
establishes a valuation allowance related to other real estate owned-on an asset-by-asset basis. The valuation allowance is
created during the holding period when the fair value less cost to sell is lower than the cost ofthe property.

RESULTS OF OPERATIONS ANALYSIS

The Company has prepared all ofthe consolidated financial information in this report in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP). In'preparing the consolidated financial statements
in accordance -with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount ofassets and
liabilities, disclosure of contingent assets aiid habilities at the date ofthe financial statements, and the reported amourits Of
revenue and expenses during the reporting period. There can be no assurances that actual results Will not differ from those
estirriates.

(In thousands)

2012

2011

2010

'12-11

'Il-'IO

'12-'ll

$ Change

,% Change

,
'Il-'IO

Net interestincome
Provision for loan losses
Noninterest income
Investment securities

gains, net

Total noninterest income
Noninterest expense
Income (loss) before

income taxes

Income tax expense (benefit)
Net income (loss)
Less: preferred dividends

and accretion of discount
Net income (loss) avaUable
to common shareholders

3
L ..

41,209$
8,900
9,700

42,616 $
11,523
9,200

42,986 $ ,
15,255
10,481

: (1,407) $
(2,623)
500

(3-70)
(3,732)
(1,281)

(3.3)
(22.8)
5.4

., (0.9) %
(24.5)
"(12.2)

26
9,726
38,667

-
9,200
36,845

-
10,481
44,851

-: : 26
526
1,822

•

-(1,281) •
(8,006)

I
$

3,368
546
2.822 $
1,125
659

3,448
591
2.857 $
1,513
476

. (6,639)
(3,087)
(3.552) $
1,513
476.

(80)
(45)
(35) $
(388)
183

10,087
3,678
6,409
-
-

NM
5.7
4.9

-2.3,
7.6
(1.2)
(25.6)
38.4

NM. -•
(12.2),,
(17.9)

(151.9)
(119.1)
(180.4) %

-
-

1,038 $

868 $

(5,541) $

170 $

6,409

19.6

115.7 %

The Company's consolidated net income of $2,822,000 for the year ended December 3 1, 2012 decreased $35,000
compared to consolidated net income of $2,857,000 for the year ended December 31, 2 0 l l. The Company recorded preferred
stock dividends and accretion on preferred stock of $1,784,000 for the year ended December 31, 2012, resulting in $1,038,000
of net income available for common shareholders compared to $868,000 of net income available for common shareholders for
the year ended December 3 1, 2 0 11 Diluted eamings per share increased fi-om $0.18 per common share for the year ended
December 31, 2011 to $0.21 per common share for the year ended December 31, 2012. On May 9, 2012, the Company
redeemed 12,000 ofthe 30,255 shares of preferred stock issued under the U.S. Treasury's CPP program. Related to these shares
was an additional $300,000 of accretion that was recognized at the time ofthe redemption. The Company's net interest income,
on a tax equivalent basis, decreased $1,466,000, or 3.4%, to $41,759,000 for the year ended December 31, 2012 compared to
$43,225,000 for year ended December 31, 2011. This decrease was primarily due to a 9 basis point decrease in the net interest
margin from 3.92% for 2 0 11 to 3.83% for 2012 and a year over year decrease in average eaming assets of $15.3 million, or
1.4%. The provision for loan losses decreased $2,623,000, or 22.8%, from the year ended December 3 1, 2011 to December 3 1,
2012 due to reduced levels of nonperforming assets and lower net charge-offs in 2012 compared to 2011. Total noninterest
mcome increased $526,000, or 5.7%, for the year ended December 31, 2012 compared to December 31,2011 primarily due to a
$1.0 miUion mcrease in gain on sales of mortgage loans partially offset by a $0.5 milhon decrease in mortgage servicing income
related to changes in the fair value of mortgage servicing rights. Noninterest expense increased $1,822,000, or 4.9%, from the
year ended December 31, 2011 to 2012. Included in this increase was a $1,183,000 increase in salaries and employee benefits
and a $400,000 increase in processing expense. The $45,000 decrease in income tax expense includes a $371,000 immaterial
correction of a prior period error. For the year ended December 31, 2012, the retum on average assets was 0.24%, the retum on
average common stockholders' equity was 1.40%, and the efficiency ratio was 75.9%.

The Company's consolidated net income of $2,857,000 for the year ended December 31, 2011 increased $6,409,000
compared to a net loss of ($3,552,000) for the year ended December 31, 2010. The Company recorded preferred stock
dividends and accretion on preferred stock of $1,989,000 for the year ended December 31, 2011, resulting in $868,000 of net
income available for common shareholders compared to a net loss of ($5,541,000) for the year ended December 3 1, 2010.
Diluted eamings per share increased from ($1.15) per common share to $0.18 per common share. The Company's net interest
income, on a tax equivalent basis, decreased $432,000, or 1.0%, to $43,225,000 for the year ended December 31, 2011

compared to $43,657,000 for the year ended December 31, 2010 primarily due to a $54.1 million decrease in average eaming
assets offset by a 14 basis point improvement in the net interest margin from 3.78% in 2010 to 3.92%.in 2011. The provision for
loan losses decreased $3,732,000, or 24.5%, from December 31, 2010 to December 31, 2011 Other real estate expenses and
impairment losses incurred on foreclosed properties decreased from. $9,804,000,for the year ended December 31,, 2010 to
$2,736,000 for the year ended December 31, 201 i t he Company had recorded a $6,158,000 valuation allowance for otherreal
estate owned during the fourth quarter of 2010 that had.significantly increased noninterest expense. The Company's net interest
income, on a tax equivalent basis, decreased $432,000, or 1.0%, to $43,225,000 for the year ended December 31, 2011
compared to $43,(557,000 for the year ended December 31,'2010 primarily due to a $54,149,000 decrease in average eaming
assets. For the year ended December 31, 2011, the retum on average assets was 0.24%, the return on average common
stockholders' equity was 1.15%, and the efficiency ratio was 71.1%.

Total assets at December 31, 2012 were $1,181,606,000, compared to $1,171,161,000 at December 31, 2011, an
increase of $10,445,000, or.0.9%. On July 1, 2012, the Company distributed ^a four percent stockdividend for the fourth
consecutive year to common shareholders of record at the close ofbusiness on June 15, 2012. For all periods presented, share
information, including basic and diluted eamings per share, has been adjusted retroactively to reflect the stock dividend:

Net Interest Income

Net interest income is the largest source of revenue resulting from the Company's lending, investing, borrowing- and
deposh gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of
interest earning assets and interest bearing liabilities.'

Average Balance Sheets

The following table presents average balance sheets, net interest income, average yields of eaming assets, average
costs ofinterest bearing liabihties, net interest spread and net interest margin on a ftilly taxable equivalent basis for' each ofthe-
years in the three year period .ended December 31,2012.

;l •

(In thousands)

ASSETS

Loans: (2) (4)

Commercial

Real estate construction - residential

Real estate construction - commercial

Real estate mortgage - residential

127,035 $

.-21,471- -

43,224

219,045

6,621

1,196

1,872

11,719

Real estate mortgage - commercial

404,462

20,856 •

Consumer

Totalloans

Investment securities; (3)

U.S. treasury

Govemment sponsored entoprises

Asset backed securities

State and municipal

27,785

843,022$

$ , •

2,048 $

70,787

113,749

34,248

Total investment securities

220,832 $

4,287

1,798

44,062-

998

3,025

1,398

5,454

102

2012

Interest

Income/

Average

Balance

Expensed)

Rate

Earned/

Paid(l)

Average

Balance

2011

Interest

Income/

Rate

Earned/

Exnensed)

Paidd)

2010

Interiest

Rate

Income/

Earned/

Esoensed)

Paid(l)

Average

Balance

5.20 % $ '

127,572" $

- 6,952

5.45 ./. $

139,679 $

5.56

, 30,171

1,704

2,255

50,374

203,587

'•

11,619

•423,682

29,828

•

22,884

2,057

5.65

4.48

5.71

5.40

6.90

4.32

5.30

-5.14 •'

6.45

37,954

75,207

•.

7,739'

1,959

2,904

221,545

440,285

34,787

• 12,672

25,309 '

2,626

5.54../.

5.16

3.86,

5.72

5.75

7.55

. 5.60 %

5.21 ./. $

865,214 $

47,471

..• 5.49;./. $

,949,457 $ .

. 53,209

1.61 %.$

1,754 $

1.65 % $ .

, f

790 $

1.41

.2.65

4.07

63,089.,

111,859

3,551

..:3.17

• 32,375

•.,.

1,573

4.86

1,240

> - 1.97

47,914

2.46 % $

209,077 $

2.37

5,091

117

6,393:

156

3.06 ./. $

165,213 $

3.06

1,242

2,918

1,764

5,939

1.90 %

2.59

. . 3 . 51

5.30

•

3.59 %,

176

2.77

83,237

33,272

6,356

187

34,680

18,207

0.25

22,245

1,086,396 $

49,664

4.56 % $

1,101,744 $

54,078

0.26

4.91

1,155,893 $

59,410

0.25

5.14 ./.

105,129

(15,141)

99,216

(13,550) -

$..^

1,176,384

.- - . . - $

1,187,410

94,802

(13,854)

1,236,841

636

- 74

436

1,111

3,715

5,972

•

1,381

531
1,933

7,905

•$

181,422 $

66,569

153,388

129,165

277,337

807,881 $

23,280

49,486

27,961

•$

100,727 $

908,608 $

163,886

7,714

1,080,208

96,176

0.35 % $

175,347 $

0.11

•0.28

0.86

1.34

60,582 ,

153,672

131,175

291,842

911

125,

608

1,663'

5,124

0.21

0.40

1.27

1.76'-

0.52

167,303 $

52,605

167,240

130,493

' 2,485

1.90

318,891

• 7,211

• 2.26

960

131

1,080

0.57 %

0.25

0.65

0.74 % $

812,618 $

' 8,431

1.04

836,532 $

11,867

1.42 %

0.09-

2.78

1.89

- 27,636 ,

49,486 •'•

42,230

1.91 % $

119,352 $

• 47

1,301

1,074

2,422

0.87 % $

931,970 $

10,853

0.17

2.63

2.54

2.03

1.16

%
%

$
$

• 32,723

•

49,486

•. 1,526

70,456

152,665 $

2,285
3,886

989,197 $

15,753

0.23

3.08

3.24

2.55 ./.

1.59 %

145,347

5,638

1,082,955

104,455

131,438

6,883

1,127,518

109,323

1,176,384

1,187,410

1,236,841

41,759

43,225

43,657

3.69 %

3.83 %

3.75

3.92

%
%

. 3.55 %

3.78 %

Restricted investments

Federal funds sold

Interest bearing deposits

in other financial institutions

Total interest earning assets

All other assets

Allowance for loan losses

Totalassets

LIABILITIES AND

STOCKHOLDERS' EQUITY

NOW accounts

Savings

Money market

Time deposits of

$100,000 and over

Other time deposits

Total time deposits

Federal' fimds purchased and

securities sold under agreements

to repurchase

' •

Subordinated notes

Federal Home Loan Bank Advances

Total borrowings

Total interest bearing liabUities

Demand deposits

Other liabilities

Total UabiUties

Stockholders' equity

Total liabilities and

stockholders' equity

Net interest income (FTE)

Net interest spread

Net interest margin

(1)

Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible
interest expense. Such adjustments totaled $550,000, $610,000 and $671,000 for the years ended December 31, 2012, 2011 and 2010, respectively.

(2) Non-accruing loans are included in the average amounts outstanding.
(3) >i Average balances based on amortized cost.
(4) Fees and costs on loans are included in interest income.

Comparison of the Years ended December 31, 2012 and 2011

Financial results for the year ended December 31, 2012 compared to the year ended December 31, 2011 reflected a
decrease in net interest income, on a tax equivalent basis, of $1,466,000, or 3.4%. Average interest-eammg assets decreased
$15,348,000, or 1.4%, to $1,086,396,000 for the year ended December 31, 2012 compared to $1,101,744,000 for the year ended
December 31, 2011 and average interest bearing liabilities decreased $23,362,000, or 2.5%, to $908,608,000 fpr the year ended
December 31,2012 compared to $931,970,000 for the year ended December 31, 2011.

Average loans outstanding decreased $22,192,000 or 2.6% to $843,022,000 for'the year ended December 31, 2012
compared to $865,214,000 for the year ended December 31, 2011. See the Lending and Credit Management section for further
discussion of changes in the composition of the lending portfolio. Average investment securities and federal funds sold
increased $11,686,000, or 5.6% to $220,880,000 for the year ended December 31, 2012 compared to $209,194,000 for the year
ended December 31,2011. Average interest bearing deposits in other financial institutions decreased $4,038,000 to $18,207,000
for the year ended December 31, 2012 compared to $22,245,000 for the year ended December 31, 2011. See the Liquidity
Ma«age/ne«? section for further discussion.

Average time deposhs decreased $4,737,000, or 0.6%, to $807,881,000 for the year ended December J l, 2012
compared to $812,618,000 for the year ended December 31, 2011. Average borrowings on Federal Home Loan Bank advances
decreased $14,269,000 to $27,961,000 for the year ended December 31, 2012 compared to $42,230,000 for the year ended
December 31, 2011. See the Z/'^M/WzXy Ma«ageff2e«? section for further discussion.

-Comparison of the Years ended December 31,2011 and 2010

Financial results for the year ended December 31, 2011 compared to the year ended December 31, 2010 included a
decrease hi net interest income, on a tax equivalent basis, of $432,000, or 1.0%. Average interest-eaming assets decreased
$54,149,000, or 4.7% to $1,101,744,000 at December 31, 2011 compared to $1,155,893,000 at December 31, 2010 and average
mterest bearing liabilities decreased $57,227,000, or 5.8%, to $931,970,000 at December 31, 2011 compared to $989,197,000 at
December 31, 2010.

Average loans outstandmg decreased $84,243,000 or 8.9% to $865,214,000 at December 31, 2011 compared to
$949,457,000 at December 31, 2010. See the Lending and Credit Management section for further discussion of changes in the
composition ofthe lending portfolio. Average investment securities and federal funds sold increased $43,794,000 or 26.5% to
$209,194,000 at December 31, 2011 compared to $165,400,000 at December 31, 2010. Average interest bearing deposhs in
other financial institutions decreased $12,435,000 to $22,245,000 at December 31, 2011 compared to $34,680,000 at December
31, 2010. See the Z,j^MM(FM?nagemeKf section for fiirther discussion.

Average time deposhs decreased $23,914,000 to $812,618,000 at December 31, 2011 compared to $836,532,000 at
December 31, 2010. Average borrowings decreased $33,313,000 to $119,352,000 at December 31, 2011 compared to
$152,665,000 at December 31, 2010. The decrease in average borrowings primarily reflects a net decrease in Federal Home
Loan Bank advances. See the Liquidity Management section for further discussion.

Rate and volume analysis

The foUowing table summarizes the changes in net interest income on, a fully taxable equivalent basis, by major
category ofinterest eaming assets and interest bearing habihties, indentifying changes related to volumes and rates for the years
ended December 31; 2012, compared to December 31, 2011 and for the years ended December 31, 2011 compared to December
31, 2010. The change in interest due to the combined rate/volume variance has,been allocated to rate and volume changes in
proportion to the absolute dollar amounts of change in each.

;

2012
Change due to

2011
Change due to i

Total
Change

Average
Volume

Average
Rate

Total
Change

Average,
Volume

Average /
Rate

(302);
(23)
(71)
(752)
(1,014)
(123)

(1)
(380)
(585)
(262)
(31)
-

I :

(1)^
(3,545)'

(307)
. (62)
(171)
,. (527)
(1,163)

:.,
. .

(331) $
(508)
(383) : •

100
(2,028)
(259)

(29) $
(485)
(312)
852
(1,014)
(136)

4
(242)
.'
(526),.
(175)
(54)
-

(12)
(4,414)

(276) '
(51)
(172)
(552)
,(1,408),,;.;

, ;,

(26)
80
(543).
(2,948)-

5
138
. 59
87
(23)
-

(11)
(869)

31
11
(1)
(25)
(245)

(6)
-
(310).
(545)

" (787), $
(255)
(649)
(1,053)
(2,425)
(569)

(662). $
(428)
(1,062)
(1,025)

(932) :.
(354)'

(125)
173
,413

.
(28).,.

(1,493)
(215)-

14
(2)
633
(191)
(20)
-

(28)
(5,332)

(49)
(6)
(472)
(822)
(2,087)

15
339
929 ',
(47)
(37)

(32)
(3,296)

-,' 45
18
(82)
13
(574)

(^1)
-
(787)
(1,378)

.
.

' (1).,
(341) :, ;
(296) = .
(144)

17 '
-

•
4
(2,036)

(94)
(24)., .
,,
(390),
(835) ,.
; (1,513); -:

(17)
(225)
(424)
(3,522) ^

(20)
80
••. (233)
(2,403)i

, (28)
(225)
(1,211)
(4,900)

(In thousands)
Interest income on a fully

taxable equivalent basis: (1)

Loans: (2) (4)
Commercial
Real estate construction - residential
Real estate construction - comriiercial
Real estate mortgage - residential
Real estate mortgage - commercial
Consumer
Investment securities: (3)
U.S. treasury
Government sponsored entities
Asset backed securities
State and municipal
Restricted investments
Federal funds sold
Interest bearing deposits

in other financial institutions

Total interest income
Interest expense:
NOW accounts
Savings
Money market
Time deposits of $100,000 and over
Other time deposits
Federal fimds purchased and

securities sold under agreements
to repurchase
Subordinated notes
Federal Home Loan Bank advarices
Total interest expense
Net interest income on a fully
taxable eanivalent basis

(1.4661$

(324)$

; ^ (1.142)

(432) $

(1.918) $

1.486

(1)

(2) Non-accruing loans are included in the average arnounts outstanding.
(3) Average balances based on amortized cost.
(4) Fees and costs on loans are included in interest income.

Net interest income on a fully taxable equivalent basis decreased $1,466,000, or 3.4%, to $41,759,000 for the year
ended December 31, 2012 compared to $43,225,000 for the year ended December 31, 2011, and followed a $432;000, or 1.0%,
decrease for the year ended December 31, 2011 compared to the year ended December 31, 2010. Measured as a percentage of
average eaming assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.83% for the year
ended December 31, 2012 compared to 3.92% for the year ended December 31, 2011, and increased compared to 3.78% for the

year ended December 31,2010. The decrease in net interest income was primarily the result of lower interest uicome eamed on
loans due to lower average balances and lower average rates. The Company's net interest spread decreased to 3.69% for the
year ended December 31, 2012 from 3.75%'for the year ended December 31, 2011, andincreased compared to 3.55% for the
year ended'December 31, 2010. Whhe theCompany was able to decrease the rates paid on mterest bearing liabilities to 0.87%
for the year ended December 31, 2012 from 1.16% for the year ended 2011, and 1.59% for the year ended 2010, this decrease
was partially offset by the decrease in the rates eamed on interest eaming assets to 4.56% for the year ended December 31, 2012
from 4.91% in 2011, and 5.14% in 2010. Interest expense incurred on deposits and other borrowings decreased $2,948,000 from
the year ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $4,900,000 from the year
ended December 31, 2011 compared to the year ended December 31, 2010. Effective January 1, 2012, the Company recorded a
$368,000 credit to interest expense on time deposits for imputed interest calculated on capitalized interest not accounted for
durhig the time period of 2004 through 2011 on the constraction ofthe Company's new bank buildings. This is considered a
correction of an immaterial prior period error. Without this credh to interest expense, rates paid on interest bearing liabilities
would have been approximately 0.91% for the year ended December 31, 2012.

Non-interest Income and Expense

Non-interest income for the years ended December 31, 2012, 2011 and 2010 was as follows:

(In thousands)

N o n - i n t e r e st I n c o me
Service c h a r g es on d e p o s it a c c o u n ts
T r u st d e p a r t i n e nt i n c o me
Gain on s a l es of m o r t g a ge l o a n s, n et
Gain on sale of

i n v e s t m e nt s e c u r i t i es

O t h er
T o t al n o n - i n t e r e st i n c o me

Non-interest income as a
% of total revenue *
Total revenue per full time
equivalent employee

2 0 12

2 0 11

2 0 10

• 1 2 - ' ll

' I l - ' IO

' 1 2 - ' ll

•11

I-'IO

$ C h a n ge

% C h a n ge

5,439
893
2,669

26
699
9.726

•

5,566
898
1,649

0
1,087
9,200

5,554
803
2,493

0
1,631
10,481

•

•• ( 1 2 7)

(5)
1,020

26
(388)
526

12
95
(844)

0
(544)
(1.281)

% .

• (2.3)
(0.6)
61.9

NM
(35.7)
• 5.7

'.;..
0.2 %

11.8
(33.9).

NM
••(33.4)

(12.2) %

19.1 %

17.8 %

19.6 %

147.6 $

153.8 $

157.3

* Total revenue is calculated as net interest income plus non-interest income.

NM - not meaningful

. '

" ] . ' .%

On January I, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting
Standards Codification (ASC) Topic 860-50 Accounting for Servicing Financial Assets. The election ofthis option resulted in
the recognition of a cumulative effect of change m accounting principle of $459,890, which was recorded as an increase to
beginning retamed eamings, as further described in Note 6 to the consolidated financial statements.- As siich, effective January
1, 2012, the change in the fair value of mortgage servicing rights is recognized in eamings as other noninterest income for the
period in which the change occurs.

Years Ended December 31,2012 and 2011

Noninterest income increased $526,000 or 5.7% to $9,726,000 for the year ended December 31, 2012 compared to
$9,200,000 for the year ended December 31, 2011. t he increase was primarily the result of a $1,020,000 increase on gam on
sales of mortgage loans, net partially offset by a $453,000 decrease in the real estate servicing income recorded in other
noninterest income. As a result ofthe changes in fair value during the year ended December 31, 2012, $878,000 was earned in
real estate service fees, $122,000 was recorded in real estate servicing income due to changes in model inputs and assumptions,
and ($915,000) was recorded due to other changes m fah value resulting from customer payments and passage of time. This is
m comparison to the year ended December 31, 2011 in which $863,000 was eamed in real estate servicing fees and $808,000 of
MSR amortization was recorded. The Company's loans sold increased from $75,000,000 for the year ended DecemberSl, 2011
to $100,000,000 for the year ended December 31, 2012. As mentioned above, due to low, interest rates, an increase in
refinancing activity impacted both the volume ofloans sold and gains recognized. The Company was servicing $310,000,000 of
mortgage loans at December 31, 2012 compared to $307,000,000 at December 31, 2011. During 2012, the Company received
$790,000 from proceeds on sales of available-for-sale debt securities and recognized a $26,000 gain on sale!

Yeiars Ended December 31,2011 and 2010

Nonmterest mcome decreased $1,281,000 or 12.2% to $9,200,000 for 2011 compared to $10,481,000 for 201().:'the
decrease was primarily the result of an $844,000 decrease in the gains on sales of mortgage loans and a $544,000 decrease in
other income. The Conipany's loans sold decreased from $107,000,000 fOr 2010 to $75,000,000 for 2011, A decrease in
refinancing activity impacted both the volume ofloans sold and gains recognized. The Company was servicing $307,000,000 of
mortgage loans at December 31, 2011 coriipared to $298,000,000 at December 31, 2010. t he .decrease in other noiimterest
income was primarily due to a $268,000 refiind of prior year's processing fees received in 2010 and a $139,000 decrease m
credhcardmcomcTheCompanyliadnosalesofdebt secm-itiesdurmg2011 or2010.

