10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2014

or

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

For the transition period from                            to                     

Commission File Number: 0-23636

HAWTHORN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Missouri	43-1626350
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

132 East High Street, Box 688, Jefferson City, Missouri 65102

(Address of principal executive offices) (Zip Code)

(573) 761-6100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

As of May 15, 2014, the registrant had 5,032,679 shares of common stock, par value $1.00 per share, outstanding

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

(In thousands, except per share data)

	March 31,			December 31,
	2014			2013
ASSETS
Cash and due from banks	$	24,314		$	27,079
Federal funds sold and other overnight interest-bearing deposits	16,920			1,360
Cash and cash equivalents	41,234			28,439
Investment in available-for-sale securities, at fair value	213,227			205,985
Loans	845,307			839,547
Allowances for loan losses	(12,845		)	(13,719		)
Net loans	832,462			825,828
Premises and equipment - net	38,164			38,079
Investments in Federal Home Loan Bank stock and other equity securities, at cost	3,962			4,001
Mortgage servicing rights	3,040			3,036
Other real estate owned and repossessed assets - net	14,054			14,867
Accrued interest receivable	4,441			4,999
Cash surrender value - life insurance	2,233			2,213
Other assets	12,152			12,675
Total assets	$	1,164,969		$	1,140,122
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest bearing demand	$	189,925		$	187,382
Savings, interest checking and money market	453,724			419,085
Time deposits $100,000 and over	110,045			111,667
Other time deposits	234,042			238,337
Total deposits	987,736			956,471
Federal funds purchased and securities sold under agreements to repurchase	20,761			31,084
Subordinated notes	49,486			49,486
Federal Home Loan Bank advances	24,000			24,000
Accrued interest payable	412			426
Other liabilities	5,892			4,275
Total liabilities	1,088,287			1,065,742
Stockholders’ equity:
Common stock, $1 par value, authorized 15,000,000 shares; issued 5,194,537 shares, respectively	5,195			5,195
Surplus	33,391			33,385
Retained earnings	41,821			40,086
Accumulated other comprehensive loss, net of tax	(208		)	(769		)
Treasury stock; 161,858 shares, at cost	(3,517		)	(3,517		)
Total stockholders’ equity	76,682			74,380
Total liabilities and stockholders’ equity	$	1,164,969		$	1,140,122

See accompanying notes to the unaudited consolidated financial statements.

2

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (unaudited)

	Three Months Ended March 31,
(In thousands, except per share amounts)	2014		2013
INTEREST INCOME
Interest and fees on loans	$	9,865	$	10,387
Interest on investment securities:
Taxable	881		905
Nontaxable	189		217
Federal funds sold and other overnight interest-bearing deposits	8		14
Dividends on other securities	20		22
Total interest income	10,963		11,545
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	267		261
Time deposit accounts $100,000 and over	190		248
Other time deposits	432		883
Interest on federal funds purchased and securities sold under agreements to repurchase	4		5
Interest on subordinated notes	312		320
Interest on Federal Home Loan Bank advances	104		99
Total interest expense	1,309		1,816
Net interest income	9,654		9,729
Provision for loan losses	0		1,000
Net interest income after provision for loan losses	9,654		8,729
NON-INTEREST INCOME
Service charges on deposit accounts	1,230		1,359
Trust department income	203		210
Real estate servicing fees, net	177		159
Gain on sale of mortgage loans, net	191		720
Gain on sale of investment securities	0		294
Other	284		265
Total non-interest income	2,085		3,007
NON-INTEREST EXPENSE
Salaries and employee benefits	5,030		4,910
Occupancy expense, net	620		635
Furniture and equipment expense	443		435
FDIC insurance assessment	238		243
Legal, examination, and professional fees	226		226
Advertising and promotion	290		281
Postage, printing, and supplies	265		256
Processing expense	759		1,275
Other real estate expense, net	124		2,821
Other	712		852
Total non-interest expense	8,707		11,934
Income (loss) before income taxes	3,032		(198		)
Income tax expense (benefit)	1,045		(62		)
Net income (loss)	1,987		(136		)
Preferred stock dividends and accretion of discount	0		295
Net income (loss) available to common shareholders	$	1,987	$	(431	)
Basic earnings (loss) per share	$	0.39	$	(0.09	)
Diluted earnings (loss) per share	$	0.39	$	(0.09	)

See accompanying notes to the unaudited consolidated financial statements.

3

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

	Three Months Ended March 31,
(In thousands)	2014		2013
Net income (loss)	$	1,987	$	(136	)
Other comprehensive income (loss), net of tax
Investment securities available-for-sale:
Unrealized gain (loss) on investment securities available-for-sale, net of tax	549		(540		)
Adjustment for gain on sale of investment securities, net of tax	0		(182		)
Defined benefit pension plans:
Amortization of prior service cost included in net periodic pension cost, net of tax	12		16
Total other comprehensive income (loss)	561		(706		)
Total comprehensive income (loss)	$	2,548	$	(842	)

See accompanying notes to the unaudited consolidated financial statements.

4

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (unaudited)

										Accumulated
										Other						Total
										Comprehensive						Stock -
	Preferred		Common				Retained			Income			Treasury			holders’
(In thousands)	Stock		Stock		Surplus		Earnings			(Loss)			Stock			Equity
Balance, December 31, 2012	$	17,977	$	5,001	$	31,816	$	39,118		$	1,825		$	(3,517	)	$	92,220
Net loss	0		0		0		(136		)	0			0			(136		)
Other comprehensive loss	0		0		0		0			(706		)	0			(706		)
Stock based compensation expense	0		0		2		0			0			0			2
Accretion of preferred stock discount	72		0		0		(72		)	0			0			0
Cash dividends declared, preferred stock	0		0		0		(228		)	0			0			(228		)
Cash dividends declared, common stock	0		0		0		(242		)	0			0			(242		)
Balance, March 31, 2013	$	18,049	$	5,001	$	31,818	$	38,440		$	1,119		$	(3,517	)	$	90,910
Balance, December 31, 2013	$	0	$	5,195	$	33,385	$	40,086		$	(769	)	$	(3,517	)	$	74,380
Net income	0		0		0		1,987			0			0			1,987
Other comprehensive income	0		0		0		0			561			0			561
Stock based compensation expense	0		0		6		0			0			0			6
Cash dividends declared, common stock	0		0		0		(252		)	0			0			(252		)
Balance, March 31, 2014	$	0	$	5,195	$	33,391	$	41,821		$	(208	)	$	(3,517	)	$	76,682

See accompanying notes to the unaudited consolidated financial statements.

5

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

	Three Months Ended March 31,
(In thousands)	2014			2013
Cash flows from operating activities:
Net income (loss)	$	1,987		$	(136	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses	0			1,000
Depreciation expense	422			400
Net amortization of investment securities, premiums, and discounts	250			343
Amortization of intangible assets	0			101
Stock based compensation expense	6			2
Change in fair value of mortgage servicing rights	46			57
Gain on sale of investment securities	0			(294		)
Gain on sales and dispositions of premises and equipment	(13		)	0
Gain on sales and dispositions of other real estate owned and repossessed assets	(145		)	(13		)
Provision for other real estate owned	123			2,343
Decrease in accrued interest receivable	558			167
Increase in cash surrender value -life insurance	(20		)	(21		)
Decrease (increase) in other assets	199			(476		)
(Decrease) increase in accrued interest payable	(14		)	125
Increase in other liabilities	1,616			800
Origination of mortgage loans for sale	(5,811		)	(26,463		)
Proceeds from the sale of mortgage loans	5,974			29,290
Gain on sale of mortgage loans, net	(191		)	(720		)
Other, net	(50		)	(170		)
Net cash provided by operating activities	4,937			6,335
Cash flows from investing activities:
Net (increase) decrease in loans	(6,865		)	6,854
Purchase of available-for-sale debt securities	(24,038		)	(62,541		)
Proceeds from maturities of available-for-sale debt securities	5,687			11,260
Proceeds from calls of available-for-sale debt securities	11,745			2,255
Proceeds from sales of available-for-sale debt securities	0			15,981
Proceeds from sales of FHLB stock	39			2
Purchases of premises and equipment	(507		)	(326		)
Proceeds from sales of premises and equipment	13			0
Proceeds from sales of other real estate owned and repossessed assets	1,094			604
Net cash used in investing activities	(12,832		)	(25,911		)
Cash flows from financing activities:
Net increase (decrease) in demand deposits	2,543			(14,866		)
Net increase in interest-bearing transaction accounts	34,639			33,942
Net decrease in time deposits	(5,917		)	(10,471		)
Net decrease in federal funds purchased and securities sold under agreements to repurchase	(10,323		)	(3,519		)
Repayment of FHLB advances	(10,000		)	(55		)
FHLB advances	10,000			0
Cash dividends paid - preferred stock	0			(228		)
Cash dividends paid - common stock	(252		)	(242		)
Net cash provided by financing activities	20,690			4,561
Net increase (decrease) in cash and cash equivalents	12,795			(15,015		)
Cash and cash equivalents, beginning of period	28,439			58,887
Cash and cash equivalents, end of period	$	41,234		$	43,872

See accompanying notes to the unaudited consolidated financial statements.

6

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued) (unaudited)

	Three Months Ended March 31,
(In thousands)	2014		2013
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	1,324	$	1,624
Income taxes	$	0	$	6
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans	$	259	$	2,470

See accompanying notes to the unaudited consolidated financial statements.

7

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(1)Summary of Significant Accounting Policies

Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and corporate customers located within the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson, and Lee’s Summit, Missouri. The Company is subject to competition from 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 unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

Stock Dividend On July 1, 2013, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2013. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

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. Participation in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock. On May 9, 2012, the Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program, and on May 15, 2013, the remaining 18,255 shares were redeemed.

On June 11, 2013, the common stock warrant issued under the U.S. Treasury Department’s CPP program was repurchased by the Company pursuant to a letter agreement between the Treasury and the Company for a total repurchase price of $540,000, or $1.88 per warrant share. The repurchase price was based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ends the Company’s participation in the U.S. Treasury Department’s CPP.

8

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(2)Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at March 31, 2014 and December 31, 2013 is as follows:

	March 31,		December 31,
(in thousands)	2014		2013
Commercial, financial, and agricultural	$	132,346	$	133,717
Real estate construction - residential	22,060		21,008
Real estate construction - commercial	57,340		55,076
Real estate mortgage - residential	230,310		225,541
Real estate mortgage - commercial	384,130		382,550
Installment and other consumer	19,121		21,655
Total loans	$	845,307	$	839,547

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of automotive vehicles. At March 31, 2014, loans with a carrying value of $376.9 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

Allowance for Loan Losses

The following is a summary of the allowance for loan losses for the three months ended March 31, 2014 and 2013:

	Commercial,			Real Estate			Real Estate		Real Estate			Real Estate			Installment
	Financial, &			Construction -			Construction -		Mortgage -			Mortgage -			Loans to			Un-
(in thousands)	Agricultural			Residential			Commercial		Residential			Commercial			Individuals			allocated			Total
Balance at December 31, 2013	$	2,374		$	931		$	631	$	2,959		$	6,523		$	294		$	7		$	13,719
Additions:
Provision for loan losses	93			(392		)	333		139			(153		)	(13		)	(7		)	0
Deductions:
Loans charged off	131			60			414		120			367			84			0			1,176
Less recoveries on loans	(116		)	0			0		(112		)	(16		)	(58		)	0			(302		)
Net loans charged off	15			60			414		8			351			26			0			874
Balance at March 31, 2014	$	2,452		$	479		$	550	$	3,090		$	6,019		$	255		$	0		$	12,845
Balance at December 31, 2012	$	1,937		$	732		$	1,711	$	3,387		$	6,834		$	239		$	2		$	14,842
Additions:
Provision for loan losses	(90		)	287			100		(189		)	844			47			1			1,000
Deductions:
Loans charged off	61			120			0		292			999			109			0			1,581
Less recoveries on loans	(42		)	0			0		(15		)	(161		)	(66		)	0			(284		)
Net loans charged off	19			120			0		277			838			43			0			1,297
Balance at March 31, 2013	$	1,828		$	899		$	1,811	$	2,921		$	6,840		$	243		$	3		$	14,545

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction

9

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration.

The following table provides the balance in the allowance for loan losses at March 31, 2014 and December 31, 2013, and the related loan balance by impairment methodology.

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, and		Construction -		Construction -		Mortgage -		Mortgage -		Loans to		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Individuals		allocated		Total
March 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	1,069	$	307	$	36	$	1,808	$	1,482	$	51	$	0	$	4,753
Collectively evaluated for impairment	1,383		172		514		1,282		4,537		204		0		8,092
Total	$	2,452	$	479	$	550	$	3,090	$	6,019	$	255	$	0	$	12,845
Loans outstanding:
Individually evaluated for impairment	$	4,919	$	2,143	$	5,936	$	7,472	$	15,252	$	316	$	0	$	36,038
Collectively evaluated for impairment	127,427		19,917		51,404		222,838		368,878		18,805		0		809,269
Total	$	132,346	$	22,060	$	57,340	$	230,310	$	384,130	$	19,121	$	0	$	845,307
December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	721	$	392	$	304	$	1,374	$	1,989	$	16	$	0	$	4,796
Collectively evaluated for impairment	1,653		539		327		1,585		4,534		278		7		8,923
Total	$	2,374	$	931	$	631	$	2,959	$	6,523	$	294	$	7	$	13,719
Loans outstanding:
Individually evaluated for impairment	$	4,015	$	2,204	$	6,615	$	6,517	$	15,422	$	43	$	0	$	34,816
Collectively evaluated for impairment	129,702		18,804		48,461		219,024		367,128		21,612		0		804,731
Total	$	133,717	$	21,008	$	55,076	$	225,541	$	382,550	$	21,655	$	0	$	839,547

Impaired Loans

Loans evaluated under the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans totaled $36.0 million and $35.1 million at March 31, 2014 and December 31, 2013, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings. Total impaired loans of $36.0 million at March 31, 2014 were individually evaluated for impairment compared to $34.8 million of impaired loans individually evaluated for impairment and $259,000 of non-accrual consumer loans that were collectively evaluated for impairment at December 31, 2013. Beginning in 2014, consumer non-accrual loans were included the individually evaluated impairment calculations.

The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At March 31, 2014 and December 31, 2013, $32.7 million and $21.8 million, respectively, of impaired loans were evaluated based on the fair value of the loan’s

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

collateral. Once the impairment amount is calculated, a specific reserve allocation is recorded. At March 31, 2014, $4.8 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $36.0 million compared to $4.8 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $35.1 million at December 31, 2013. Management determined that $21.3 million, or 59%, of total impaired loans required no reserve allocation at March 31, 2014 compared to $18.8 million, or 54%, at December 31, 2013 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at March 31, 2014 and December 31, 2013 are as follows:

	March 31,		December 31,
(in thousands)	2014		2013
Non-accrual loans	$	24,804	$	23,680
Troubled debt restructurings continuing to accrue interest	11,234		11,395
Total impaired loans	$	36,038	$	35,075

The following tables provide additional information about impaired loans at March 31, 2014 and December 31, 2013, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
March 31, 2014
With no related allowance recorded:
Commercial, financial and agricultural	$	2,182	$	2,239	$	0
Real estate - construction residential	43		77		0
Real estate - construction commercial	5,833		6,998		0
Real estate - residential	2,105		2,814		0
Real estate - commercial	11,155		11,417		0
Total	$	21,318	$	23,545	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	2,737	$	2,800	$	1,069
Real estate - construction residential	2,100		2,271		307
Real estate - construction commercial	103		104		36
Real estate - residential	5,367		5,536		1,808
Real estate - commercial	4,097		4,662		1,482
Consumer	316		351		51
Total	$	14,720	$	15,724	$	4,753
Total impaired loans	$	36,038	$	39,269	$	4,753

11

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2013
With no related allowance recorded:
Commercial, financial and agricultural	$	2,467	$	2,593	$	0
Real estate - construction residential	44		80		0
Real estate - construction commercial	6,101		7,148		0
Real estate - residential	2,121		2,654		0
Real estate - commercial	7,817		8,056		0
Consumer	259		282		0
Total	$	18,809	$	20,813	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,548	$	1,607	$	721
Real estate - construction residential	2,160		2,331		392
Real estate - construction commercial	514		514		304
Real estate - residential	4,396		4,570		1,374
Real estate - commercial	7,605		7,925		1,989
Consumer	43		45		16
Total	$	16,266	$	16,992	$	4,796
Total impaired loans	$	35,075	$	37,805	$	4,796

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the periods indicated.

	Three Months Ended March 31,
	2014				2013
			Interest				Interest
	Average		Recognized		Average		Recognized
	Recorded		For the		Recorded		For the
(in thousands)	Investment		Period Ended		Investment		Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	2,496	$	21	$	2,937	$	25
Real estate - construction residential	117		0		369		0
Real estate - construction commercial	6,998		0		2,616		0
Real estate - residential	2,901		6		2,736		0
Real estate - commercial	11,809		66		5,480		29
Consumer	25		0		189		0
Total	$	24,346	$	93	$	14,327	$	54
With an allowance recorded:
Commercial, financial and agricultural	$	2,341	$	8	$	990	$	7
Real estate - construction residential	2,271		0		2,273		0
Real estate - construction commercial	105		0		6,475		1
Real estate - residential	5,479		40		4,082		20
Real estate - commercial	4,594		0		13,634		26
Consumer	343		0		45		0
Total	$	15,133	$	48	$	27,499	$	54
Total impaired loans	$	39,479	$	141	$	41,826	$	108

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $141,000 and $108,000, for the three months ended March 31, 2014 and 2013, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported. Contractual interest lost on loans in non-accrual status was $289,000 and $350,000 for the three months ended March 31, 2014 and 2013, respectively.

12

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due.

The following table provides aging information for the Company’s past due and non-accrual loans at March 31, 2014 and December 31, 2013.

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
March 31, 2014
Commercial, Financial, and Agricultural	$	129,201	$	513	$	0	$	2,632	$	132,346
Real Estate Construction - Residential	19,821		96		0		2,143		22,060
Real Estate Construction - Commercial	51,347		56		1		5,936		57,340
Real Estate Mortgage - Residential	222,827		3,350		194		3,939		230,310
Real Estate Mortgage - Commercial	372,245		2,047		0		9,838		384,130
Installment and Other Consumer	18,535		261		9		316		19,121
Total	$	813,976	$	6,323	$	204	$	24,804	$	845,307
December 31, 2013
Commercial, Financial, and Agricultural	$	131,091	$	942	$	0	$	1,684	$	133,717
Real Estate Construction - Residential	18,738		66		0		2,204		21,008
Real Estate Construction - Commercial	48,230		595		0		6,251		55,076
Real Estate Mortgage - Residential	217,179		4,068		129		4,165		225,541
Real Estate Mortgage - Commercial	372,651		725		100		9,074		382,550
Installment and Other Consumer	21,048		291		14		302		21,655
Total	$	808,937	$	6,687	$	243	$	23,680	$	839,547

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch status when (1) 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 current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. 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.

13

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The following table presents the risk categories by class at March 31, 2014 and December 31, 2013.

(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and other Consumer		Total
At March 31, 2014
Watch	$	16,988	$	2,485	$	5,928	$	26,615	$	24,169	$	285	$	76,470
Substandard	5,558		91		1,029		10,030		10,233		230		27,171
Non-accrual	2,632		2,143		5,936		3,939		9,838		316		24,804
Total	$	25,178	$	4,719	$	12,893	$	40,584	$	44,240	$	831	$	128,445
At December 31, 2013
Watch	$	15,016	$	2,007	$	6,111	$	26,331	$	23,662	$	388	$	73,515
Substandard	7,553		92		1,403		8,579		14,510		281		32,418
Non-accrual	1,684		2,204		6,251		4,165		9,074		302		23,680
Total	$	24,253	$	4,303	$	13,765	$	39,075	$	47,246	$	971	$	129,613

Troubled Debt Restructurings

At March 31, 2014, loans classified as troubled debt restructurings (TDRs) totaled $22.2 million, of which $11.0 million were on non-accrual status and $11.2 million were on accrual status. At December 31, 2013, TDRs totaled $21.5 million, of which $10.1 million were on non-accrual status and $11.4 million were on accrual status. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $2.4 million and $2.2 million related to TDRs were allocated to the allowance for loan losses at March 31, 2014 and December 31, 2013, respectively.

The following table summarizes loans that were modified as TDRs during the periods indicated.

	Three Months Ended March 31,
	2014					2013
	Recorded Investment (1)					Recorded Investment (1)
(in thousands)	Number of Contracts	Pre- Modification		Post- Modification		Number of Contracts	Pre- Modification		Post- Modification
Troubled Debt Restructurings
Commercial, financial and agricultural	2	$	244	$	244	0	$	0	$	0
Real estate construction - commercial	0	0		0		0	0		0
Real estate mortgage - residential	1	1,256		1,185		1	619		619
Real estate mortgage - commercial	0	0		0		0	0		0
Consumer	0	0		0		0	0		0
Total	3	$	1,500	$	1,429	1	$	619	$	619

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

14

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The Company’s portfolio of loans 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 full, 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 of the loan’s maturity date. During the three months ended March 31, 2014, three loans meeting the TDR criteria were modified compared to one loan during the three months ended March 31, 2013. There were no loans modified as a TDR that defaulted during the three months ended March 31, 2014 and 2013, respectively, and within twelve months of their modification date.

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

	March 31,			December 31,
(in thousands)	2014			2013
Real estate construction - residential	$	32		$	114
Real estate construction - commercial	10,020			10,020
Real estate mortgage - residential	332			830
Real estate mortgage - commercial	8,289			8,537
Repossessed assets	23			41
Total	$	18,696		$	19,542
Less valuation allowance for other real estate owned	(4,642		)	(4,675		)
Total other real estate owned and foreclosed assets	$	14,054		$	14,867

Changes in the net carrying amount of other real estate owned and repossessed assets for the three months ended March 31, 2014 and 2013, respectively, were as follows:

	Three Months Ended March 31,
	2014			2013
Balance at beginning of period	$	19,542		$	29,729
Additions	259			2,470
Proceeds from sales	(1,094		)	(604		)
Charge-offs against the valuation allowance for other real estate owned	(156		)	(136		)
Net gain on sales	145			13
Total other real estate owned and repossessed assets	$	18,696		$	31,472
Less valuation allowance for other real estate owned	(4,642		)	(8,344		)
Balance at end of period	$	14,054		$	23,128

During the three months ended March 31, 2014 and 2013, net charge-offs against the allowance for loan losses at the time of foreclosure were approximately $162,000 and $374,000, respectively.

Activity in the valuation allowance for other real estate owned in settlement of loans for the three months ended March 31, 2014 and 2013, respectively, is summarized as follows:

15

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

	Three Months Ended March 31,
(in thousands)	2014			2013
Balance, beginning of period	$	4,675		$	6,137
Provision for other real estate owned	123			2,343
Charge-offs	(156		)	(136		)
Balance, end of period	$	4,642		$	8,344

(4)Investment Securities

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2014 and December 31, 2013 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses		Fair value
March 31, 2014
U.S. Treasury	$	1,000	$	1	$	0	$	1,001
Government sponsored enterprises	71,052		325		566		70,811
Asset-backed securities	111,096		813		2,534		109,375
Obligations of states and political subdivisions	31,597		574		131		32,040
Total available-for-sale securities	$	214,745	$	1,713	$	3,231	$	213,227
December 31, 2013
U.S. Treasury	$	1,000	$	3	$	0	$	1,003
Government sponsored enterprises	61,006		377		767		60,616
Asset-backed securities	112,747		817		3,191		110,373
Obligations of states and political subdivisions	33,637		568		212		33,993
Total available-for-sale securities	$	208,390	$	1,765	$	4,170	$	205,985

All of the Company’s investment securities are classified as available for sale. Agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB), which are U.S. government-sponsored enterprises.

Investment securities that are classified as restricted equity securities primarily consist of Federal Home Loan Bank stock and the Company’s interest in statutory trusts. These securities are reported at cost in the amount of $4.0 million as of both March 31, 2014 and December 31, 2013, respectively.

Debt securities with carrying values aggregating approximately $186.2 million and $145.8 million at March 31, 2014 and December 31, 2013, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

16

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2014, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	7,566	$	7,629
Due after one year through five years	55,166		55,592
Due after five years through ten years	39,901		39,653
Due after ten years	1,016		978
Total	103,649		103,852
Asset-backed securities	111,096		109,375
Total available-for-sale securities	$	214,745	$	213,227

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2014 and December 31, 2013 were as follows:

	Less than 12 months					12 months or more					Total		Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
At March 31, 2014
Government sponsored enterprises	$	42,190	$	(566	)	$	0	$	0		$	42,190	$	(566	)
Asset-backed securities	68,052		(2,013		)	11,736		(521		)	79,788		(2,534		)
Obligations of states and political subdivisions	7,731		(90		)	634		(41		)	8,365		(131		)
Total	$	117,973	$	(2,669	)	$	12,370	$	(562	)	$	130,343	$	(3,231	)
(in thousands)
At December 31, 2013
Government sponsored enterprises	$	25,771	$	(767	)	$	0	$	0		$	25,771	$	(767	)
Asset-backed securities	76,048		(2,940		)	5,941		(251		)	81,989		(3,191		)
Obligations of states and political subdivisions	6,907		(159		)	450		(53		)	7,357		(212		)
Total	$	108,726	$	(3,866	)	$	6,391	$	(304	)	$	115,117	$	(4,170	)

The total available for sale portfolio consisted of approximately 294 securities at March 31, 2014. The portfolio included 97 securities having an aggregate fair value of $130.3 million that were in a loss position at March 31, 2014. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $12.4 million at fair value. The $3.2 million aggregate unrealized loss included in accumulated other comprehensive income at March 31, 2014 was caused by interest rate fluctuations.

The total available for sale portfolio consisted of approximately 348 securities at December 31, 2013. The portfolio included 96 securities having an aggregate fair value of $115.1 million that were in a loss position at December 31, 2013. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $6.4 million at fair value.

17

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The $4.2 million aggregate unrealized loss included in accumulated other comprehensive income at December 31, 2013 was caused by interest rate fluctuations.

Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments were not considered other-than-temporarily impaired at March 31, 2014 and December 31, 2013, respectively.

In addition, the Company does not have the intent to sell these investments over the period of recovery, and it is not more likely than not that it will be required to sell such investment securities.

The table below presents the components of investment securities gains and losses which have been recognized in earnings.

	Three Months Ended March 31,
(in thousands)	2014		2013
Gains realized on sales	$	0	$	294
Losses realized on sales	0		0
Other-than-temporary impairment recognized	0		0
Investment securities gains	$	0	$	294

(5)Intangible Assets

Core Deposit Intangible Asset

Core deposit intangible assets in the amount of $4.8 million were fully amortized as of December 31, 2013. Changes in the net carrying amount of core deposit intangible assets for the three months March 31, 2013 is as follows:

	Three Months Ended
(in thousands)	March 31, 2013
Balance at beginning of period	$	135
Additions	0
Amortization	(101		)
Balance at end of period	$	34

Mortgage Servicing Rights

At March 31, 2014 and December 31, 2013, the Company serviced mortgage loans for others totaling $319.3 million and $322.5 million, respectively. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $223,000 and $217,000 for the three months ended March 31, 2014 and 2013, respectively.

The table below presents changes in mortgage servicing rights (MSRs) for the three months ended March 31, 2014 and 2013.

18

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

	Three Months Ended March 31,
(in thousands)	2014			2013
Balance at beginning of period	$	3,036		$	2,549
Originated mortgage servicing rights	50			197
Changes in fair value:
Due to change in model inputs and assumptions (1)	106			153
Other changes in fair value (2)	(152		)	(210		)
Balance at end of period	$	3,040		$	2,689

(1)The change in fair value resulting from changes in valuation inputs or assumptions used in 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.

The following key data and assumptions were used in estimating the fair value of the Company’s MSRs as of the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014		2013
Weighted average constant prepayment rate	9.07	%	17.63	%
Weighted average note rate	4.01	%	4.12	%
Weighted average discount rate	9.08	%	8.03	%
Weighted average expected life (in years)	6.20		4.10

(6)Income Taxes

Income taxes as a percentage of earnings (loss) before income taxes as reported in the consolidated financial statements were 34.5% for the three months ended March 31, 2014 compared to 31.3% for the three months ended March 31, 2013.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences at March 31, 2014 and, therefore, did not establish a valuation reserve.

(7)Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss)

The following details the change in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2014 and 2013:

19

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

							Accumulated
				Unrecognized Net			Other
				Pension and			Comprehensive
	Unrealized Loss			Postretirement			(Loss)
(in thousands)	on Securities (1)			Costs (2)			Income
Balance, December 31, 2013	$	(1,491	)	$	722		$	(769	)
Other comprehensive income, before reclassifications	886			0			886
Amounts reclassified from accumulated other comprehensive income	0			19			19
Current period other comprehensive income, before tax	886			19			905
Income tax expense	(337		)	(7		)	(344		)
Current period other comprehensive income, net of tax	549			12			561
Balance, March 31, 2014	$	(942	)	$	734		$	(208	)
Balance, December 31, 2012	$	3,265		$	(1,440	)	$	1,825
Other comprehensive (loss) income, before reclassifications	(957		)	0			(957		)
Amounts reclassified from accumulated other comprehensive income	(294		)	27			(267		)
Current period other comprehensive (loss) income, before tax	(1,251		)	27			(1,224		)
Income tax benefit (expense)	529			(11		)	518
Current period other comprehensive (loss) income, net of tax	(722		)	16			(706		)
Balance, March 31, 2013	$	2,543		$	(1,424	)	$	1,119

(1) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in gain on sale of investment securities in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in the computation of net periodic pension cost.

(8)Employee Benefit Plans

Employee Benefits

Employee benefits charged to operating expenses are summarized in the table below for the periods indicated.

	Threee Months Ended March 31,
(in thousands)	2014		2013
Payroll taxes	$	293	$	304
Medical plans	518		491
401k match and profit sharing	153		75
Pension plan	236		286
Other	11		47
Total employee benefits	$	1,211	$	1,203

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

20

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Pension

The Company provides a noncontributory defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company has not made any contributions to the defined benefit plan for the current plan year. The minimum required contribution for the 2014 plan year is estimated to be $1.3 million. The Company has not determined whether it will make any contributions other than the minimum required funding contribution for 2014.

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

The following items are components of net pension cost for the periods indicated:

	Estimated			Actual
(in thousands)	2014			2013
Service cost - benefits earned during the year	$	981		$	1,174
Interest costs on projected benefit obligations	732			646
Expected return on plan assets	(887		)	(797		)
Expected administrative expenses	40			40
Amortization of prior service cost	79			79
Amortization of unrecognized net loss	0			31
Net periodic pension expense	$	945		$	1,173
Pension expense - three months ended March 31 (actual)	$	236		$	286

21

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(9)Stock Compensation

The Company’s stock option plan provides for the grant of options to purchase up to 547,492 shares of the Company’s common stock to officers and other key employees of the 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 11,578 shares that vested immediately.

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

					Weighted
			Weighted		Average	Aggregate
	Number		average		Contractual	Intrinsic
	of		Exercise		Term	Value
	Shares		Price		(in years)	($000)
Outstanding, beginning of period	121,405		$	24.14
Granted	0		0.00
Exercised	0		0.00
Forfeited	0		0.00
Expired	(18,255	)	28.97
Outstanding, March 31, 2014	103,150		$	23.28	2.70	$	0.00
Exercisable, March 31, 2014	88,633		$	23.49	2.50	$	0.00

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2013.

Total stock-based compensation expense for the three months ended March 31, 2014 and 2013 was $6,000 and $2,000, respectively. As of March 31, 2014, the total unrecognized compensation expense related to non-vested stock awards was $44,000 and the related weighted average period over which it is expected to be recognized is approximately 1.6 years.

22

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(10)Earnings (Loss) per Share

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

	Three Months Ended March 31,
(dollars in thousands, except per share data)	2014		2013
Basic earnings (loss) per common share:
Net income (loss)	$	1,987	$	(136	)
Less:
Preferred stock dividends and accretion of discount	0		295
Net income (loss) available to common shareholders	$	1,987	$	(431	)
Basic earnings (loss) per share	$	0.39	$	(0.09	)
Diluted earnings (loss) per common share:
Net income (loss)	$	1,987	$	(136	)
Less:
Preferred stock dividends and accretion of discount	0		295
Net income (loss) available to common shareholders	$	1,987	$	(431	)
Average shares outstanding	5,032,679		5,032,679
Effect of dilutive stock options	0		0
Average shares outstanding including dilutive stock options	5,032,679		5,032,679
Diluted earnings (loss) per share	$	0.39	$	(0.09	)

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of any 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 with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

23

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The following options to purchase shares during the dates indicated were not included in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.

	Three Months Ended March 31,
	2014	2013
Anti-dilutive shares - option shares	103,150	188,491
Anti-dilutive shares - warrant shares	—	298,618
Total anti-dilutive shares	103,150	487,109

(11)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 or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of March 31, 2014 and December 31, 2013, respectively, there were no transfers into or out of Levels 1-3.

The fair value hierarchy is as follows:

Level 1 — Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 — Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s best information and assumptions that a market participant would consider.

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

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

Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

24

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Available-for-Sale Securities

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future 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 future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3.

	Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2014
Assets:
U.S. Treasury	$	1,001	$	1,001	$	0	$	0
Government sponsored enterprises	70,811		0		70,811		0
Asset-backed securities	109,375		0		109,375		0
Obligations of states and political subdivisions	32,040		0		32,040		0
Mortgage servicing rights	3,040		0		0		3,040
Total	$	216,267	$	1,001	$	212,226	$	3,040
December 31, 2013
Assets:
U.S. Treasury	$	1,003	$	1,003	$	0	$	0
Government sponsored enterprises	60,616		0		60,616		0
Asset-backed securities	110,373		0		110,373		0
Obligations of states and political subdivisions	33,993		0		33,993		0
Mortgage servicing rights	3,036		0		0		3,036
Total	$	209,021	$	1,003	$	204,982	$	3,036

25

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
	Mortgage Servicing Rights
	Three Months Ended March 31,
(in thousands)	2014			2013
Balance at beginning of period	$	3,036		$	2,549
Total gains or losses (realized/unrealized):
Included in earnings	(46		)	(57		)
Included in other comprehensive income	0			0
Purchases	0			0
Sales	0			0
Issues	50			197
Settlements	0			0
Balance at end of period	$	3,040		$	2,689

Total gains for the three months ended included in earnings attributable to the change in unrealized gains or losses related to assets still held were $106,000 and $153,000 at March 31, 2014 and 2013, respectively.

	Quantitative Information about Level 3 Fair Value Measurements
			Input Value
			Three Months Ended March 31,
	Valuation Technique	Unobservable Inputs	2014		2013
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate	9.07	%	17.63	%
		Weighted average discount rate	9.08	%	8.03	%
		Weighted average expected life (in years)	6.20		4.10

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

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

Impaired Loans

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 of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of March 31, 2014, the Company identified $14.7 million in impaired loans that had specific allowances for losses aggregating $4.8 million. Related to these loans, there was $1.1 million in charge-offs recorded during the three months ended March 31, 2014. As of March 31, 2013, the Company identified $25.7 million in impaired loans that had specific allowances for losses aggregating $4.1 million. Related to these loans, there was $1.4 million in charge-offs recorded during the three months ended March 31, 2013.

26

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Other Real Estate Owned and Repossessed Assets

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

	Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total		Assets		Inputs		Inputs		Total Gains
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Losses)*
March 31, 2014
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	1,668	$	0	$	0	$	1,668	$	(103	)
Real estate construction - residential	1,793		0		0		1,793		(60		)
Real estate construction - commercial	67		0		0		67		(414		)
Real estate mortgage - residential	3,559		0		0		3,559		(94		)
Real estate mortgage - commercial	2,615		0		0		2,615		(365		)
Consumer	265		0		0		265		(18		)
Total	$	9,967	$	0	$	0	$	9,967	$	(1,054	)
Other real estate owned and repossessed assets	$	14,054	$	0	$	0	$	14,054	$	(30	)
March 31, 2013
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	737	$	0	$	0	$	737	$	(10	)
Real estate construction - residential	1,959		0		0		1,959		(119		)
Real estate construction - commercial	5,762		0		0		5,762		0
Real estate mortgage - residential	2,774		0		0		2,774		(235		)
Real estate mortgage - commercial	10,368		0		0		10,368		(987		)
Consumer	38		0		0		38		0
Total	$	21,638	$	0	$	0	$	21,638	$	(1,351	)
Other real estate owned and repossessed assets	$	23,128	$	0	$	0	$	23,128	$	(200	)

* 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.

27

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

Investment Securities

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

Federal Home Loan Bank (FHLB) Stock

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

Federal Funds Sold, Cash, and Due from Banks

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

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future 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 future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings 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 amount. 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 of the short maturity for these financial instruments.

Deposits

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

28

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

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

Subordinated Notes and Other Borrowings

The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.

29

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

A summary of the carrying amounts and fair values of the Company’s financial instruments at March 31, 2014 and December 31, 2013 is as follows:

					March 31, 2014
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	March 31, 2014				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	24,314	$	24,314	$	24,314	$	0	$	0
Federal funds sold and overnight interest-bearing deposits	16,920		16,920		16,920		0		0
Investment in available-for-sale securities	213,227		213,227		1,001		212,226		0
Loans, net	832,462		835,199		0		0		835,199
Investment in FHLB stock	2,315		2,315		0		2,315		0
Mortgage servicing rights	3,040		3,040		0		0		3,040
Cash surrender value - life insurance	2,233		2,233				2,233		0
Accrued interest receivable	4,441		4,441		4,441		0		0
	$	1,098,952	$	1,101,689	$	46,676	$	216,774	$	838,239
Liabilities:
Deposits:
Non-interest bearing demand	$	189,925	$	189,925	$	189,925	$	0	$	0
Savings, interest checking and money market	453,724		453,724		453,724		0		0
Time deposits	344,087		346,442		0		0		346,442
Federal funds purchased and securities sold under agreements to repurchase	20,761		20,761		20,761		0		0
Subordinated notes	49,486		34,081		0		34,081		0
Federal Home Loan Bank advances	24,000		25,261		0		25,261		0
Accrued interest payable	412		412		412		0		0
	$	1,082,395	$	1,070,606	$	664,822	$	59,342	$	346,442

30

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

					December 31, 2013
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2013				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	27,079	$	27,079	$	27,079	$	0	$	0
Federal funds sold and overnight interest-bearing deposits	1,360		1,360		1,360		0		0
Investment in available-for-sale securities	205,985		205,985		1,003		204,982		0
Loans, net	825,828		829,223		0		0		829,223
Investment in FHLB stock	2,354		2,354		0		2,354		0
Mortgage servicing rights	3,036		3,036		0		0		3,036
Cash surrender value - life insurance	2,213		2,213				2,213		0
Accrued interest receivable	4,999		4,999		4,999		0		0
	$	1,072,854	$	1,076,249	$	34,441	$	209,549	$	832,259
Liabilities:
Deposits:
Non-interest bearing demand	$	187,382	$	187,382	$	187,382	$	0	$	0
Savings, interest checking and money market	419,085		419,085		419,085		0		0
Time deposits	350,004		352,432		0		0		352,432
Federal funds purchased and securities sold under agreements to repurchase	31,084		31,084		31,084		0		0
Subordinated notes	49,486		32,048		0		32,048		0
Federal Home Loan Bank advances	24,000		25,366		0		25,366		0
Accrued interest payable	426		426		426		0		0
	$	1,061,467	$	1,047,823	$	637,977	$	57,414	$	352,432

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. 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 instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.