Non-interest expense for the years ended December 31, 2012,2011, and 2010 was as follows:

;.,;

2 0 12

2 0 11

2 0 10

' 1 2 - ' ll

• I l - ' IO

' 1 2 - ' ll

•11-UO

$ Change

% Change

(In thousands)
N o n - i n t e r e st Eitpense.
Salaries
Employee benefits
O c c u p a n cy e x p e n s e, net
F u m i t u re and equiprhent

ejqjense

FDIC i n s u r a n ce
a s s e s s m e nt

Legal, exarriination, and
p r o f e s s i o n al fees

A d v e r t i s i ng aiid promotion •
P o s t a g e, printing,iandi.

supplies

P r o c e s s i ng e x p e n se
Other real estate e>q>ense
O t h er
Total n o n - i n t e r e st e x p e n se

Efficiency ratio
Salaries and benefits as a %

of total n o n - i n t e r e st
expense

N u m b er of full-time

14,368
' 4,797
; 2 , 5 9 8'

13,760
.•4,222
2;70t'

13,904
3^995
2,532

608 $

•'

1,840

993

2,019

1,107

1,189
1,083

; 1,332
' 1,103

1,144
3,593
2,937
4,125
38,667

1,158
3,193
2,736
3,514
36.845

75.9 %

71.1

$
%'

1,997

1^651

1,441
1,256

1,201
3,353
9,804
3,717
44,851

83.9

$
%

49.6 %

48.8

%"'"

39.9

(144)
227::
169

,4.4 %
13.6
(3.8)

, 22

(8.9)

, .,

• „ -,

( 1 . 0 )%

' , ' " ••

5 .7
6.7

1.1

.(544)

J ^ ^ '^

, ; ( 3 2 . 9)

(109)
(153)

*•

(43)
(160)
(7,068)
(203)
(8.006)

(io;7) •
(1.8)

(7.6),
(i2.2)^;-''

,'••:,

(1.2)
• ..r n .5
7.3
17.4
,
4.9 %

(3.6)

•-•:c(4.8)„

(72.1)
:. (5.5)

(17.9) %

. 575
(103)

(179)
.0'
:,.
(114)
0
(143)
(20)
0
(14)
400
201
611
1,822 $

equivalent employees 1

345

, 3 3 7.

340

Totaf noninterest expense increased $1,822,000, or 4.9%, to $38,667,000 for the year ended December 31, 2012
compared to the year ended December 31^ 2011, and decreased $8,006,000, or 17.9%, to $36,845,000 for the year ended
December 31, 2011, compared to $44,851,000 forthe year ended December 31, 2010.

Salary expense increased $608,00(), pr 4.4%, for the year ended December 31, 2012 compared to the year ended
December 31, 2011, and decreased $144,000, or 4.,4%, for the year ended December 31, 2011 compared to the year ended
December 31, 2010. The number of full-time equivalent employees increased from 337 at DecemberSl, 2011 to 345 at
December 31, !2012 partly due to opening a new lending location in Liberty, Missouri in, May of 2012 as well as hiring
additional support personnel in loan operations departments.

Employee benefits increased $575,000, or 13.6%, for the year ended December 3.1, 2012 cornpared to the year ended-
December 3l, 2011, and increased $227,000, or 5.7%, for the year ended December 31, 2011 compared to the year ended
December 31, 2010. The increase in the year ended 2012 oyer 2011 mduded a $95,000 increase in medical insurance
premiums, a $68,000 increase in other employee benefits; and a $382,000 increase in esthnated profit sharmg and pension
expense accruals.. The increase in the year ended 2011 over 2010 included a $132,000 increase in medical insurance premimhs,
a $I5,00() increase in estimated profit sharing and pmsion accruals, and a $88,000 increase in other employee benefits.

;

Federal Deposit Insurance Corporation (FDIC) insurance assessment decreased $114,000, or 10.3%, for the year
ended December 31, 2012 compared to the year ended December 31, 2011, and decreased $544,000, or 32.9%, for the year
ended December 31, 2011 compared to the year ended December 31, 2010. The decrease in FDIC insurance assessments was
due to amendments made by the FDIC effective for the third quarter of 2011 to implement revisions to the Federal Deposh
Insurance Act made by the Dodd-Frank WaH Sfreet Reform and Consumer Protection Act. The years ending after September
30, 2011 reflect a new assessment base using assets and tier one capital in the assessment calculation.
.

•

ended December 31.

QQO of piope'^^^'^ ,

* ^ ' ^ ^ ? f 7 4 T o o S ^ ^ f ° ^ * ' ^ "'
$1,068,^41,uw i

7012 provision tor 1

. . ,, for loan losses « f \ ' f 4 %0 decrease mspe^^^^^^
$1,84/.,

gnaents,

owned 01'!> '
"

- -4 .,cihies.

.,. ..

Comparingfourthquarter2012tofourth quarter 2011

The Company's net income available to common shareholders' of $1,90{),000 for the fourth quarter ended Deceniber
31, 2012 increased $3,422,000 compared to a net loss of ($1,522,000) for the fourth quarter ended December 31, 2011. Net
mterest income decreased to $10,100,000 from $10,549,000 over the same period. This decrease was primarily the result of a
decrease in average mterest eammg assets from $1,081,924,000 for the fourth quarter ended December 31, 2011 to
$1,068,741,000 for the fourth quarter ended December 31, 2012.

The fourth quarter 2012 provision for loan losses of $1,000,000 was $4,880,000 lower than fbtirth quarter 2 0 l i 's
provision of $5,880,000 and was based upon management's determination ofthe loan loss reserve required to cover probable
losses in the loan portfolio at year-end.

Noninterestdncome of $2,633,000 for fourth quarter 2012 increased $21,000:from fourth quarter 2011's noninterest
mcome Of:$2,612,000. This increase was primarily the resuh of gains on sales of mortgage loans that increased $141,000 to
$896,000 for the fourth quarter of 2012 from $755,000 in the fourth quarter of 2011. The Company's loanssold were
$30,255,000 for three months ended December 31, 2012 compared to $31,491,000 forthe three montiis ended December.31,
2011.

Noninterest expense of $8,711,000 for fourth quarter 2012 decreased by $823,000 from fourth quarter 2blt's
noninterest expense of $9,534,000. This decrease primarily resulted from a $1,617,000 decrease in other real estate expenses
from $1,171,000 for the three months ended December 31, 2011 to $(446,000) for the three months ended December 31,2012,
The decrease prirnarily resulted from a $1,699,000 decrease to the provision for. the valuation allowance for other real estate
owned. A current appraisal supported a partial recovery of $3,908,000 of a $5,663,000 provision on a commercial real estate
construction property taken in 2010.

Income taxes

Income taxes as a percentage of eamings > (loss) before. mcome taxes as reported in the consolidated financial
statements were 16.2% for the years ended December 31, 2012 compared to 17.2% for the year ended December 31, 2011, and
46.5%) for the year ended December 31, 2010. Excluding an immaterial correction of a prior period error of $371,000,' and prior,
year retum to provision adjustments, income taxes as a percentage of eamings before income taxes were 26.3% in comparison
to 17.2% forthe years ended December 31, 2012 and 2011,
respectively. Af December 31, 2010, total accrued interest was
$31,000 and total interest expense recognized for the year ended December 31, 2010 was $24,000. At December 31, 2011, the
Company released $28,000 of interest accrued related to the release of $221,000 of uncertain tax provisions, and as of
December 31, 2012, the Company had not recognized any tax liabilities or any interest or penalties in mcome tax expense
related to uncertain tax positions.

Lending and Credit Management

70.4% of total assets as of December 31,2012 compared to 70.8% as of December 31,2011.

Interest eamed on the loan portfolio is a primary source of interest income for the Company. Net loans represented
:

•

Lending activities are conducted pursuant to an established loan policy approved by the Bank's board of directors. The
Bank's credit review process comprises of regional loan committees with established loan approval limits. In addition, a senior
loan committee reviews all credit relationships in aggregate over anestablished dollar amount. The senior, loan committee theets
,
weekly and comprises of senior managers ofthe Bank.

'.•

A summary ofloans, by major class withm the Company's loan portfolio as ofthe dates indicated is as follows:

(In thousands)

2012

2011

2010

2009

2008

Commercial, financial, and agricultural
Real estate constmction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
,
Totalloans

130,040- $
22,177
.43,486
221,223
405,092
24,966
846,984 $

128,555 $
30,201
47,697
203,454
402,960
30,063
842.930 S

151,399 $
38,841
77,937
232,332
453,975
37,130
991.614 S

153,386 $.^^:.
49,623
80,016
235,834
456,696
. 33,548
1.009.103 S

151,488
0
147,432
210,458
365,094
36,806
911,278

The Company's loan portfolio increased $4,054,000 from December 31; 2011 to December31, 2012. During the year
ended December 31, 2012 there were no significant increases in loan demand. The Company did experience an increase in
refinancing during this time period due to low interest rates available for real estate mortgage residential properties. Also,
during the first quarter of 2012 approximately $10,000,000 of real estate construction - residential loans were reclassified to
real estate mortgage - residential loans due to the completion of the constmction phase.

The State's economy as a whole has exhibited recent improvement from the recessionary lows of 2010 and 2011 but
continues to be considered weak. State government spending has remained relatively constant over the last year but below pre-
recession levels which hurts our cenfral region. Branson, while having good holiday weekends, is still sfruggling. NationaUy,
unemployment has improved over the last year but remains high at 7.8% while Missouri's unerhployment rate is better at 6.6%.
The stock market has exhibited recent sfrength having set record high levels for the DOw Jones Industiial Average however
there is growing concem that theselevels cannot be maintamed unless the economy begins to grow more, than the recent 1.0% -
1.5% quarterly averages. The US FHFA House Price Index fOr December 2012 indicates house prices nationwide have
increased 5.5% over the. last four quarters but remainl2.9% below the 2007 peak. For Missouri, the HPI data indicates prices
have increased 4.7% over the last foiu- quarters but remain 8.1% below the 2007 peak. The house price index for Jefferson City
indicates a year over year price change of 1.76%, Columbia's change was 1.37%, Kansas City declined by 1.25%) and
Springfield increased by 0.61%). Borrowing rates have also remained depressed over the last 36 month analysis period. We
anticipate moderate improvement in the next several quarters over the 12-quarter analysis period but growth will remain slow
and the economy will continue a modest recovery. Management continues to'focus on the improvement of asset quality by
tightening underwrhing standards and focusing on lending to credit worthy borrowers with the'capacity to service their debts.
Where appropriate, management actively works with existing borrowers to modify loan terms and conditions in order to assist
the borrowers in servicing their debt obligations to the Company.

' '

The Company extends credit to its local community market through fraditional real estate mortgage products. The
Company does not participate in extending credit to sub-prime residential real estate markets. The Company does not lend
funds for the type of transactions defined as "highly leveraged" by bank regulatory authorhies or for foreign loans. Additionally,
the Company does not have any concenfrations ofloans exceeding 10% of total loans that are not otherwise disclosed in the
loan portfolio composition table. The Companydoes not have, any interest-eaming assets that would have been included in
nonaccrual, past due, or resfructured loans if such assets were loans.

s ;»

•

The confrEictual maturities of loan categories at December 31, 2012, arid the composition of those loans between fixed

rate and floating rate loans are as follows:

(In thousands)
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total loans net of unearned income

Loans with fixed rates
Loans with floating rates
Total loans net of unearned income

Principal Payments Due
Over One
Year Through
Five Years

'
Over
Five
Years

One Year
Or Less
80,994
20,954
•31,080
59,979
143,840
10,151
346.998 $

44,995
1,223
11,972
86,119
246,507
13,657
404.473 $

4,051 $

434
75,125
1,4,745
1,158
95.513 $

Total
130,040
22,177.
43,486
221,223
405,092
24,9,66
846,984

278,050
68,948
346.998 $

361U59
43,214
404.473 $

25,6itl
69,872
95.513 $

664,950^
182,034
846.984

The 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 nof funded until the
Company has a non-recourse purchase commitment from the secondary market at a predetermined price. For the year ended
December 31, 2012, the Company sold approximately $100,000,000 ofloans to investors compared to $75^000,000 for the year
ended-December 31v2011. At December 31, 2012, the Company was servicing approximately $310,000,000 ofloans sold to the
secondary market compared to $307,000,000 at December 31, 2010.

Real estate mortgage loans retained in the Company's portfolio generaUy include provisions for rate adjustments at one
to five year intervals. Commercial loans and real estate consfruction loans generally have maturhies of less than one year.
Installment loans to individuals are primarily fixed rate loans with maturities from one to five years.

Risk Elements of the Loan Portfolio

Management, the senior loan committee, and intemal loan review, formally review all loans in excess of certain dollar
amounts (periodically established) at least annually. Currently, loans in excess of $2,000,000 in aggregate and all adversely
classified credits identified by management are reviewed. In addition, all other loans are reviewed on a sample basis. The senior
loan committee reviews and reports to the board of directors, on a monthly basis, past due, classified, and watch list loans in
order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management
also determines which loans should be considered impafred. Management follows the guidance provided in the FASB's ASC
Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measurmg loan impafrment. If management
determines that h is probable that all amounts due on a loan will not be collected under the original termsof the loan agreement,'
the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current
economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually
evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience
by loan type, delinquencies, current economic conditions, loan risk ratings and mdustry concenfration. Managehient believes,
but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these
procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered
necessary by management to provide for probablelosses inherent in the loan portfoho.

Nonperforming Assets
The following table summarizes nonperforming assets at the dates indicated:
(In thousands)
2011
Nonaccrual loans:

2012

2010

2009

2008

Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total

Loans contractually past - due 90 days

or more and still accruing:
Commercial, fmancial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total
Troubled debt restructurings - accruing

Total nonperforming loans
Other real estate owned
Repossessions
Total nonnerforming assets

Loans
Allowance for loan losses to loans
Nonperforming loans to loans
Allowance for loan losses to
nonperforming loans

Nonperforming assets to loans and

foreclosed assets

'1,335 $ •
•
:

2,497
7,762
5,330
13,938
219
31,081 $

2,068 $
1,147
7,867
4,153
31,000
168
46.403 $

3,532 $
3,586
10,067
5,672
27,604
'
126
50.587.$

2,067 $
2,678
9,277
,6;692
13,161
279
34.154 $

• 2,071
.2,775
. 7;572
,4,345
3,505
• 119
20,387.

• '•

, $•

0 $
0
0
0
0,

•

, 6$

8,282

39,369
23,124
468
62.961 $

0$
0
8
9
36

5 4 $ --

0$
Q
0
0
0
33
33 $

7,217

• 5,683

" 53,674
15,741
,279
69,694 $

56,303
13,393
616
70.312 $

2$
0
0
0
0

2 $

-
8,191

42,347

8,452 .
39

50,838$

140
0,
52,
0
,547

- 743
3,736

24,866
7,828,

• :h
32.694

846,984 $
1.75 %
4.65 %

842,930 $
1.64 %
6.37 %

898,472 $
1.62 %
6.27 %

991,614 $
1.49 %
4.27 %

1,009,103

1.26 %
2.46 •%

37.70 %

25.73 %

25.87 %

34.94 %

50:94 %

7.23 %

g.ll %

7.71 %

5.08 %

3.21 %

Total nonperforming assets decreased $6,733,000, or 9.7%, from December 31, 2011 to December31, 2012.. As detahed
below, this decrease included a decrease of $15,322,000, or 33.0%,-in nonaccrual loans partially offset by incresases of
$1,065,000, or 14.8%, in accruing TDR's and $7,572,000, or 47.3%, in other real estate owned and repossessions.

Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and
froubled debt resttiicturings (TDRs) totaled $39,369,000 or 4.65% of total loans at December 31, 2012 compared to
$53,674,000 or 6.37% of total loans at December 31,2011.

• •-

;

It is the Company's policy to discontinue the accrual of interest income on loans when management believes that the
borrower's financial condition, after consideration ofbusiness conditions and collection^ efforts, is such that the collection of
interest is doubtful, or upon.which principal or interest due has been in default for a period of 90 days or more and the asset is
not both well secured and in the; process of collection. Subsequent interest payments received on such loans are applied to
principal if any doubt exists as to the collectability of such principal; otherwise, such receiptsare recorded as interest income on
a cash basis. Interest.on nonaccrual loans, which would have,been recorded under the original terms of the loans, was
approximately $1,198,000 and $1,952,000 for,the.years ended December 31, 2012 and 2011, respectively

As of December 31, 2012 and 2011, approximately $ 17,556, OCiO and $11,673,000, respectively, ofloans not mcluded
m the nonperforming asset taljle were identified as potential problem loans having more than normal risk which raised doubts as
to the ability ofthe borrower to comply with present loan repayhieht terms. Even though borrowers are experiencing moderate
cash flow problems as well as some deterioration in collateral value. Management believes the general allovvance was sufficient
to cover the risks and probable losses related to such loans, at December 31, 2012 and 2011, respectively.

Total non-accmal loans at December 31, 2012 decreased $15,322,000 from December 31, 2011. This decrease
primarily consisted of a $17,062,000 decrease in real estate mortgage - commercial non-accraal loans. This decrease was
partially offset by a $1,350,000 net increase in real estate construction - residential loans, and a $1,177,000 net increase in real
estate mortgage - residential non-accrual loans. The overall decrease in nonaccrual loans primarily resulted from the foreclosure
of six commercial real estate loans with balances totaling $14,769,000 at December 31, 2011 that had been in nOnaccmal status.
The increase in real estate constmction - residential loans, and real estate mortgage residential loans resulted prirnarily from
three significant loan relationships with balances totaling $3,336,000 at December 31, 2012 that were put on non-accrual status
during the year. At December 31, 2012, real estate mortgage - commercial non-accrual loans made up 45%) of total non-accrual
• ^^
loans compared to 67% at December 31,2011.

Loans past due 90 days and sthl accrumg interest decreased $48,000 from $54,000 at December 31, 2011 to $6,000 at
December 31, 2012. Foreclosed real estate and other repossessions increased $7,572,000 from $16,020,000 at DecemberSl,
2011 to $23,592,000 at December 31, 2012 primarily due to real estate mortgage - commercial foreclosures. During the year
ended 2012, $16,869,000 of nonaccrual loans, net of charge-offs taken, moved to foreclosed assets. Real estate values improved
during the year and the Company was able to sell several properties v^dth proceeds totaling $8,571,000 that partially offset the
additional properties acquired. Also, during the year the Company had recorded a net $713,000 addhional provision to the
valuation allowance that included a $3,908,000 recovery as a resuh of a current appraised value. See Note 3 for additional
information.

The following table summarizes the Company's TDRs at the dates indicated:

(In thousands)
TDRs - Accrual
Commercial, fmancial and agricultural
Real estate mortgage- residential
Real estate mortgage - commercial
Total TDRs - Accrual
TDRs - Non-accrual
Commercial, financial and agricultural
Real estate construction - commercial
Real estate mortgage- residential
Real estate mortgage - commercial
Consumer,
Total TDRs - Non-accrual
Total TDRs

Number of
contracts

December 31,2012
Recorded
Investment

Speciflc
Reserves

Number of
contracts

December 31, 2011
Recorded
Investment

Speciflc
Reserves

'•

•

12 $

-" 3

6 -^

21, $,.. .

, 2,820' $
440 •
5,022
8,282. $

2 .$
5
9
12

;•;

• 2

30 $
51 $

201 $

5,693
1,177
6,966
• ' 44
14,081 $
22,363 $

104
94
ur
309

14
468
142
611
0
1,235
1,544

9 $
20
3
32 $

2 $
8
9
15
0
34 $
66 $

2,360 $
2,416
2,441
7,217 $

•

'• 1 ' 20
61
0
181

84 $
.

6,227
1,278
. 17,359
0

24,948 $
32,165 $

52
, 321
108
860
0
1,341
1,522

At December 31, 2012, loans classified as TDRs totaled $22,363,000, ofwhich $14,081,000 were on non-accraal
status and $8,282,000 were on accrual status. At December 31, 2011, loans classified as TDRs totaled $32,165,000, ofwhich
$24,948,000 were on non-accrual status and $7,217,000 were on accrual status. The $9,802,000 decrease from December 31,
2011 consisted primarily of two commercial real estate mortgage nonaccmal loans with balances totaling approximately
$8,360,000 at December 31, 2011, that went to foreclosure during the year ended December 31, 2012. These commercial
foreclosures consisted of two hotels in the Branson Area and a church in the Lee's Summit area. The church was sold during the
fourth quarter of 2012 and the hotels are going to auction during the second quarter of 2013. The decrease in TDRs classified as
real estate - mortgage residential accruing loans primarily related to one loan relationship consisting of fourteen loans that were
consolidated into one new loan at a market rate meeting ah the qualifications to be removed from the TDR classification.

Provision and Allowance for Loan Losses

As mentioned above, the Company is continuing to recover from the deterioration of collateral values during the prior
and current economic conditions. Current appraisals are being obtained and management has adjusted the provision to reflect
the amounts determined necessary to maintain the allowance for loan losses at a level necessary to cover probable losses in the
loan portfolio. The allowance for loan losses increased to $14,842,000 or 1.75% ofloans outstanding at December 31, 2012
cornparedto $13,809,000 or 1.64% of loans outstanding at December 31, 2011.

The following table summarizes loan loss experience for the years ended as indicated:
(In thousands)
Analysis of allowance for loan losses:
Balance beginning of year
Net charge-offs (recoveries):

14,565 $

13,809$

2011

2012

2010

14,797$

Net charge-offs
Provision for loan losses
Balance end of year

Provision

1,599
(67)
(23)
819
5,218
321

7,867
8,900
14.842$

1,964
1,793
262
1,775
6,317
168

12,279
11,523
13.809$

1,750
903
4,534
4,306
3,812
' 182
15,487
15,255
14.565$

2009

2008

12,667$

9,282'

450 .

1,191 ,
1,007

• 3,418
458
188
416
35
_ ^ _ _ ^ _ ^ _ ^ _ _ _ _ _ __
•• 3 11
4,826
8,211
12.667

2,612
724
240
6,224
8,354
14.797$

The provision for loan losses decreased to $8,900,000 for the year ended December 31, 2012 compared to $11,523,000 for the
year ended December 31, 2011, and $15,255,000 for the year ended Decernber 31,2010. The Company's net loan charge-offs
were $7,867,000, or 0.93% of average loans, for the year ended December 31, 2012 compared to net loan charge-offs of
$12,279,000, or 1.42% of average loans, for the year ended December 31, 2011, and $15,487,000, or 1.63% of average ioans,
for the year ended December 31, 2010. Net charge-offs continued to mclude significant write-downs of approximately
$6,700,000 during the year ended December 31,2012 on properties going to foreclosure to reflect declines in current collateral
values; Real estate mortgage - commercial net charge-offs represented 66% of total net charge-offs during the year ended
Deceniber 31, 2012 and primarily related to three significant commercial loan relationships that went to foreclosure. One of
these foreclosures consisted of two hotels in the Branson area for which a $1,745,000 charge off was taken to value the property
according to its current appraised value determined during the third quarter of 2012. Although net charge offs have decreased
from the year ended December 31, 2010 to the year ended December 31, 2012, the provision for loan losses remains significant
due to the level of specific reserves on loans individually evaluated for impairment and the historical loss rate based on the
Company's last thirty-six months of charge off experience. Specific reserves were $4,(120,000 at December 31, 2012 compared
to $3,748,000 at December 31, 2011, and $6,376,000 at December 31, 2010.

Allowance for loan losses

The following table is a summary ofthe allocation ofthe allowance for loan losses:

(In thousands)
Allocation of allowance for
loan losses at end of year:
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction -. commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Unallocated
Total

Percent of categories to total loans:

Commercial, fmancial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total

2012

2011

2010

2009

2008

1,937
.732
1,711..
3,387
6,834
239
. 2
14.842

• 154 %
2.6
5.1
26.1
47.8
3.0
100.0 %

. $

1,804
1,188
1,562
3,251
5,734
267
.3
13,809

. 15.3 %
, 3.6
5.1
24.1
47.8 ..
3.5
100.0 %

2,931
2,067
1,339
3,922
3,458
231
617
14.565

.146 %
3.5
6.2
23.2
48.9'
3.6
100.0 %

2,773
348^
1,740
3,488
4,693
380
1,375 ,
14.797

15.3 %
3.9
7.9
23.4
45.8
3.7
100.0 %

1,712
0
2,490
557
6,014.
391
1,503
12,667

15.2 %
49
7.9
234
'
45.3 ,
3.3
100.0 %

The Company's allowance for loan losses increased $1,033,000 from December 31, 2011 to December 31, 2012. The
overall increase primarily consisted of a $1,100,000 increase in the allocation for real estate mortgage - commercial loans that
was partially offset by a $456,000 decrease in real estate consfruction - residential loans. The ratio ofthe allowance for loan
losses to nonperforming loans was 37.7% at December 31, 2012 compared to 25.73% at December 31, 2011.

The following table is a srunmary of the general and specific allocations of the allowance for loan losses for the years ended as
indicated:
(In thousands)
Allocation of allowance for loan losses:

2008

2011

2010

2009

2012

Individually evaluated for impairment - specific reserves
Collectively evaluated for impairment - general reserves

' $

Total

4,020 $
10,822
14,842 $

3,748 $
10,061
13.809 $

6,376 $
8,189
14,565 $

6,415 $
8,382
14.797 $

3,837
8,830
12.667

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of
impaired loans is generally based on the fair values of collateral obtained through independent appraisals Or intemal
evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve
allocation is recorded. At December 31, 2012, $4,020,000 of the Company's allowance for loan losses was allocated to
impaired loans totalmg approximately $39,363,000 compared to $3,748,000 of the Company's allowance for loan losses
allocated to impaired loans totaling approximately $53,620,000 at December 31, 2011. Management determined that
$14,733,000, or 37%, of total impaired loans required no reserve allocation at December 31, 2012 compared to $23,223,000, or
43%, at December 31, 2011 primarily due to adequate collateral values, acceptable payment history and adequate cash flow
ability.

The incurred loss component ofthe general reserve, or loaris collectively evaluated for impairment, is determined by
applying percentages to pools of loans by asset type. Loans not individually evaluated are aggregated based on similar risk
characteristics. Historical loss rates for each risk group, which is updated quarterly, are quantified using all recorded loan
charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the
Company's loan portfolio during the recent three year economic environment. These historical loss rates for each risk group are
used as the starting point to determine allowance provisions. The Company's methodology includes factors that allow
management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to
reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through
foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local
economic conditions and developments, including general economic and business conditions affecting.the Company's key
lendmg areas, credit quality trends, specific indusfry conditions within portfolio segments, bank regulatory examination results,
20

and findings of the intemal loan review department These risk factors are generally reviewed and updated quarterly, as
appropriate.

Prior to 2011, the historical loss percentage for non-impaired loans was based on a blend between indusfry standards
and the Company's five year loss experience, and the uiiallocated portion of the allowance was based on management's
evaluation of conditions that were not directly refiected in the determination ofthe specific reserve component and the incurred
loss component: The specific and general reserve allocations represent management's best estimate of probable losses contained
in the loan portfolio at the evaluation date. Although the allowance for loan losses comprises of specific and general aUOcations,
the entire allowance is available to absorb any credit losses.

Investment Portfolio

The Company classifies its debt and equity securities into one of the following two categories:

i Held-to-Maturity - includes investments in debt securities that the Company has the positive intent and ability to hold
unth maturity. Available-for-Sale - includes investments in debt and equity securities not classified as held to maturity or
frading (i.e., investments that the Company has no present plans to sell in the near-term but may be sold m the future under
differerit circumstances). The Company's investment portfolio consists of available-for-sale securities.

Debt securities classified as held-to-maturity are carried at amortized cost, while debt and equity securities classified as
available-for-sale are carried at estimated market value. Unrealized holding gains and losses from available-for-sale securities
are excluded from eamings and reported, net of apphcable taxes, as a separate component of stockholders' equity until realized.

The Company does not engage in frading activities and accordingly does not have any debt or equity securities
classified as trading securities. Historically the Company's practice had been to purchase and hold debt instruments unth
maturity unless special circumstances exist. However, since the investment portfolio's major function is to provide liquidity and
to balance the Company's interest rate sensitivity position, aU debt securities are classified as available-for-sale.

At December 31, 2012, the investment portfolio classified as available-for-sale represented 18.3%) of total consolidated
assets. Future levels of held-to-maturity and available-for-sale mvestment securities can be expected to vary depending upon
liquidity and interest sensitivity needs as weH as other factors.

The following table presents the composition ofthe investment portfolio by major category:

(In thousands)
U.S. Treasury
Govemment sponsored enterprises
Asset-backed securhies
ObHgations of states and political subdivisions
Total available for sale debt securities

2012

2,030
55,180
107,872'
35,164
200.246

2011

2,054
70,314
107,329
34,109
$. 213.806

. $

As of December 31, 2012, the maturity of debt securities in the investment portfolio

was as follows:

(In thousands)
U.S. TreasuT}'
Government sponsored enterprises
Asset-backed securities(2)
States and political subdivisions (3)
Total available-for-sale debt

One Year
Or Less

Over One
Through
Five Years

Over Five
Through
Ten Years

1,017 $
590
5,023
2,345
8.975 $

1,013 $

52,571
95,995
11,570
161.149 $

- $

2,019
6,854
19,321
28.194 $

Over
Ten Years

- $

1,928
1.928 $

Total

2,030
55,180
107,872
35,164'
200.246

Weighted
Average
Yield (1)

1.63 %
1.34
2.69
4.15
2.54 :%

Weighted average yield (1)

3.07 %,-

2.38 %

3.34 %

4.67 %

2.54 %

1) Weighted average yield is based on amortized cost.
2) Asset-backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio
experience during the twelve months ended December 31, 2012 calculated separately for each mortgage-backed security. These repayment
speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage interest rates.

3) Rates on obligations of states and political subdivisions have been adjusted to fijlIy taxable equivalent rates using the statutory Federal

income tax rate of 34%.

At December 31, 2012 $105,000 of debt securities classified as available-for-sale in the table above had variable rate

provisions with adjustment periods ranging from one week to twelve months.

The following non-marketable securities are restricted securities which, lacking a market, are carried at cost. These
securities are reported in other assets. At December 31, 2012, $2,278,000 ofthe total included Federal Home Loan Bank (Des
Moines) stock held by the Bank in accordance with debt and regulatory requirements. Other non-marketable securities include a
$1,486,000 equity investment m the Company's imconsolidated Exchange Statutory Trusts. (See Note 8 to the Company's
consolidated financials for further explanation on the Exchange Statutory Trasts.)

(In thousands)
Federal Home Loan Bank of Des Moines stock
Midwest Independent Bank stock
Federal Agricultural Mortgage Corporation stock
Investment in unconsolidated ttusts
Total non-marketable investment securities

Liquidity and Capital Resources

Liquidity Management

2012

2011

2,278 $
151
10
1,486
3.925 $

2,738
151
10
1,486
4.385

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 balancmg 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 hquid assets that
can be converted to cash-and the abihty to atfract funds from extemal sources, principally depositors. Due to the nature of
services offered by the 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.

The Company's AssefLiability Committee (ALCO), primarily made up of senior management, has direct oversight
responsibility for the Company's liquidity position and profile. A combination of daily, weekly, and monthly reports provided to
management detail the following: intemal hquidity 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 the Company's liquidity.

The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company'Srmost liquid
assets comprise of available for sale investment securities, federal funds sold, and excess reserves held at the Federal Reserve.
Federal funds sold and resale agreements normally have ovemight maturities and are used for general daily liquidity purposes.
The fair value ofthe available for sale investment portfolio was $200,246,000 at December 31, 2012 and included an unrealized
net gain of $5,353,000. The portfolio includes projected maturities and mortgage backed securities pay-dovras Of approximately
$22;850,000 over the next twelve months, which offer resources to meet either new loan demand or reductions m the
Company's deposit base.

(In thousands)

Federal funds sold
Federal Reserve Bank - excess reserves
Available for sale investment securities
Total

2012

2011

•

,27,857
• 200,246
• 228,103 $

75
19,997
213,806
233,878

TheCompany pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines,
securities sold imder agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes
required by law. At December 31, 2012 and 2011, respectively, the Company's unpledged securities in the available for sale
portfolio totaled approximately $53,804,000 and $41,359,000, respectively.
Total investment securities pledged for these purposes were as follows:

(In thousands)
Investment securities pledged for the purpose of securing:

2012

2011

Federal Reserve Bank borrowings
Repurchase agreements
Other deposits
Total pledged, at fair value

.:'''

': •

. '.

•

',-' •, ..

2,390 $

•28,888
115,164
146.442 $

1,819
29,656
1,40,972
172.447

Liquidity is available from the Company's base of core, customer deposits, defined as deniand, iriterest checking,
savings, and money market deposit accounts. At Deceriiber 31!, 2012, such deposits totaled $597,973,000 arid represerited
60.3% ofthe Company's total deposits. These core deposits are normally less volatile and are often tied to other products ofthe
Company through long lasting relationships. Time deposits and certificates of deposit of $100-000 and over totaleid
$393,302,000 at December 31, 2012. These accounts are normally considered more volatile and higher costing representing
39.7% of totaldeposits at December 31, 2012.

Core deposits at December 31, 2012 and 2011 were as follows:
(In thousands)
Core deposit base:

Non-interest bearing demand
Interest checking
Savings and money market
Total

2012

2011

192,271 $,
178,121
227,581
597.973 $

159,187
169,452
215,147
543,786

Other components of liquidity are the level of borrowings from third party sources and the availabihty of future credit;
The Company's outside borrowings are comprised of securities sold under agreements to repurchase. Federal Home Loan Bank
advances, and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream
correspondent banks with which the Company maintains approved credit lines. As of December 31, 2012, under agreements
withlhese imafiFiliated banks, the Bank may borrOw'up to $15,000,000 in federal funds ori an unsecured basis and $5,135,000
on a secured basis. There was no federal ftuids piu-chased outstanding at December 31, 2012. Securities sold under agreemerits
to repurchase are generally borrowed overnight and are secured by a portion ofthe Company's investirient portfolio: At
December 31, 2012, there was $21,058,000 in repurchase agreements. The Company may periodically borrow additional short-
term funds from the Federal Reserve Bank through the discount window; although no such borrowings were outstanding at
December 31, 2012. The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As a member of the
FHLB, the Bank has access to credit products of the FHLB. As of December 31, 2012, the Bank had $20,126,000 in
outstanding borrowings with the FHLB. In addhion, the Company has $49,486,000 in outstanding subordinated notes issued to
wholly-owned grantor frusts, fimded by preferred securities issued by thefrusts.

Borrowings outstanding at December 31, 2012 and 2011 were as follows:
(In thousands)
Borrowings:

Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated notes
Total

" '

' 2012

' 2011

21,058
20,126
49,486
90.670 $

24,516
28,410
49,486
102.412

The Company pledges.certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB,
and other correspondent banks as security to establish lines of credit and borrow from' these entities. Based on the type and
value of collateral pledged, the Company may draw advances against this collateral

The following table reflects the advance equivalent ofthe assets pledged,' borrowings, and letters of credit outstariding,

in addition to the estimated futm-e funding capacity available to the Company.as follows:

(In thousands)
Advance equivalent
Advances outstariding
.Letters of credit issued
Total available

FHLB

290,084 $
(20,126)-
0

269.958 $

2012

Federal
Reserve
Bank
' 3,344
0
0
3,344

Federal
Funds
Purchased
Lines

16,790 $

0
0

' 16:790 S

2011

Federal
Reserve
Bank

Federal
Funds
Purchased
Lines

2,051
'0
0
J=
2.051

,25,402 $
.

0
0

25,402 $

Total
290,652'
(43,657)
(206)
246,789

Total
310,218
(20,126)
0
"290.092

FHLB
263,199 $
(43,657)
(206)
219.336 S'

At December 31, 2012, loans with a market value of $449,956,000 were pledged at the Federal Home Loan Bank as
collateral for borrowings and letters of credit. At December 31, 2012, investments with a market value of $5,826,000 were
pledged to secure federal ftinds purchase lines and borrowing capacity at the Federal Reserve Bank.

Sources and Uses of Funds

Cash and cash equivalents were $58,877,000 at December 31, 2012 compared to $43,210,000 at December 31, 2011.
The $15,877,000 increase resulted from changes in the various cash flows produced by operating, investing, and financing
activities ofthe Company, as shown in the accompanying consolidated statement of cash flows for the year ended December
31, 2012. Cash flow provided from operating activities consists mainly of net income adjusted for certairi non-cash items.
Operating activities provided'cash flow of $14,875,000 for the year ended December.31, 2012.

Investmg activities consisting mainly of purchases, sales and maturities of available for sale securities, arid changes in
the level-of the loan portfolio, used total cash of $6,374,000. The cash outflow primarily consisted of $76,498,000 purchases of
investment securhies and a $26,499,000 increase in the loan portfolio. Partially offsetting this increase was $87,905,000 in
proceeds from maturities, calls, and pay-downs-of investment securities and $8,571,000 in proceeds from sales of other real
estate owned and repossessions' •

. .

Financmg activities provided cash of $7^166,000, resulting primarily from a $33,084,000 net increase in demand
deposits partially offset by $12,000,000 paid on the redemption of 12,000 shares of preferred stock, an $8,284,000 repayment of
Federal Home Bank advances, and a $3,458,000 decrease in federal funds purchased and securities sold under agreements to
repurchase. See Note 9 for further discussion. Future short-term liquidity needs arising from daily operations are not expected tp
vary significantly during 2013.

•

In the normal course of business, the Company enters into certain forms of off-balance sheet fransactions, including :

unfunded loan commitments and letters of credit. These transactions are managed through the Companj^s various risk
management processes: Management considers both on-balance sheet and off-balance sheet fransactions in its evaluation of the
Company's liquidity. The Company had $121,407,000 in unused loan commitments and standby letters of; credit as of
December 31, 2012. Although the Company's current liquidity resources are adequate to fund this commitment level, we know
that the nature of these commitments is such that the likelihood of such a funding demand is very low.

The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its
operating needs. The Company's ongoing hquidity needs primarhy include funding its operating expenses and paying cash
dividends to its common and preferred shareholders. For the years ended December 31, 2012 and 2011, respectively, the
Company paid cash di-vidends to its common and preferred shareholders totaling $2,143,000 and $2,417,000. A large portion of
the Company's liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $4,500,000 and
$5,000,000 to the Company for each of the years ended December 31,2012 and 2011, respectively At December 31"; 2012 and
December 31, 201-lvthe Company had cash and cash equivalents totaling $1,863,000 and $13,282,000, respectively. -;

Capital Management

The Company and the Bank are subject to various.regulatory capital requirements administered by federal and state
banking agencies. Failure to meet minimum capital requirements cari initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if imdertaken, could have a direct material effect on the Company's: consolidated
firiancial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that;
involve quanthative measures of assets, liabihtiesi and certain off-balance-sheet items as calculated under regulatory accounting
practices. The caphal amounts and classification of the Cornpariy and the Bank are subject to qualitative jiidgrrients by the
regulators about components, risk-weightings, arid other factors. ;

;

Quantitative measures established by regulations to ensure capital adequacy require the Company and. the Bank to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of
Tierl capitalto adjusted-average assets..

;;;)

-v

; .

The Company exceeded all capital adequacy requirements as of Decernber 31, for the years indicated:

'.••.--

"•••.,•'•

2012

20li

•'••'•,:.^
''•"••^•'^'•.\.'''''
2010

2009

=.• W e l

;'•'••••

' • ' • C a p i t a l i z ed •
R e g u l a t o r y :/
Guidelines

'••'•

2008

Risk-based capital ratios:
Total capital
Tier 1 capital
Leverage ratio

16.83 %
13.58 ,
10.37

: ,

18.03 %
15.16
11.52

17.05;%
14.25
.11:00,

16.49 %

.14.01
11.35

16.01 %
13.55
10.80

10.00 %
6:00
5.00

Commitments, Contractual Obligations, and Off-Balaiice Sheet Arrangements

The required payments of time deposits and other borrowed money, not including interest, at December 31, 2012 are as follows:

(In thousands)
Time deposits
Other borrowed money

Pavments due by Period

• . Total
$ 393,302
20,126

Less than 1

•, Year

$.280,477
10,126

1-3
Years
$ 88,702

3-5
Years

Overs
Years

$ 24,123 -'^$;,

.- -
10,000

In the normal course ofbusiness, the Company is party to activities that contain credit, market and operational risk that
are not reflected in whole or in part in the Company's consolidated financial statements. Such activities include fraditional off-
balance sheet credit related financial instruments.

The Company provides customers with off-balance sheet credit support through loan commitments and standby letters
of credit. Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at
December 31, 2012 are as follows:

•

(In thousands)
Unused loan commitments
Standby letters of credit

, ,

Ainount of Commitment Expiration per Period
1-3
Years
$ 13,003
26

Less than
lYear
$ 90,560
2,944

3 -5
Years
$ 4,921
. .. 25

. V:

• •

Total
$ 118,412 '

.2,995

Overs
Years
$ 9,928

Since many of the unused commitments are expected to expire or be only partially used, the total amount of commitments in
the preceding table does not necessarily represent future cash requirements.

Quantitative and Qualitative Disclosures about Market Risk

Interest Sensitivity.' .

'•.-•.•.,''..''

• . • . . . ' . '•

Market risk arises from exposure to changes in iriterest rates ,and ofher relevant market rate or price risk. The. Company
faces market risk in fhe form ofinterest rate risk through; tiansactions other than fradirig activities. The'Company uses financial
modeling techniqtles to measure interest rate risk. These techniques measure the serisitiyity of future earriirigs due to changirig
interest rate environments. Guidelines established by the Conipany's Asset/Liabhity Committee and approved by the board of
directors are used to monitor exposiu-e of eamings at risk: General iriteirest rate rriovements are used to develop serisitivity as" the;
Company feels-it has no primary exposure fo.specificpoints on the yield curve. At Decerriber 31, 2012, the rate shock scenario
models indicated that annual net interest income Couldjcharigebyas much as (22.5)% to 30.3% shouldlnterestrates rise or fall,-
respectively, 400 basis points from their current level over a one. year period. However there are no assurances that the change
win not be more or less than this estimate. Managernent believes this is;anacceptableleyel of risk.

> ;;

The following table represents estimatedinterest rate sensitivity and periodic and ciunulafive.gap positions calculated
as of December 31, 2012. Significant assumptions used for this table included: loans wih repay at historic repayment rates-
certain interest-bearing demand accounts are interest sensitive due to immediate repricing, and fixed maturity deposits will not
be withdrawn prior to matiuity. A significant-variance m actual results firiain one or more of these assumptions could materially
affect the results reflectedin the table.

•' • . ; . - ; . _ - • -•

.::•'.";'

; ;•

;

' • •

(In thousands)
ASSETS
Investment securities
Interest-bearing deposits
Other restrictedinvestments
Loans
Total

Y e a r!

Year 2

Year 3

Year 4

;

YearS

Over
5 Years or
No stated
Maturity

•

22,850.'$.^"'^56,723 $•
27,857 .
• -3,925 ;•'•;*•;•; ^
.

.155,682

. - '

"411,402

.466,034^$^.--212,405.$

-•

•

' . -

50,643 $"

;':31,330^ $ .

' -

, 1 3 , 6 4 6 '$
-

25,054

•

$•

'•

;

••

. , : -•

•;.,

• ';

: ? ; • •.

, - • • ..

101,646;
152,289 $

39,727 ..
, 71,057 $

110,375
.124,021 $

28,152
53,206'.

- $'

238,624
280,477

21,058
49,486'
20,126
609,771 $

LIABILITIES
Savings, now deposits .
Rewards checking, super now, and

. money market deposits

Time deposits
Federal fiinds purchased and
securities sold under
agreerhents to repurchase

Subordihated notes
Federal Home Loan Bank advances
Total

Interest-sensitivity GAP
Periodic GAP ••"

Cumulative GAP

Ratio of interest-eaming

assets to interest-bearing liabilities

Periodic GAP
Cumulative GAP

.'.

167,077 $

. 65-220

23,482

,984

12,139

;: 65,220 $

190,559 $

11,984 $

. 1 2 , 1 39 $ .

•';;21,058
•:'-:49,486
...^20,126!
...889,673

. $.-:.

(143,737) $

147,185 ;$ '

(38,270):$ .

59,073 $

111,882.$

53,206 • $•

^^'•189,339

(143,737) $

3,448 $

(34,822) $

24,251 $

136,133 $

189,339 $ ,,

,.189;339

0.76
0.76

3.26
1.01

0.80
0.96

5.93
1.03

10.22
L15

NM.
1.21

. .

1.21
1.21 '

TdtaH-

• 200,246''
;. 27,857
• vr 3;925;;
; 846,984
1,079,012 ..

167,077

.238,624
; 393,302;

Effects of Inflation

The effects of inflation on financial institutions are different from the effects on other commercial enterprises since
financial institutions make few significant capital or inventory expenditures, which are directly affected by changing prices.
Because bank assets and habilities are virtually ah monetary in nature, mflation does not affect a financial institution as much;as
do changes in interest rates. The general level of inflation does underlie the general level of most interest rates, but interest rates
do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in the
expected rate of inflation and to changes in monetary and fiscal policy.

Inflation does have an impact on the growth of total assets in the banking indusfry, often resulting in a need to increase
capital at higher than normal rates to maintain an appropriate caphal to asset, ratio. In the opinion of management, mflation did
not have a significant effect on the Company's operations for the year ended December 31, 2012.

Impact of New Accounting Standards

Balance Sheet In December 2011, the FASB issued ASU 201 It 11, Dwc/oiMre^ aboiit Offsetting Assets and Liabilities.
The ASU is a joint requirement by the FASB and Intemational Accounting Standards Board to enhance current disclosures and
mcrease comparability of GAAP and Intemational Financial Reporting Standards (IFRS) financial statements. Under the ASU,
an entity will be required to disclose both gross and net information about insfruments and fransactions eligible for offset in the
balance sheet, as well as instruments and fransactions subject to an agreement similar to a master netting agreement. ASU 2013-
01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities was issued in January 2013, and amended ASU
2011-11 to specifically include only derivatives accounted under Topic 815, repttfchase and reverse purchase agreements, and
securities and borrowing and lending fransactions that are either offset or subject to an enforceable master netting arrangement.
Both ASUs are effective for annual and interim periods beginning January 1, 2013. Their adoption is not expected to have a
significant effect on the Company's financial statements.