31

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(13)Repurchase Reserve Liability

The Company’s repurchase reserve liability for estimated losses incurred on sold loans that are included in gain on sales of mortgage loans was $160,000 at March 31, 2014. This liability represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans originated for sale that may arise from representation and warranty claims that could relate to a variety of issues, including but not limited to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines. Although the Company has not experienced any historical repurchase losses, it was notified during the third quarter of 2013 by one of its two investors, Freddie Mac, that fifteen loans which were foreclosed upon from 2007 to the present, are being reviewed for quality control purposes and may result in loss indemnification payments to the investor as reimbursement for losses. The balance of these loans at foreclosure date totaled $1.5 million. During the fourth quarter of 2013 and through March 31, 2014, the Company settled these loan foreclosures resulting in payments totaling $119,000 for reimbursement of costs incurred by Freddie Mac on three of these foreclosures. The remaining twelve foreclosures were settled without incurring any additional costs. At March 31, 2014, the Company was servicing 3,158 loans sold to the secondary market with a balance of approximately $319.3 million compared to 3,114 loans sold with a balance of approximately $322.5 million at December 31, 2013.

(14)Commitments and Contingencies

The Company issues financial instruments 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 of the amounts 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 financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At March 31, 2014, no amounts have been accrued for any estimated losses for these financial instruments.

The contractual amount of off-balance-sheet financial instruments as of the periods indicated:

	March 31,		December 31,
(in thousands)	2014		2013
Commitments to extend credit	$	121,100	$	117,880
Commitments to originate residential first and second mortgage loans	1,866		1,852
Standby letters of credit	1,591		1,826

Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The 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 accounts receivable, inventory, furniture and equipment, and real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby letters of credit range from on e month to five years at March 31, 2014.

32

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss is deemed probable or an amount can be estimated.

33

Item 2 - Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Forward-Looking Statements

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company, Hawthorn 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, estimates, intends or similar expressions.

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

·competitive pressures among financial services companies may increase significantly,

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

·general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

·increases in non-performing assets in the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,

·costs or difficulties related to the integration of the business of the Company and its acquisition targets may be greater than expected,

·legislative or regulatory changes may adversely affect the business in which the Company and its subsidiaries are engaged, and

·changes may occur in the securities markets.

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

We have described under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, and in other reports filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.

Overview

Through the branch network of its subsidiary bank, the Company, with $1.2 billion in assets at March 31, 2014, 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, including real estate, commercial, installment, and other consumer loans. Other financial services that the Company provides include automated teller machines, trust services, credit-related insurance, and safe-deposit boxes. The geographic areas in which the Company provides 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 activities. 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.

34

Much of the Company’s business is commercial, commercial real estate development, and mortgage lending. The Company has experienced soft loan demand in the communities 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 strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company’s financial performance also depends, in part, on its 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 of the Company’s growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.

The Company’s subsidiary bank, Hawthorn Bank (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 trust services.

The deposit accounts of the 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 of the Bank are conducted by representatives of the 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 by the Board of Governors of the Federal Reserve System.

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 critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to 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 of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the Company’s business operations is provided in note 1 to the Company’s unaudited consolidated financial statements and is also discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of 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 returns. Judgment is required in addressing the Company’s future tax consequences of events that have been recognized in the consolidated financial statements or tax returns 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 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 the deferred tax asset, which would result in a direct charge to income tax expense and earnings 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. Critical to the assessment is the Company’s estimates and judgments related to future taxable income which is based on historical financial performance and

35

assumptions related to the forecasts of future performance. In addition, the Company is subject to the continuous examination of its tax returns by the Internal Revenue Service and other taxing authorities. The Company accrues for penalties and interest related to income taxes in income tax expense. As of March 31, 2014, the Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions.

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 is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the fair value of the 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 internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The write-downs are recorded as other real estate expense, net. 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 of the property.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for the Company as of and for each of the three months ended March 31, 2014 and 2013, respectively. The selected consolidated financial data should be read in conjunction with the unaudited consolidated financial statements of the Company, including the related notes, presented elsewhere herein.

Selected Financial Data

	Three Months Ended
	March 31,
(In thousands, except per share data)	2014			2013
Per Share Data
Basic earnings (loss) per common share	$	0.39		$	(0.09	)
Diluted earnings (loss) per common share	0.39			(0.09		)
Dividends paid on preferred stock	—			228
Accretion of discount on preferred stock	—			72
Dividends paid on common stock	252			242
Book value per common share	15.24			14.48
Market price per common share	13.23			11.08
Selected Ratios
(Based on average balance sheets)
Return on total assets	0.70		%	(0.05		)%
Return on common stockholders’ equity	10.67		%	(2.33		)%
Common stockholders’ equity to total assets	6.57		%	7.85		%
Efficiency ratio (1)	74.17		%	93.70		%
Efficiency ratio (2)	73.10		%	73.20		%
(Based on end-of-period data)
Common stockholders’ equity to assets	6.58		%	7.66		%
Stockholders’ equity to assets	6.58		%	6.14		%
Total risk-based capital ratio	15.51		%	16.84		%
Tier 1 risk-based capital ratio	11.67		%	13.55		%
Leverage ratio (3)	8.87		%	10.09		%

(1)Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue includes net interest income and non-interest income.

(2)Does not include other real estate expense or gain on sale of investment securities.

(3)Leverage ratio is calculated by dividing Tier 1 capital ratio by average total consolidated assets.

37

RESULTS OF OPERATIONS ANALYSIS

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

	Three Months Ended March 31,
(In thousands)	2014		2013			$ Change			% Change
Net interest income	$	9,654	$	9,729		$	(75	)	(0.8	)%
Provision for loan losses	—		1,000			(1,000		)	(100.0	)
Noninterest income	2,085		3,007			(922		)	(30.7	)
Noninterest expense	8,707		11,934			(3,227		)	(27.0	)
Income (loss) before income taxes	3,032		(198		)	3,230			1,631.3
Income tax expense (benefit)	1,045		(62		)	1,107			1,785.5
Net income (loss)	$	1,987	$	(136	)	$	2,123		1,561.0	%
Preferred stock dividends and accretion of discount	—		295			(295		)	(100.0	)
Net income (loss) available to common shareholders	$	1,987	$	(431	)	$	2,418		561.0	%

Business Events 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. Participation in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock. On May 9, 2012, the Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program, and on May 15, 2013, the remaining 18,255 shares were redeemed.

On June 11, 2013, the common stock warrant issued under the U.S. Treasury Department’s CPP program was repurchased by the Company pursuant to a letter agreement between the Treasury and the Company for a total repurchase price of $540,000, or $1.88 per warrant share. The repurchase price was based on the fair value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ends the Company’s participation in the U.S. Treasury Department’s CPP.

For the fifth consecutive year, on July 1, 2013, the Company distributed a four percent stock dividend to shareholders of record at the close of business on June 15, 2013. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect the stock dividend.

Consolidated net income of $2.0 million for the three months ended March 31, 2014 increased $2.1million compared to a consolidated net loss of $136,000 for the three months ended March 31, 2013. Net income available to common shareholders for the three months ended March 31, 2014 was $2.0 million, or $0.39 per diluted common share, compared to a net loss available to common shareholders of $431,000, or $(0.09) per diluted common share for the three months ended March 31, 2013. For the quarter ended March 31, 2014, the return on average assets was 0.70%, the return on average common stockholders’ equity was 10.67%, and the efficiency ratio was 74.17%.

Net interest income was $9.7 million for both the three months ended March 31, 2014 and 2013. The net interest margin increased to 3.72% for the three months ended March 31, 2014, compared to 3.65% for the three months ended March 31, 2013 primarily resulting from a decrease in the Company’s cost of certificate of deposits. During the third quarter of 2013, $23.0 million from a 58 month 6.05% certificate of deposit special matured and approximately $5.7 million was reinvested at current market rates.

The lower provision for loan losses for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 was primarily a result of the improving credit quality in the Company’s historical loss analysis and reduced levels of nonperforming loans. Net charge-offs for the three months ended March 31, 2014, were $874,000, or 0.10% of average loans compared to $3.2 million, or 0.15% of average loans for the three months ended March 31, 2013. Non-performing loans totaled $36.2 million, or 4.29% of total loans, at March 31, 2014 compared to $35.3 million, or 4.21% of total loans, at December 31, 2013, and $38.6 million, or 4.63%of total loan, at March 31, 2013.

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Non-interest income decreased $922,000, or 30.7%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. These changes are discussed in greater detail below under Non-interest Income.

Non-interest expense decreased $3.2 million, or 27.0%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. These changes are discussed in greater detail below under Non-interest Expense.

Average Balance Sheets

Net interest income is the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit 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. The following table presents average balance sheets, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the periods ended March 31, 2014 and 2013, respectively.

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	Three Months Ended March 31,
	2014							2013
				Interest		Rate					Interest		Rate
	Average			Income/		Earned/		Average			Income/		Earned/
(In thousands)	Balance			Expense(1)		Paid(1)		Balance			Expense(1)		Paid(1)
ASSETS
Loans: (2) (4)
Commercial	$	129,845		$	1,502	4.69	%	$	126,969		$	1,559	4.98	%
Real estate construction - residential	22,962			238		4.20		22,746			252		4.49
Real estate construction - commercial	56,768			606		4.33		44,681			514		4.67
Real estate mortgage - residential	228,530			2,753		4.89		219,843			2,781		5.13
Real estate mortgage - commercial	383,157			4,468		4.73		400,681			4,928		4.99
Consumer	20,364			332		6.61		25,069			378		6.12
Total loans	$	841,626		$	9,899	4.77	%	$	839,989		$	10,412	5.03	%
Investment securities: (3)
U.S. Treasury	$	1,003		$	3	1.21	%	$	2,029		$	8	1.60	%
Government sponsored enterprises	66,822			217		1.32		71,949			216		1.22
Asset backed securities	108,941			649		2.42		117,396			670		2.31
State and municipal	33,221			295		3.60		35,157			334		3.85
Total investment securities	$	209,987		$	1,164	2.25	%	$	226,531		$	1,228	2.20	%
Restricted investments	4,046			20		2.00		3,924			22		2.27
Federal funds sold and interest bearing deposits in other financial institutions	10,658			8		0.30		24,661			14		0.23
Total interest earning assets	$	1,066,317		$	11,091	4.22	%	$	1,095,105		$	11,676	4.32	%
All other assets	96,718							105,301
Allowance for loan losses	(13,682		)					(15,271		)
Total assets	$	1,149,353						$	1,185,135
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts	$	209,669		$	150	0.29	%	$	203,709		$	147	0.29	%
Savings	79,595			20		0.10		71,535			19		0.11
Money market	161,473			97		0.24		159,549			95		0.24
Time deposits of $100,000 and over	110,648			190		0.70		119,511			248		0.84
Other time deposits	235,353			432		0.74		271,682			884		1.32
Total time deposits	$	796,738		$	889	0.45	%	$	825,986		$	1,393	0.68	%
Federal funds purchased and securities sold under agreements to repurchase	19,397			4		0.08		18,544			5		0.11
Subordinated notes	49,486			312		2.56		49,486			320		2.62
Federal Home Loan Bank Advances	25,167			104		1.68		20,104			99		2.00
Total borrowings	$	94,050		$	420	1.81	%	$	88,134		$	424	1.95	%
Total interest bearing liabilities	$	890,788		$	1,309	0.60	%	$	914,120		$	1,817	0.81	%
Demand deposits	176,860							171,398
Other liabilities	6,220							6,595
Total liabilities	1,073,868							1,092,113
Stockholders’ equity	75,485							93,022
Total liabilities and stockholders’ equity	$	1,149,353						$	1,185,135
Net interest income (FTE)				9,782							9,859
Net interest spread						3.62	%						3.51	%
Net interest margin						3.72	%						3.65	%

(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 $128,000 and $131,000 for the three months ended March 31, 2014 and 2013, respectively.

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

(3)Average balances based on amortized cost.

(4)Fees and costs on loans are included in interest income.

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Rate and Volume Analysis

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates for the three months ended March 31, 2014 compared to March 31, 2013. 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.

	Three Months Ended March 31,
	2014 vs. 2013
				Change due to
	Total			Average			Average
(In thousands)	Change			Volume			Rate
Interest income on a fully taxable equivalent basis: (1)
Loans: (2) (4)
Commercial	$	(57	)	$	34		$	(91	)
Real estate construction - residential	(14		)	2			(16		)
Real estate construction - commercial	92			131			(39		)
Real estate mortgage - residential	(28		)	108			(136		)
Real estate mortgage - commercial	(460		)	(211		)	(249		)
Consumer	(46		)	(75		)	29
Investment securities: (3)	0			0
U.S. Treasury	(5		)	(3		)	(2		)
Government sponsored entities	1			(16		)	17
Asset backed securities	(21		)	(49		)	28
State and municipal	(39		)	(17		)	(22		)
Restricted investments	(2		)	1			(3		)
Federal funds sold and interest bearing deposits in other financial institutions	(6		)	(10		)	4
Total interest income	(585		)	(105		)	(480		)
Interest expense:
NOW accounts	3			4			(1		)
Savings	1			2			(1		)
Money market	2			1			1
Time deposits of $100,000 and over	(58		)	(17		)	(41		)
Other time deposits	(451		)	(106		)	(345		)
Federal funds purchased and securities sold under agreements to repurchase	(1		)	0			(1		)
Subordinated notes	(8		)	0			(8		)
Federal Home Loan Bank advances	5			23			(18		)
Total interest expense	(507		)	(93		)	(414		)
Net interest income on a fully taxable equivalent basis	$	(78	)	$	(12	)	$	(66	)

(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 $128,000 and $131,000 for the three months ended March 31, 2014 and 2013, respectively.

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

(3)Average balances based on amortized cost.

(4)Fees and costs on loans are included in interest income.

Financial results for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, reflected a decrease in net interest income, on a tax equivalent basis, of $78,000, or 0.79%. The decrease in net interest income is primarily due to lower average earning asset levels. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) increased to 3.72% for the three months ended March 31, 2014, compared to 3.65% for the three months ended March 31, 2013. Although the volume and yield on average earning assets decreased for the three months ending March 31, 2014 compared to the three months ended March 31, 2013, the increase in the net interest margin was primarily due to lower costs of certificates of deposit. See Interest expense on deposits below for further discussion.

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Average interest-earning assets decreased $28.8 million, or 2.6%, to $1.1 billion for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, and average interest bearing liabilities decreased $23.3 million, or 2.6%, to $890.8 million for the three months ended March 31, 2014 compared to $914.1 million for the three months ended March 31, 2013.

Total interest income (expressed on a fully taxable equivalent basis) decreased to $11.1 million for the three months ended March 31, 2014 compared to $11.7 million for the three months ended March 31, 2013. The Company’s rates earned on interest earning assets were 4.22% for the three months ended March 3, 2014 compared to 4.32% for the three months ended March 31, 2013.

Interest income on loans decreased to $9.9 million for the three months ended March 31, 2014 compared to $10.4 million for the three months ended March 31, 2014.

Average loans outstanding increased $1.6 million, or 0.19%, to $841.6 million for the three months ended March 31, 2014 compared to $840.0 million for the three months ended March 31, 2013. The average yield on loans receivable decreased to 4.77% during the three months ended March 31, 2014 compared to 5.03% for the three months ended March 31, 2013 primarily as a result of decreasing market interest rates. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio.

Total interest expense decreased to $1.3 million for the three months ended March 31, 2014, compared to $1.8 million for the three months ended March 31, 2013. The Company’s rates paid on interest bearing liabilities was 0.60% for the three months ended March 31, 2014 compared to 0.81% for the three months ended March 31, 2013. See the Liquidity Management section for further discussion.

Interest expense on deposits decreased to $889,000 for the three months ended March 31, 2014 compared to $1.4 million for the three months ended March 31, 2013.

Average time deposits decreased $29.2 million, or 3.5%, to $796.7 million for the three months ended March 31, 2014 compared to $826.0 million for the three months ended March 31, 2013. The average cost of deposits decreased to 0.45% during the three months ended March 31, 2014 compared to 0.68% for the three months ended March 31, 2013 primarily as a result of lower market interest rates and the maturity of $23.0 million from a 58 month 6.05% certificate of deposit special during the third quarter of 2013.

Interest expense on borrowings decreased to $420,000 for the three months ended March 31, 2014 compared to $424,000 for the three months ended March 31, 2013. Average borrowings increased $5.9 million to $94.0 million for the three months ended March 31, 2014 compared to $88.1 million for the three months ended March 31, 2013. See the Liquidity Management section for further discussion.

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Non-interest Income and Expense

Non-interest income for the periods indicated is as follows:

	Three Months Ended March 31,
(In thousands)	2014			2013			$ Change			% Change
Non-interest Income
Service charges on deposit accounts	$	1,230		$	1,359		$	(129	)	(9.5	)%
Trust department income	203			210			(7		)	(3.3	)
Real estate servicing fees, net	177			159			18			11.3
Gain on sales of mortgage loans, net	191			720			(529		)	(73.5	)
Gain on sale of investment securities	0			294			(294		)	NM
Other	284			265			19			7.2
Total non-interest income	$	2,085		$	3,007		$	(922	)	(30.7	)%
Non-interest income as a % of total revenue *	17.8		%	23.6		%
Total revenue per full time equivalent employee	$	33.5		$	37.6

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

NM - not meaningful

Total non-interest income decreased $922,000, or 30.7%, to $2.1 million for the three months ended March 31, 2014 compared to $3.0 million for the three months ended March 31, 2013.

Real estate servicing fees, net increased $18,000 to $177,000 for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Net real estate servicing fees include mortgage loan servicing fees and the gains or losses due to the change in fair value of MSRs arising from inputs and assumptions. Mortgage loan servicing fees earned on loans sold were $223,000 for the three months ended March 31, 2014 compared to $217,000 for the three months ended March 31, 2013. Total net losses recognized related to MSRs due to the change in fair value were $46,000 for the three months ended March 31, 2014 compared to total net losses of $57,000 for the three months ended March 31, 2013. The Company was servicing $319.3 million of mortgage loans at March 31, 2014 compared to $322.5 million and $318.9 million at December 31, 2013 and March 31, 2013, respectively.

Gain on sales of mortgage loans decreased $529,000 to $191,000 for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The Company sold loans of $6.0 million for the three months ended March 31, 2014 compared to $29.3 million for the three months ended March 31, 2013. Refinancing activity impacting both the volume of loans sold and gains recognized continued to be slow during 2014 primarily due to rising interest rates.

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Non-interest expense for the periods indicated was as follows:

	Three Months Ended March 31,
(In thousands)	2014			2013			$ Change			% Change
Non-interest Expense
Salaries	$	3,819		$	3,707		$	112		3.0	%
Employee benefits	1,211			1,203			8			0.7
Occupancy expense, net	620			635			(15		)	(2.4	)
Furniture and equipment expense	444			435			9			2.1
FDIC insurance assessment	238			243			(5		)	(2.1	)
Legal, examination, and professional fees	226			226			0			0.0
Advertising and promotion	291			281			10			3.6
Postage, printing, and supplies	265			256			9			3.5
Processing expense	759			1,275			(516		)	(40.5	)
Other real estate expense	124			2,821			(2,697		)	(95.6	)
Other	710			852			(142		)	(16.7	)
Total non-interest expense	$	8,707		$	11,934		$	(3,227	)	(27.0	)%
Efficiency ratio *	74.2		%	93.7		%
Efficiency ratio ***	73.1			73.2
Salaries and benefits as a % of total non-interest expense	57.8		%	41.1		%
Number of full-time equivalent employees	350			339

* Efficiency ratio is calculated as non-interest expense as a percent of revenue. Total revenue includes net interest income and non-interest income.

*** Does not include other real estate expense or gain on sale of investment securities

Total non-interest expense decreased $3.2 million, or 27.0%, to $8.7 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Processing expense decreased $516,000, or 40.5%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to contract savings resulting in lower core processing expenses. In 2013 a one time consulting fee was incurred to negotiate reduced future core processing expenses. A portion of this fee is being amortized over the new contract period with the Company’s core processing vendor.

Other real estate (ORE) expense decreased $2.7 million, or 95.6%, to $124,000 for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The expense provision for valuation write-downs taken on ORE was $123,000 for the three months ended March 31, 2014 compared to $2.3 million for the three months ended March 31, 2013. The significant expense provision during 2013 primarily related to two hotels located in the Branson area that were sold at auction during the second quarter of 2013. Expenses incurred to maintain foreclosed properties were $147,000 for the three months ended March 31, 2014 compared to $490,000 for the three months ended March 31, 2013. Overall operating costs began to decrease during the third quarter of 2013 due to the sale of the hotels.