Other Comprehensive Income In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income. The amendments of ASU No. 2013-02 require an entity to
present, either in the income statement or in the notes, significant amoimts reclassified out of acctunulated other comprehensive
income by the respective line items of net income, but only if the amount reclassified is required imder U.S. GAAP td be
reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP
to be reclassified in their entirety, an entity is requfred to cross-reference to other disclosures that provide additional detah about
those amounts. This ASU is effective for armual and interim periods beginning January 1, 2013. Adoption ofthe ASU is not
expected to have a significant impact on the Company's consolidated financial statements.

CONSOLIDATED FINANCL^L STATEMENTS

The following consolidated financial statements ofthe Company and report ofthe Company's independent audhors

appear on the pages indicated.

•' •

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2012 and 2011

Consolidated Statements of Operations for each of the years ended
December 31, 2012, 2011, and 2010

Consolidated Statements of Comprehensive Incorne (Loss) for each of the
years ended December 31,2012, 20II, and 2010

Consolidated Statements of Stockholders'Equity for each of the years ended
December 31,2012,2011, and 2010

•

Consolidated Statements of Cash Flows for each of the years ended
December 31, 2012,2011, and 2010

Notes to the Consolidated Financial Statements

P a ge

, 29

34-35

28.

ijt'jtf^'^;-:

KPMG LLP
Suite 900
10 South Broadway
St. Louis, MO 63102-1761

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Hawthom Bancshares, Inc.:

We have audited the accompanying consolidated balance sheets of Hawthom Bancshares, Inc. and
subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity, and cash flows for each ofthe years in the
three-year period ended December 3.1, 2012. These consolidated financial statements are the responsibility
ofthe Company's management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perfonri the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amoimts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentatiori. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Hawd:hom Bancshares, Inc. and subsidiaries as of December :31, 2012 and
2011, and the results of their operations and their cash flows for each ofthe years in the three-year period
ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the PubUc Company Accounting Oversight
Board (United States), Hawthom Bancshares, Inc.'s intemal control oyer financial reporting as of
December 31, 2012, based on criteria established in Internal Control - Integrated Framework, issued by
the Committee of Sponsoring Organizations ofthe Treadway Commission, and our report dated April 1,
2013 expressed an unqualified opinion on the effectiveness of Hawthom Bancshares, Inc.'s intemal control
over financial reporting.

i < ^ H <^ LCT>

St. Louis, Missouri
April 1,2013

KPMG LLP is a Delaware limited liability partnership,
tlie U.S. member firm of KPMG International Cooperative
("KPMG Intemational"), a Swiss entity.

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

ASSETS

Loans

Allowances for loan losses

Net loans
Investment in available-for-sale securities, at fairvalue
Federal fiinds sold and securities purchased under agreements to resell
Cash and due from banks
Premises and equipment - net
Other realestate owned and repossessed assets - net
Accrued interest receivable
Mortgage servicing rights
Intangible assets - net
Cash surrender value - life insurance
Other assets

. •

. •"

•

Total assets'

LLlBILiriES AND STOCKHOLDERS' EQUITY

Deposits;.

Non-interest bearing,demand
Savings, interest checking and moneymarket
Time deposits $100,000 and over
Other time deposits

Total deposits

Federalfunds purchased and securities sold

under agreements to repurchase

Subordinated notes
FederalHome Loan Bankadvances
Accrued interest payable
Other liabilities

Total liabilities

Stockholders'equity:

DecemberSl,

2012

2011

(In thousands, except per share amounts)

846,984 $
(14,842)
832,142
200,246
0
58,877 .
37,021.
23,592
5,190
2,549
135
2,136
19,718.

842,930
(13,809)
829,121
213,806
75
43,135
37,953
16,020
5,341
2,308
543
2,064
20,795

1,181,606 $

1,171,161

192,271
405,702
120,777
272,525

991,275

21,058
49,486
20,126
909
6,532

159,187
384,599
139,504
274,934

958,224

24,516
49,486
28,410
1,054
6,895

1,089,386 $

1,068,585

Preferred stock, $0.01 parvalue per share, 1,000,000 shares authorized;
' Issued 18,255 shares tod 30,255 shares, respectively,
$1,000 per share liquidation value, net of discount

Common stock, $1 parvalue, authorized 15,000,000 shares;
Issued 5,000,972 and 4,814,852 shares, respectively

Surplus
Retained eamings
Accumulated othercomprehensive income, net of tax
Treasury stock; 161,858 shares, at cost

Total stockholders' equity

Total liabilities and stockholders' equity

See accompanying notes to the consolidated fmancial statements.

17,977

5,001
31,816
39,118
1,825
(3,517)

92,220

1,181,606 $

29,318

4,815
30,266
40,354
1,340
(3.517)

102,576

1,171,161

H A W T H O RN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations

(In thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans
Interest on debt securities:

Taxable
Nontaxable

Interest on federal fluids sold and securities purchased

under agreements to resell

Interest on interest-bearing deposits
Dividends on other securities
Total interest income
INTEREST EXPENSE
Interest on deposits:

Savings, interest checking and money market
Time deposit accoimts $100,000 and over
Other time deposits

Interest on federal fiinds purchased and securities sold

under agreements to repurchase

Interest on subordinated notes
Interest on Federal Home Loan Bank advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NON-INTEREST INCOME
Service charges on deposit accounts
Trust department income
Gain on sale of mortgage loans, net
Gain on sale of investment securities
Other
Total non-interest income
NON-INTEREST EXPENSE
Salaries and employee benefits
Occupancy expense, net
Fumiture and equipment expense
FDIC insurance assessment
Legal, examination, and professional fees
Advertising and promotion
Postage, printing, and supplies
Processing expense
Other real estate expense, net
Other
Total non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)

Net income (loss)

Preferred stock dividends
Accretion of discount on preferred stock

Net income (loss) available to common shareholders
Basic earnings (loss) per share
Diluted earnings (loss) per share

See accompanying notes to the consolidated financial statements.

$
$
$

Years Ended December 31,

2012

2011

2010

43,957 $

47,361 $

53,089

4,100
909

0
46
102
49,114

1,146
1,111
3,715

21
1,381
531
7,905
41,209
8,900
32,309

5,439
893
2,669
26
699
9,726

19,165
2,598
1,840
993
1,189
1,083
1,144
3,593
2,937
4,125
38,667
3,368
546
2,822
1,125
659
1,038
0.21
0.21

$
$
$

4,864
1,029

1
58
156
53,469

. 1,645
1,663
5,123

47
1,301
1,074
10,853
42,616
11,523
31,093

5,566
898
1,649
0
1,087
9,200

17,982
2,701
2,019
1,107
1,332
1,103
1,158
3,193
2,736
3,514
36,845
3,448
591
2,857
1,513
476
868
0.18
0.18

$
$
$

4,214
1,174

0
86
176
58,739

2,171
2,485
7,211

75
1,526
2,285
15,753
42,986
15,255
27,731

5,554
803
2,493
0
1,631
10,481

17,899
2,532
1,997
1,651
1,441
1,256
1,201
3,353
9;804
. 3,717
44,851
(6,639)
(3,087)
(3,552)
1,513
476
(5,541)

(1.15)
(1.15)

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)

(In thousands)
Net income (loss)
Other comprehensive income (loss), net of tax

Unrealized (loss) gain on investment securities

available-for-sale, net of tax
Adjustment for gain on sales of

investment securities, net of tax

Defined benefit pension plans:

Net gain (loss) arising during the year, net of tax
Amortization of prior service cost included
in net periodic pension cost, net of tax

Total other comprehensive income (loss)
Total comprehensive income (loss)

See accompan5dng notes to the consolidated financial statements.

Years Ended December 31,
2011

2010

2012

2,822

2,857 $

(3,552)

(123)

(16)

547

77
485

3,307 $

2,380

(389)

. 0

(1,830)

: ', ..

171.

. ..4g

598
3,455

48
(170)
(3,722)

HAWTHORN BANCSHARES, INC. AND SUBSIDLVRIES
Consolidated Statements of Stockholders'Equity

Balance, December 31,2010

28,841 $

(In thousands)
Balance, December 31,2009

Net loss

Other comprehensive income
Stock based compensation expense
Accretion of preferred stock discount
Stock dividend
Cash dividends declared, preferred stock
Cash dividends declared, common stock

Net income

Other comprehensive income
Stock based compensation expense
Accretion of preferred stock discount
Stock dividend
Cash dividends declared, preferred stock
Cash dividends declared, common stock
Balance, December 31,2011
Cumulative effect of change in

accounting principle
Balance, January 1, 2012

Net income

Other comprehensive income
Stock based compensation expense
Accretion of preferred stock discount
Redemption of 12,000 shares of

preferred stock

Stock dividend
Cash dividends declared, preferred stock
Cash dividends declared, common stock
Balance, December 31, 2012

Preferred
Stock

Common
Stock

Surplus

Retained
Earnings

Accumulated
Otiier
Comprehensive
Income

Treasury
Stock

Total
stock
holders'
Equity

28,365 $

4,464 $

26,971 $

50,576

912 $

(3,517)$

107,771 .

0
0
476
0
0
0

0
0
477
0
0
0

•

29,318 $

0
0
0
172
0
. 0
4,636 $

'•

0
0
0
179
0
0
4,815 $

0
87
0
1,871
0
'
0

(3,552)

0
0
(476)
(2,043)
(1,513)
(1,135V •

28,929 $

41,857 $

0
58
0
1,279
0
0

2,857

0
0
(477)
(1,458)
(1,513)
(912),

30,266 $

40,354 $

(170)
0 .,
0
0
0
0 •

742.$

•

598
0
0
0
0
0
1,340 $

(3,552)

(170)
... • 87
0
0
(1,513)
(1,135)

0
0
, 0
0
0
0

':"'

(3,517)$

101,488

0'
0,
0
0
0^
0

2,857

598
58
0
0
(1,513)
.(912)
102,576

.,^
,

^ (3,517) $

460

29,318 $

^4,815 $

30,266 $

40,814 $ •

0
1,340 $

(3,517)$

460
103,036

0
0
659

(12,000)
0
0
0

17,977 $

0
0
0

0
186
0
0
5,001 $

0
29
0

0
1,521
0
0

31,816 $

2,822

0
0
(659)

0
(1,707) ^
(1,203)
(949)
39,118 $

485 ^
0
0^

^ 0

0 '
0

2,822

485
- 29
0
•

•

0
0
0
0
1,825 $

0
0
0
,0
(3,517)$

: (12,000)
. .0
(1,203)
(949)
92,220

See accompanying notes to the consolidated financial statements.

33^

H A W T H O RN B A N C S H A R E S, I N C. A ND S U B S I D I A R I ES
Consolidated Statements of Cash Flows

(In thousands)
Cash flows from operating activities: v
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
'

Provision for loan losses
Depreciation expense
Net amortization of investment securities, premiums, and discounts
Amortization of intangible assets
Stock based compensation expense
Change in fair value of mortgage servicing rights
Gain on sale of investment securities
(Gain) loss on sales and dispositions of premises and equipment
, ^ (Gain) loss on sales and dispositions of other real estate owned
'

and repossessions' > ' '.

Provision for other realestate owned
Decrease in accrued interest receivable
Increase in cash surrender value-Ufe insurance
•
Decrease in other assets
(Increase) decrease in income tax receivable
Decrease in accrued interest payable
Increase (decrease) in other liabilities
Origination of mortgage loans for sale
Proceeds from the sale of mortgage loans
Gain on sale of mortgage loans, net
(Increase) decrease in net deferred tax asset
Other, net

.'.

'•

Net cash provided by operating activities
Cash flows from investing activities:
Net (increase) decrease in loans
Purchase of available-for-sale debt securities
Proceeds from maturities of available-for-sale debt securities
Proceeds from calls of available-for-sale debt securities
Proceeds from sales of available-for-sale debt securities
Proceeds fi-om sales of FHLB stock
Pm-chase of FHLB stock
Purchases of premises and equipment
Proceeds from sales of premises and equipment
Proceeds from sales of other real estate owned and repossessions
Net cash (used) provided by investing activities
Cash flows from financing activities:
Net increase in demeind deposits
Net increase in interest-bearing transaction accounts
Net decrease in time deposits
Net decrease in federal funds purchased and securities sold

under agreements to repurchase

Proceeds from Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
Redemption of 12,000 shares of preferred stock
Cash dividends paid - preferred stock
Cash dividends paid - conunon stock
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

See accompanying notes to the consolidated financial statements.

Years Ended December 31,
2011

2012

2010

2,822 $

2,857 $

(3,552)

: 8,900
1,858
1,161
408
29
1,331
(26)
(79)

(317)
713
151
(72)
949
(644)
(145)
253
(99,420)
99,797
(2,669)
(214)
89 .

14,875

(26,499)
(76,498)
42,735
45,170
790
460
.0
(1,375)
272 .

8,571'

(6,374)

33,084
21,103
(21,136)

(3,458)
0
(8,284)
(12,000)
(1,203)
(940)
7,166
15,667
43,210
58,877 $

11,523.
1,940
837
1,243

58 •
0
0
(13)

. •. 15,255
'. 1,964
698
1,360
87
0
0
60

206
1,252
393
(62)
. , 252 . ,:-:
. .1,008
(437)
•
(104)
(73,272)
74,983 ..^- :
(1,649)
462
(645)

20,832

2,311
6,158
892
(72)
1,538 :,
(1,328)
(946)
30
(104,002)
. 106,548 ^
(2,493)
(2,299)
11531

21,756

32,298
(122,871)::
36,923
54,185
0
1,757
0
(3,393)
47
7,435
6,381

21,438
5,461
(15,337)

(5,552)
0
(38,576)
0
(1,513)
(904)
(34,983)
(7,770)
50,980
43,210 $

53,926
(189,082)
114,899
46,'795
0
1,004
(392)
(549)
34
" 9,689

36,324

2,732
24,854
(37,246)

(6,577)
10,000
(22,331)
0
(1,513)
(1,385)

(31,466)
26,614
24,666
51,280

H A W T H O RN B A N C S H A R E S, I N C. A ND S U B S I D I A R I ES
Consolidated Statements of Cash Flows (continued)

(In thousands)

Supplemental disclosures of cash flow information:'
Cash paid during the year for:

Interest
Income taxes

Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans

See accompanying notes to the consolidated fmancial statements.

Years Ended December 31,
2011

2012

2010

8,420
1,591

$
s

11,290 $
665 $

16,699
800

.16,869

=.$

10,903, $

23,677

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements :

December 31, 2012, 2011, and 2010

(1) Summary of Significant Accounting Policies

•

Havrthom Bancshares, Inc. (the Company) through its subsidiary, ;Hawthbm Bank (the Bank); provides a broad range of
banking services to individual and corporate customers located vvithin the commtinities in and;surrolinding Jefferson City,
Clinton, Warsaw, Springfield, Branson, and Lee's Surnmit, Missouri. The Company is subjectto Competition fi;om; other
financial and nonfinancial institutions providing financial products. Additionally, the Company and its subsidiaries are
subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

The accompanying consolidated financial statenients ofthe Company have been prepared in conformity with U.S.
generally accepted accounting principles (U.S. GAAP).'The preparation of the consolidated financial statements includes
all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading.
Management .is required to make estimates and assumptions, including the determination of the allowance for loan losses,
real estate; acquired in connection with foreclosure or-in satisfaction of loans, and fair values of investment securities
available-for-sale that affect the reported amounts; 01" assets and liabilities and disclosure of contingent assets and liabilities
at the date ofthe consolidated financial statements and the reported amoimts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The Company's management has evaluated and did not identify
any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

The significant acpounting policies used by the Company in the preparation ofthe consolidated financial statements are
summarized below:

Principles of Consolidation

In December of 2008 and March of 2010, the Company formed Hawthom Real Estate, LLC, and Real Estate Holdings
of Missouri, LLC, respectively (the Real Estate Companies); both are wholly owned subsidiaries of the Company. The
consolidated financial statements include the accounts of the Company, Hawthom Bank (the Bank), and the Real
Estate Companies. All significant intercompany;accounts and transactions have been eliminated in consolidation.

Loans

Loans that the Company has the intent and ability to hold for the foreseeable future or maturity are held for investment
at their stated unpaid principal balance amount ;less uneamed income and the allowance for loan losses, Income on
loans is accrued on a simple-interest basis. Loan origination fees and certain direct costs are deferred and recognized
over the life of the loan as an adjustment to yield.

Non-Accrual Loans

Loans are placed on nonaccrual status when management believes that the borrower's financial condition, after
consideration ofbusiness conditions and collection efforts, is such that collection ofinterest is doubtful. Loans that are
contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless
they are both well-secured and in the process of collection! Subsequent interest payments received on such loans are
applied to principal if doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as
interest income on a cash basis. 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.

Restructured Loans

A modified or restructiared loan is accounted for as a troubled debt restructm-ing (TDR) for any loans in which
concessions are made to the borrower for economic or legal reasons that the Company would not. otherwise consider
andthe borrower is experiencing financial difficulty. Once a loan has been iclassified as a TDR. it remains a TDR for
the life of the.loan. The Company includes all accruing and non-accruing TDRs in the impaired and non-performing
asset totals. TDRs are measured for impairment loss by using fair values of the underlying collateral obtained through
independent appraisals and intemal evaluations, or by discounting the total expected future cash flows.

HAWTHORN BANCSHARES, INC. .
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Impaired Loans

. ' ; ' ; - ; . .'

A loan is considered impaired when it is probable the Company will be unable to collect, all amounts due, both
principal and interest, according fo the contractual terms ofthe loan agreement Included in impaired loans are all non-
accrual loans and loans whose terms have been modified in a troubled debt restructuring. Impaired loans are
individually evaluated for impairment based on fair values ofthe underlying collateral, obtained through independent
appraisals or intemal valuations for a collateral dependent loan, or by discounting the total expected future cash flows.

Loans Held for Sale

The Bank originates certain loans which are sold in the secondary market. These long-term, fixed rate loans are
typically classified as held for sale upon origination based on management's intent to sell. In order to manage the risk
associated with such activities, the Company upon locking in an interest rate with the borrower enters into an
agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights
retained and without recourse except for normal and custotnary representation and warranty provisions. At
December 31, 2012 there were $2,292,000 mortgage loans that were held for sale in comparisonto no loans held for .
sale at December 31, 2011.

Mortgage loan servicing fees eamed on loans sold are reported as other noninterest income when the related loan
payments are collected net of amortization from mortgage servicing rights. Operational costs to service such loans are
charged to expense as incurred;

Allowance/Provision for Loan Losses

The Company maintains an allowance for loan losses to absorb probable loan losses in the Company's loan portfolio.
Loans, or portions ofloans, are charged off to the extent deemed uticollectible. Loan charge-offs reduce the allowance
for loan losses, and recoveries ofloans previously charged off are added back to the allowance. Provisions for loan
losses are charged to income and credited to the allowance in an amount necessary to maintain an appropriate
allowance given the risks identified in the portfolio. Once the fair value for a collateral dependent loan has been
determined, any impaired amount is typically charged off as a confirmed loss unless the loan has other income streams
to support repayment. For impaired loans individually evaluated for impairment, which have other income streams to
support repayment, a specific reserve is established for the amount determined to be impaired. The allowance for loan
losses consists of a specific reserve component for loans that are individually evaluated for impairment arid an
incurred loss component, or general reserves for loans that are collectively evaluated for impairment: based on
assigned risk ratings and historical loan loss experience for each loan type. The allowance is based upon
management's estimates of probable losses inherent in the loan portfolio.

In detertnining the allowance arid the related provision for loan losses, the Company establishes valuation allowances
based upon probable losses identified during the review of impaired loans. • Management follows the guidance
provided in FASB's ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measuring
loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected
imderthe original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated
individually for impairment, arid in conjunction with ciurent economic cotiditions and loss experience, to determine
specific reserves as further discussed below. .

Loans not individually evaluated are aggregated based oh similar risk characteristics; Historical-loss rates for each risk
group, which is updated quarterly, are quantified using all recorded loan charge-offs. Management determined that the
previous twelve quarters were refiective ofthe loss characteristics ofthe Company's loan portfolio during the recent
three year economic environment. These historical loss rates for each risk group are used as the starting point to
determine allowance provisions. The Company's methodology includes factors that allow management to adjust its
estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual changes
and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure,
any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

economic conditions and developments, including general economic and business conditions affecting the Company's
key Tending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory
examination resuhs, and findings ofthe intemal loan review department. These risk factors are generally reviewed and
updated quarteriy,'as appropriate.

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 quahty and inherent losses. Changes in such estimates could significantly impact the
allowance and provision for credit losses. The Company could experience credit losses that are different from the
current estimates made by management.

Investment in Debt and Equity Securities

At the time of purchase, debt securities are classified into one of two categories:-ayailable-for-sale or held-to-maturity.
Held-to-maturity securities are those securities that the Company has the positiye intent and ability to hold until
maturity. All debt securities; not .classified as held-to-maturity are-classified as.ayailable-for-sale. The.»Company's
securities are classified as available-for-sale and are carried at fair value. Changes in fair value, excluding certain
losses associated with other-than-temporary impaimient, are reported in other comprehensive income (loss), net of
taxes, as a component, of stockholders' equity. Securities are periodically evaluated for other-than-temporary
impairment in accordance with guidance provided in Ae FASB ASC Topic 320, Investinents ^Debt.and Equity
Securities. For those securities with other-than-temporary impairment, the entire loss.in fair value: is required to be
recognized in current eamings if the Company intends to sell the securities or believes it more likely than not that it
will bef equired to sell the security before the anticipated recovery. If neither condition is met, but the Company does
not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred, which is
then recognized in current eamings. The amount ofthe total other-than-temporary impairment related to all other
factors is recognized in other comprehensive income (loss) net of taxes.

Premiums and discounts are amortized using the interest method over the lives of the respective securities, with
consideration of historical and estimated prepayment rates for mortgage-backed securities, as an adjustment to yield.
Dividend and interest income is recognized when earned. Realized gains and losses for securities: classified as
available-for-sale are included in eamings based on the specific identification method for determining the cost of
securities sold.

Capital Stock of the Federal Home Loan Bank

The Bank, as a member ofthe Federal Home Loan Bank System administered by the Federal Housing Finance Board,
is required to maintain an investment in the capital stock ofthe Federal Home Loan Bank of Des Moines (FHLB) in
an amount equal to 12 basis points ofthe Bank's year-end total assets plus 4.45% of advances from the FHLB to the
Bank. These investments are recorded at cost, which represents redemption value...

Premises and Equipment

: .,

Premises and equipment are stated at cost, less accumulated depreciation; Depireciation applicable tb',buildings and
improvements and fumiture and equipment is charged to expense using straight-line and accelerated methods over the
estimated useful lives ofthe assets. Such lives are estimated to be 5 to 40 years for buildings and improvements and 3
to 15 years for-flimitiu-e and equipment-Maintenance and repairs are charged to expense as.incurred.