Other non-interest expense decreased $142,000, or 16.7%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease for the three months ended March 31, 2014 was primarily due to a $101,000 decrease in core deposit intangible asset amortization and a $50,000 decrease in commercial and real estate loan expense.

Income taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 34.5% for the three months ended March 31, 2014 compared to 31.3% for the three months ended March 31, 2013.

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 71.5% of total assets as of March 31, 2014 compared to 72.4% as of December 31, 2013.

Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors. The Bank’s credit review process is overseen by regional loan committees with established loan approval limits. In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised of senior managers of the Bank.

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A summary of loans, by major class within the Company’s loan portfolio as of the dates indicated is as follows:

	March 31,			December 31,
(In thousands)	2014			2013
Commercial, financial, and agricultural	$	133,346		$	133,717
Real estate construction - residential	22,060			21,008
Real estate construction - commercial	57,340			55,076
Real estate mortgage - residential	230,310			225,541
Real estate mortgage - commercial	384,130			382,550
Installment loans to individuals	19,121			21,655
Total loans	$	846,307		$	839,547
Percent of categories to total loans:
Commercial, financial, and agricultural	15.7		%	15.9		%
Real estate construction - residential	2.6			2.5
Real estate construction - commercial	6.8			6.6
Real estate mortgage - residential	27.2			26.9
Real estate mortgage - commercial	45.4			45.6
Installment loans to individuals	2.3			2.5
Total	100.0		%	100.0		%

The Company extends credit to its local community market through traditional 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 authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets that would have been included in nonaccrual, past due, or restructured loans if such assets were loans.

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 not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. For the three months ended March 31, 2014, the Company sold approximately $6.0 million of loans to investors compared to $29.3 million for the three months ended March 31, 2013. At March 31, 2014, the Company was servicing approximately $322.5 million of loans sold to the secondary market compared to $322.5 million at December 31, 2013, and $318.9 million at March 31, 2013.

Risk Elements of the Loan Portfolio

Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Currently, loans in excess of $2.0 million 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 impaired. Management follows the guidance provided in the FASB’s ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, 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 industry concentration. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered adequate by management to provide for probable losses inherent in the loan portfolio.

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Nonperforming Assets

The following table summarizes nonperforming assets at the dates indicated:

	March 31,			December 31,
(In thousands)	2014			2013
Nonaccrual loans:
Commercial, financial, and agricultural	$	2,632		$	1,684
Real estate construction - residential	2,143			2,204
Real estate construction - commercial	5,936			6,251
Real estate mortgage - residential	3,939			4,165
Real estate mortgage - commercial	9,838			9,074
Installment loans to individuals	316			302
Total	$	24,804		$	23,680
Loans contractually past - due 90 days or more and still accruing:
Commercial, financial, and agricultural	$	0		$	0
Real estate construction - residential	0			0
Real estate construction - commercial	1			0
Real estate mortgage - residential	194			129
Real estate mortgage - commercial	0			100
Installment loans to individuals	9			14
Total	$	204		$	243
Troubled debt restructurings - accruing	11,234			11,395
Total nonperforming loans	36,242			35,318
Other real estate owned	14,031			14,826
Foreclosed assets	23			41
Total nonperforming assets	$	50,296		$	50,185
Loans	$	845,307		$	839,547
Allowance for loan losses to loans	1.52		%	1.63		%
Nonperforming loans to loans	4.29		%	4.21		%
Allowance for loan losses to nonperforming loans	35.44		%	38.84		%
Nonperforming assets to loans, other real estate owned and foreclosed assets	5.85		%	5.87		%

Total nonperforming assets totaled $50.3 million at March 31, 2014 compared to $50.2 million at December 31, 2013. Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and TDRs totaled $36.2 million, or 4.29%, of total loans at March 31, 2014 compared to $35.3 million, or 4.21%, of total loans at December 31, 2013. See further discussion below.

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 of business 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 receipts are recorded as interest income on a cash basis. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was approximately $289,000 and $350,000 for the three months ended March 31, 2014 and 2013, respectively.

As of March 31, 2014 and December 31, 2013, approximately $15.9 million and $21.0 million, respectively, of loans classified as substandard, not included in the nonperforming asset table, were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. Even though borrowers are experiencing moderate cash flow problems as well as some deterioration in collateral value, management believes the general allowance was sufficient to cover the risks and probable losses related to such loans at March 31, 2014 and December 31, 2013, respectively.

Total non-accrual loans at March 31, 2014 increased $1.1 million to $24.8 million from December 31, 2013. This increase primarily consisted of a $948,000 increase in commercial, financial and agricultural non-accrual loans and a $764,000 increase in real estate mortgage - commercial non-accrual loans. This increase was partially offset by a $376,000 decrease in real estate construction non-accrual loans and a $226,000 decrease in real estate mortgage — residential non-accrual loans. At March 31, 2014 and December 31, 2013, real estate mortgage — commercial non-accrual loans made up 40% and 38%, respectively, of total non-accrual loans.

Loans past due 90 days and still accruing interest at March 31, 2014 were $204,000 compared to $243,000 at December 31, 2013. Other real estate owned and repossessed assets at March 31, 2014 were $14.0 million compared to $14.9 million at December 31, 2013.  During the three months ended March 31, 2014, $259,000 of nonaccrual loans, net of charge-offs taken,

46

moved to other real estate owned and repossessed assets, and a net $123,000 additional provision to the valuation allowance was recorded to reflect current fair values. This is compared to a net $2.3 million provision during the three months ended March 31, 2013. The provision during 2013 primarily related to two hotels located in the Branson area that were sold during the second quarter.

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

	March 31, 2014					December 31, 2013
(In thousands)	Number of Contracts	Recorded Investment		Specific Reserves		Number of Contracts	Recorded Investment		Specific Reserves
TDRs - Accrual
Commercial, financial and agricultural	9	$	2,287	$	99	9	$	2,331	$	101
Real estate construction - commercial	0	0		0		1	364		0
Real estate mortgage - residential	7	3,533		1,039		6	2,352		529
Real estate mortgage - commercial	6	5,414		0		6	6,348		885
Total TDRs - Accrual	22	$	11,234	$	1,138	22	$	11,395	$	1,515
TDRs - Non-accrual
Commercial, financial and agricultural	4	$	327	$	250	2	$	88	$	8
Real estate construction - commercial	1	3,742		0		1	3,742		0
Real estate mortgage - residential	5	631		240		5	639		229
Real estate mortgage - commercial	7	6,242		801		7	5,572		424
Consumer	2	43		16		2	43		15
Total TDRs - Non-accrual	19	$	10,985	$	1,307	17	$	10,084	$	676
Total TDRs	41	$	22,219	$	2,445	39	$	21,479	$	2,191

At March 31, 2014, loans classified as TDRs totaled $22.2 million, of which $11.0 million were on non-accrual status and $11.2 million were on accrual status. At December 31, 2013, loans classified as TDRs totaled $21.5 million, of which $10.1 million were on non-accrual status and $11.4 million were on accrual status. The net increase in total TDRs from December 31, 2013 was primarily due to $1.5 million additions to TDRs, partially offset by $314,000 charged off, and approximately $446,000 of payments received. The increase in TDRs classified as real estate mortgage - residential accruing loans primarily relates to one new loan relationship modified to interest only payments. The increase in real estate mortgage - commercial non-accrual TDRs is primarily related to one loan relationship that was placed on non-accrual TDR status during the first quarter of 2014.

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 was $12.8 million, or 1.52%, of loans outstanding at Mach 31, 2014 compared to $13.7 million, or 1.63%, of loans outstanding at December 31, 2013, and $14.5 million, or 1.74%, of loans outstanding at March 31, 2013.

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The following table summarizes loan loss experience for the periods indicated:

	Three Months Ended
	March 31,
(In thousands)	2014		2013
Analysis of allowance for loan losses:
Balance beginning of period	$	13,719	$	14,842
Charge-offs:
Commercial, financial, and agricultural	131		61
Real estate construction - residential	60		120
Real estate construction - commercial	414		—
Real estate mortgage - residential	120		292
Real estate mortgage - commercial	367		999
Installment loans to individuals	84		109
Total charge-offs	1,176		1,581
Recoveries:
Commercial, financial, and agricultural	$	116	$	42
Real estate construction - residential	—		—
Real estate construction - commercial	—		—
Real estate mortgage - residential	112		15
Real estate mortgage - commercial	16		161
Installment loans to individuals	58		66
Total recoveries	302		284
Net charge-offs	874		1,297
Provision for loan losses	—		1,000
Balance end of period	$	12,845	$	14,545

Loan Charge-offs

The Company’s net loan charge-offs were $874,000, or 0.10% of average loans, for the three moths ended March 31, 2014 compared to net loan charge-offs of $1.3 million, or 0.15% of average loans, for the three months ended March 31, 2013.

Real estate mortgage charge-offs represented 41% of total charge-offs during the three months ended March 31, 2014 compared to 81% of total charge-offs during the three months ended March 31, 2013. Real estate construction charge-offs represented 40% of total charge-offs during the three months ended March 31, 2014 compared to 8% of total charge-offs during the three months ended March 31, 2013.

Provision

There was no provision for loan losses during the three months ended March 31, 2014 compared to $1.0 million for the three months ended March 31, 2013. Due to decreases in historical loss rates based on the Company’s last thirty-six months of charge-off experience, decreases in average loans and reduced levels of nonperforming loans, no provision was required during the first quarter of 2014.

Allowance for Loan Losses

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

	March 31,		December 31,
(In thousands)	2014		2013
Allocation of allowance for loan losses at end of year:
Commercial, financial, and agricultural	$	2,452	$	2,374
Real estate construction - residential	479		931
Real estate construction - commercial	550		631
Real estate mortgage - residential	3,090		2,959
Real estate mortgage - commercial	6,019		6,523
Installment loans to individuals	255		294
Unallocated	0		7
Total	$	12,845	$	13,719

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The Company’s allowance for loan losses decreased to $12.8 million at March 31, 2014 compared to $13.7 million at December 31, 2013. The decrease from December 31, 2013 primarily consisted of a $452,000 decrease in the allocation for real estate construction — residential loans, and a $504,000 decrease in real estate mortgage — commercial loans, partially offset by a $131,000 increase in real estate mortgage - residential loans. The ratio of the allowance for loan losses to nonperforming loans was 35.4% at March 31, 2014, compared to 38.8% at December 31, 2013.

The following table is a summary of the general and specific allocations of the allowance for loan losses:

	March 31,		December 31,
(In thousands)	2014		2013
Allocation of allowance for loan losses:
Individually evaluated for impairment - specific reserves	$	4,753	$	4,796
Collectively evaluated for impairment - general reserves	8,092		8,923
Total	$	12,845	$	13,719

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 and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At March 31, 2014, $4.8 million of the Company’s allowance for loan losses was allocated to impaired loans totaling approximately $36.0 million compared to $4.8 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $35.1 million at December 31, 2013. Management determined that $21.3 million, or 59%, of total impaired loans required no reserve allocation at March 31, 2014 compared to $18.8 million, or 54%, at December 31, 2013 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The incurred loss component of the general reserve, or loans 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 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 through the use of qualitative risk factors 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 lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These qualitative risk factors are generally reviewed and updated quarterly, as appropriate.

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 is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.

Liquidity and Capital Resources

Liquidity Management

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet the demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors.  Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full service relationships with customers.

The Company’s Asset/Liability 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: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company’s liquidity.

49

The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company’s most liquid assets are comprised of available for sale investment securities, federal funds sold, and excess reserves held at the Federal Reserve.

	March 31,		December 31,
(In thousands)	2014		2013
Federal funds sold and other overnight interest-bearing deposits	$	16,920	$	1,360
Available-for-sale investment securities	213,227		205,985
Total	$	230,147	$	207,345

Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $213.2 million at March 31, 2014 and included an unrealized net loss of $1.5 million. The portfolio includes projected maturities and mortgage backed securities pay-downs of approximately $8.0 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s deposit base.

The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes required by law. At March 31, 2014 and December 31, 2013, the Company’s unpledged securities in the available for sale portfolio totaled approximately $27.0 million and $60.2 million, respectively.

Total investment securities pledged for these purposes were as follows:

	March 31,		December 31,
(In thousands)	2014		2013
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	3,213	$	3,360
Federal funds purchased and securities sold under agreements to repurchase	32,598		25,149
Other deposits	150,353		117,283
Total pledged, at fair value	$	186,164	$	145,792

Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At March 31, 2014, such deposits totaled $643.6 million and represented 65.2% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships. Time deposits and certificates of deposit of $100,000 and over totaled $344.1 million at March 31, 2014. These accounts are normally considered more volatile and higher costing representing 34.8% of total deposits at March 31, 2014.

Core deposits at March 31, 2014 and December 31, 2013 were as follows:

	March 31,		December 31,
(In thousands)	2014		2013
Core deposit base:
Non-interest bearing demand	$	189,925	$	187,382
Interest checking	210,848		182,103
Savings and money market	242,876		236,982
Total	$	643,649	$	606,467

Other components of liquidity are the level of borrowings from third party sources and the availability 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 March 31, 2014, under agreements with these unaffiliated banks, the Bank may borrow up to $40.0 million in federal funds on an unsecured basis and $4.7 million on a secured basis. There was no federal funds purchased outstanding at March 31, 2014. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio. At March 31, 2014, there was $20.8 million 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 March 31, 2014.

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 March 31, 2014, the Bank had $24.0 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

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Borrowings outstanding at March 31, 2014 and December 31, 2013 were as follows:

	March 31,		December 31,
(In thousands)	2014		2013
Borrowings:
Securities sold under agreements to repurchase	$	20,761	$	31,084
Federal Home Loan Bank advances	24,000		24,000
Subordinated notes	49,486		49,486
Total	$	94,247	$	104,570

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 of the assets pledged, borrowings, and letters of credit outstanding in addition to the estimated future funding capacity available to the Company as follows:

	March 31,										December 31,
	2014										2013
(In thousands)	FHLB			Federal Reserve Bank		Federal Funds Purchased Lines		Total			FHLB			Federal Reserve Bank		Federal Funds Purchased Lines			Total
Advance equivalent	$	259,604		$	3,134	$	41,540	$	304,278		$	259,221		$	3,286	$	41,430		$	303,937
Advances outstanding	(24,000		)	0		0		(24,000		)	(24,000		)	0		(13,504		)	(37,504		)
Total available	$	235,604		$	3,134	$	41,540	$	280,278		$	235,221		$	3,286	$	27,926		$	266,433

At March 31, 2014, loans with a market value of $370.1 million were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit. At March 31, 2014, investments with a market value of $5.3 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Sources and Uses of Funds

Cash and cash equivalents were $41.2 million at March 31, 2014 compared to $28.4 million at December 31, 2013. The $12.8 million increase resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the three months ended March 31, 2014. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $4.9 million for the three months ended March 31, 2014.

Investing activities consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, used total cash of $12.8 million. The cash outflow primarily consisted of $24.0 million purchases of investment securities and a $6.9 million increase the loan portfolio, partially offset by $17.4 million proceeds from maturities, calls, and pay-downs of investment securities.

Financing activities provided cash of $20.7 million, resulting primarily from a $34.6 million increase in interest bearing transaction accounts, partially offset by a $10.3 million decrease in federal funds purchased and securities sold under agreements to repurchase. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2014.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company had $124.6 million in unused loan commitments and standby letters of credit as of March 31, 2014. Although the Company’s current liquidity resources are adequate to fund this commitment level 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 liquidity needs primarily include funding its operating expenses and paying cash dividends to its common and preferred shareholders. The Company paid cash dividends to its common and preferred shareholders totaling approximately $252,000 and $470,000 for the three months ended March 31, 2014 and 2013, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $250,000 in dividends to the Company during the three months ended March 31, 2014. At March 31, 2014 and December 31, 2013, the Company had cash and cash equivalents totaling $332,000 and $450,000, respectively.

51

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 can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of 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 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 Tier I capital to adjusted-average assets. Management believes, as of March 31, 2014 and December 31, 2013, the Company and the Bank each met all capital adequacy requirements.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations begins January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) must begin compliance on January 1, 2014. The final rules call for the following capital requirements:

·A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%.

·A minimum ratio of tier 1 capital to risk-weighted assets of 6%.

·A minimum leverage ratio of 4%.

In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations will begin on January 1, 2016.

Under the proposed rules previously issued by the federal banking agencies, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to include these new AOCI components in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule.

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.

The Company has assessed the impact of these changes and it does not expect there to be a material impact on the regulatory ratios of the Company and the Bank and on the capital, operations and earnings of the Company and the Bank.

The Company exceeded all capital adequacy requirements as of March 31, 2014 and December 31, 2013.

52

					Minimum				Well-Capitalized
	Actual				Capital Requirements				Capital Requirements
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2014
Total capital (to risk-weighted assets):
Company	$	135,389	15.51	%	$	69,855	8.00	%	N.A.		N.A.	%
Bank	125,164		14.52		68,973		8.00		$	86,217	10.00
Tier I capital (to risk-weighted assets):
Company	$	101,902	11.67	%	$	34,928	4.00	%	N.A.		N.A.	%
Bank	114,361		13.26		34,487		4.00		$	51,730	6.00
Tier I capital (to adjusted average assets):
Company	$	101,902	8.87	%	$	34,482	3.00	%	$	N.A.	N.A.	%
Bank	114,361		10.04		34,178		3.00		56,964		5.00

(in thousands)
December 31, 2013
Total capital (to risk-weighted assets):
Company	$	133,638	15.33	%	$	69,728	8.00	%	N.A.		N.A.	%
Bank	122,959		14.29		68,842		8.00		$	86,052	10.00
Tier I capital (to risk-weighted assets):
Company	$	99,398	11.40	%	$	34,864	4.00	%	N.A.		N.A.	%
Bank	112,166		13.03		34,421		4.00		$	51,631	6.00
Tier I capital (to adjusted average assets):
Company	$	99,398	8.80	%	$	33,876	3.00	%	$	N.A.	N.A.	%
Bank	112,166		10.04		33,517		3.00		55,862		5.00

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Sensitivity

Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through transactions other than trading activities. The Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the Company’s Asset/Liability Committee and approved by the board of directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to specific points on the yield curve. For the three months ended March 31, 2014, our Company utilized a 400 basis point immediate and gradual move in interest rates (both upward and downward) applied to both a parallel and proportional yield curve.  However, there are no assurances that the change will not be more or less than this estimate.

The following table represents estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of March 31, 2014. Significant assumptions used for this table included: loans will 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 maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table.

53

															Over
															5 Years or
															No stated
(In thousands)	Year 1			Year 2			Year 3			Year 4			Year 5		Maturity		Total
ASSETS
Investment securities	$	19,101		$	19,806		$	20,073		$	20,374		$	17,911	$	115,962	$	213,227
Federal funds sold and other over-night interest-bearing deposits	16,920			—			—			—			—		—		16,920
Other restricted investments	3,962			—			—			—			—		—		3,962
Loans	341,780			122,106			132,708			109,602			100,299		38,812		845,307
Total	$	381,763		$	141,912		$	152,781		$	129,976		$	118,210	$	154,774	$	1,079,416
LIABILITIES
Savings, interest checking, and money market deposits	$	242,961		$	—		$	210,763		$	—		$	—	$	—	$	453,724
Time deposits	238,915			54,215			24,785			12,941			13,231		—		344,087
Federal funds purchased and securities sold under agreements to repurchase	20,761			—			—			—			—		—		20,761
Subordinated notes	49,486			—			—			—			—		—		49,486
Federal Home Loan Bank advances	10,000			—			3,000			3,000			8,000		—		24,000
Total	$	562,123		$	54,215		$	238,548		$	15,941		$	21,231	$	—	$	892,058
Interest-sensitivity GAP
Periodic GAP	$	(180,360	)	$	87,697		$	(85,767	)	$	114,035		$	96,979	$	154,774	$	187,358
Cumulative GAP	$	(180,360	)	$	(92,663	)	$	(178,430	)	$	(64,395	)	$	32,584	$	187,358	$	187,358
Ratio of interest-earning assets to interest-bearing liabilities
Periodic GAP	0.68			2.62			0.64			8.15			5.57		NM		1.21
Cumulative GAP	0.68			0.85			0.79			0.93			1.04		1.21		1.21

Effects of Inflation

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

Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on the Company’s operations for the three months ended March 31, 2014.

Item 4. Controls and Procedures

Our Company’s management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as defined in Rules 13a — 15(e) or 15d — 15(e) of the Securities Exchange Act of 1934 as of March 31, 2014.  Based upon and as of the date of that evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required.  It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.  In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

There has been no change in our Company’s internal control over financial reporting that occurred during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

54

Impact of New Accounting Standards

Investments - Equity Method and Joint Ventures The FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, in January 2014. These amendments allow investors in low income housing tax credit entities to account for the investments using a proportional amortization method, provided that certain conditions are met, and recognize amortization of the investment as a component of income tax expense. In addition, disclosures are required that will enable users to understand the nature of the investments, and the effect of the measurement of the investments and the related tax credits on the investor’s financial statements. This ASU is effective for interim and annual periods beginning January 1, 2015 and should be applied retrospectively to all periods presented. The adoption is not expected to have a significant effect on the Company’s consolidated financial statements.

Troubled Debt Restructurings by Creditors The FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, in January 2014. These amendments require companies to disclose the amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction. The ASU also defines when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments are effective for interim and annual periods beginning January 1, 2015. The adoption is not expected to have a significant effect on the Company’s consolidated financial statements.

55

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings
The information required by this Item is set forth in Commitments and Contingencies, Pending Litigation, in our Company’s Notes to Consolidated Financial Statements (unaudited).
Item 1A.	Risk Factors	None
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	None
Item 3.	Defaults Upon Senior Securities	None
Item 4.	Mine Safety Disclosures	None
Item 5.	Other Information	None
Item 6.	Exhibits

Exhibit No.	Description
3.1	Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on August 9, 2007 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on June 8, 2009 and incorporated herein by reference).
4.1	Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference).
31.1	Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)

56

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HAWTHORN BANCSHARES, INC.
Date
	/s/ David T. Turner
May 15, 2014	David T. Turner, Chairman of the Board and
	Chief Executive Officer (Principal Executive Officer)
	/s/ W. Bruce Phelps
May 15, 2014	W. Bruce Phelps, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

57

HAWTHORN BANCSHARES, INC.

INDEX TO EXHIBITS

March 31, 2014 Form 10-Q

Exhibit No.	Description	Page No.
3.1	Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on August 9, 2007 and incorporated herein by reference).	**
3.2	Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on June 8, 2009 and incorporated herein by reference).	**
4.1	Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference).	**
31.1	Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	59
31.2	Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	60
32.1	Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	61
32.2	Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	62
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)	*

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

**Incorporated by reference.

58

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, David T. Turner, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Hawthorn Bancshares, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2014
	/s/ David T. Turner
	David T. Turner
	Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, W. Bruce Phelps, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Hawthorn Bancshares, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2014
	/s/ W. Bruce Phelps
	W. Bruce Phelps
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

In connection with the Quarterly Report of Hawthorn Bancshares, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014 as filed with the Securities and Exchange Commission (the “Report”), I, David T. Turner, Chairman of the Board and Chief Executive Officer of our Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(a)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(b)The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated: May 15, 2014
	/s/ David T. Turner
	David T. Turner
	Chairman of the Board and Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

In connection with the Quarterly Report of Hawthorn Bancshares, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014 as filed with the Securities and Exchange Commission (the “Report”), I, W. Bruce Phelps, Chief Financial Officer of our Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(a)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(b)The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated: May 15, 2014
	/s/ W. Bruce Phelps
	W. Bruce Phelps
	Chief Financial Officer

XML

Loans and Allowance for Loan Losses (Details 4) (USD $)	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013
Categories of impaired loans
Non-accrual loans	$ 24,804,000	$ 23,680,000
Troubled debt restructurings continuing to accrue interest	11,234,000	11,395,000
Total impaired loans, Recorded Investment	36,038,000	35,075,000
Additional information about impaired loans
Impaired loans individually evaluated for impairment	36,000,000	34,800,000
Impaired loans were evaluated based on the fair value of the loan's collateral	32,700,000	21,800,000
Percentage of impaired loans for which no reserve allocation required	59.00%	54.00%
Recorded Investment, With no related allowance recorded	21,318,000	18,809,000
Recorded Investment, With an allowance recorded	14,720,000	16,266,000	25,700,000
Total impaired loans, Recorded Investment	36,038,000	35,075,000
Unpaid Principal Balance, With no related allowance recorded	23,545,000	20,813,000
Unpaid Principal Balance, With an allowance recorded	15,724,000	16,992,000
Total impaired loans, Unpaid Principal Balance	39,269,000	37,805,000
Specific Reserves, With an allowance recorded	4,753,000	4,796,000	4,100,000
Commercial, financial, and agricultural
Categories of impaired loans
Non-accrual loans	2,632,000	1,684,000
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	2,182,000	2,467,000
Recorded Investment, With an allowance recorded	2,737,000	1,548,000
Unpaid Principal Balance, With no related allowance recorded	2,239,000	2,593,000
Unpaid Principal Balance, With an allowance recorded	2,800,000	1,607,000
Specific Reserves, With an allowance recorded	1,069,000	721,000
Real estate - construction residential
Categories of impaired loans
Non-accrual loans	2,143,000	2,204,000
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	43,000	44,000
Recorded Investment, With an allowance recorded	2,100,000	2,160,000
Unpaid Principal Balance, With no related allowance recorded	77,000	80,000
Unpaid Principal Balance, With an allowance recorded	2,271,000	2,331,000
Specific Reserves, With an allowance recorded	307,000	392,000
Real estate - construction commercial
Categories of impaired loans
Non-accrual loans	5,936,000	6,251,000
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	5,833,000	6,101,000
Recorded Investment, With an allowance recorded	103,000	514,000
Unpaid Principal Balance, With no related allowance recorded	6,998,000	7,148,000
Unpaid Principal Balance, With an allowance recorded	104,000	514,000
Specific Reserves, With an allowance recorded	36,000	304,000
Real estate - residential
Categories of impaired loans
Non-accrual loans	3,939,000	4,165,000
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	2,105,000	2,121,000
Recorded Investment, With an allowance recorded	5,367,000	4,396,000
Unpaid Principal Balance, With no related allowance recorded	2,814,000	2,654,000
Unpaid Principal Balance, With an allowance recorded	5,536,000	4,570,000
Specific Reserves, With an allowance recorded	1,808,000	1,374,000
Real estate - commercial
Categories of impaired loans
Non-accrual loans	9,838,000	9,074,000
Additional information about impaired loans
Recorded Investment, With no related allowance recorded	11,155,000	7,817,000
Recorded Investment, With an allowance recorded	4,097,000	7,605,000
Unpaid Principal Balance, With no related allowance recorded	11,417,000	8,056,000
Unpaid Principal Balance, With an allowance recorded	4,662,000	7,925,000
Specific Reserves, With an allowance recorded	1,482,000	1,989,000
Consumer
Additional information about impaired loans
Non-accrual loans that were collectively evaluated for impairment		259,000
Recorded Investment, With no related allowance recorded		259,000
Recorded Investment, With an allowance recorded	316,000	43,000
Unpaid Principal Balance, With no related allowance recorded		282,000
Unpaid Principal Balance, With an allowance recorded	351,000	45,000
Specific Reserves, With an allowance recorded	$ 51,000	$ 16,000

XML

Income Taxes (Details)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Income Taxes
Effective income tax rate continuing operation (as a percent)	34.50%	31.30%

XML

Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Amortized Cost
Due in one year or less	$ 7,566
Due after one year through five years	55,166
Due after five year through ten years	39,901
Due after ten years	1,016
Total	103,649
Asset-backed securities	111,096
Total available for sale securities	214,745
Fair Value
Due in one year or less	7,629
Due after one year through five years	55,592
Due after five year through ten years	39,653
Due after ten years	978
Total	103,852
Asset-backed securities	109,375
Fair value, Total	$ 213,227	$ 205,985

XML

Stockholders' Equity (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Accumulated Other Comprehensive Income (Loss)
Balance at the beginning	$ (769)	$ 1,825
Other comprehensive (loss) income, before reclassifications	886	(957)
Amounts reclassified from accumulated other comprehensive income	19	(267)
Current period other comprehensive (loss) income, before tax	905	(1,224)
Income tax benefit (expense)	(344)	518
Total other comprehensive income (loss)	561	(706)
Balance at the end	(208)	1,119
Unrealized Gain on Securities
Accumulated Other Comprehensive Income (Loss)
Balance at the beginning	(1,491)	3,265
Other comprehensive (loss) income, before reclassifications	886	(957)
Amounts reclassified from accumulated other comprehensive income		(294)
Current period other comprehensive (loss) income, before tax	886	(1,251)
Income tax benefit (expense)	(337)	529
Total other comprehensive income (loss)	549	(722)
Balance at the end	(942)	2,543
Unrecognized Net Pension and Postretirement Costs
Accumulated Other Comprehensive Income (Loss)
Balance at the beginning	722	(1,440)
Other comprehensive (loss) income, before reclassifications	0	0
Amounts reclassified from accumulated other comprehensive income	19	27
Current period other comprehensive (loss) income, before tax	19	27
Income tax benefit (expense)	(7)	(11)
Total other comprehensive income (loss)	12	16
Balance at the end	$ 734	$ (1,424)

XML

Real Estate and Other Assets Acquired in Settlement of Loans (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Summary of activity in valuation allowance for other real estate owned in settlement of loans
Balance, beginning of period	$ 4,675	$ 6,137
Provision for other real estate owned	123	2,343
Charge-offs	(156)	(136)
Balance, end of period	$ 4,642	$ 8,344

XML

Commitments and Contingencies (Tables)

3 Months Ended

Mar. 31, 2014

Commitments and Contingencies

Schedule of contractual amount of off-balance-sheet financial instruments

	March 31,		December 31,
(in thousands)	2014		2013
Commitments to extend credit	$	121,100	$	117,880
Commitments to originate residential first and second mortgage loans	1,866		1,852
Standby letters of credit	1,591		1,826

XML

Employee Benefit Plans (Details 2) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Components of net pension cost
Pension expense	$ 236,000	$ 286,000
Pension
Defined Benefit Plan Disclosure
Minimum required contribution	1,300,000
Components of net pension cost
Service cost - benefits earned during the year		1,174,000
Interest costs on projected benefit obligations		646,000
Expected return on plan assets		(797,000)
Expected administrative expenses		40,000
Amortization of prior service cost		79,000
Amortization of unrecognized net loss		31,000
Net periodic pension expense		1,173,000
Pension expense	236,000	286,000
Pension | Estimated
Components of net pension cost
Service cost - benefits earned during the year	981,000
Interest costs on projected benefit obligations	732,000
Expected return on plan assets	(887,000)
Expected administrative expenses	40,000
Amortization of prior service cost	79,000
Net periodic pension expense	$ 945,000

XML

Investment Securities (Tables)

3 Months Ended

Mar. 31, 2014

Investment Securities

Schedule of amortized cost and fair value of debt securities classified as available-for-sale

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses		Fair value
March 31, 2014
U.S. Treasury	$	1,000	$	1	$	0	$	1,001
Government sponsored enterprises	71,052		325		566		70,811
Asset-backed securities	111,096		813		2,534		109,375
Obligations of states and political subdivisions	31,597		574		131		32,040
Total available-for-sale securities	$	214,745	$	1,713	$	3,231	$	213,227
December 31, 2013
U.S. Treasury	$	1,000	$	3	$	0	$	1,003
Government sponsored enterprises	61,006		377		767		60,616
Asset-backed securities	112,747		817		3,191		110,373
Obligations of states and political subdivisions	33,637		568		212		33,993
Total available-for-sale securities	$	208,390	$	1,765	$	4,170	$	205,985

Schedule of amortized cost and fair value of debt securities classified as available-for-sale by contractual maturity

	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	7,566	$	7,629
Due after one year through five years	55,166		55,592
Due after five years through ten years	39,901		39,653
Due after ten years	1,016		978
Total	103,649		103,852
Asset-backed securities	111,096		109,375
Total available-for-sale securities	$	214,745	$	213,227

Schedule of gross unrealized losses on debt securities and fair value of related securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position

	Less than 12 months					12 months or more					Total		Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
At March 31, 2014
Government sponsored enterprises	$	42,190	$	(566	)	$	0	$	0		$	42,190	$	(566	)
Asset-backed securities	68,052		(2,013		)	11,736		(521		)	79,788		(2,534		)
Obligations of states and political subdivisions	7,731		(90		)	634		(41		)	8,365		(131		)
Total	$	117,973	$	(2,669	)	$	12,370	$	(562	)	$	130,343	$	(3,231	)
(in thousands)
At December 31, 2013
Government sponsored enterprises	$	25,771	$	(767	)	$	0	$	0		$	25,771	$	(767	)
Asset-backed securities	76,048		(2,940		)	5,941		(251		)	81,989		(3,191		)
Obligations of states and political subdivisions	6,907		(159		)	450		(53		)	7,357		(212		)
Total	$	108,726	$	(3,866	)	$	6,391	$	(304	)	$	115,117	$	(4,170	)

Schedule of components of investment securities gains (losses), which are recognized in earnings

	Three Months Ended March 31,
(in thousands)	2014		2013
Gains realized on sales	$	0	$	294
Losses realized on sales	0		0
Other-than-temporary impairment recognized	0		0
Investment securities gains	$	0	$	294

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Investment Securities (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013
Investment Securities
Gains realized on sales	$ 294
Investment securities gains	$ 294

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Loans and Allowance for Loan Losses (Details 7) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	$ 845,307	$ 839,547
Commercial, Financial, and Agricultural
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	132,346	133,717
Real Estate Construction - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	22,060	21,008
Real Estate Construction - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	57,340	55,076
Real Estate Mortgage - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	230,310	225,541
Real Estate Mortgage - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	384,130	382,550
Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	76,470	73,515
Watch | Commercial, Financial, and Agricultural
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	16,988	15,016
Watch | Real Estate Construction - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,485	2,007
Watch | Real Estate Construction - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	5,928	6,111
Watch | Real Estate Mortgage - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	26,615	26,331
Watch | Real Estate Mortgage - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	24,169	23,662
Watch | Installment and other Consumer
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	285	388
Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	27,171	32,418
Substandard | Commercial, Financial, and Agricultural
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	5,558	7,553
Substandard | Real Estate Construction - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	91	92
Substandard | Real Estate Construction - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	1,029	1,403
Substandard | Real Estate Mortgage - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	10,030	8,579
Substandard | Real Estate Mortgage - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	10,233	14,510
Substandard | Installment and other Consumer
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	230	281
Non-accrual
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	24,804	23,680
Non-accrual | Commercial, Financial, and Agricultural
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,632	1,684
Non-accrual | Real Estate Construction - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,143	2,204
Non-accrual | Real Estate Construction - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	5,936	6,251
Non-accrual | Real Estate Mortgage - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	3,939	4,165
Non-accrual | Real Estate Mortgage - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	9,838	9,074
Non-accrual | Installment and other Consumer
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	316	302
Total Watch, Substandard, and Non-Accrual Loans
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	128,445	129,613
Total Watch, Substandard, and Non-Accrual Loans | Commercial, Financial, and Agricultural
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	25,178	24,253
Total Watch, Substandard, and Non-Accrual Loans | Real Estate Construction - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	4,719	4,303
Total Watch, Substandard, and Non-Accrual Loans | Real Estate Construction - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	12,893	13,765
Total Watch, Substandard, and Non-Accrual Loans | Real Estate Mortgage - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	40,584	39,075
Total Watch, Substandard, and Non-Accrual Loans | Real Estate Mortgage - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	44,240	47,246
Total Watch, Substandard, and Non-Accrual Loans | Installment and other Consumer
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	$ 831	$ 971

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Loans and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Summary of the allowance for loan losses
Balance at beginning of period	$ 13,719	$ 14,842
Additions:
Provision for loan losses		1,000
Deductions:
Loans charged off	1,176	1,581
Less recoveries on loans	(302)	(284)
Net loans charged off	874	1,297
Balance at end of period	12,845	14,545
Commercial, Financial, and Agricultural
Summary of the allowance for loan losses
Balance at beginning of period	2,374	1,937
Additions:
Provision for loan losses	93	(90)
Deductions:
Loans charged off	131	61
Less recoveries on loans	(116)	(42)
Net loans charged off	15	19
Balance at end of period	2,452	1,828
Real Estate Construction - Residential
Summary of the allowance for loan losses
Balance at beginning of period	931	732
Additions:
Provision for loan losses	(392)	287
Deductions:
Loans charged off	60	120
Net loans charged off	60	120
Balance at end of period	479	899
Real Estate Construction - Commercial
Summary of the allowance for loan losses
Balance at beginning of period	631	1,711
Additions:
Provision for loan losses	333	100
Deductions:
Loans charged off	414
Net loans charged off	414
Balance at end of period	550	1,811
Real Estate Mortgage - Residential
Summary of the allowance for loan losses
Balance at beginning of period	2,959	3,387
Additions:
Provision for loan losses	139	(189)
Deductions:
Loans charged off	120	292
Less recoveries on loans	(112)	(15)
Net loans charged off	8	277
Balance at end of period	3,090	2,921
Real Estate Mortgage - Commercial
Summary of the allowance for loan losses
Balance at beginning of period	6,523	6,834
Additions:
Provision for loan losses	(153)	844
Deductions:
Loans charged off	367	999
Less recoveries on loans	(16)	(161)
Net loans charged off	351	838
Balance at end of period	6,019	6,840
Installment Loans to Individuals
Summary of the allowance for loan losses
Balance at beginning of period	294	239
Additions:
Provision for loan losses	(13)	47
Deductions:
Loans charged off	84	109
Less recoveries on loans	(58)	(66)
Net loans charged off	26	43
Balance at end of period	255	243
Unallocated
Summary of the allowance for loan losses
Balance at beginning of period	7	2
Additions:
Provision for loan losses	(7)	1
Deductions:
Balance at end of period		$ 3

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Intangible Assets (Details 2) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Changes in mortgage servicing rights
Balance at beginning of year			$ 3,036,000
Changes in fair value:
Balance at end of year	3,040,000		3,036,000
Mortgage Service Rights
Mortgage Servicing Rights
Mortgage loans serviced for others	319,300,000		322,500,000
Mortgage loan servicing fees reported as other non-interest income	223,000	217,000
Changes in mortgage servicing rights
Balance at beginning of year	3,036,000	2,549,000
Originated mortgage servicing rights	50,000	197,000
Changes in fair value:
Due to change in model inputs and assumptions	106,000	153,000
Other changes in fair value	(152,000)	(210,000)
Balance at end of year	$ 3,040,000	$ 2,689,000

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Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified								3 Months Ended
	Mar. 31, 2014	Mar. 31, 2014 Commitments to extend credit	Dec. 31, 2013 Commitments to extend credit	Mar. 31, 2014 Commitments to originate residential first and second mortgage loans	Dec. 31, 2013 Commitments to originate residential first and second mortgage loans	Mar. 31, 2014 Standby letters of credit	Dec. 31, 2013 Standby letters of credit	Mar. 31, 2014 Standby letters of credit Minimum	Mar. 31, 2014 Standby letters of credit Maximum
Contractual amount of off-balance-sheet financial instruments
Amounts accrued for estimated losses for the financial instruments	$ 0
Total contractual amount of off-balance-sheet financial instruments		$ 121,100	$ 117,880	$ 1,866	$ 1,852	$ 1,591	$ 1,826
Remaining term of standby letters of credit								1 month	5 years