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Intangible Assets

On January I, 2012, the Company opted to measure mortgage servicing rights at fair value as pennitted by
Accounting Standards Codification (ASC) Topic 860-50 Accounting for Servicing Financial Assets. Consistent with
ASC 860-50-35-3d, an entity may make an irrevocable decision to subsequently measure a class of servicing assets
and servicing liabilities at fair value at the beginning ofany fiscal year. The election ofthis option resulted in the
recognition of a cumulative effect of change iri accounting principle of $459,890, net of tax in the amount of
$281,868, which was recorded as an increase to beginning retained eamings, as fiirther described in Note 6 to the
consolidated fiiiancial statements. As such, effective January 1, 2012, the change in the fair value of mortgage
servicing rights is recognized in eamings in the period for which the change occurs. The newly adopted accounting
principle is preferable in the circumstances because the fair value measurement method will produce financial
information and results more directly aligned with the performance of mortgage servicing rights.

Intangible assets that have indefinite useful lives are not amortized, but tested annually for impairment. Intangible
assets that have finite usefiil lives, such as core deposit intangibles and mortgage servicing rights, are amortized over
their estimated useful lives. Core deposit intangibles are amortized over periods of 7 to 8 years representing their
estimated lives using straight line and accelerated methods. During the years ended December 31, 201 Land 2010,
mortgage servicing rights (MSRs) were amortized using straight line over the shorter of 7 years or the life ofthe loan.

When facts and circumstances indicate potential impairment of amortizable intangible assets, the Comjpany evaluates
the recoverability ofthe cairrying value based upon fiiture cash fiows expected to result from the use ofthe underlying
asset and its eventual disposition. If the sum ofthe expected ftiture cash flows (undiscounted and without interest
charges) is less than the carrying value ofthe imderlying asset, the Compariy recognizes an impairment loss. The
impairment loss recognized represents the amount by which the carrying value ofthe underlying asset exceeds the fair
value of the imderlying asset.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through
foreclosure. This collateral comprises of commercial and residential real estate and other non-real estate property,
including autos, manufactured homes, and constmction equipment. Other real estate owned assets are initially
recorded as held for sale at the fair value ofthe collateral less estimated selling costs. Any adjustment is recorded as a
charge-off against the allowance for loan losses. The Company relies on extemal appraisals and assessment of
property values by intemal staff In the case of non-real estate collateral, rehance is placed on a variety of sources,
including extemal estimates of value and judgment based on experience and expertise of intemal specialists.
Subsequent to foreclosure, valuations are updated periodically, and the assets may be written dovm to reflect a new
cost basis. The write-downs are recorded as other real estate expense. The Company establishes a valuation allowance
related to other real estate owned on an asset-by-asset basis. The valuation allowance is created diuing the holding
period when the fair value less cost to sell is lower than the "cost" of a parcel of other real estate.

Pension Plan

The Company provides a noncontributory defined benefit pension plan for all full-time employees. The benefits are
based on age, years of service and the level of compensation during the employees highest ten years of cornpensation
before retirement. Net periodic costs are recognized as employees render the services necessary to eam the retirement
benefits. The Company records annual amounts relating to its pension plan based on calculations that incorporate
various actuarial and other assumptions including discount rates, mortality, assumed rates of retum, compensation
increases and tumover rates. The Company reviews its assumptioris on an annual basis and may make modifications
to the assumptions based on current rates and trends when it is appropriate to do so. The Company believes that the

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

assumptions utilized in recording its obligations under its plan are reasonable based on its experience and market
conditions.

The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation -Retirement Plans
under the subtopic Employers' Accounting for Defined Benefit Pension arid Other Postretirement Plans. ASC Topic
715 requires an employer to recognize the overfiinded or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in
the fimded status in the year in w^hich the changes occur through comprehensive incorne. This guidance also requires
an employer to measure the fimded status of a plan as of the date of its fiscal year-end, with limited exceptions.
Additional disclosures are required to provide users with an understanding of^how investment allocation decisions are
made, major categories ofplan assets, and fair value measurement ofplan assets as defined iri ASC Topic 820, Fair
Value.Measiirements and Disclosures.

Income Taxes

Income taxes are accounted for under the asset / liability method by recogriizing the amount oftaxes payable or
refuridable for the current period and deferred tax assets and liabilities foi- future tax consequences of events that have
been recognized in an entity's financial statements or tax retums. Judgriient is required in addressing the Company's
future tax consequences of events that have been recognized in the consolidated'firiancial statements or tax retums
such as realization ofthe effects of temporary differences, net operating loss carry forwards and changes in tax laws or
interpretations thereof A valuation allowance is established when in the judgment of management, it is more likely
than not that such deferred tax assets will not become realizable. In this case, the Company would adjust the recorded
value of thej deferred tax asset, which would result in a direct charge to income tax expense in the period that the
determination was made. Likewise, the Company would reverse the valuation allowance when the realization ofthe
deferred tax |asset is more likely than not. In addition, the Company is subject to the continuous examination of its tax
retums by the Intemal Revenue Service and other taxing authorities. The Company accrues for penalties and interest
related to income taxes in income tax expense. At December 31, 2010, total accmed interest was $31,000 and total
interest expense recognized for the year ended December 31,2010 was $24,000., At December 31, 2011, the Company
released $28^000 ofinterest accraed related to the release of $221,000 of uncertain tax provisions, and as of December
31, 2012; the Company had not recognized any tax liabilities or any interest or penalties in income tax expense related
to uncertain tax positions.

Trust Department

-•

•

Property held by the Bank in a fiduciary or agency capacity for customers is not included in the accompanying
consolidated balance sheets, since such items are not assets ofthe Company. Trast department income is recognized
on the accrual basis.

Consolidated Statements of Cash Flows

For the purpose ofthe consolidated statements of cash flows, cash and cash equivalents consist of short-term federal
funds sold and securities sold or purchased under agreetnents to resell, interest eaming deposits with banks, cash, and
due from banks with original maturities of three months or less.

Stock-Based Compensation

•

;

•

The Company's, stock-based employee compensation plan is described in Note 11, Stock Compensation. In
accordance with FASB ASC Topic 718, Compensation - Stock Compensation, the Company nieasures the cost ofthe
stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite
service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The expense
recognized is based on an estimation of the number of awards for which the requisite service is expected to be

j
i

. .

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

rendered, and is included in salaries and employee benefits in the accompanying consolidated statements of
operations. The standard also requires that excess tax benefits related to stock option exercises be reflected as
financing cash inflows instead of operating cash inflows.

Treasury Stock

The purchase of the Company's common stock is recorded at cost. Purchases ofthe stock are made both in the open
market and through negotiated private purchases based on market prices. At the date of subsequent reissue; the
treasury stock account is reduced by the cost associated with such'stock ori a first-in-first-out basis.

Comprehensive Income

The Company reports comprehensive income (loss) in the consolidated statements of comprehensive income (loss).

Reclassifications

Certain prior year information has been reclassified to conform to the current year presentation.

The following represents significant new accounting principles adopted in 2012:

Repurchase Agreements In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2011-03, Reconsideration of Effective Control for Repurchase Agreements, which deals with the
accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repiirchase or
redeem financial assets before their maturity. The provisions of ASU No. 2011-03 modify the criteria for determining
when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that
maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather
than as a sale. ASU No. 2011-03 removes from the assessment of effective confrol the criterion requiring the fransferor to
have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default
by the fransferee. The FASB believes that confractual rights and obligations determine effective control and that there does
not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other
existing criteria used in the assessment of effective confrol. The Company adopted the provisions of ASU No. 2011-03
prospectively for fransactions or modifications of existing transactions that occurred on or after January 1, 2012. The
Company accounted for all of its repurchase agreements as collateralized financing arrangements prior to the adoption of
ASU No. 2011-03 and the adoption had no impact on the Company's consolidated financial statements.

Fair Value Measurements h\ May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards
(IFRSs), to substantially converge the guidance in U.S. GAAP and IFRS on fair value measurements and disclosures. The
provisions of ASU No. 2011-04 resuh in a consistent definition of fair value and common requirements for the
measurement of and disclosure about fair value between U.S. GAAP and IFRS. The changes to U.S. GAAP as a result of
ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when
measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S.
GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active
markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the
basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with
offsetting positions in market risks or counterparty credit risk that are managed on the.basis ofthe entity's net exposure to
either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value ofthe net asset or
liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair
value measurement of instruments classified within an entity's shareholders' equity with the guidance for liabilities; and
(5) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information
about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to
qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 201,1, and 2010

interrelationships
between those inputs. In addition, entities must report the level in the fair value hierarchy of items that
are not measured
at fair value in the statement of condition but whose fair value must be disclosed. The Company adopted
the provisions of
ASU No. 2011-04 effective January I, 2012. The fair value measurement provisions of ASU No. 2011-
04 had no impact on the Company's consolidated financial statements. See Notes 11 and 12 to the consolidated financial
statements for the enhanced disclosures required by ASU No. 2011-04.

Other Comprehensive Income In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income,
which irevises thej manner in which entities present comprehensive income in their financial statements. The proyisions of
ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income,
and the components of other comprehensive income either in a single continuous statement of comprehensive income or in
two separate but consecutive statements. In both options, an entity is required to present each component of net income
along with total net income, each component of other comprehensive income along with a total for other comprehensive
income, and a total amount for comprehensive income. Under either method, entities are'required to present on the face of
the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net
income in the statement(s) where the components of net income and the components of other compreherisive income are
presented. ASU No. 2011-05 also elirninates the option tp present the components of other comprehensive income as part
of the statement of changes in shareholders' equity but does not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05
is effective for periods beginning January 1, 2012 and requires refrospective application. ASU No. 2011-05 was effective
for the Cbmpany'js interim reporting period beginning on or after January 1, 2012. The Company has chosen to present net
income and other comprehensive income in two consecutive statements in the accompanying consolidated financial
statements.

Stock Dividend On July 1, 2012, the Company paid a special stock dividend of four percent to common shareholders of
record at the close of business on June 15, 2012; For all periods presented, share infonnation, including basic and diluted
eamings per share, has been adjusted refroactively to refiect this change.

(2) Loans and Allowance for Loan Losses

Loans

Asummary of loans, by major class within the Company's loanportfolio, at December 31, 2012 and 2011 isas follows:

(in thousands)

Commercial, financial, and agricultural
Real estate construction - residential
Real estate constraction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment and other consumer

Total loans

2012

' 2011

130,040 $
22,177
43,486
221,223
405,092
24,966

- 128,555
30,201
47,697
203,454
402,960
30,063

846,984 $

842,930

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities
surroimding Jefferson City, Clinton,'Warsaw, Springfield, Branson and Lee's Summit, Missouri. As such, the Bank is
susceptible to changes in the economic environment in these commimities. The Bank does not have a concentration of credit in
any one economic sector. Installment and other iibnsumer loans consist primarily ofthe fmancing of vehicles. At December 31,
2012,
loans with a carrying value of $457,000,000 "were pledged to the Federal Home Loan Bank as collateral for borrowings
and letters of credit.

H A W T H O R N 'S ANCSHARESfINC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following is a summary ofloans to directors and executive officers or to entities in which such individuals had a beneficial
interest of the Company, are summarized as follows:

(in thousands)
Balance at December 31, 2011
Newloans
Amounts collected

Balance at December 31, 2012

. ;,

•

;

. ; ..

3,161
9,79L
(1,937)

11,015

Such loans were made in the nonnal course ofbusiness on substantially the same terms, including interest rates arid collateral
requirements, as those prevailing at the same time for comparable fransactions with other persons, and did not involve rnore
thanthenormalriskofcollectability or present unfavorable features.

. .

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Allowance for loan losses

The followdng is a summary ofthe allowance for loan losses for the years ended December 31, 2012, 2011, and 2010:

(ift thousands)

Commercial,

Financial, &
Agricultural

Real Estate

Construction -
Residential

Real Estate

Construction -
Conimercial

Real Estate

Mortgage -
Residential

Real Estate

Mortgage -
Conimercial

Installment

Loans to
Individuals

Un
allocated

Total

Balance at December 31, 2009 . S

i,m $ .

348 $

1,740

3,488.

...

4,693

380 $

W75 $

14,797:

1,908'

;

2,622..

..,.

• • 4,133 .

Additions:

Provision for loan losses

Deductions:

Loans charged off -,

Less recoveries on loans

Net loans charged off

1,903 -

(153)

1,750

Balance at December 31,2010

2,931 $

Additions:

Provision for loan losses

Deductions:

Loans charged off

Less recoveries on loans

Net loans charged off

Balance at December 31,2011

Additions;

Provision for loan losses

Deductions:

Loans charged off

Less recoveries on loans

Net loans charged off

837

2,157

(193) •

1,964

1,804 $

1,732

1,760

(161)
1,599

. 933

(30)
903

2,067 $

914

1,858

(65)

1,793

1,188 $

(523)

(67)

4,740

4,534

(228)

4,306

2,577

3,841

(29)-

3,812"

-32

(758)

.-': 15,254

-•"422

-..,

(241)
181

0
0

•,,,- 16,189 _

;-.

(703)

• 15,486

4,556

(22)

4,534

1,339

3,922

3,458

231 $

617 $

14,565

485

512

(250)
262

1,104

1,883

(108)
1,775

8,593

6,420

(103)
6,317

204

376

(208)
168

(614)

11,523

0
0

13,206

(927)

12,279

1,562

3,251

5,734

267 $

3 $

13,809

126

(23)

955

977

(158)
819

6,318

5,466

(248)

5,218

293

586

(265)
321

(1)

8,900

8,789

(922)

7,867

Balance at December 31,2012

1,937 $

732 $

1,711

3,387

6,834

.$_

239 $

2 $

14,842

H A W T H O R N B A N C S H A R E S, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following table provides the balance in the allowance for loan losses at December 31, 2012 and 2011, and the related loan
balance by impairment methodology. Loans evaluated under ASC 310-10-35 include loans on non-accraal status, ;which are
individually evaluated for impairment, froubled debt restructurings, and other impaired loans deemed to have similar risk
characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Although the allowance for loan
losses is comprised of specific and general allocations, the entire allowance is available to absorb credit losses.

(in thousands)

December 31, 2012

Allowance for loan losses:
Individually evaluated for

impairment

Collectively evaluated for

impairment
Total

Loans outstanding;
Indi-vidually evaluated for

impairment

Gollectively evaluated for

impairment
Total

December 31,2011

Allowance for loan losses:
Individually evaluated for ,

impairment

Collectively evaluated for

impairment
Total

Loans outstanding:
Individually evaluated for

impairment

Collectively evaluated for

impairment
Total

•

Commercial,
Financial, and
Agricultural

Real Estate
Construction -
Residential

Real Estate
Construction -
Conimercial

Real Estate
Mortgage -
Residential

Real Estate
Mortgage -
Commercial

Installment
Loans; to
Individuals

Unallocated

Total

213 $

1,724
1,937 $

125 $

607
732$

542 $

1,169
1,711 S

1,069 $

2,318
3,387 $

2,071 $

4,763..
6,834 $

0 $

239
239 $

0 $

,,4,020

2 .
2,$

10,822
14,842

4,157 $

,2,496 :

7,762

5,771 $

18,959 $

44 :

0 $

,,39,189'

125,883
130,040 $

19,681
22,177 $

35,724
43,486 $

215,452
221,223 $

386,133
405,092 $

24,922'
24,966 $

0
0 S

.807,795
846,984

239

167 $

380

653 $

2,309

1,565
1,804 $

1,021
1,188 $

1,182
1,562 $

2,598
3,251 $

3,425
5,734 $

0 $

267
2 6 7$

3,748

"10,061
.13,809

3 $

4,428

1,147 $

7,867 $

6,569

33,440

0 $

53,451

, 124,127
128,555 $

29,054
30,201 $

39,830
47,697 $

196,885
203,454 $

369,520
402,960 $

30,063
30,063 $

0, . 789,479
842,930
0 $

Loans, or portions ofloans, are'charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for loan
losses, and recoveries ofloans previously charged off are added back to the allowance. Once the fair value for a collateral
dependent loan has been determined, any impaired amount is typically charged off unless the loan has other income sfreams to
support repayment. For impaired loans which have other income streams to support repayment, a specific reserve is established for
the amount determined to be impaired.

Impairedloans

Impaired loans totaled $39,363,000 and $53,620,000 at December 31, 2012 and 2011 respectively, and are comprised ofloans
on non-accrual status and loans which have been classified as froubled debt restracturings.

The categories of impaired loans at December 31, 2012 and 2011 are as follows:

(in thousands)

Non-accrual loans
Troubled debt restructurings continuing to accrue interest

Total impaired loans

2012

2011

31,081 $
8,282
39,363 $

46,403

- 7,217
53,620

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following tables provide additional information about impaired loans at December 31, 2012 and 2011, respectively;
segregated between loans for which an allowance has been provided and loans for which no allowance has been provided:

(in thousands)

At December 31, 2012
Wltli no related allowance recorded:

Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer
Total

With an allowance recorded:

Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer
i Total

Total impaired loans

At December 31, 2011
Witli no related allowance recorded:

Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer,
Total

With an allowance recorded: .

Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial

Total
Total impaired loans-

Recorded
Investment

Unpaid
Principal
• Balance

Related
Allowance

$
$

4;oo9. $
2,339
2,102
2,393
5,565
186
16,594 $

898 S
189
6,011
3,999
14,167
44

-•-,,25,308 $

41,902 $

,3,625
788
1,756
2,654
21,190
177,
30,190 $

'904
563
6,448
4,265
18,780
30,960 $
61,150 $

3,272 -$
2,307
1,879
1,939
5,162
174
14,733 $

885 $
189
5,883
3,832
13,797
44
24,630 $

39,363 $

3,546 $
584
1,459
2,315
15,151
168
23,223 $

882
563
6,409
4,254
18,289
30,397 $
53,620 $

0
0
0
0
0
0
0

213
125
, 542
1,069
2,071
0
4,020

4,020

239
167
380
653
2,309
3,748
3,748

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements-

December 31, 2012, 2011, and 2010

The following table presents by class, information related to the average recorded investment and interest income recognized
on impaired loans for the years ended December 31, 2012 and 2011:

• -

(in thousands)
With no related allowance recorded:

Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
. Real estate - residential
Real estate - commercial
Consumer

Total

With an aUowance recorded:

Commercial, financial and agricultural
Real estate - construction residential^:..- ,
Real estate - construction commercial
Real estate - residential
Real estate - commei-dal
Consumer
-^
Total
Total impaired loans

2012

2011

Average
Recorded
Investment

Interest
Recognized
Forthe
Period Ended

Average
Recorded
Investment

Interest
Recognized
Forthe
Period Ended

4,157 :
1,137
1,692
3,169
12,198
170
22,523 $

7 7 6 - $ -•
189
6,087
2,604
11,271 .

20,929 :
. 43,452 :

93 :
7
0
50 :
124
,1
..275

29 ;
0
0
11
99
0
139 $
414 :

3,510 :
1,273
3,568
3,596
18,270
190
30,407 :

655 :

.. 47
5,805
3,203
12,724

:•
22,434 $
52,841 $

52-
0
0
26
7 3;

155

17--
0
0
113
.0
- :0
.130
285

The specific reserve component ofthe Company's allowance for loan losses at December 31, 2012 and 2011 was, determined
by using fair values of the imderlying collateral obtained through independent appraisals and intemal evaluations, or by
discounting the total expected fiiture cash flows. The recorded investment varies from the unpaid principal balance primarily
due to partial charge-offs taken resulting from cunent appraisals received. The amount recognized as interest income on
impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $275,000 and $155,000, for
the years ended December 31, 2012 and 2011, respectively. The average recorded investment in impaired loans is calculated on
a monthly basis during, the periods reported, Confractual interest due on loans in non-accraal status was $1,198,000 at
December 31, 2012 compared to $1,952,000 at December 31, 2011..Interest income recognized on loans in non-accrual status
was $11,000 for the year ended December.31, 2011. During the year ended December 3,1, 2012 there was no significant
interest recognized on loans in non-accrual statos.

Delinquent and Non-Accrual Loans

The delinquency status ofloans is determined based on the confractual terms ofthe notes. Borrowers are generally classified as
delinquent once payments beiiome 30 days or more past due.

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following table provides aging information for the Company's past due and non-accraal loans at December 31, 2012 and
2011.

(in thousands)

December 31,2012
Commercial, Financial, and Agricultural
Real Estate Construction - Residential
Real Estate Construction - Commercial
Real Estate Mortgage - Residential
Real Estate Mortgage - Commercial
Installment and Other Consumer

Total

December 31,2011
Commercial, Financial, and Agricultoral
Real Estate Construction ~ Residential
Real Estate Construction - Commercial
Real Estate Mortgage - Residential
Real Estate Mortgage - Commercial
Installment and Other Consumer

Total

Credit Quality

Current or
Less Than
3,0;Days
PastDue

90 Days
Past Due
And Still
Accruing

30-89 Days
Past Due

Non-Accrual

Total

126,884
19,390
35,117
213,694
390,032
24,221
809,338

126,244 $
. 29,054
39,822
195,779
371,000
29,282
791,181 $

1,821
290
607
2,199
,1,122
520
6,559 $

243
. 0
- 0
3,513
924
612
5,292

0
0
8-
9
36

•54 $

l-,335 $
2,497
7,762
5,330
13,938
. 219
31,081

2,068
1,1.47;
7,867
4,153
31,000
168
46,403

130,040
22,177
43,486'
221,223
405,092.
24,966-

128,555
30,201
. 47,697
• 203,454 •
402,960
30,063
842,930;

The following table provides information about the credit quality ofthe loan portfolio using the Company's intemal rating
system reflecting management's risk assessment. Loans are placed on watch status when (I) one or more weaknesses that
could jeopardize timely liquidation exits; or (2) the margin or liquidity of an asset is sufficiently tenuous that adverse trends
could result in a collection problem. Loans classified as substandard are inadequately protected by the cmrent sound worth and
paying capacity ofthe obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or.
weaknesses that jeopardize the repayment ofthe debt. Such loans are characterized by the distinct possibility that the Company
may sustain some loss if the deficiencies are not conected. It is the Company's, policy to discontinue the accrual ofinterest
income on loans when management believes that the collection ofinterest or principal is doubtful. Loans are placed on non-
accrual status when (1) deterioration in the fmancial condition ofthe borrower exists for which payment of fiillprincipal arid
interest is not expected, or (2) payment of principal or interest has been in defauh for a period of 90 days or more and the asset
is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to
principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income
on a cash basis.