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Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Fair Value Measurements
Transfers into or out of Levels 1-3	$ 0	$ 0
Assets:
Available for sale debt securities, fair value	213,227	205,985
Mortgage servicing rights, fair value	3,040	3,036
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Assets, Total	46,676	34,441
Other Observable Inputs (Level 2)
Assets:
Assets, Total	216,774	209,549
Significant Unobservable Inputs (Level 3)
Assets:
Mortgage servicing rights, fair value	3,040	3,036
Assets, Total	838,239	832,259
Recurring
Assets:
Assets, Total	216,267	209,021
Recurring | U.S. Treasury
Assets:
Available for sale debt securities, fair value	1,001	1,003
Recurring | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	70,811	60,616
Recurring | Asset-backed securities
Assets:
Available for sale debt securities, fair value	109,375	110,373
Recurring | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	32,040	33,993
Recurring | Mortgage servicing rights
Assets:
Mortgage servicing rights, fair value	3,040	3,036
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Assets, Total	1,001	1,003
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | U.S. Treasury
Assets:
Available for sale debt securities, fair value	1,001	1,003
Recurring | Other Observable Inputs (Level 2)
Assets:
Assets, Total	212,226	204,982
Recurring | Other Observable Inputs (Level 2) | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	70,811	60,616
Recurring | Other Observable Inputs (Level 2) | Asset-backed securities
Assets:
Available for sale debt securities, fair value	109,375	110,373
Recurring | Other Observable Inputs (Level 2) | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	32,040	33,993
Recurring | Significant Unobservable Inputs (Level 3)
Assets:
Assets, Total	3,040	3,036
Recurring | Significant Unobservable Inputs (Level 3) | Mortgage servicing rights
Assets:
Mortgage servicing rights, fair value	$ 3,040	$ 3,036

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Investment Securities (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Amortized cost and fair value of debt securities
Amortized Cost	$ 214,745,000	$ 208,390,000
Gross Unrealized Gains	1,713,000	1,765,000
Gross Unrealized Losses	3,231,000	4,170,000
Fair value, Total	213,227,000	205,985,000
Available for sale securities, restricted
Available for sale securities, restricted	4,000,000	4,000,000
Available for sale securities, pledged	186,200,000	145,800,000
U.S. Treasury
Amortized cost and fair value of debt securities
Amortized Cost	1,000,000	1,000,000
Gross Unrealized Gains	1,000	3,000
Fair value, Total	1,001,000	1,003,000
Government sponsored enterprises
Amortized cost and fair value of debt securities
Amortized Cost	71,052,000	61,006,000
Gross Unrealized Gains	325,000	377,000
Gross Unrealized Losses	566,000	767,000
Fair value, Total	70,811,000	60,616,000
Asset-backed securities
Amortized cost and fair value of debt securities
Amortized Cost	111,096,000	112,747,000
Gross Unrealized Gains	813,000	817,000
Gross Unrealized Losses	2,534,000	3,191,000
Fair value, Total	109,375,000	110,373,000
Obligations of states and political subdivisions
Amortized cost and fair value of debt securities
Amortized Cost	31,597,000	33,637,000
Gross Unrealized Gains	574,000	568,000
Gross Unrealized Losses	131,000	212,000
Fair value, Total	$ 32,040,000	$ 33,993,000

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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2014

Loans and Allowance for Loan Losses

Loans and Allowance for Loan Losses

(2) Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at March 31, 2014 and December 31, 2013 is as follows:

	March 31,		December 31,
(in thousands)	2014		2013
Commercial, financial, and agricultural	$	132,346	$	133,717
Real estate construction - residential	22,060		21,008
Real estate construction - commercial	57,340		55,076
Real estate mortgage - residential	230,310		225,541
Real estate mortgage - commercial	384,130		382,550
Installment and other consumer	19,121		21,655
Total loans	$	845,307	$	839,547

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of automotive vehicles. At March 31, 2014, loans with a carrying value of $376.9 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

Allowance for Loan Losses

The following is a summary of the allowance for loan losses for the three months ended March 31, 2014 and 2013:

	Commercial,			Real Estate			Real Estate		Real Estate			Real Estate			Installment
	Financial, &			Construction -			Construction -		Mortgage -			Mortgage -			Loans to			Un-
(in thousands)	Agricultural			Residential			Commercial		Residential			Commercial			Individuals			allocated			Total
Balance at December 31, 2013	$	2,374		$	931		$	631	$	2,959		$	6,523		$	294		$	7		$	13,719
Additions:
Provision for loan losses	93			(392		)	333		139			(153		)	(13		)	(7		)	0
Deductions:
Loans charged off	131			60			414		120			367			84			0			1,176
Less recoveries on loans	(116		)	0			0		(112		)	(16		)	(58		)	0			(302		)
Net loans charged off	15			60			414		8			351			26			0			874
Balance at March 31, 2014	$	2,452		$	479		$	550	$	3,090		$	6,019		$	255		$	0		$	12,845
Balance at December 31, 2012	$	1,937		$	732		$	1,711	$	3,387		$	6,834		$	239		$	2		$	14,842
Additions:
Provision for loan losses	(90		)	287			100		(189		)	844			47			1			1,000
Deductions:
Loans charged off	61			120			0		292			999			109			0			1,581
Less recoveries on loans	(42		)	0			0		(15		)	(161		)	(66		)	0			(284		)
Net loans charged off	19			120			0		277			838			43			0			1,297
Balance at March 31, 2013	$	1,828		$	899		$	1,811	$	2,921		$	6,840		$	243		$	3		$	14,545

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration.

The following table provides the balance in the allowance for loan losses at March 31, 2014 and December 31, 2013, and the related loan balance by impairment methodology.

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, and		Construction -		Construction -		Mortgage -		Mortgage -		Loans to		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Individuals		allocated		Total
March 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	1,069	$	307	$	36	$	1,808	$	1,482	$	51	$	0	$	4,753
Collectively evaluated for impairment	1,383		172		514		1,282		4,537		204		0		8,092
Total	$	2,452	$	479	$	550	$	3,090	$	6,019	$	255	$	0	$	12,845
Loans outstanding:
Individually evaluated for impairment	$	4,919	$	2,143	$	5,936	$	7,472	$	15,252	$	316	$	0	$	36,038
Collectively evaluated for impairment	127,427		19,917		51,404		222,838		368,878		18,805		0		809,269
Total	$	132,346	$	22,060	$	57,340	$	230,310	$	384,130	$	19,121	$	0	$	845,307
December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	721	$	392	$	304	$	1,374	$	1,989	$	16	$	0	$	4,796
Collectively evaluated for impairment	1,653		539		327		1,585		4,534		278		7		8,923
Total	$	2,374	$	931	$	631	$	2,959	$	6,523	$	294	$	7	$	13,719
Loans outstanding:
Individually evaluated for impairment	$	4,015	$	2,204	$	6,615	$	6,517	$	15,422	$	43	$	0	$	34,816
Collectively evaluated for impairment	129,702		18,804		48,461		219,024		367,128		21,612		0		804,731
Total	$	133,717	$	21,008	$	55,076	$	225,541	$	382,550	$	21,655	$	0	$	839,547

Impaired Loans

Loans evaluated under the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans totaled $36.0 million and $35.1 million at March 31, 2014 and December 31, 2013, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings. Total impaired loans of $36.0 million at March 31, 2014 were individually evaluated for impairment compared to $34.8 million of impaired loans individually evaluated for impairment and $259,000 of non-accrual consumer loans that were collectively evaluated for impairment at December 31, 2013. Beginning in 2014, consumer non-accrual loans were included the individually evaluated impairment calculations.

The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At March 31, 2014 and December 31, 2013, $32.7 million and $21.8 million, respectively, of impaired loans were evaluated based on the fair value of the loan’s collateral. Once the impairment amount is calculated, a specific reserve allocation is recorded. At March 31, 2014, $4.8 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $36.0 million compared to $4.8 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $35.1 million at December 31, 2013. Management determined that $21.3 million, or 59%, of total impaired loans required no reserve allocation at March 31, 2014 compared to $18.8 million, or 54%, at December 31, 2013 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at March 31, 2014 and December 31, 2013 are as follows:

	March 31,		December 31,
(in thousands)	2014		2013
Non-accrual loans	$	24,804	$	23,680
Troubled debt restructurings continuing to accrue interest	11,234		11,395
Total impaired loans	$	36,038	$	35,075

The following tables provide additional information about impaired loans at March 31, 2014 and December 31, 2013, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
March 31, 2014
With no related allowance recorded:
Commercial, financial and agricultural	$	2,182	$	2,239	$	0
Real estate - construction residential	43		77		0
Real estate - construction commercial	5,833		6,998		0
Real estate - residential	2,105		2,814		0
Real estate - commercial	11,155		11,417		0
Total	$	21,318	$	23,545	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	2,737	$	2,800	$	1,069
Real estate - construction residential	2,100		2,271		307
Real estate - construction commercial	103		104		36
Real estate - residential	5,367		5,536		1,808
Real estate - commercial	4,097		4,662		1,482
Consumer	316		351		51
Total	$	14,720	$	15,724	$	4,753
Total impaired loans	$	36,038	$	39,269	$	4,753

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2013
With no related allowance recorded:
Commercial, financial and agricultural	$	2,467	$	2,593	$	0
Real estate - construction residential	44		80		0
Real estate - construction commercial	6,101		7,148		0
Real estate - residential	2,121		2,654		0
Real estate - commercial	7,817		8,056		0
Consumer	259		282		0
Total	$	18,809	$	20,813	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,548	$	1,607	$	721
Real estate - construction residential	2,160		2,331		392
Real estate - construction commercial	514		514		304
Real estate - residential	4,396		4,570		1,374
Real estate - commercial	7,605		7,925		1,989
Consumer	43		45		16
Total	$	16,266	$	16,992	$	4,796
Total impaired loans	$	35,075	$	37,805	$	4,796

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the periods indicated.

	Three Months Ended March 31,
	2014				2013
			Interest				Interest
	Average		Recognized		Average		Recognized
	Recorded		For the		Recorded		For the
(in thousands)	Investment		Period Ended		Investment		Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	2,496	$	21	$	2,937	$	25
Real estate - construction residential	117		0		369		0
Real estate - construction commercial	6,998		0		2,616		0
Real estate - residential	2,901		6		2,736		0
Real estate - commercial	11,809		66		5,480		29
Consumer	25		0		189		0
Total	$	24,346	$	93	$	14,327	$	54
With an allowance recorded:
Commercial, financial and agricultural	$	2,341	$	8	$	990	$	7
Real estate - construction residential	2,271		0		2,273		0
Real estate - construction commercial	105		0		6,475		1
Real estate - residential	5,479		40		4,082		20
Real estate - commercial	4,594		0		13,634		26
Consumer	343		0		45		0
Total	$	15,133	$	48	$	27,499	$	54
Total impaired loans	$	39,479	$	141	$	41,826	$	108

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $141,000 and $108,000, for the three months ended March 31, 2014 and 2013, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported. Contractual interest lost on loans in non-accrual status was $289,000 and $350,000 for the three months ended March 31, 2014 and 2013, respectively.

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due.

The following table provides aging information for the Company’s past due and non-accrual loans at March 31, 2014 and December 31, 2013.

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
March 31, 2014
Commercial, Financial, and Agricultural	$	129,201	$	513	$	0	$	2,632	$	132,346
Real Estate Construction - Residential	19,821		96		0		2,143		22,060
Real Estate Construction - Commercial	51,347		56		1		5,936		57,340
Real Estate Mortgage - Residential	222,827		3,350		194		3,939		230,310
Real Estate Mortgage - Commercial	372,245		2,047		0		9,838		384,130
Installment and Other Consumer	18,535		261		9		316		19,121
Total	$	813,976	$	6,323	$	204	$	24,804	$	845,307
December 31, 2013
Commercial, Financial, and Agricultural	$	131,091	$	942	$	0	$	1,684	$	133,717
Real Estate Construction - Residential	18,738		66		0		2,204		21,008
Real Estate Construction - Commercial	48,230		595		0		6,251		55,076
Real Estate Mortgage - Residential	217,179		4,068		129		4,165		225,541
Real Estate Mortgage - Commercial	372,651		725		100		9,074		382,550
Installment and Other Consumer	21,048		291		14		302		21,655
Total	$	808,937	$	6,687	$	243	$	23,680	$	839,547

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch status when (1) 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 current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. 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.

The following table presents the risk categories by class at March 31, 2014 and December 31, 2013.

(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and other Consumer		Total
At March 31, 2014
Watch	$	16,988	$	2,485	$	5,928	$	26,615	$	24,169	$	285	$	76,470
Substandard	5,558		91		1,029		10,030		10,233		230		27,171
Non-accrual	2,632		2,143		5,936		3,939		9,838		316		24,804
Total	$	25,178	$	4,719	$	12,893	$	40,584	$	44,240	$	831	$	128,445
At December 31, 2013
Watch	$	15,016	$	2,007	$	6,111	$	26,331	$	23,662	$	388	$	73,515
Substandard	7,553		92		1,403		8,579		14,510		281		32,418
Non-accrual	1,684		2,204		6,251		4,165		9,074		302		23,680
Total	$	24,253	$	4,303	$	13,765	$	39,075	$	47,246	$	971	$	129,613

Troubled Debt Restructurings

At March 31, 2014, loans classified as troubled debt restructurings (TDRs) totaled $22.2 million, of which $11.0 million were on non-accrual status and $11.2 million were on accrual status. At December 31, 2013, TDRs totaled $21.5 million, of which $10.1 million were on non-accrual status and $11.4 million were on accrual status. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $2.4 million and $2.2 million related to TDRs were allocated to the allowance for loan losses at March 31, 2014 and December 31, 2013, respectively.

The following table summarizes loans that were modified as TDRs during the periods indicated.

	Three Months Ended March 31,
	2014					2013
	Recorded Investment (1)					Recorded Investment (1)
(in thousands)	Number of Contracts	Pre- Modification		Post- Modification		Number of Contracts	Pre- Modification		Post- Modification
Troubled Debt Restructurings
Commercial, financial and agricultural	2	$	244	$	244	0	$	0	$	0
Real estate construction - commercial	0	0		0		0	0		0
Real estate mortgage - residential	1	1,256		1,185		1	619		619
Real estate mortgage - commercial	0	0		0		0	0		0
Consumer	0	0		0		0	0		0
Total	3	$	1,500	$	1,429	1	$	619	$	619

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

The Company’s portfolio of loans 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 full, 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 of the loan’s maturity date. During the three months ended March 31, 2014, three loans meeting the TDR criteria were modified compared to one loan during the three months ended March 31, 2013. There were no loans modified as a TDR that defaulted during the three months ended March 31, 2014 and 2013, respectively, and within twelve months of their modification date.

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Fair Value Measurements (Details 2) (Mortgage Servicing Rights, USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Fair value of assets
Total unrealized gains included in earnings related to Level 3 assets still held	$ 106,000	$ 153,000
Recurring | Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Fair value of assets
Balance at beginning of period	3,036,000	2,549,000
Total gains or losses (realized/unrealized) Included in earnings	(46,000)	(57,000)
Issues	50,000	197,000
Balance at end of period	$ 3,040,000	$ 2,689,000

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Loans and Allowance for Loan Losses (Details 8) (USD $)	3 Months Ended
	Mar. 31, 2014 item	Mar. 31, 2013 item	Dec. 31, 2013
Loans that were modified as TDRs
Troubled debt restructurings	$ 22,200,000		$ 21,500,000
Troubled debt restructurings, non-accrual status	11,000,000		10,100,000
Troubled debt restructurings, accrual status	11,234,000		11,395,000
Amount of specific reserves related to TDRs which were allocated to the allowance for loan losses	2,400,000		2,200,000
Number of Contracts	3	1
Pre- Modification	1,500,000	619,000
Post- Modification	1,429,000	619,000
Troubled debt restructurings, debt forgiven	0	0
Troubled debt restructurings, number of contracts that defaulted within 12 months of modification	0	0
Commercial, financial, and agricultural
Loans that were modified as TDRs
Number of Contracts	2
Pre- Modification	244,000
Post- Modification	244,000
Real estate mortgage - residential
Loans that were modified as TDRs
Number of Contracts	1	1
Pre- Modification	1,256,000	619,000
Post- Modification	$ 1,185,000	$ 619,000

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Stock Compensation (Tables)

3 Months Ended

Mar. 31, 2014

Stock Compensation

Summary of Company's stock option activity

					Weighted
			Weighted		Average	Aggregate
	Number		average		Contractual	Intrinsic
	of		Exercise		Term	Value
	Shares		Price		(in years)	($000)
Outstanding, beginning of period	121,405		$	24.14
Granted	0		0.00
Exercised	0		0.00
Forfeited	0		0.00
Expired	(18,255	)	28.97
Outstanding, March 31, 2014	103,150		$	23.28	2.70	$	0.00
Exercisable, March 31, 2014	88,633		$	23.49	2.50	$	0.00

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Employee Benefit Plans (Tables)

3 Months Ended

Mar. 31, 2014

Employee Benefit Plans

Summary of employee benefits charged to operating expenses

	Threee Months Ended March 31,
(in thousands)	2014		2013
Payroll taxes	$	293	$	304
Medical plans	518		491
401k match and profit sharing	153		75
Pension plan	236		286
Other	11		47
Total employee benefits	$	1,211	$	1,203

Components of net pension cost

	Estimated			Actual
(in thousands)	2014			2013
Service cost - benefits earned during the year	$	981		$	1,174
Interest costs on projected benefit obligations	732			646
Expected return on plan assets	(887		)	(797		)
Expected administrative expenses	40			40
Amortization of prior service cost	79			79
Amortization of unrecognized net loss	0			31
Net periodic pension expense	$	945		$	1,173
Pension expense - three months ended March 31 (actual)	$	236		$	286

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Employee Benefit Plans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Summary of employee benefits charged to operating expenses
Payroll taxes	$ 293	$ 304
Medical plans	518	491
401k match and profit-sharing	153	75
Pension plan	236	286
Other	11	47
Total employee benefits	$ 1,211	$ 1,203
Employer match (as a percent)	3.00%
Defined benefit plan contributions by employer percent	6.00%

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Real Estate and Other Assets Acquired in Settlement of Loans (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012
Summary of real estate and other assets acquired in settlement of loans
Repossessed assets	$ 23	$ 41
Total	18,696	19,542	31,472	29,729
Less valuation allowance for other real estate owned	(4,642)	(4,675)	(8,344)	(6,137)
Total other real estate owned and foreclosed assets	14,054	14,867	23,128
Real estate construction - residential
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	32	114
Real estate construction - commercial
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	10,020	10,020
Real estate mortgage - residential
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	332	830
Real estate mortgage - commercial
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	$ 8,289	$ 8,537

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Earnings (Loss) per Share (Tables)

3 Months Ended

Mar. 31, 2014

Earnings (Loss) per Share

Schedule of calculations of basic and diluted earnings (loss) per share

	Three Months Ended March 31,
(dollars in thousands, except per share data)	2014		2013
Basic earnings (loss) per common share:
Net income (loss)	$	1,987	$	(136	)
Less:
Preferred stock dividends and accretion of discount	0		295
Net income (loss) available to common shareholders	$	1,987	$	(431	)
Basic earnings (loss) per share	$	0.39	$	(0.09	)
Diluted earnings (loss) per common share:
Net income (loss)	$	1,987	$	(136	)
Less:
Preferred stock dividends and accretion of discount	0		295
Net income (loss) available to common shareholders	$	1,987	$	(431	)
Average shares outstanding	5,032,679		5,032,679
Effect of dilutive stock options	0		0
Average shares outstanding including dilutive stock options	5,032,679		5,032,679
Diluted earnings (loss) per share	$	0.39	$	(0.09	)

Summary of anti-dilutive shares

	Three Months Ended March 31,
	2014	2013
Anti-dilutive shares - option shares	103,150	188,491
Anti-dilutive shares - warrant shares	—	298,618
Total anti-dilutive shares	103,150	487,109

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value Measurements

Schedule of assets and liabilities recorded at fair value on a recurring basis

	Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2014
Assets:
U.S. Treasury	$	1,001	$	1,001	$	0	$	0
Government sponsored enterprises	70,811		0		70,811		0
Asset-backed securities	109,375		0		109,375		0
Obligations of states and political subdivisions	32,040		0		32,040		0
Mortgage servicing rights	3,040		0		0		3,040
Total	$	216,267	$	1,001	$	212,226	$	3,040
December 31, 2013
Assets:
U.S. Treasury	$	1,003	$	1,003	$	0	$	0
Government sponsored enterprises	60,616		0		60,616		0
Asset-backed securities	110,373		0		110,373		0
Obligations of states and political subdivisions	33,993		0		33,993		0
Mortgage servicing rights	3,036		0		0		3,036
Total	$	209,021	$	1,003	$	204,982	$	3,036

Summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
	Mortgage Servicing Rights
	Three Months Ended March 31,
(in thousands)	2014			2013
Balance at beginning of period	$	3,036		$	2,549
Total gains or losses (realized/unrealized):
Included in earnings	(46		)	(57		)
Included in other comprehensive income	0			0
Purchases	0			0
Sales	0			0
Issues	50			197
Settlements	0			0
Balance at end of period	$	3,040		$	2,689

Schedule of quantitative Information about Level 3 Fair Value Measurements

	Quantitative Information about Level 3 Fair Value Measurements
			Input Value
			Three Months Ended March 31,
	Valuation Technique	Unobservable Inputs	2014		2013
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate	9.07	%	17.63	%
		Weighted average discount rate	9.08	%	8.03	%
		Weighted average expected life (in years)	6.20		4.10

Schedule of valuation methods for instruments measured at fair value on a nonrecurring basis

	Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total		Assets		Inputs		Inputs		Total Gains
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Losses)*
March 31, 2014
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	1,668	$	0	$	0	$	1,668	$	(103	)
Real estate construction - residential	1,793		0		0		1,793		(60		)
Real estate construction - commercial	67		0		0		67		(414		)
Real estate mortgage - residential	3,559		0		0		3,559		(94		)
Real estate mortgage - commercial	2,615		0		0		2,615		(365		)
Consumer	265		0		0		265		(18		)
Total	$	9,967	$	0	$	0	$	9,967	$	(1,054	)
Other real estate owned and repossessed assets	$	14,054	$	0	$	0	$	14,054	$	(30	)
March 31, 2013
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	737	$	0	$	0	$	737	$	(10	)
Real estate construction - residential	1,959		0		0		1,959		(119		)
Real estate construction - commercial	5,762		0		0		5,762		0
Real estate mortgage - residential	2,774		0		0		2,774		(235		)
Real estate mortgage - commercial	10,368		0		0		10,368		(987		)
Consumer	38		0		0		38		0
Total	$	21,638	$	0	$	0	$	21,638	$	(1,351	)
Other real estate owned and repossessed assets	$	23,128	$	0	$	0	$	23,128	$	(200	)

* 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.

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2014

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

(1) Summary of Significant Accounting Policies

Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and corporate customers located within the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson, and Lee’s Summit, Missouri. The Company is subject to competition from 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 unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

Stock Dividend On July 1, 2013, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2013. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

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. Participation in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock. On May 9, 2012, the Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program, and on May 15, 2013, the remaining 18,255 shares were redeemed.

On June 11, 2013, the common stock warrant issued under the U.S. Treasury Department’s CPP program was repurchased by the Company pursuant to a letter agreement between the Treasury and the Company for a total repurchase price of $540,000, or $1.88 per warrant share. The repurchase price was based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ends the Company’s participation in the U.S. Treasury Department’s CPP.

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Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value of Financial Instruments

Summary of the carrying amounts and fair values of financial instruments

					March 31, 2014
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	March 31, 2014				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	24,314	$	24,314	$	24,314	$	0	$	0
Federal funds sold and overnight interest-bearing deposits	16,920		16,920		16,920		0		0
Investment in available-for-sale securities	213,227		213,227		1,001		212,226		0
Loans, net	832,462		835,199		0		0		835,199
Investment in FHLB stock	2,315		2,315		0		2,315		0
Mortgage servicing rights	3,040		3,040		0		0		3,040
Cash surrender value - life insurance	2,233		2,233				2,233		0
Accrued interest receivable	4,441		4,441		4,441		0		0
	$	1,098,952	$	1,101,689	$	46,676	$	216,774	$	838,239
Liabilities:
Deposits:
Non-interest bearing demand	$	189,925	$	189,925	$	189,925	$	0	$	0
Savings, interest checking and money market	453,724		453,724		453,724		0		0
Time deposits	344,087		346,442		0		0		346,442
Federal funds purchased and securities sold under agreements to repurchase	20,761		20,761		20,761		0		0
Subordinated notes	49,486		34,081		0		34,081		0
Federal Home Loan Bank advances	24,000		25,261		0		25,261		0
Accrued interest payable	412		412		412		0		0
	$	1,082,395	$	1,070,606	$	664,822	$	59,342	$	346,442

					December 31, 2013
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2013				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	27,079	$	27,079	$	27,079	$	0	$	0
Federal funds sold and overnight interest-bearing deposits	1,360		1,360		1,360		0		0
Investment in available-for-sale securities	205,985		205,985		1,003		204,982		0
Loans, net	825,828		829,223		0		0		829,223
Investment in FHLB stock	2,354		2,354		0		2,354		0
Mortgage servicing rights	3,036		3,036		0		0		3,036
Cash surrender value - life insurance	2,213		2,213				2,213		0
Accrued interest receivable	4,999		4,999		4,999		0		0
	$	1,072,854	$	1,076,249	$	34,441	$	209,549	$	832,259
Liabilities:
Deposits:
Non-interest bearing demand	$	187,382	$	187,382	$	187,382	$	0	$	0
Savings, interest checking and money market	419,085		419,085		419,085		0		0
Time deposits	350,004		352,432		0		0		352,432
Federal funds purchased and securities sold under agreements to repurchase	31,084		31,084		31,084		0		0
Subordinated notes	49,486		32,048		0		32,048		0
Federal Home Loan Bank advances	24,000		25,366		0		25,366		0
Accrued interest payable	426		426		426		0		0
	$	1,061,467	$	1,047,823	$	637,977	$	57,414	$	352,432

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Loans and Allowance for Loan Losses (Details 5) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Average Recorded Investment
With no related allowance recorded	$ 24,346,000	$ 14,327,000
With an allowance recorded	15,133,000	27,499,000
Total impaired loans	39,479,000	41,826,000
Interest Recognized For the Period Ended
With no related allowance recorded	93,000	54,000
With an allowance recorded	48,000	54,000
Total impaired loans	141,000	108,000
Additional information about impaired loans
Contractual interest lost on nonaccrual loans	289,000	350,000
Commercial, financial, and agricultural
Average Recorded Investment
With no related allowance recorded	2,496,000	2,937,000
With an allowance recorded	2,341,000	990,000
Interest Recognized For the Period Ended
With no related allowance recorded	21,000	25,000
With an allowance recorded	8,000	7,000
Real estate - construction residential
Average Recorded Investment
With no related allowance recorded	117,000	369,000
With an allowance recorded	2,271,000	2,273,000
Real estate - construction commercial
Average Recorded Investment
With no related allowance recorded	6,998,000	2,616,000
With an allowance recorded	105,000	6,475,000
Interest Recognized For the Period Ended
With an allowance recorded		1,000
Real estate - residential
Average Recorded Investment
With no related allowance recorded	2,901,000	2,736,000
With an allowance recorded	5,479,000	4,082,000
Interest Recognized For the Period Ended
With no related allowance recorded	6,000
With an allowance recorded	40,000	20,000
Real estate - commercial
Average Recorded Investment
With no related allowance recorded	11,809,000	5,480,000
With an allowance recorded	4,594,000	13,634,000
Interest Recognized For the Period Ended
With no related allowance recorded	66,000	29,000
With an allowance recorded		26,000
Consumer
Average Recorded Investment
With no related allowance recorded	25,000	189,000
With an allowance recorded	$ 343,000	$ 45,000

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Intangible Assets (Details 3) (Mortgage Service Rights)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Mortgage Service Rights
Assumptions used in estimating the fair value of mortgage service rights
Weighted average constant prepayment rate (as a percent)	9.07%	17.63%
Weighted average note rate (as a percent)	4.01%	4.12%
Weighted average discount rate (as a percent)	9.08%	8.03%
Weighted average expected life (in years)	6 years 2 months 12 days	4 years 1 month 6 days

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
ASSETS
Cash and due from banks	$ 24,314	$ 27,079
Federal funds sold and other overnight interest-bearing deposits	16,920	1,360
Cash and cash equivalents	41,234	28,439
Investment in available-for-sale securities, at fair value	213,227	205,985
Loans	845,307	839,547
Allowances for loan losses	(12,845)	(13,719)
Net loans	832,462	825,828
Premises and equipment - net	38,164	38,079
Investments in Federal Home Loan Bank stock and other equity securities, at cost	3,962	4,001
Mortgage servicing rights	3,040	3,036
Other real estate owned and repossessed assets - net	14,054	14,867
Accrued interest receivable	4,441	4,999
Cash surrender value - life insurance	2,233	2,213
Other assets	12,152	12,675
Total assets	1,164,969	1,140,122
Deposits
Non-interest bearing demand	189,925	187,382
Savings, interest checking and money market	453,724	419,085
Time deposits $100,000 and over	110,045	111,667
Other time deposits	234,042	238,337
Total deposits	987,736	956,471
Federal funds purchased and securities sold under agreements to repurchase	20,761	31,084
Subordinated notes	49,486	49,486
Federal Home Loan Bank advances	24,000	24,000
Accrued interest payable	412	426
Other liabilities	5,892	4,275
Total liabilities	1,088,287	1,065,742
Stockholders' equity:
Common stock, $1 par value, authorized 15,000,000 shares; issued 5,194,537 shares, respectively	5,195	5,195
Surplus	33,391	33,385
Retained earnings	41,821	40,086
Accumulated other comprehensive loss, net of tax	(208)	(769)
Treasury stock; 161,858 shares, at cost	(3,517)	(3,517)
Total stockholders' equity	76,682	74,380
Total liabilities and stockholders' equity	$ 1,164,969	$ 1,140,122

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Real Estate and Other Assets Acquired in Settlement of Loans (Details 2) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013	Dec. 31, 2012
Schedule of real estate acquired in settlement of loans
Balance at beginning of period	$ 19,542,000	$ 29,729,000
Additions	259,000	2,470,000
Proceeds from sales	(1,094,000)	(604,000)
Charge-offs against the valuation allowance for other real estate owned	(156,000)	(136,000)
Net gain on sales	145,000	13,000
Balance at end of period	18,696,000	31,472,000
Less valuation allowance for other real estate owned	(4,642,000)	(8,344,000)	(4,675,000)	(6,137,000)
Balance at end of period	14,054,000	23,128,000	14,867,000
Net charge-offs against the allowance for loan losses at the time of foreclosure	$ 162,000	$ 374,000

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Consolidated Statements of Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Total	Preferred Stock	Common Stock	Surplus	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Treasury Stock
Balance at Dec. 31, 2012	$ 92,220	$ 17,977	$ 5,001	$ 31,816	$ 39,118	$ 1,825	$ (3,517)
Increase (Decrease) in Stockholders' Equity
Net income (loss)	(136)				(136)
Other comprehensive income (loss)	(706)					(706)
Stock based compensation expense	2			2
Accretion of preferred stock discount		72			(72)
Cash dividends declared, preferred stock	(228)				(228)
Cash dividends declared, common stock	(242)				(242)
Balance at Mar. 31, 2013	90,910	18,049	5,001	31,818	38,440	1,119	(3,517)
Balance at Dec. 31, 2013	74,380		5,195	33,385	40,086	(769)	(3,517)
Increase (Decrease) in Stockholders' Equity
Net income (loss)	1,987				1,987
Other comprehensive income (loss)	561					561
Stock based compensation expense	6			6
Cash dividends declared, common stock	(252)				(252)
Balance at Mar. 31, 2014	$ 76,682		$ 5,195	$ 33,391	$ 41,821	$ (208)	$ (3,517)

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Earnings (Loss) per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Basic earnings (loss) per common share:
Net income (loss)	$ 1,987	$ (136)
Less: Preferred stock dividends and accretion of discount		295
Net income (loss) available to common shareholders	1,987	(431)
Basic earnings (loss) per share (in dollars per share)	$ 0.39	$ (0.09)
Diluted earnings (loss) per common share:
Net income	1,987	(136)
Less: Preferred stock dividends and accretion of discount		295
Net income (loss) available to common shareholders	$ 1,987	$ (431)
Average shares outstanding	5,032,679	5,032,679
Average shares outstanding including dilutive stock options (in shares)	5,032,679	5,032,679
Diluted earnings (loss) per share	$ 0.39	$ (0.09)

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Summary of Significant Accounting Policies (Details 2) (USD $)	0 Months Ended			0 Months Ended
	Jun. 11, 2013	Dec. 19, 2008	Dec. 19, 2008 Common Stock	May 15, 2013 Preferred Stock	May 09, 2012 Preferred Stock	Dec. 19, 2008 Preferred Stock
Class of Stock [Line Items]
Number of shares issued						30,255
Par value of share issued (in dollars per share)						$ 1,000
Term of warrants		10 years
Number of common shares called per warrant			287,133
Number of shares redeemed				18,255	12,000
Repurchase price of warrant	$ 540,000
Repurchase price of warrant (in dollars per share)	$ 1.88

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Assets:
Cash and due from banks	$ 24,314	$ 27,079
Federal funds sold and overnight interest-bearing deposits	16,920	1,360
Mortgage servicing rights	3,040	3,036
Accrued interest receivable	4,441	4,999
Deposits:
Non-interest bearing demand	189,925	187,382
Savings, interest checking and money market	453,724	419,085
Accrued interest payable	412	426
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Cash and due from banks	24,314	27,079
Federal funds sold and overnight interest-bearing deposits	16,920	1,360
Investment in available-for-sale securities	1,001	1,003
Accrued interest receivable	4,441	4,999
Assets, Total	46,676	34,441
Deposits:
Non-interest bearing demand	189,925	187,382
Savings, interest checking and money market	453,724	419,085
Federal funds purchased and securities sold under agreements to repurchase	20,761	31,084
Accrued interest payable	412	426
Liabilities, Fair Value Disclosure, Total	664,822	637,977
Other Observable Inputs (Level 2)
Assets:
Investment in available-for-sale securities	212,226	204,982
Investment in FHLB stock	2,315	2,354
Cash surrender value - life insurance	2,233	2,213
Assets, Total	216,774	209,549
Deposits:
Subordinated notes	34,081	32,048
Federal Home Loan Bank advances	25,261	25,366
Liabilities, Fair Value Disclosure, Total	59,342	57,414
Net Significant Unobservable Inputs (Level 3)
Assets:
Loans, net	835,199	829,223
Mortgage servicing rights	3,040	3,036
Assets, Total	838,239	832,259
Deposits:
Time deposits	346,442	352,432
Liabilities, Fair Value Disclosure, Total	346,442	352,432
Carrying Amount
Assets:
Cash and due from banks	24,314	27,079
Federal funds sold and overnight interest-bearing deposits	16,920	1,360
Investment in available-for-sale securities	213,227	205,985
Loans, net	832,462	825,828
Investment in FHLB stock	2,315	2,354
Mortgage servicing rights	3,040	3,036
Cash surrender value - life insurance	2,233	2,213
Accrued interest receivable	4,441	4,999
Assets, Total	1,098,952	1,072,854
Deposits:
Non-interest bearing demand	189,925	187,382
Savings, interest checking and money market	453,724	419,085
Time deposits	344,087	350,004
Federal funds purchased and securities sold under agreements to repurchase	20,761	31,084
Subordinated notes	49,486	49,486
Federal Home Loan Bank advances	24,000	24,000
Accrued interest payable	412	426
Liabilities, Fair Value Disclosure, Total	1,082,395	1,061,467
Fair Value
Assets:
Cash and due from banks	24,314	27,079
Federal funds sold and overnight interest-bearing deposits	16,920	1,360
Investment in available-for-sale securities	213,227	205,985
Loans, net	835,199	829,223
Investment in FHLB stock	2,315	2,354
Mortgage servicing rights	3,040	3,036
Cash surrender value - life insurance	2,233	2,213
Accrued interest receivable	4,441	4,999
Assets, Total	1,101,689	1,076,249
Deposits:
Non-interest bearing demand	189,925	187,382
Savings, interest checking and money market	453,724	419,085
Time deposits	346,442	352,432
Federal funds purchased and securities sold under agreements to repurchase	20,761	31,084
Subordinated notes	34,081	32,048
Federal Home Loan Bank advances	25,261	25,366
Accrued interest payable	412	426
Liabilities, Fair Value Disclosure, Total	$ 1,070,606	$ 1,047,823

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2014

Summary of Significant Accounting Policies

Stock Dividend

Stock Dividend On July 1, 2013, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2013. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Preferred Stock

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. Participation in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock. On May 9, 2012, the Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program, and on May 15, 2013, the remaining 18,255 shares were redeemed.

On June 11, 2013, the common stock warrant issued under the U.S. Treasury Department’s CPP program was repurchased by the Company pursuant to a letter agreement between the Treasury and the Company for a total repurchase price of $540,000, or $1.88 per warrant share. The repurchase price was based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ends the Company’s participation in the U.S. Treasury Department’s CPP.

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Loans and Allowance for Loan Losses (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Summary of loans, by major class within Company's loan portfolio
Total loans	$ 845,307,000	$ 839,547,000
Carrying amount of loans pledged as collateral to the Federal Home Loan Bank	376,900,000
Commercial, financial, and agricultural
Summary of loans, by major class within Company's loan portfolio
Total loans	132,346,000	133,717,000
Real estate construction - residential
Summary of loans, by major class within Company's loan portfolio
Total loans	22,060,000	21,008,000
Real estate construction - commercial
Summary of loans, by major class within Company's loan portfolio
Total loans	57,340,000	55,076,000
Real estate mortgage - residential
Summary of loans, by major class within Company's loan portfolio
Total loans	230,310,000	225,541,000
Real estate mortgage - commercial
Summary of loans, by major class within Company's loan portfolio
Total loans	384,130,000	382,550,000
Installment and other consumer
Summary of loans, by major class within Company's loan portfolio
Total loans	$ 19,121,000	$ 21,655,000

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

3 Months Ended

Mar. 31, 2014

Real Estate and Other Assets Acquired in Settlement of Loans

Summary of real estate and other assets acquired in settlement of loans

	March 31,			December 31,
(in thousands)	2014			2013
Real estate construction - residential	$	32		$	114
Real estate construction - commercial	10,020			10,020
Real estate mortgage - residential	332			830
Real estate mortgage - commercial	8,289			8,537
Repossessed assets	23			41
Total	$	18,696		$	19,542
Less valuation allowance for other real estate owned	(4,642		)	(4,675		)
Total other real estate owned and foreclosed assets	$	14,054		$	14,867

Schedule of changes in the net carrying amount of other real estate owned and repossessed assets

	Three Months Ended March 31,
	2014			2013
Balance at beginning of period	$	19,542		$	29,729
Additions	259			2,470
Proceeds from sales	(1,094		)	(604		)
Charge-offs against the valuation allowance for other real estate owned	(156		)	(136		)
Net gain on sales	145			13
Total other real estate owned and repossessed assets	$	18,696		$	31,472
Less valuation allowance for other real estate owned	(4,642		)	(8,344		)
Balance at end of period	$	14,054		$	23,128

Summary of activity in valuation allowance for other real estate owned in settlement of loans

	Three Months Ended March 31,
(in thousands)	2014			2013
Balance, beginning of period	$	4,675		$	6,137
Provision for other real estate owned	123			2,343
Charge-offs	(156		)	(136		)
Balance, end of period	$	4,642		$	8,344

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities:
Net income (loss)	$ 1,987	$ (136)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		1,000
Depreciation expense	422	400
Net amortization of investment securities, premiums, and discounts	250	343
Amortization of intangible assets		101
Stock based compensation expense	6	2
Change in fair value of mortgage servicing rights	46	57
Gain on sale of investment securities		(294)
Gain on sales and dispositions of premises and equipment	(13)	0
Gain on sales and dispositions of other real estate owned and repossessed assets	(145)	(13)
Provision for other real estate owned	123	2,343
Decrease in accrued interest receivable	558	167
Increase in cash surrender value -life insurance	(20)	(21)
Decrease (increase) in other assets	199	(476)
(Decrease) increase in accrued interest payable	(14)	125
Increase in other liabilities	1,616	800
Origination of mortgage loans for sale	(5,811)	(26,463)
Proceeds from the sale of mortgage loans	5,974	29,290
Gain on sale of mortgage loans, net	(191)	(720)
Other, net	(50)	(170)
Net cash provided by operating activities	4,937	6,335
Cash flows from investing activities:
Net (increase) decrease in loans	(6,865)	6,854
Purchase of available-for-sale debt securities	(24,038)	(62,541)
Proceeds from maturities of available-for-sale debt securities	5,687	11,260
Proceeds from calls of available-for-sale debt securities	11,745	2,255
Proceeds from sales of available-for-sale debt securities		15,981
Proceeds from sales of FHLB stock	39	2
Purchases of premises and equipment	(507)	(326)
Proceeds from sales of premises and equipment	13
Proceeds from sales of other real estate owned and repossessed assets	1,094	604
Net cash used in investing activities	(12,832)	(25,911)
Cash flows from financing activities:
Net increase (decrease) in demand deposits	2,543	(14,866)
Net increase in interest-bearing transaction accounts	34,639	33,942
Net decrease in time deposits	(5,917)	(10,471)
Net decrease in federal funds purchased and securities sold under agreements to repurchase	(10,323)	(3,519)
Repayment of FHLB advances	(10,000)	(55)
FHLB advances	10,000
Cash dividends paid - preferred stock		(228)
Cash dividends paid - common stock	(252)	(242)
Net cash provided by financing activities	20,690	4,561
Net increase (decrease) in cash and cash equivalents	12,795	(15,015)
Cash and cash equivalents, beginning of period	28,439	58,887
Cash and cash equivalents, end of period	41,234	43,872
Cash paid during the year for:
Interest	1,324	1,624
Income taxes		6
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans	$ 259	$ 2,470

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Consolidated Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Consolidated Balance Sheets
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	5,194,537	5,194,537
Treasury stock, shares	161,858	161,858

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Earnings (Loss) per Share

3 Months Ended

Mar. 31, 2014

Earnings (Loss) per Share

Earnings (Loss) per Share

(10) Earnings (Loss) per Share

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

	Three Months Ended March 31,
(dollars in thousands, except per share data)	2014		2013
Basic earnings (loss) per common share:
Net income (loss)	$	1,987	$	(136	)
Less:
Preferred stock dividends and accretion of discount	0		295
Net income (loss) available to common shareholders	$	1,987	$	(431	)
Basic earnings (loss) per share	$	0.39	$	(0.09	)
Diluted earnings (loss) per common share:
Net income (loss)	$	1,987	$	(136	)
Less:
Preferred stock dividends and accretion of discount	0		295
Net income (loss) available to common shareholders	$	1,987	$	(431	)
Average shares outstanding	5,032,679		5,032,679
Effect of dilutive stock options	0		0
Average shares outstanding including dilutive stock options	5,032,679		5,032,679
Diluted earnings (loss) per share	$	0.39	$	(0.09	)

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of any 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 with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

The following options to purchase shares during the dates indicated were not included in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.