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Commercial,
Financial, &
Agricultural

Real Estate
Construction -
Residential

Real Estate
Construction -
Commercial

Real Estate
Mortgage-
Residential

Real Estate
Mortgage -
Commercial

Installment
and other
Consumer

(in thousands)

At December 31, 2012
Watch
Substandard
Non-accrual

Total

At December 31, 2011
Watch
Substandard
Non-accrual
Total

- $

14,814 $
6,485
1,335
22,634 $

,
-;

22,206 $
4,142
2,068
28,416 $

4,580 $
396
2,497
. 7,473 $

9,644$
842
1,147
11,633 $

;

6,459 $
2,035
7,762
.16,256 $

26,063 S
5,472
5,330
36,865 $

9,338 $

^^i;i89
7,867
18,394 $

13,231 $
4,269
;
4,153
21,653 $

29,753 $
11,027
13,938 .
54,718 $

24,392 $
8,004
31,000
63,396 $

Total

•'
82,341,
,.j 25,838
31,081
139,260

' 6 7 2$ •
423, •
219
1,314$

557,.$
444
168 V
1,169$

79,368
18,890
46,403
144,661

Troubled Debt Restructurings

At December 31,2012, loans classified as froubled debt restracturings (TDRs) totaled $22,363,000, ofwhich $14,081,000 was
on non-accrual status and $8,282,000 was on accraal status. At December 31, 2011, loans classified as TDRs totaled
$32,165,000, ofwhich $24,948,000 was on non-accraal status and $7,217,000 was on accraal status. When an individual loan
is determined to be a TDR, the amount of impairment is based upon the present value of expected fiiture cash flows discounted
at the loan's effective interest rate or the fair value ofthe underlying collateral less applicable selling costs. Accordingly,
specific reserves of $1,544,000 and $1,522;000 were allocated to the allowance for loan losses at December 31,2012 and 2011,
respectively.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2012 and 2011:

(in thousands)
Troubled Debt Restructurings
Commercial, financial and agricultural
Real estate construction - commercial
Real' estate mortgage - residential
Real estate mortgage - commercial
Consumer
Total

2012
Recorded Investment (1)

2011
Recorded Investment (1)

Number of
Contracts

Pre
Modification

Post-
Modiflcation

Number of
Contracts

Pre-
Modification

Post-,
Modification

4 S
1
5
2 .
2
14 $

637 $
43.
657
645
44
2,026 $

613
41
657
644
44
1,999

9 $
8
7
9
0
33 $

3,500 $
6,616
1,157
9,553
0

20,826 $

3,486
=6,227
1,010
9,215
0
19,938

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion ofthe debt was forgiven.
Loans modified as a TDR that were fiilly paid down, charged-off or foreclosed upon during the period ended are not reported.

The Company's portfolio ofloans classified as TDRs include concessions such as interest rates below the current market rate,
deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as a
TDR until it is ultimately repaid in fiill, charged-off, or the collateral for the loan is foreclosed and sold. The Company
considers a loan in TDR status in default when the borrower's payment according to the modified terms is at least 90 days past
due or has defaulted due to expiration ofthe loan's maturity date. During the year ended December 31, 2012, fourteen loans
meeting the TDR criteria were modified. There was one loan modified as a TDR that defaulted during the year ended
December 31, 2012, and vrithin twelve months of their modification date. No loans modified as a TDR during the year ended
December 31, 2011 defaulted.

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated-Financial Statements

December 31, 2012, 2011, and 2010

(3) Real Estate and Other Assets Acquired in Settlement of Loans

•

" ";
-

(in thousands)
Commercial
Real estate constmction - residential
Real estate constraction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Repossessed assets
Total
Less valuation allowance for other real estate owned
Total other real estate owned and repossessed assets

'•

2012

2011

329 $
112
13,392
1,227
14,20L
468
29,729 $
(6,137)
23,592 $

17
307
13,650
2,121
6,623
, . - 279
22,997
(6,977)
16,020

;

•.

;•

•

Balance at December 31,2010
Additions
Proceeds from sales ; -
Charge-offs against: the valuation allowance for other real estate owned
Net gain on sales

; .

•

• .- -'•

Balance at December 31, 2011
Additions
Proceeds from sales
Charge-offs against the valuation allowance for other real estate owned, net
^
Net gain on sales
Total other real estate ovraed and repossessed assets
Less valuation allowance for other real estate owned
Balance at December 31,2012

' •'

20,168
10,903
(7,435)
(433)
K206)
22,997
16,869
(8,571)
(1,883)
317
29,729
(6,137)
23,592

During the years ended December 31, 2012 and 2011, net charge-offs against the allowance for loan losses at the time of
foreclosure were approximately $6,705,000 and $8,248,000, respectively.

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Activity in the valuation allowance for other real estate owned in settiement ofloans for the years ended December 31, 2012,
2011 and 2010, respectively, is summarized as follows:
(in thousands)

2011

2010

2012

•

Balance, beginning of year
Provision for other real estate owned
Charge-offs
Balance, end of year

6,977
713
(1,553)
6,137 $

6,158
1,252
_i433i
6,977 S

0
6,158
.0,
6,158

The significant change in the expense provision from the years ended 2010 to 2012, primarily related to one foreclosed
commercial real estate constraction property. During the year ended December 31, 2010, tiie Coinpany recorded a $5,663,000
provision and related valuation allowance related to this property reflecting its current appraised value. During the.year ended
December 31, 2012, real estate values improved and comparable sales occurred which led to an,increased current,appraised
value that allowed the Company to recover $3,908,000 ofthis valuation allowance. This recovery partially offset current year
expense provisions for other real estate owned of $4,621,000,primarily atfributable to eight properties where significant write
downs were required to reflect current appraised values. These' amounts are reflected" in other real esta;te expense in the
consolidated statements of operations.

(4)

Investment Securities

A summary of investment securities by major category, at fair value, consisted ofthe following at December 31, 2012 and
2011, respectively.
(in thousands)

2011

2012

U.S. Treasury
Govemment sponsored enterprises
Asset-backed securities
Obligations of states and political subdivisions

Total available for sale securities

2 , 0 3 0$
55,180
107,872 -^
35,164

2;054
70,314
107,329'
34,109

'200,246; $

213,806

All ofthe Company's investment securities are classified as available for sale, as discussed in more detail below. Asset backed
securities include agency mortgage-backed securities, which are guaranteed by government sponsored agencies such as the
FHLMC, FNMA and GNMA. The Company does not invest in subprune originated mortgage-backed or collateralized debt
obligation instraments.

'' '

Investment securities that are classified as restticted equity securities primarily consist of Federal Home Loan Bank stock and
the Company's interest m statutory trasts. These securities are reported at cost in other assets in the amoimt of $3,925,000 and
$4,385,000 as of December 31, 2012 and 2011, respectively.

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The ariiortized cost and fair value of debt securities classified as available-for-sale at December 31, 2012 and 2011 are as
follows:

(in thousands)
December 31,2012

• -

U.S. Treasury
Govemment sponsored enterprises
Asset-backed securities
Obhgations of states and political

.subdivisions

Amortized
cost

Gross
unrealized
gains

Gross
imrealized
losses

Fair value

2,000 $
54,327
104,607

30
853
3,276

0 $
0
II

2,030
55,180
107,872

33,959

. 1,222

35,164

Total available for sale securities

194,893 •$

5,381 $

28 $

200,246

: • •'

•

Weighted average yield at end of period

2.54 %

December 31, 2011

U.S. Treasury
Govemment sponsored enterprises
Asset-backed securities
Obligations of states and political

subdivisions

2,000 $
69,703
103,806

32,716

54 $

629
3,547

1,394

Total available for sale securities

208,225 $

5,624 $

Weighted average yield at end ol period

2.89 %

0 $
18
•24

.2,054
70,314
107,329

34,109

43 $

213,806

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2012, by confractual
maturity are shown below. Expected maturities may differ from confractual maturities becaiise borrowers have the right
to call or prepay obligations with or without prepayment penalties.

(in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Asset-backed securities
Total available for sale securities

Amortized
cost

3,919 $

63,985
20,478
1,904
'90,286
104,607
194,893 $

Fair
value

3,951
65,154
21,340
i;929
92,374
107,872
200,246

Debt secm-ities wath carrying values aggregating approximately $146,442,000 and $172,447,000 at December 31, 2012
and 2011, respectively, were pledged to secure public fimds, securities sold under agreements to repurchase, and for
other purposes as required or permitted by law.

Gross unrealized losses on debt securities and the fair value ofthe related securities, aggregated by investment category
and length of time that individual securities have been in a continuous unreahzed loss position, at December 31, 2012
and 2011, were as follows:

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(in thousands)

At December 31, 2012

Government sponsored

enterprises

Asset-backed securities
Obligations of states and
political subdivisions .

Total

(in thousands)

At December 31,2011

Government sponsored

enterprises

Asset-backed securities
Obligations of states and
political subdivisions

Total

Less than 12 months
Fair
Value

Unrealized
Losses

12 months or more

Fair
Value

Unrealized
Losses

d
Tots

Fair
Value

Unrealized
Losses

$•

1,044
4,729

2,114

(11)

(17)

0 $
0

.. 150

7,887

(28)

150 $

0
0

. 1,044
4,729

2,264

8,037

$•

13,250
4,591

229
18,070

_$_

(18)
(24)

(1)
(43)

0 $
0

150
150 $

'$ '

0
0

13,250
4,591

•

0
tL

379
18,220

(11)

;(i7)

(28)

•

( 1 ^)
(24)

(1)
(43)

The total available for sale portfolio consisted of approximately 380 securities at December 31, 2012. The fiortfolio
included 14 securities, having an aggregate fair value of $8,037,000 that were in a loss position at December 31, 2012.
Securities identified as temporarily impaired which have been in a loss position for 12 months or longer totaled $150,000
at fair value. The $98 unrealized loss included in other comprehensive income at December 31, 2012 was caused by
interest rate fluctuations. The total available for sale portfolio consisted of approximately 365 securities at December 31,
2011. The portfolio included 20 securities, having an aggregate fair value of $ 18,220,000 that were in- a loss position at
December 31, 2011. Securities identified as temporarily impaired which have been in a loss position for 12 months or
longer totaled $150,000 at fair value. The $294 imrealized loss included in other comprehensive income at December 31,
2011 was caused by interest rate fluctuations. Because the decline in fair value is attributable to changes in interest rates
and not credit quahty these investments; were not considered other-than-temporarily impaired at December 31, 2012 and
2011, respectively.

The table presents proceeds from sales" of securities aiid the components of investment securities gains and losses which
have been recognized in eamings as follows:

(in thousands)
Proceeds from sales of available for sales securities
Gains realized on sales
Losses realized on sales
Other-than-temporary impairment recognized
Investment securities gains

2012

2011

2010

790 $
26
0
0
26 $

0 $
0
a
0
0 $

0
0
0
0
0

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(5)

Premises and Equipment

A summary of premises and equipment at December 31,2012 and 2011 is as follows:

(in thousands)

2012

Land and iand improvements
; Buildings and improvements
Furniture and equipment
Constmction in progress
Total
Less accumulated depreciatioii
Premises and equipment, net

10,073 $
34,174
12,250
155
56,652
19,631
37,021 $

2011

10,121
33,652
12,013
... 277
' 56,063
18,110
37,953

Depreciation expense for the years ended December 31, 2012, 2011, and 2010 is as follows:

(in thousands)

2012

2011

2010

Depreciation expense

1,858 $

1,940

1,964

(6)

Intangible Assets

Core Deposit Intangible Asset'

A summary of amortizable intangible assets at December 31, 2012 and 2011 is as follows:

(in thousands)

_ _ : _^

2012

2011

Gross
Carrying
Amount

Accumulated
Amortization

Net
Amount

Gross
Carrying
Amount

Accumulated
Amortization

•Net
Amount

Core deposit intangible

4,795 $

(4,660) $

...

135 $

4,795 $

(4,252) $

543

The Company's amortization expense on intangible assets in any given period may be different from the estimated
amoimts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates, and
other market conditions. The following table shows the estimated future amortization expense based on existing asset
balances and the interest rate environment as of December 31, 2012 for the next five years:

(in thousands)
2013
2 0 14
2 0 15

2016
2017

•

.
'h

•-•

• •

:
Core Deposit
Intangible
Asset
. ' ;'135
0
Q

0
0

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Changes in the net carrying amount of core deposit intangible assets for the years ended December 31, 2012, 2011, and
2010 is as follows:

(in thousands)

Balance at beginning of year
Additions
Amortization

Balance at end of year

Mortgage Servicing Rights

2012

2011

2010

•

543 $
0
(408)

135 $

978 $
0
(435)

543 $

1,504
0
(526)

978

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting
Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option
resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as
an increase to beginning retained eamings. As such, effective January 1, 2012, changes in the fair value of mortgage
servicing rights is recognized in eamings in noninterest income in the period in which the change occurs and no
amortization will be recognized on mortgage servicing rights going forward. For the years ended December 31, 2011
and 2010, MSRs were amortized over the shorter of 7 years or the life of the loan and periodically reviewed for
impairment. At December 31, 2011 and 2010, no temporary impairment was recognized.

At December 31, 2012 and 2011, respectively, the Company serviced mortgage loans for others totaling $310,587,000
and $307,016,000, respectively. Mortgage loan servicing fees eamed on loans sold were $878,000, $863^000, and
$927,000 for the years ended DecemberSl, 2012, 2011, and 2010, respectively, and are reported as other noninterest
income.

The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2012, 2011,
and 2010 as follows:

(in thousands)

Balance at beginning of year
Re-measurement to fair value upon election to measure

servicing rights at fair value

Originated mortgage servicing rights
Changes in fair value:

Due to change in model inputs and assumptions (I)
Other changes in fair value (2)

Amortization

Balance at end of year

2012

2011

2010

2,308 .,$

2,356 $

2,021

742
830

122
(1,453)
0

. 0
760 '

0
0 "
(808)

0
1,169

0
0
(834)

2,549 $

2,308 $

2,356

(1) The change in fair value resulting froin changes in valuation inpiits or assumptions used hi the valuation model reflects the

change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

(2) Other changes in fair value reflect changes due to customer payments and passage of time. This also includes a one time
adjustment of a $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization
method to an accelerated amortization method of accounting for amortizing MSRs in prior years. If the aforementioned was
corrected as of December 31, 2011, the balance at the beginning of the period would have been $1,770,000.

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following key data and assumptions were used in estunating the fair value ofthe Company's mortgage servicing
rights as of the years ended December 31, 2012 and 2011:

Weighted-Average Constant Prepayment Rate
Weighted-Average Note Rate
Weighted-Average Discoimt Rate
Weighted-Average Confractual Life (in years)

(7) Deposits

2012

2011

%
%
%

18.60
4.22
7.99
20:00

%
%
%

20.86
4.64
7.99
23.00

The scheduled maturities of total time deposits as ofthe years ended December 31, 2012 and 2011 are as follows:,

(in thousands)
Due within:
One year
Two years
Three years
Four years
Five years
Thereafter,-
Total

2012

2011

280,477 $ .-,

65,220
23,482
11,984
12,139
0

393,302 $

.266,516
- 93,209
V 34,730
8,811
,: 11,172
0

414,438

At December 31, 2012 and 2011, the Company had certificates and other time deposits in denominations of $100,000 or
more which mature as follows:

(in thousands)
Due within:

Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months

Total

2012

2011

37,166 $ •
18,690
33,265
31,656

52,274
16,017
32,291
38,922

120,777 $

139,504

The Federal Reserve-Bank required the Bank to maintain cash or balances of $1,367,000 and $1,335,000 atDecember 31,
2012 and 2011, respectively, to satisfy reserve requirements.

Average compensating balances held at correspondent banks were $1,595,000 and $489,000 at December 31, 2012 and
2011, reispectively. The Bank maintains such compensatmg balances with correspondent banks to offset charges for
services rendered by those banks.

H A W T H O RN BANCSHARES, INC; .:
AND SUBSIDL\RIES

Notes to the Consolidated Financial Statements;

December 31, 2012, 2011, and 2010

(8)

Borrowings

Federal Funds Purchased and Securities Sold under Agreements to Repurchase (Repurchase Agreements)

Information relating to federal fimds purchased and repurchase agreements is as follows:

(in thousands)
2012

•

Year End
Weighted
Rate

Average
Weighted
Rate

Average
Balance
Outstanding

Maximum
Outstanding at
any Month End

Balance at
December 31,

Federal fiinds purchased
Short-term repurchase agreements

0.0
. 0.1

0.1

412
22,867

345
24,734

Total

2011

Federal fiinds purchased
Short-term repurchase agreements

\ 0.0 %
0.1
,

0.3 % $
0.2

' 2, $

.. 27,634

Total

0 $

30,227

0
21,058
21,058

0
24,516
'24,516

The securities underlying the agreements to repurchase are under the conttol ofthe Bank. All securities sold under
agreements to repurchase are secured by a portion ofthe Bank's investment portfolio.

Under agreements with unaffiliated banks, the Bank may borrow federal fimds up to $15,000,000 on an imsecured basis
and $5,135,000 on a secured basis at December 31, 2012.

Subordinated Notes and Other Borrowings

Other borrowings of the Company consisted of the following:

(in thousands)

2012

FHLB advances

The Bank

Borrower

Total Bank

Subordinated notes

The Company

Total Company

Maturity
Date

2013 $
2014.
2015
2016
2017-18

Year End
Balance
10,126
. 0
0
0
10,000
20,126

2034 $
2035

25,774
23,712
49,486

Year End
Weighted
Rate

2011

Year End
Balance

Year End
Weighted
Rate

1.5 %
na
na
na
2.5 %

3.0 %
2.f %

_$_

8,284
10,126
0
0
10,000
28,410

25,774
23,712
49,486

1.6 %
1.5 %
na
na
2.5 %

3 . 3%
•, 2.4 %

The Bank is a member ofthe Federal Home Loan Bank of Des Moines (FHLB) and has access to term financing from
the FHLB. These borrowings are secured under a blanket agreement which assigns all investment in FHLB stock, as
well as mortgage loans equal to 125% to 175% (based on collateral type) ofthe outstanding advance balance, to secure
amounts borrowed by the Bank. The outstanding balance of $20,126,000 uicludes $10,000,000 which the FHLB may
call for early payment within the next year. Based upon the collateral pledged to the FHLB at December 31, 2012, the
Bank could borrow up to an additional $269,958,000 under the agreement.

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

On March 17, 2005, Exchange Statiitory Tmst II, a business tiTist, issued $23,000,000 of 30-year floating rate Trust
Preferred Securities (TPS) to a TPS Pool. The floating fate is equal to a three-month LIBOR rate plus 1.83% and
reprices quarterly (2.14% at December 31, 2012). The TPS can be prepaidWithout penalty at any time after five years
from the issuance date.

The TPS represent preferred,interests m the frust. The Company invested approximately $712,000 in common interests
in the trust and the purchaser in the private placement purchased $23,000,000 in preferred interests. The proceeds were
used by the,tmst to purchase from the Company its 30-year deeply subordinated debentures whose terms mirror those
stated above for the TPS: The debentures are guaranteed by the Company pursuant to a subordinated guarantee.
Disfributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that
the TPS are outstanding. The frustee for the TPS holders isU.S. Bank, N;A.. The tioistee does not have the power to take
enforcement action in the.event of a defauh.under the TPS for five years from thedate of default. In the event of default,
however, the Company would be precluded from paying dividends imtil the defauh is cured.

•

On March 17, 2004, Exchange Statutory Trust I, a Delaware business trust and subsidiary of the Company issued
$25,000,000 of floating TPS to a TPS Pool. The floating rate is equal to the three-month LIBOR rate plus 2.70% and
reprices quarterly (3.00% at December 31; 2012). The TPS are-fiilly, irrevocably, and unconditionally guaranteed on a
subordinated basis by the Company. The proceeds ofthe TPS were invested in junior subordinated debentures ofthe
Company. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of
each year that the TPS are outstanding. The-TPS mature on March 17, 2034. That maturity date may be shortened if
certain conditions are met.

The Exchange Statutory Tmsts are not consolidated in the Company's financial statements. Accordingly, the Company
does not report the securities issued by the Exchange Stamtory Trusts as liabilities, and instead reports the subordinated
notes issued by the Company and held by the Exchange Stamtory Trusts as liabilities. The amount of the subordinated
notes as of December 31, 2012 and 2011 was $49,486,000, respectively. The Company has recorded the investments in
the common securities issued by the Exchange Statatory Trusts aggregating $1,486,000, and the corresponding
obligations under the subordinated notes, as well as the interest income and interest expense on such investments and
obligations in its consolidated fmancial statements.

(9)

Income Taxes

The composition of income tax expense (benefit) forthe years ended December 31, 20,12, 2011, and 2010 are as follows:

(in thousands)
Current:
Federal
State

Total current
Deferred:
Federal
State

Total deferred

2012

2011

2010.

651 $
156
807

(197)
. (64)..;,
(261)

374 $
(214)
160

386
45
431

(837)
80
(757)

(2,091)
(239)
(2,330)

Total income tax expense (benefit)

% ..

546 $

.591 $.

. (3,087)

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and2010'

Applicable income tax (benefit) expense for financial reporting purposes differs from the amount computed by applying
the statutory Federal income tax rate for the reasons noted in the table for the years ended December 31, 2012, 2011, and
2010 are as follows:

(in thousands)

Income (loss) before provision for

income tax expense (beneflO

Tax at statutory Federal income tax rate

Tax-exempt income

State income tax, net of Federal

tax benefit

Release of prior year over acaual

Other, net

2012

Amount

2011

Amount

2010

Amount

$
.. $ -

3,368
1,145,

34,00 %

$
$

(380)

(11.27),,

3,448

1,172
(404)

- $

(6,639)

34.00 % $ . ^

(2,257)-

34,00 %

(11.72).

(371)
. 91

1.81 :

(11,01)

2.70.

(111)
0

(3.23)

0.00

(66)

(1.91)

(445)

6.70

: (105)
0
(280)

1.58

0.00

4,22

Provision for income tax expense (benefit)

546

16.23 %

591

17,14 %

(3,087)

46.50 %

The components of deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are as follows:

(in thousands)

Deferred tax assets:

Allowance for loan losses
Impairment of other real estate owned
Goodwill
Deferred taxes on pension
Nonaccraal loan interest
Core deposit intangible
Pension
Deferred compensation
Other

Total deferred tax assets

Deferred tax liabilities:

Available-for-sale securities
Premises and equipment
Mortgage servicing rights
Assets held for sale
FHLB stock dividend
Other

Total deferred tax liabilities

Net deferred tax asset

2012

2011

5,640 $
2,774
2,483
997
940 -
904 ,
450
:
36
449 =

5,248
•
••-' 2,734
..
.2,831
, . 1,380
1,033
883
276
27
549

-•

14,673 $

14,961

;,088 $
958
908
110
100

• , . , . .•

4,165

2,177
960
791
109
100
,. 2

4,139

10,508 $

10,822

The ultimate realization of deferred tax assets is dependent upon the generation of futare taxable income during the
periods in which those temporary differences become deductible. Managemerit considers the scheduled reversal of
deferred tax liabilities, projected fiitare taxable income, and tax planning sfrategies in making this assessnient. Based
upon the level of historical taxable income and projections for foture taxable income over the periods in which the

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

deferred tax assets are-deductible, management believes it is more likely than not the Company will reahze the benefits
of these temporary differences at December 31, 2012 and, therefore, did not establish a valuation reserve.

At December 31, 2012, the accumulation of prior years' eamings representing tax bad debt deductions ofthe Bank was
$2,931,503. If these tax bad debt reserves were charged for losses other than bad debt losses, the Bank would be
required to recognize taxable income in the arnount ofthe charge. It is not contemplated that such tax-restticted retained
eamings will be used m a marmer that would create federal income tax liabilities.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. As a
result ofthe lapse ofthe statae of limitations for the 2007 tax year, the Company recognized $340,351 of gross
unrecognized tax benefits and $30,969 of accrued interest. This resulted in a decrease in the effective tax rate for the
year ended December 31, 2011 compared to December 31, 2010. As of December 31, 2012 and 2011, respectively, the
Company did not have any uncertain tax provisions.

A reconciliation ofthe beginning and ending amount of the unrecognized tax benefits is as follows:

Unrecognized tax benefits as of January 1,
Gross amounts ofthe increases and decreases in unrecognized

tax benefits as a resuk of tax positions taken during prior years

Gross amounts ofthe increases and decreases in unrecognized
tax benefits as a result of tax positions taken during year

The amount of decreases in unrecognized tax benefits

relating to settlements with taxing authorities

Reductions to unrecognized benefits as a result of a lapse ofthe

applicable statute of limitations

2012

0 $

2011
340,351 ..$

2010
562,076

.'-0

.. . 0

(340,351)

(221,725)

Unrecognized tax benefits as of December 31,

0 $

0 $,

340;351

(10) Employee Benefit Plans

Employee benefits charged to operating expenses are summarized in the table below for the years ended December 31,
as indicated.

(in thousands)
Payroll taxes
Medical plans
401k match
Pension plan
Profit-sharing
Other

Total employee benefits

2012

2011

2010

,127 $
,772
298
,224
58
318

4,797 $

1,098 S
1,676
291
907"'
0
250

4,222 $

1,105
1,545
319
'864
0
162

3,995

The Company's profit-sharing plan includes a matching 401k portion, in which the Coinpany rnatches the first 3% of
eligible employee confributions. The Company made annual confributions in an amoimt up to 6%) of income, before
income taxes-and before confributions to the profit-sharing and pension plans, for all participants, limited to the
maximum amount deductible for federal income tax purposes, for each of the periods shown. In addition, employees
were able to make additional tax-deferred confributions.

H A W T H O RN BANCSHARES, ING.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Pension

The Company provides a nonconfributory defined benefit pension plan for all fall-time employees. An employer is
required to recognize the fanded status of a defined benefit postretirement plan as an asset or liability in its balance sheet
and to recognize changes in that fimded status in the year iri which the changes occur through cornprehensive income.
Under the Company's fanding policy for the defined benefit pension plan, confributions are made to a tmst as riecessary
to provide for current service and for any unfanded accraed actuarial liabilities over a reasonable period. To the extent
that these requirements are fally covered by assets in the trast, a contribution might not be made in a'patticular year. The
Company made $766,000 of confributions to the defined benefit plan through April 1, 2013, of which $238,000 relates
to the 2011 plan year and $528,000 relates to the 2012 plan year. The minimum required corittibution for the 2013 plan
year is estimated to be $665,000. The Company has not determined whether it will make any contributions other than the
minimum required fimding contiibution for 2013.

• <

Obligations and Funded Status at December 31

(in thousands)

Change in projected benefit obligation:
Balance, January 1
Service cost
Interest cost
Actaarial (gain) loss
Benefits paid
'
Balance, December 31

Change in plan assets:
Fair value, January 1
Actaal gain (loss) return on plan assets
Employer conttibution
Expenses paid
Benefits paid
Fair value, December 31
Funded status at end of year

Accumulated benefit obligation

2012

2011

14,217;.
1,168
667
(458)
(252)
15,342 $

f 0,034
1,193
766"
(34)
(252)
11,707' $
(3,635) $

^^=- $
$

. \%

12,564 .$

10,655
931
604
'2,240
' ( H 3)
14,217

9,296
(54)
1,005
0
(213)
•: 10,034
(4,183)
10,762

Components of Net Pension Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income

The followdng items are components of net pension cost for the years ended December 31, as indicated:

, (in thousands)
Service cost—^benefits earned during the year
Interest costs on projected benefit obligations
Expected return on plan assets
Expected administrative expenses
Amortization of prior service cost
Amortization of imrecognized net loss

Net periodic pension expense

2012

2011

2010

,168. $
668
(776)
40
78
46

1,224 $

931 $
604.
(706)
0
78
0

907 $

844
556
(614)
0
78
0

864

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December31,2012, 2011, and 2010

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at
December 31, 2012 and 2011 are shovm below, including amoimts recognized in other comprehensive income during
the periods. All amounts are shown on a pre-tax basis.

•- • •

(in thousands) •
' '
Prior service costs' '
Net accumulated actaarial net loss
Accumulated other comprehensive loss

:. •-•

2012

2011

( 6 0 0) $

••,

(1,849)
(2,449)

;(679)
(2,777)
(3,456)

Net periodic benefit cost in excess of cufnulative employer contributions

' •(1,185)- ••

(727)

Net amount recognized at December 31, balance sheet

Net gain (loss) arising during period
Prior service cost amortization
Amortization of net actuarial loss
Total reeognized in other comprehensive income (loss)

Total recognized in net periodic pension cost
and other comprehensive income (loss)

$•

.(3,634)$;

88L $
79

•••

4 6 '^

1,006 $

•

(4,183)

(3,001)
79
0
(2,922)

218 S

3,829

The estimated prior service cost for the defined benefit pension plan that will be amortized froni accumulated other
comprehensive income into net periodic cost in 2013 is $79,000. During 2013, $3(),000 is the estimated amount of
actuarial loss subject to amortization into net periodic pension cost.

Assumptions utilized to determine benefit obligations as of December 31, 2012, 2011 and 2010 and to determine
pension expense for the years then ended are as follows:

Determination of benefit obligation at year end:

Discount rate
Aimual rate of compensation increase

Determination of pension expense for year ended:

Discount rate for the service cost
Annual rate of compensation increase
Expected long-term rate of return on plan assets

2012

2011

4.25%
3.61%

4.75%
3.61%
7.00%

4.75%
4.50%

5.75%
4.50%
7.00%

\
2010

5.75%
4.50%

5.75%
4.50%
7.00%

The assumed overall expected long-term rate of retum on pension plan assets used in calculating 2012 pension expense
was 7.0%. Determination of the plan's rate of retum is based upon historical retums for equities and fixed income
indexes. During the past five years, the Company's plan assets have experienced the following annual retums: 11.4% in
2012, 0.1% in 201,1, l2.4% in 2010, 22.0% in 2009, and (32.6)% in 2008. The rate used in plan calculations may be
adjusted by management for current frends in the economic environment. With a fraditional investment mix of over half
ofthe plan's investments m equities, the actual retum for any one plan year may fluctaate significantiy with changes in
the stock market. Due to a decrease in discount rates used in the actaarial calculation ofplan income, the Company
expects to incur $1,144,000 of expense in 2013 compared to $1,224,000 in 2012.

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Plan Assets

The investment policy ofthe pension plan is designed for growth in value while minunizirig risk to the overall portfolio.
The Company diversifies the assets through investments m domestic and intemational fixed income secitrities and
domestic and intemational equity securities. The assets are readily marketable and can be sold to fand benefit payment
obligations as they become payable. The Company's long-terrri uivestment target mix for theplaii is 70% equity
securities and 30% fixed income. The Company regularly reviews its policies on the investment mix and may make
changes depending on economic conditions and perceived investment mix.

The fair value ofthe Company's pension plan assets at December 31, 2012 and 2011 by asset category are as follows:

Fair Value Measurements

Quoted Prices
in Active
Markets for
Identical
Assets
(Levell)

Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Fair Value

485 -$

485 $

0 $.

4,335
., 575.
635
1,670

395 .
370

:2,726
416
100
11,707 $

4,335
575
635
1,670
395
370

0
0
0
0

0-
0
0
8,465 $

2,726
416
too
3,242 $

1,791 $

0 $

3,821
502
595
1,278
203
198

841
,653
152
10,034 $

.;,,

3,821
502
595^
1,278
203
198

0
0
0
8,388 $

0
0
0./
0
0
0

841
653
152
1,646 1$

(in thousands)

December 31,2012
Cash equivalents.
Equity securities:

U.S. large-cap (a)
U.S. mid-cap (b)
U.S. small-cap (c)
Intemational (d)
Real estate (e)
Commodities (f)

Fixed income securities:

U.S, gov't agency obligations (g)
Corporate investment grade (g)
Corporate non-investment grade (g)
Total

December 31,2011
Cash equivalents
Equity securities;

U.S. large-cap.(a)
U.S, mid-cap (b)
U,S. small-cap (c)
Intemational (d)
Real estate (e)
Commodities (f)

Fixed income securities:
. U,S, gov't agency obligations (g)
Corporate investment grade (g)
Corporate non-investment grade (g)
Total

(a) This category comprises of low-cost equity index iunds not actively managed that track the, S&P 500. ; ..
(b) This category comprises of low-cost equity index fiinds not actively managed that ttack the MSCI U,S, mid-cap 450.
(c) This is comprises'of actively managed mutual
fiinds,
(d) 37% ofthis category is comprised of low-cost equity index funds not actively managed that ttackthe MSCI EAFE.
(e) This category comprises of low-cost real estate index exchange traded funds.
(t) This category comprises of exchange ttaded fimds investing in agricultural and energy commodities.
(g) This category comprises of individual bonds.

,.,.

..,

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

The following fatiu-e benefit payments are expected to be paid:

Year
(in thousands)
2013
2014
2015
2016
2017
2018 to 2022

(11) Stock Compensation

Pension
benefits

336
428
452
462
561
3,712

The Company's stock optiori.plan provides for the grant of options to purchase up to 526,435 shares ofthe Company's
common stock to officers and other key employees ofthe Company and its subsidiaries. All options have been granted at
exercise prices equal to fair value and vest over periods ranging from four to five years, except options.issued in 2008 to
acquire 11,133 shares that vested immediately.

The following table summarizes the Company's stock option activity:

Outstanding, beginning of year
Granted
Exercised
Forfeited
Expired

dumber of shares
December 31
2011
270,835
0

0
(201)

2012
270,634
0
0
0
(55,291)

2010
310,263 $

0
0
0
(39,428)

Weighted average
exercise price
DecemberSl
2011
23.50 $
0.00
0.00
0.00
17.96

2012
23.51
0.00
0.00
0.00
18.92

2010
22.29
0.00
0.00
0.00
13.96

Outstanding, end of year

215,343

270,634

270,835 $

24.68 $

23.51 $

23.50

Exercisable, end of year

197,713

242,970

226,100 $

24.76 $ 23.59 $ 23.58

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2012.

Options outstanding at December 31, 2012 had a weighted average remaining conttactual life of approximately,3.0 years
and no intrinsic value. Options outstanding at December 31, 2011 had a remaining conttactual life of approximately 3.5
years arid no intrinsic value. No stock options were granted during the years presented above.

Options exercisable at'December 31, 2012 had a weighted average remaining conttactual life of approximately 2.8 years
and no intrinsic vaMeT Options' exercisable at December 31, 2011 had a weighted average remaining conttactual life of
approximately 3.3 years and no inttinsic value. No stock options were exercised during the years presented above.

Total stock-based compensation expense for the years ended December 31, 2012, 2011, and 2010 was $29,000, $58,000,
and $87,000, respectively. As of Decernber 31, 2012, the total imrecognized cornpensation expense related to non-vested
stock awards was $68,000 and the related weighted average period over which it is expected to be recognized is
approximately 2 years.

.HAWTHORN.BANCSHARES, INC. •
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(12) Preferred Stock

• On December 19,2008, the Company announced its participation in the U.S. Treasury Department's Capital Purchase
Program (CPP), a voluntary program that provides- capital to financially healthy banks. This program was designed to
atfract broad participation by banking institutions to help stabilize the financial system by encouraging lending.

Participating in this program included the Conipany's issuance of 30,255 shares of senior preferred stock (with,a par
value of $ 1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock (see below
for additional information) to the U.S. Department of Treasury in exchange for $30,255,000. The proceeds received
were allocated between the preferred stock and the common stock warrant based upon their relative fair values. This
resulted in the recording of a discoimt on the preferred stock upon issuance that reflects the value allocated to the
warrant. The discount on the preferred stock will be accreted over five years, consistent with managements' estimate of
the life of the preferred stock. Such accretion will be treated as additional dividends on the preferred stock. On May 9,
2012, the Company redeemed 12,000 shares of preferred stock from the U.S. Department of Treasury by .repaying
$12^000,000 ofthe $30,255,000 CPP fands along with $140,000; of accrued arid impaid dividends on the shares
redeemed. Related to these shares was an additional $300,000 of accretion that was" recognized at the time of the
redemption. The allocated carrying values ofthe senior preferred stock and common stock warrant at December 31,
2012 were $17,977,000.and $2,382,000, respectively.

The preferred shares remaining outstanding of 18,255 carry a 5% cumulative dividend through December 2013 and 9%
thereafter if not redeemed. The Company intends to redeem the remaining shares by E)ecember 2013. The preferred
stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends
on the preferred stock for nine or more quarterly periods, whether or riot consecutive. Undersuch circumstances, the
Treasury will be entitled to vote to elect two directors to the board until all unpaid dividends have been paid or declared
and set apart for paymenf. The Company, is pirohibited from paying any dividends with respect to shares of common
stock unless all accmed and impaid dividends are paid in fall on the senior preferred stock for all past dividend periods.
The Treasury Department may also fransfer the senior preferred stock to a third party at any time.

The common stock warrant is exercisable immediately with a ten year term, in whole or in part, at an exercise price of
$15.81 per share. The preferred stock and warrant are classified as stockholders' equity in the consolidated balance
sheets and qualify/ for regulatory capital purposes, as Tier I capital. For the year ended December 31, 2012, the
Company had declared and paid $1,203,000 of dividends and amortized $659,000 of accretion of the discount on
preferred stock.

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and'2010

(13) Earnings per Share

Basic eamings per share is computed by dividing income available to common shareholders by the weighted average
. number of common shares outstanding during the year. Diluted eamings per share' gives effect to all dilutive potential
, common shares that were outstandmg during the year.The.calculations of basic and diluted eamings per share are as
follows for the.years,indicated: .

Basic earnings (loss) per common share:
Net income (loss)
Less: '

Preferred stock dividends
Accretion of discount on preferred stock

Net income (loss) available to
comnion shareholders

Basic earnings Qoss) per share

Diluted earnings (loss) per common share:

Net income (loss)
L e s s:

• •

; •

Preferred stock dividends •
Accretion of discount on preferred stock

Net income (loss) available to ' ;

common shareholders
Average shares outstanding
Effeict of dilutive stock options
Average shares outstanding including
. dilutive stock options
Diluted earnings (loss) per share

2012,

2011

2010

2,821,969 $

• '2,857,270 $

(3,551,740)

1,124,417
659,244

1,512,750
476,474

1,038,308 $
0.21 $

868,046 $
0.18 $

(5,540,964)
11051

2,821,969 $

2,857,270 $

(3,551,740)

.1,124,417
'• 659,244

1,038,308
'4,839,114
0

1,512,750
476,474

868;046
4,839,114
0

••

1,512,750-
476,474

(5,540,964)
4,839,114
6

•

••

4,839,114
0.21

$ • • ••

. 4,839,114
0.18

; $ -•

• 4,839,114
.; (1.15)

Under the tteasury stock method, outstandirig stock options are dilutive when the average market price of the
Company's common stock, when combined with the effect ofany unamortized compensation expense, exceeds the
option price during the period, except when the Company has a loss from continuing operations available to common
shareholders. In addition, proceeds from the assumed exercise of dilutive options along wdth the related tax benefit are
assumed to be used to repurchase common shares at the ayerage market price of such stock during the period.

The following options to purchase shares during the years ended December 31, 2012, 2011 arid 2010 were not included
in the respective computations of diluted eamings per share because the exercise price of the option, when combined
with the effect ofthe unamortized compensation expense, was greater thari the average market price ofthe common
shares and were considered anti-dilutive.

Anti-dilutive shares - option shares
Anti-dilutive shares - warrant shares
Total anti-dilutive shares

2012
' 2 1 5 , 3 43
287,133
502,476

2011
270,634
287,133
557,767

2010
270,835
287,133
557,968

HAWTHORN BANCSHARES, INC.
ANDSUBSIDIARIES

Notes to the Consolidated {Financial Statements

December 31, 2012, 2011, and 2010

(14) Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state
banking agencies. Failure to meet minimum capital requirements canimitiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken,; could have a direct material effect on: the Company's
consohdated financial statements. Under capital adeqiiacy guidelines, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures ofassets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amoimts and classification of the Company and the; Bank
are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulations to erisure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets,
and of Tier 1 capital to adjusted-average assets. Management believes, as of December 31, 2012 and,2011, the Company
and the Bank met all capital .adequacy requirements.

As of December 31, 2012, the most recent notification from the regulatory authorities categorized the bank as well-
capitalized under the regulatory framework for prompt,corrective action. To be categorized as well-capitalized, the Bank
must maintain minimimi total risk-based, Tier I risk-based, arid Tier I leverage ratios as set forth in the table. There are
no conditions or events since the notificatioris that management believes have changed the Bank's categories.

(in thousands)

, ,.
, •."

December 3L 2012
Total capital (to risk-vveighted assets):
Company
Bank
Tier I capital (toi risk-weighted assets):
Company
Bank
Tier I capital (to adjusted average assets):
^Company
Bank

': ,

• .;

(in thousands)
December 3L 2011
Total capital (to risk-weighted assets):
Company
Bank
Tier I capital (to risk-weighted assets):
Company
Bank'
Tier I capital (to adjusted average assets):
Company
Bank

Actual

Amount

Ratio
. -,..; ..

Minimuni
Capital Requirements
Amount

Ratio

. ,

Well-Capitalized
Capital Requireiiiiehts
' Ratio
Amount
.•--.;.. r ,

"'- ^

.148,889
131,126 .

.$':-:

16.83,:
15.12

70,75^; .
69,375 •{

8.00
" 8.00'

,N.A.-,
86,715:

,.. 'N,A,
. . 10,00

_,,$

120,138
• 1 2 0 , 2 4 3'

.13.58
"13.87

$..._

, 35,380
' 34,686'

4.00
4.m'

•

N.A.'
52i629 • '

.., N,A,
:;'56,00

"-$

' 120,138
120,243

10.37
10.60

•

34,762
34,037-

,' 3.00'
3.00

»/o

••

....

N.A" ^''

" .'-'kA,
i :' 5,00

56,729

t59,768-,,:
130,398,

18.03
15.00

,70,905
, 69,567

•%
s

8.00-
8.00

N.A.
86,959 =

N,A,
10,00

\ s

134,35^1.
119,498

as. 16
' 'l3,74

•

- 35,453 •
34,784'

4,00'
4.00

$','

N.A,
:' 52,175

134,391
119,498

11,52
10,45

34,993
34,309

3.00
3;oo

N,A,
57,181

N A,
6,00

N,A,
5,00

H A W T H O RN BANCSHARES^ I NC
ANDSUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012,2011, and 2010

(15) Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial.assets
and liabilities. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a
framework for the measurement:of fair value,.and'enhances disclosures about fair value measurements: The standard
applies whenever other standards require (permit) assets lor liabilities to be measured at fair value but does not expand
> the use of fair value in,any new circumstances. In' this standard, FASB clarified the principle that fair value should be
based on the iassumptions market participants would use wheri pricing the asset or liability. In support ofthis principle,
the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of
December 31, 2012 and 2011, respectively, there were no fransfers into or out of Levels 1-3.

;

The fafr value hierarchy is as follows:

Levell -Inputsareunadjustedquotedpricesjfor identical assets or liabilities in active markets,

r ; •

Level 2 - Inputs other than quoted prices included iri Level 1 that are observable for the asset or liability, either directly
or indirectly. These might include quoted prices for similar assets and liabihties in active tnarkets, such as mterest rates
andyieldcurvesithat are observable at commonly quoted intervals.

: ; .s; -.;

Level 3 - Inputs are unobservable inputs for the asset or lialbility and'significant to the fair value. These may be
intemafly developed usirig the Company's best;informatiori and assumptions thaf a tttarket participant would consider.

ASC. Topic 820 also provides guidance on determming fair value when the. volume and'level of activity for the asset or
„ liability have sigiiificantly^decfeased and on identifying circumstances when a fransaction may not be considered
•brderiyv" ' •;; „' r '

•';";. " '. ' —

.-, : , . . ••

' :;-•

; The Company is required to disclose assets .and liabilities measured at fair value on a recurring basis separate frorri those
measured at fair value on a noru-ecurring basis. Nonfinancial assets measured at fafr value on-a nonrecurring basis would
include foreclosed reaf estate, long-lived assets, and core deposit intangible assets, which are reviewed when
circumstances or other events indicate that impairriifent may have occurred. -

Valuation methods for instruments imeasured a:t fair value oil a recurring basis

FoUowing is a description ofthe Company's valuation metiiodologies uSed for assets and habilities recorded at fair
value on a recurrmg basis:

Available-for-sale securities

•

- -

* The fair value measimements of the Company's investment securities are determined by a.third.party pricing ser-vice
which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live,frading levels„.frade execution data, market consensus prepayment speeds, credit information and the bond's
terms .and conditions, among other things. The fair valiie measurements are subject to indeperident verification tp
another pricing source by managetneiit each quarter for reasonableness. Securities classified as available-for-'sale are
:-
reported at fafr value utilizhig Level 2 uiputs.

..• '

•*

•

Mortgage servicing rights'' :

The fair value of mortgage servicing rights is based on the discounted value of estimated fature cash flows utilizmg
' contractual cashflows, servicing rate, constant prepayment rate, servicing cost, and discountf ate factors. Accordingly,
tiie fair value is estimated based on a valuation model that calculates the present value of estimated fature net servicing
income; The model incorporates assuniptions that market participants use in estimiating fature net servicing income,
including estimates of prepayment speeds, market discount rates, cost to service, float eamingsrates, and other ancillary
mcome, including late fees. The valuation models estimate the present value of estimated fature net servicing income.
The Company classifies its servicing rights as Level 3.

HAWTHORN BANCSHARES^ INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

'J Fair Value Measurements

(in thousands)

December 31, 2012

Assets:

U.S. treasury
Govemment sponsored enterprises
Asset-backed securities
Obligations of states and political

subdivisions

Mortgage servicing rights

Total

December 31, 2011
-Assets:

U.S. treasury
Govemment sponsored enterprises
Asset-backed securities
Obligations of states and political

subdi-visions

Total

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Fair Value

2,030 $
55,180
107,872

2,030
0
0

Other
Observable
Inputs
(Levell)

Signiflcant
Unobservable
Inputs
(Level 3)

0
55,180
107,872

35,164
0

35,164
:-> 2,549
^ • 202,795 $

• -•

0
0

• .2,030 $

198,216 S

0
2,549
; : 2,549

2,054 $
70,314
07,329

34,109
213,806 S

2,054 $

0 $

•

' - • iu

0
0

70,314
107,329

0
0
0

0
, 2,054, $

34,109
:211,752 .$:,

The changes in Level 3 assets and habilities measured at fair value on a recurrmg basis are summarized as follows:

(in t h o u s a n d s)
Balance at December 31,2011
Transfer imo level 3
Total gains or losses (realized/unrealized):

•

Included in eamings
Included in other comprehensive income

. Purchases
Sales
Issues
Settlements
Balance at December 31, 2012

• - ' ' ' . .-

Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)

Mortgage Servicing Rights

0
3,050

(1,331)
0
0
0
830
0
2,549

Total gains for the years ended included hi eamings atfributable to the change in unrealized gains or losses related to
assets still held were $2,216,000 and $ 1,705,000 at December 31, 2012 and 2011, respectively.

H A W T H O RN BANCSHARES, INC.
ANDSUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Quantitative Information about Level 3 Fair Value Measurements

Valuation Technique

Unobservable Inputs

. Mortgage servicing rights , Discounted cash flows Weighted average constant prepayment rate
. •

Weighted average discount rate

Injput Value

2012

20II

18,60 % 20,86 %
7,99 %

7.99 %

Valuation methods for instruments measured at fair value on a nonrecurring basis

Following is a description ofthe Company's valuation methodologies used for assets and liabilities recorded at fair
value on a nomecurring basis:

Impairedloans

The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired.
The net carrying value of impaired loans is generally based on fair values ofthe underlying collateral obtained through
indeperident appraisals or intemal. evaluations, or by discounting the total expected fature cash flows. Once the fair
value ofthe collateral has been determined and any impairment amount calculated, a specific reserve allocation is
made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of December
31, 2012, the Compariy identified $24.6 million in impaired loans that had specific allowances for losses aggregating
$4.0 million. Related to these loans, there was $5.2 million in charge-offs recorded during the year ended December
31, 2012. As of December 31, 2011, the Company identified $30.4 million in impafred bans that had specific
allowances for losses aggregating $3.7 milhon. Related to these loans, there was $11.3 million in charge-offs recorded
during the year ended December 31, 2012.

Other Real Estate Owned andRepossessed Assets

Other real estate owned and repossessed assets consisted of loan collateral that has been repossessed through
foreclosure. This collateral comprises of commercial and residential real estate and other non-real estate property,
including autos, manufactured homes, and constmction equipment. Other real estate o-wned assets are recorded as held
for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. The
Company relies on extemal appraisals and assessment of property values by intemal staff, fri the case of non-real estate
collateral, reliance is placed on a variety of sources, including extemal estimates of value and judgment based on
experience and expertise of intemal specialists. Subsequent to foreclosure, valuatioris are updated periodically, and the
assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the
measiffements are classified as Level 3.

HAWTHORN BANCSHARES, INC.
ANDSUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Fair Value Measurements Using

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Total
Fair Value

other
Observable
Inputs.
(Level 2)

Significant
Unobservable
Inputs
'
(Level 3)

Total Gains
(Losses)*

(in thousands)
December 31, 2012
Assets:
Impaired loans:
Cominercial, fmancial, & agricultural $
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Consumer
Total •

• S

672 $
64
5,341
2,763 .^
11,726
44
20,610 $

Other real estate owned
and repossessed assets

$. .::

23,592 $ •:

December 31, 2011
Assets:
Impaired loans:
Commercial, financial, & agricultural $
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial

Total

Other real estate owned
and repossessed assets

643 $
396
6,029
3,601
15,980
,26,649 $,

16,020 $

0 $
0
0
0
0
0
0 $

0 $

0 $
0
0
0
0
0 , S

0 $
0
0
0
0
0
0 $

672 $•
64
5,341
2,763
11,726
44
20,610 $

(1,659)
0
0
(83,9)
(2,716),

0
(5,214)

0 S

23,592 $ , •,

(4,378)

0 $
0
0
0
0

643 $
396
6,029
3,601
15,980
26,649 $

(2,136)
(1,557)
(279)
(1,509)
(5,842)
(11,323)

16,020 $

(2,112)

* Total gains (losses) reported for other real estate owned and repossessed assets includes charge offs, valuation write downs, and net losses
taken during the periods reported.

(l6) Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate such value:

Loans

The fair values of loans are estimated by discotmting the expected fature cash flows using the current rates, at which
similar loans could be made to borrowers with similar credit ratings and for the same remaining matiuities. The net
carrying amount of impaired loans is generally based on the fair values of collateral obtained through independent
appraisals or intemal evaluations, or by discounting the total expected fature cash flows. This method of estimating fafr
value does not mcorporate the exit-price concept of fair value prescribed by ASC Topic 820.

Investment Securities

A detailed description ofthe fair value measurement ofthe debt instruments in the available-for-sale sections ofthe
investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment
securities by category and maturity is provided in the notes on Investment Securities.

H A W T H O RN BANCSHARES, INC.
ANDSUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

Federal Home Loan Bank (FHLB) Stock

Ownership of equity securities of FHLB is restricted and there is no established market for thefr resale. The carrying
amount is a reasonable estunate of fair value.

Federal Funds Sold, Cash, and Due from Banks

The carrying amounts of short-term federal fands sold and securities purchased under agreements to resell, interest
eaming deposits 'with banks, and cash and due from banks approximate fair value. Federal fands sold and securities
purchased tmder agreements to resell classified as short-term generally matore in 90 days or less.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated fatare cash flows utilizing
contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly,
the fair value is estimated based on a valuation model that calculates the present value of estimated fature net servicing
income. The model incorporates assumptions that market participants use in estimating fafare net servicing mcome,
including estimates of prepayment speeds, market discount rates, cost to service, float eamings rates, and other ancillary
income, including late fees.

Cash Surrender Value-Life Insurance

The fair value of Bank owned life insurance (BOLI) approximates the carrying amoimt. Upon liquidation of these
investments, the Company would receive the cash surrender value which equals the carrying amount.

Accrued Interest Receivable and Payable

For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because ofthe
short maturity for these financial instmments.

Deposits

The fair value of deposhs with no stated matiu-ity, such as noninterest-bearing demand, NOW accounts, savings, and
money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted
value of contracfaal cash flows. The discount rate is esthnated using the rates currentiy offered for deposits of similar
remaining maturities.

Securities Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S Treasury

For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treastu-y, the carrying
ainount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

Subordinated Notes and Other Borrowings

The fair value of subordinated notes.and other borrowings is based on the discounted value of confractual cash flows.
The discount rate is estimated usmg the rates currentiy offered for other borrowed money of similar remainmg
maturities.

HAWTHORN: BANCSHARES, INC.'^ •

ANDSUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

A summary ofthe carrying amounts and fair values ofthe Company's financial instruments at December 31, 2012 and 2011 is
, as follows:

fln thousands)

Assets:
Loans
Investment securities
FHLB stock
Cash and due from banks
Mortgage servicing rights
Cash surrender value -

life insurance

Accrued interest receivable

Liabilities:
Deposits:
Demand
NOW
Savings
Money market
Time
Federal funds purchased and

securities sold under
agreements to repurchase

Subordinated notes
Federal Home Loan Bank

advances

Accrued interest payable

December 31,2012
Fair Value Measurements

Quoted Prices
in Active
Markets for
Identical

Assets
(Level 1)

other
Observable

Inputs
(Level 2)

Net
Significant
.
Unobservable

Inputs
(Level 3)

0 $

834,824

2,030
0
58,877
0

5,190

66.097

192,271
178,121
69,997
157,584
0

21,058
0

0
909

.0
0
0
2,549

198,216
2,278
0
0

2,136
0

202,630 $

: 837,373

0
0
,0
0
397,986

0
13,154

20,651
0

December 31,2012

Carrying
amount

Fair
value

832,142 $
200,246
2,278
58,877
2,549

834,824 $
200,246
2,278
58,877
2,549

2,136
5,190

1,103,418

1,106,100

192,271
178,121
69,997
157,584
393,302

21,058
49,486

20,126
909"

192,271
178,121
69,997
157,584
397,986

21,058
13,154

20,651
909

1,082,854 $

1.051.731 $

619,940 $

33;805 $

397,986

H A W T H O RN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

December 31,2011
Fair Value Measurements

Quoted Prices
in Active
Markets for
Identical

Assets
(Level 1)

other
Observable

Inputs
(Level 2)

Net..
Signiflcant
Unobservable

Inputs
(Level 3)

December 31,2011

Carrying
amount

Fair
value

829,121 $
213,806
2,738

830,077
213,806
2,738

0 $

2,054
0

0
211,752
2,738

75'
43,135
2,308

2,064
5,341

75
43,135
2,512

2,064
5,341

1,098,588 $

1,099,748 $

159,187
169,452'
62,075
153,072
414,438

24,516
49,486

28,410
1,054

159,187
169,452
62,075
153,072
421,687

24,516
22,082

29,525
1,054

75
43,135
0

5,341

50,605

159,187
169,452
62,075
153,072
0

24,516
0

0
1,054

830,077
0
0

0
0
2,512

0
0
0

2,064
0

216,554 $

832,589

0
0
0
0
421,687

0
0'

0
22,082

29,525
0

(in thousands)

Assets:
Loans
Investment securities
FHLB stock
Federal fimd sold and

securities purchased under
agreements to resell
Cash and due from banks
Mortgage servicing rights
Cash surrender value -

life insurance

Accrued interest receivable

Liabilities:
Deposits:
Demand
NOW
Savings
Money market
Time
Federal fimds purchased and

securities sold under
agreements to repurchase

Subordinated notes
Federal Home Loan Bank

advances

Accrued interest payable

1,061,690

1,042.650 $

569,356 $

51,607 $

421,687

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is estimated using the fees ciu-rently charged to
enter into similar agreements, taking into accoimt the remainfrig terms ofthe agreements, the likelihood ofthe counterparties
drawing on such financial insfruments, and the present creditworthiness of such counterparties. The Company believes such
commitments have been made on terms that are competitive in the markets in which it operates.

Limitations

The fair value estimates provided are made at a point in time based on market information and information about the
financial instrmnents. Because no market exists for a portion ofthe Company's financial insfruments, fair value estimates are
based on judgments regarding fature expected loss experience, current economic conditions, risk characteristics of various
financial instmments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect
the fair value estimates.

H A W T H O RN BANCSHARES, INC.
ANDSUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2012, 2011, and 2010

(17) Commitments and Contingencies

The Company issues financial instmments with off-balance-sheet risk in the normal course of business of meeting the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters
of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess ofthe
amoimts recognized in the consolidated balance sheets.

The Company's extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by
the other party to the fmancial instrament for commitinents to extend credit and standby letters of credit is represented
by the confractual amount of these instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for financial instraments included on its consolidated balance sheets. At December 31,
2012, no amounts have been accraed for any estimated losses for these financial instruments.

The confractual amotmt of off-balance-sheet financial uistruments as of December 31, 2012 and2011, is as follows:

(in thousands)

2012

2011

Commitments to extend credh
Standby letters of credit

[

118,412 $
2,995

117,171
2,992

Commitments
Commitmerits to extend credit are ajgreeirients to lend to a custoirier as long as there is no violation of any, condition
established in the confract. Commitments generally have fixed expfration dates or other termination clauses and may
require payment of a fee. Since certain ofthe commitments and letters of credit are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent fature cash requirements, t he Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer.
Collateral held varies, but may include accoimts receivable, inventory, fumiture and equipment, and real estate;

Standby letters of credit are conditional commitments issued by the CompaSny to guarantee the performance of a
customer to a third party. These standby letters of credit are, primarily issued to support confractual obligations ofthe
Company's customers. The approximate remaining term of standby letters of credit range from one month to five years
at December 31, 2012.

Pending Litigation

The Company and its subsidiaries are defendants in various.legal actions incidental to the Company's past and current
business activities. Based on the Company's analysis, and considering the inherent uncertainties associated with
litigation, management does not believe that it is reasonably possible that these legal actions will materially adversely
affect the Company's consolidated financial condition or results of operations in the near term.

On November 18, 2010, a smt was filed against the Company and its subsidiary, the Bank, in the Circuit Court of
Jackson County for the Eastem Division of Missouri state court by a customer alleging that the fees associated with the
Bank's automated overdraft program in,connection with its debfr card and ATM cards constitute unlawfal interest in
violation of Missouri's usury laws. The suit seeks class-action status for Bank customers who have paid overdraft fees
on their checking accounts. The suit seeks forfeifare and refand of twice the amoimt of improper overdraft fees assessed
and collected. The court has denied the Bank's motion to dismiss the suit. At this stage ofthe litigation, it is not possible
for management of the Bank to determine the probability of a material adverse outcome or reasonably estiiriate the
amount of any potential loss.

On December 17, 2009, a suit was filed against the Bank in Circuit Court of Jackson County for the Eastem Division of
Missouri state court by a customer alleging that the Bank had not followed through on its commitment to fand a loan
request. A jury found in favor of the customer and awarded $630,000 in damages to the plamtiffs, including $200,000 in

H A W T H O RN BANCSHARES, I N C.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 3 1, 2012,2011, and 2010-

punitive damages. The jiuy verdict was upheld at the appellate level. At December 31,..2012, the Company's
consolidated balance sheets included reserves for payment ofthe jury award as the Company is awaiting tiie (Court's
determmation as to the order in which proceeds will be'applied. After insurance proceeds, the Company's net loss for
tiiesejury awards is expected to be approximately $275,000';

(18) Condensed Financial Information of the P a r e nt Company Oiily

Following are the condensed financial statements of Havvthbm Bancshares, Inc. (Parent only) as of and for the years
• >
indicated:

- .

Condensed Balance Sheets

(in thousands)
Assets

Cash and due from bank subsidiaries
Investment in equity securities
Investment in subsidiaries :
Premises and equipment
Deferred tax asset
Other assets

Total assets

Liabilities and Stocldiolders' Equity
Subordinated notes
Other liabilities
Stockholders' equity

Total liabilities and stockholders' equity

Condensed Statements of Operations

December 31,

2012

2011

1,863 $ •
1,486
139,849.
I
1,424
1,022

13,282

1,486 ,

140,361
I
1,611
10

145,645 $

156,751

49,486 $
3,939
92,220

49,486
4,689
102,576

145,645 $

156,751

For the Years Ended December 31,
2012

2011

2010

Income
Interest and dividends received from subsidiaries
Total income
Expenses
Interest on subordinated notes
Other
Total expenses
Income (loss) before incometax benefit and

equity in undisfributed income of stibsidiaries

Income tax benefit
Equity in undisfributed income (loss) of subsidiaries
Net income (loss)

4,596
4,596

5,192 $
5,192

4,405
4,405,,

1,381
2,889
• 4,270

326,
2,257
239
2,822 $

1,301
2,605
3,906

1,285
1,368
204
'2,857 $

1,526
2,904
4,430'

(25)
1,450
(4,977)
(3,552),

H A W T H O RN BANCSHARES, INC.
ANDSUBSIDIARIES

Notes to theConsolidatedFinancial Statements

December 31, 2012, 2011, and 2010

2012

2011

2010

2,822 $

•'•2,857- $

f (3^552):

I
(239)
29
(148)
(813)
1,652

:-l,072

1,072

(12,000)
(1,203)
(940)

2
(204)
58
(274)
(89)
2,350

900

0
(1,513)
(904)

"
3
4,977
87
(38)
•382
1,859

(K250)

(1.250)

0
i(l,513)
1(1,385)

(14,143)

(2,417)

1(2,898)'

(11,419)

13,282

1,863

833

12,449

13,282 $

! (2,289)

114,738

112,449

Condensed Statements of Cash Flows

(in thousands)

Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash provided, by operating activities:
Depreciation
Equity in imdistributed (income) losses of subsidiaries

-
.,^^

. Stock based compensation expense

(Increase) decrease in deferred tax asset
Other, net

•• •

,•

-.• • ' ••-••---•• ^

Net cash provided by operating activities

Cash flows from investing activities:
Investment in subsidiary

Net cash provided by (used in) investing activities

Cash flows from financing activities:
Redemption of 12,000 shares of preferred stock
Cash dividends paid - preferred stock
Cash dividends paid - common, stock
Net cash used in

financing activities

Net (decrease) increase in cash

and doe from banks

Cash and due from banks at beginning of year

Cash and due from banks at end of year

HAWTHORN BANCSHARES, INC.
ANDSUBSIDIARIES

Notesto the Consolidated Financial Statements

December 31, 2012,2011, and^20l0v:

First
quarter

Second ....
quarter

Third
quarter
-

Fourth
quarter

year
to
Date

12,646 $
1,831
10,815
.1,700
1,970
9,480
154

12,297 $ . 12,151 $
,2,125
,
10,172
1,500
2,443 ,
10,098
277

„ , 2,029
10,122
. 4,700
2,680
10,378
• (704)

12,020
1,920
10,100
1,000
2,633 . v'
.8,711 ,,
819

.49,114
7,905
, 41,209
8,900
;. 9,726
38,667
546
•

1,451
370
119
962

740
296
396

. .

(1,572)$
:228-
... .72-
(1,872)'$.

, 2,203
231
72

2,822
1,125
659

1,900

•

•$

\ 1,038

0.21
0.21

0.01
0.01

(0.39) $
:X6:39):.\

$,,

0.39
0.39

0.21
0.21

13,583
3,102
I0,48r
1,750
2,052
9,378
•451

954
, 370
119

$ " 13,640
'2,858
"10,782 •"
1,883
2,178
9,008
661

, : •$

1'3,384 $ .
2,580
10,804
: 2,010
2,358
. 8,925
.711

...12,862
2,313
10,549 •
5,880 •
2,612 :
9,534
(1,232)

=^^3,469
,.10,853
"' '42,616
11,523
9,200
36,845
591

. $.

•

: 1,408
382
119
907

465

0.10
0.10

0.19
0.19

$ ..

1,516
379
119
1,018

0.21
0.21

•

. (1,021).^$
382
119
(1,522) $

2,857
1,513
476

868

(0.31) $
(0.31)

0.18
0.18

(19) Quarterly Financial Information (Unaudited)

.;:..,

.
(In thousands except per share data)

Year Ended December 31,2012
Interest income
Interest expense
Net interest income <
Provision for loan losses
Noninterest income
Noninterest expense
Income tax (benefit) expense

Netincoine (liMs)

Preferred'stock dividends
Accretion of discount on preferred stock

Net income (loss) avajlablejo common stockholders

Net income (loss) per share:.

Basic eamings (loss) per share
Diluted eamings (loss) per share

,, ,

Year Ended December 31,2011
Interestincome
Interest expense
Net iiiterest income
Provision for loan losses
Noniriterest income
Noiiinterest expense
Income tax (benefit) expense

Net iiicome (loss)

•

Preferred stock dividends
Accretion of discount on preferred stock

Net income (loss) available to common stockholders

Net income (loss) per share:

Basic eamings (loss) per share
Diluted earnings (loss) per share

MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS

Market Price

The Company's common stock trades on Nasdaq's global select market under the stock symboLof "HWBK." The
following table sets forth the range of high and low bid prices of the Company's common stock by quarter for each
quarter in 2012 and 2011 in which the stock was

s v :

fraded.

; ,,

High

Low

2012
First Quarter
Second Quarter
Third Qiiarter
Fourth Quarter

2011
First Quarter
Second Quarter
Third Quarter.
Fourth Quarter

%•

. $

$
$.

•

$
$

-
7.83 $
9.97 $
10.38 $
. 9.25 $

' 5 . 73
6.92
.' ,8.45
7.04

9.33 $
8.89 $
8.50 $
8.10 $

8.06
7.29
5.80
5.50

Shares Outstanding.

As of Febraary 28, 2013, the Company had issued 5,000,972 shares of common stock, ofwhich 4,839,114 shares were
outstanding. The outstanding shares were held of record by approximately 1,425 shareholders. The Company has a
warrant outstanding for the purchase of 287,133 shares of common stock. In additiori, the Company has 18,255 shares
of cumulative, perpetual preferred stock outstanding. The wartant and preferred shares were issued pursuant to the
U.S. Treasury's Capital Purchase Program (or CPP).

Dividends

The following table sets forth friformation on dividends paid by the Company in 2012 and 2011.

Month Paid
January, 2012
April, 2012
July, 2012
October, 2012
Total for 2012

January, 2011
April, 2011
July, 2011
October, 2011
Total for 2011

Dividends
Per Share
0.05
0.05
0.05
0.05
0.20

0.05
0.05
0.05
0.05
0.20

'
$

The board of directors mtends that the Company will continue to pay quarterly dividends. The actual amount of
quarterly dividends and the payment, as well as the amount, ofany special dividend ultimately will depend on the
payment of sufficient dividends by the subsidiary Bank to the Company. The payment by the Bank of dividends to the

Company will-depend upon such factors as the Bank's financial condition,, results of operations and current and
anticipated cash needs, including capital requirements. In addition to the above limitations, the Company's ability to
pay dividends on its common stock is limited by the Company's participation in the Treasury's Capital Purchase
Program (or CPP). If the Company is not current in the payment of quarterly dividends on the Series A preferred stock
issued to the U.S. Treasury in CPP, the Company cannot pay dividends on its comfrion stock.

Stock Performance Graph

. • • ' ..

The following performance graph shows a comparison of cumulative total retums for the Company, the Nasdaq Stock
Market (U.S. Companies), and a peer mdex of financial instifations havirig total assets of between $1 biUion and $5
billion for the period from December 31, 2007, through December 31, 2012. The cumulative total retum on
investment for each ofthe periods for the Company, the Nasdaq Stock Market (U.S. Companies) and the peer index is
based on the stock price or mdex at December 31, 2007. The perforinance graph assumes that the value of an
investment in the Company's common stock and each index was $100 at December 31, 2007 and that all dividends
were reinvested. The information presented in the performance graph is historical in nature and is not intended to
represent or guarantee fature retums.

Total Return Performance

150

-Hawthorn Bancshares, Inc

125 -

-NASDAQ Composite

-SNL Bank $1B-$5B

12/31/07

12/31/08

12/31/09

12/31/10

12/31/11

12/31/12

The comparison of cumulative total retums presented in the above graph was plotted using the following index values
and common stock price values:

Hawthorn Bancshares, Inc.
Nasdaq Composite
(U.S. Companies)
Index of financial

12/31/07

12/31/08

12/31/09

12/31/10

12/31/11

12/31/12

$100.00

•

•-

••

$71.61 •

$43.35

$41.61

$31.29

$41.32

$60.02

$87.24

$103.08

$102.26

$120.42

institutions ($1 billion to $5 billion)

$100.00 ..

$82.94

$59.45

;

$67.39

.. $61,46,

$75.78

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Name

David T. Tumer

Position with The Companv

Position with Subsidiary Bank Principal Occupation

Chairman, Chief Executive
Officer, President and Director Officer, President and Director
-Class 111

Chairman, Chief Executive

Position with Hawthom
Bancshares, Inc. and
Hawthom Bank

Charles G. Dudenhoeffer, Jr. Director-Class II

Philip D. Freeman

Director-Class I

Director

Kevin L. Riley

Director-Class 111

Director

James E. Smith

Director-Class 1

Gus S. Wetzel, 11

Director-Class 11

Director

W. Brace Phelps

Chief Financial Officer

Senior Vice President and Chief
Financial Officer

Kathleen L. Bruegenhemke

Senior Vice President, Chief
Risk Officer and Corporate
Secretary

Senior Vice President and Chief
Risk Officer

Retired

Owner/Manager, Freeman
Mortuary, Jefferson City,
Missoiffi

Co-owner, Riley Chevrolet,
Buick, GMC Cadilac, and
Riley Toyota Scion, Jefferson
City, Missouri

Retired

Physician, Wetzel Clinic,
Clmton, Missouri

Position with Hawthorn
Bancshares, Inc. and
Hawthom Bank

Position with Hawthom
Bancshares, Inc. and
Hawthom Bank

ANNUAL REPORT ON FORM 10-K

A copy ofthe Company's Annual Report on Form 10-K for the year ended December 31, 2012, as filed with tiie Securities and
Exchange Commission, excluding exhibits, will be fiunished without charge to shareholders entitled to vote at the 2013 annual
meeting of shareholders upon written request to Katiileen L. Braegenhemke, Corporate Secretary, Hawthom Bancshares, Inc.,
132 East High Sfreet, Jefferson City, Missouri 65101. The Company will provide a copy of any exhibit to the Form 10-K to any
such person upon written request and the payment ofthe Company's reasonable expenses in fltmishing such exhibits;