	Three Months Ended March 31,
	2014	2013
Anti-dilutive shares - option shares	103,150	188,491
Anti-dilutive shares - warrant shares	—	298,618
Total anti-dilutive shares	103,150	487,109

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Document and Entity Information	3 Months Ended
	Mar. 31, 2014	May 15, 2014
Document and Entity Information
Entity Registrant Name	HAWTHORN BANCSHARES, INC.
Entity Central Index Key	0000893847
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		5,032,679
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

XML

Fair Value Measurements

3 Months Ended

Mar. 31, 2014

Fair Value Measurements

Fair Value Measurements

(11) 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 or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of March 31, 2014 and December 31, 2013, respectively, there were no transfers into or out of Levels 1-3.

The fair value hierarchy is as follows:

Level 1 — Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 — Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s best information and assumptions that a market participant would consider.

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

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

Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

Available-for-Sale Securities

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future 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 future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3.

	Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2014
Assets:
U.S. Treasury	$	1,001	$	1,001	$	0	$	0
Government sponsored enterprises	70,811		0		70,811		0
Asset-backed securities	109,375		0		109,375		0
Obligations of states and political subdivisions	32,040		0		32,040		0
Mortgage servicing rights	3,040		0		0		3,040
Total	$	216,267	$	1,001	$	212,226	$	3,040
December 31, 2013
Assets:
U.S. Treasury	$	1,003	$	1,003	$	0	$	0
Government sponsored enterprises	60,616		0		60,616		0
Asset-backed securities	110,373		0		110,373		0
Obligations of states and political subdivisions	33,993		0		33,993		0
Mortgage servicing rights	3,036		0		0		3,036
Total	$	209,021	$	1,003	$	204,982	$	3,036

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

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
	Mortgage Servicing Rights
	Three Months Ended March 31,
(in thousands)	2014			2013
Balance at beginning of period	$	3,036		$	2,549
Total gains or losses (realized/unrealized):
Included in earnings	(46		)	(57		)
Included in other comprehensive income	0			0
Purchases	0			0
Sales	0			0
Issues	50			197
Settlements	0			0
Balance at end of period	$	3,040		$	2,689

Total gains for the three months ended included in earnings attributable to the change in unrealized gains or losses related to assets still held were $106,000 and $153,000 at March 31, 2014 and 2013, respectively.

	Quantitative Information about Level 3 Fair Value Measurements
			Input Value
			Three Months Ended March 31,
	Valuation Technique	Unobservable Inputs	2014		2013
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate	9.07	%	17.63	%
		Weighted average discount rate	9.08	%	8.03	%
		Weighted average expected life (in years)	6.20		4.10

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

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

Impaired Loans

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 of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of March 31, 2014, the Company identified $14.7 million in impaired loans that had specific allowances for losses aggregating $4.8 million. Related to these loans, there was $1.1 million in charge-offs recorded during the three months ended March 31, 2014. As of March 31, 2013, the Company identified $25.7 million in impaired loans that had specific allowances for losses aggregating $4.1 million. Related to these loans, there was $1.4 million in charge-offs recorded during the three months ended March 31, 2013.

Other Real Estate Owned and Repossessed Assets

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

	Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total		Assets		Inputs		Inputs		Total Gains
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Losses)*
March 31, 2014
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	1,668	$	0	$	0	$	1,668	$	(103	)
Real estate construction - residential	1,793		0		0		1,793		(60		)
Real estate construction - commercial	67		0		0		67		(414		)
Real estate mortgage - residential	3,559		0		0		3,559		(94		)
Real estate mortgage - commercial	2,615		0		0		2,615		(365		)
Consumer	265		0		0		265		(18		)
Total	$	9,967	$	0	$	0	$	9,967	$	(1,054	)
Other real estate owned and repossessed assets	$	14,054	$	0	$	0	$	14,054	$	(30	)
March 31, 2013
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	737	$	0	$	0	$	737	$	(10	)
Real estate construction - residential	1,959		0		0		1,959		(119		)
Real estate construction - commercial	5,762		0		0		5,762		0
Real estate mortgage - residential	2,774		0		0		2,774		(235		)
Real estate mortgage - commercial	10,368		0		0		10,368		(987		)
Consumer	38		0		0		38		0
Total	$	21,638	$	0	$	0	$	21,638	$	(1,351	)
Other real estate owned and repossessed assets	$	23,128	$	0	$	0	$	23,128	$	(200	)

* 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.

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Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
INTEREST INCOME
Interest and fees on loans	$ 9,865	$ 10,387
Interest on investment securities:
Taxable	881	905
Nontaxable	189	217
Federal funds sold and other overnight interest-bearing deposits	8	14
Dividends on other securities	20	22
Total interest income	10,963	11,545
Interest on deposits:
Savings, interest checking and money market	267	261
Time deposit accounts $100,000 and over	190	248
Other time deposits	432	883
Interest on federal funds purchased and securities sold under agreements to repurchase	4	5
Interest on subordinated notes	312	320
Interest on Federal Home Loan Bank advances	104	99
Total interest expense	1,309	1,816
Net interest income	9,654	9,729
Provision for loan losses		1,000
Net interest income after provision for loan losses	9,654	8,729
NON-INTEREST INCOME
Service charges on deposit accounts	1,230	1,359
Trust department income	203	210
Real estate servicing fees, net	177	159
Gain on sale of mortgage loans, net	191	720
Gain on sale of investment securities		294
Other	284	265
Total non-interest income	2,085	3,007
NON-INTEREST EXPENSE
Salaries and employee benefits	5,030	4,910
Occupancy expense, net	620	635
Furniture and equipment expense	443	435
FDIC insurance assessment	238	243
Legal, examination, and professional fees	226	226
Advertising and promotion	290	281
Postage, printing, and supplies	265	256
Processing expense	759	1,275
Other real estate expense, net	124	2,821
Other	712	852
Total non-interest expense	8,707	11,934
Income (loss) before income taxes	3,032	(198)
Income tax expense (benefit)	1,045	(62)
Net income (loss)	1,987	(136)
Preferred stock dividends and accretion of discount		295
Net income (loss) available to common shareholders	$ 1,987	$ (431)
Basic earnings (loss) per share (in dollars per share)	$ 0.39	$ (0.09)
Diluted earnings (loss) per share (in dollars per share)	$ 0.39	$ (0.09)

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Intangible Assets

3 Months Ended

Mar. 31, 2014

Intangible Assets

Intangible Assets

(5) Intangible Assets

Core Deposit Intangible Asset

Core deposit intangible assets in the amount of $4.8 million were fully amortized as of December 31, 2013. Changes in the net carrying amount of core deposit intangible assets for the three months March 31, 2013 is as follows:

	Three Months Ended
(in thousands)	March 31, 2013
Balance at beginning of period	$	135
Additions	0
Amortization	(101		)
Balance at end of period	$	34

Mortgage Servicing Rights

At March 31, 2014 and December 31, 2013, the Company serviced mortgage loans for others totaling $319.3 million and $322.5 million, respectively. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $223,000 and $217,000 for the three months ended March 31, 2014 and 2013, respectively.

The table below presents changes in mortgage servicing rights (MSRs) for the three months ended March 31, 2014 and 2013.

	Three Months Ended March 31,
(in thousands)	2014			2013
Balance at beginning of period	$	3,036		$	2,549
Originated mortgage servicing rights	50			197
Changes in fair value:
Due to change in model inputs and assumptions (1)	106			153
Other changes in fair value (2)	(152		)	(210		)
Balance at end of period	$	3,040		$	2,689

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in 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.

The following key data and assumptions were used in estimating the fair value of the Company’s MSRs as of the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014		2013
Weighted average constant prepayment rate	9.07	%	17.63	%
Weighted average note rate	4.01	%	4.12	%
Weighted average discount rate	9.08	%	8.03	%
Weighted average expected life (in years)	6.20		4.10

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Investment Securities

3 Months Ended

Mar. 31, 2014

Investment Securities

Investment Securities

(4) Investment Securities

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2014 and December 31, 2013 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses		Fair value
March 31, 2014
U.S. Treasury	$	1,000	$	1	$	0	$	1,001
Government sponsored enterprises	71,052		325		566		70,811
Asset-backed securities	111,096		813		2,534		109,375
Obligations of states and political subdivisions	31,597		574		131		32,040
Total available-for-sale securities	$	214,745	$	1,713	$	3,231	$	213,227
December 31, 2013
U.S. Treasury	$	1,000	$	3	$	0	$	1,003
Government sponsored enterprises	61,006		377		767		60,616
Asset-backed securities	112,747		817		3,191		110,373
Obligations of states and political subdivisions	33,637		568		212		33,993
Total available-for-sale securities	$	208,390	$	1,765	$	4,170	$	205,985

All of the Company’s investment securities are classified as available for sale. Agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB), which are U.S. government-sponsored enterprises.

Investment securities that are classified as restricted equity securities primarily consist of Federal Home Loan Bank stock and the Company’s interest in statutory trusts. These securities are reported at cost in the amount of $4.0 million as of both March 31, 2014 and December 31, 2013, respectively.

Debt securities with carrying values aggregating approximately $186.2 million and $145.8 million at March 31, 2014 and December 31, 2013, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2014, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	7,566	$	7,629
Due after one year through five years	55,166		55,592
Due after five years through ten years	39,901		39,653
Due after ten years	1,016		978
Total	103,649		103,852
Asset-backed securities	111,096		109,375
Total available-for-sale securities	$	214,745	$	213,227

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2014 and December 31, 2013 were as follows:

	Less than 12 months					12 months or more					Total		Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
At March 31, 2014
Government sponsored enterprises	$	42,190	$	(566	)	$	0	$	0		$	42,190	$	(566	)
Asset-backed securities	68,052		(2,013		)	11,736		(521		)	79,788		(2,534		)
Obligations of states and political subdivisions	7,731		(90		)	634		(41		)	8,365		(131		)
Total	$	117,973	$	(2,669	)	$	12,370	$	(562	)	$	130,343	$	(3,231	)
(in thousands)
At December 31, 2013
Government sponsored enterprises	$	25,771	$	(767	)	$	0	$	0		$	25,771	$	(767	)
Asset-backed securities	76,048		(2,940		)	5,941		(251		)	81,989		(3,191		)
Obligations of states and political subdivisions	6,907		(159		)	450		(53		)	7,357		(212		)
Total	$	108,726	$	(3,866	)	$	6,391	$	(304	)	$	115,117	$	(4,170	)

The total available for sale portfolio consisted of approximately 294 securities at March 31, 2014. The portfolio included 97 securities having an aggregate fair value of $130.3 million that were in a loss position at March 31, 2014. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $12.4 million at fair value. The $3.2 million aggregate unrealized loss included in accumulated other comprehensive income at March 31, 2014 was caused by interest rate fluctuations.

The total available for sale portfolio consisted of approximately 348 securities at December 31, 2013. The portfolio included 96 securities having an aggregate fair value of $115.1 million that were in a loss position at December 31, 2013. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $6.4 million at fair value.

The $4.2 million aggregate unrealized loss included in accumulated other comprehensive income at December 31, 2013 was caused by interest rate fluctuations.

Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments were not considered other-than-temporarily impaired at March 31, 2014 and December 31, 2013, respectively.

In addition, the Company does not have the intent to sell these investments over the period of recovery, and it is not more likely than not that it will be required to sell such investment securities.

The table below presents the components of investment securities gains and losses which have been recognized in earnings.

	Three Months Ended March 31,
(in thousands)	2014		2013
Gains realized on sales	$	0	$	294
Losses realized on sales	0		0
Other-than-temporary impairment recognized	0		0
Investment securities gains	$	0	$	294

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Loans and Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2014

Loans and Allowance for Loan Losses

Summary of loans, by major class within the Company's loan portfolio

	March 31,		December 31,
(in thousands)	2014		2013
Commercial, financial, and agricultural	$	132,346	$	133,717
Real estate construction - residential	22,060		21,008
Real estate construction - commercial	57,340		55,076
Real estate mortgage - residential	230,310		225,541
Real estate mortgage - commercial	384,130		382,550
Installment and other consumer	19,121		21,655
Total loans	$	845,307	$	839,547

Summary of the allowance for loan losses

	Commercial,			Real Estate			Real Estate		Real Estate			Real Estate			Installment
	Financial, &			Construction -			Construction -		Mortgage -			Mortgage -			Loans to			Un-
(in thousands)	Agricultural			Residential			Commercial		Residential			Commercial			Individuals			allocated			Total
Balance at December 31, 2013	$	2,374		$	931		$	631	$	2,959		$	6,523		$	294		$	7		$	13,719
Additions:
Provision for loan losses	93			(392		)	333		139			(153		)	(13		)	(7		)	0
Deductions:
Loans charged off	131			60			414		120			367			84			0			1,176
Less recoveries on loans	(116		)	0			0		(112		)	(16		)	(58		)	0			(302		)
Net loans charged off	15			60			414		8			351			26			0			874
Balance at March 31, 2014	$	2,452		$	479		$	550	$	3,090		$	6,019		$	255		$	0		$	12,845
Balance at December 31, 2012	$	1,937		$	732		$	1,711	$	3,387		$	6,834		$	239		$	2		$	14,842
Additions:
Provision for loan losses	(90		)	287			100		(189		)	844			47			1			1,000
Deductions:
Loans charged off	61			120			0		292			999			109			0			1,581
Less recoveries on loans	(42		)	0			0		(15		)	(161		)	(66		)	0			(284		)
Net loans charged off	19			120			0		277			838			43			0			1,297
Balance at March 31, 2013	$	1,828		$	899		$	1,811	$	2,921		$	6,840		$	243		$	3		$	14,545

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, and		Construction -		Construction -		Mortgage -		Mortgage -		Loans to		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Individuals		allocated		Total
March 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	1,069	$	307	$	36	$	1,808	$	1,482	$	51	$	0	$	4,753
Collectively evaluated for impairment	1,383		172		514		1,282		4,537		204		0		8,092
Total	$	2,452	$	479	$	550	$	3,090	$	6,019	$	255	$	0	$	12,845
Loans outstanding:
Individually evaluated for impairment	$	4,919	$	2,143	$	5,936	$	7,472	$	15,252	$	316	$	0	$	36,038
Collectively evaluated for impairment	127,427		19,917		51,404		222,838		368,878		18,805		0		809,269
Total	$	132,346	$	22,060	$	57,340	$	230,310	$	384,130	$	19,121	$	0	$	845,307
December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	721	$	392	$	304	$	1,374	$	1,989	$	16	$	0	$	4,796
Collectively evaluated for impairment	1,653		539		327		1,585		4,534		278		7		8,923
Total	$	2,374	$	931	$	631	$	2,959	$	6,523	$	294	$	7	$	13,719
Loans outstanding:
Individually evaluated for impairment	$	4,015	$	2,204	$	6,615	$	6,517	$	15,422	$	43	$	0	$	34,816
Collectively evaluated for impairment	129,702		18,804		48,461		219,024		367,128		21,612		0		804,731
Total	$	133,717	$	21,008	$	55,076	$	225,541	$	382,550	$	21,655	$	0	$	839,547

Schedule of impaired loans

	March 31,		December 31,
(in thousands)	2014		2013
Non-accrual loans	$	24,804	$	23,680
Troubled debt restructurings continuing to accrue interest	11,234		11,395
Total impaired loans	$	36,038	$	35,075

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
March 31, 2014
With no related allowance recorded:
Commercial, financial and agricultural	$	2,182	$	2,239	$	0
Real estate - construction residential	43		77		0
Real estate - construction commercial	5,833		6,998		0
Real estate - residential	2,105		2,814		0
Real estate - commercial	11,155		11,417		0
Total	$	21,318	$	23,545	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	2,737	$	2,800	$	1,069
Real estate - construction residential	2,100		2,271		307
Real estate - construction commercial	103		104		36
Real estate - residential	5,367		5,536		1,808
Real estate - commercial	4,097		4,662		1,482
Consumer	316		351		51
Total	$	14,720	$	15,724	$	4,753
Total impaired loans	$	36,038	$	39,269	$	4,753

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2013
With no related allowance recorded:
Commercial, financial and agricultural	$	2,467	$	2,593	$	0
Real estate - construction residential	44		80		0
Real estate - construction commercial	6,101		7,148		0
Real estate - residential	2,121		2,654		0
Real estate - commercial	7,817		8,056		0
Consumer	259		282		0
Total	$	18,809	$	20,813	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,548	$	1,607	$	721
Real estate - construction residential	2,160		2,331		392
Real estate - construction commercial	514		514		304
Real estate - residential	4,396		4,570		1,374
Real estate - commercial	7,605		7,925		1,989
Consumer	43		45		16
Total	$	16,266	$	16,992	$	4,796
Total impaired loans	$	35,075	$	37,805	$	4,796

	Three Months Ended March 31,
	2014				2013
			Interest				Interest
	Average		Recognized		Average		Recognized
	Recorded		For the		Recorded		For the
(in thousands)	Investment		Period Ended		Investment		Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	2,496	$	21	$	2,937	$	25
Real estate - construction residential	117		0		369		0
Real estate - construction commercial	6,998		0		2,616		0
Real estate - residential	2,901		6		2,736		0
Real estate - commercial	11,809		66		5,480		29
Consumer	25		0		189		0
Total	$	24,346	$	93	$	14,327	$	54
With an allowance recorded:
Commercial, financial and agricultural	$	2,341	$	8	$	990	$	7
Real estate - construction residential	2,271		0		2,273		0
Real estate - construction commercial	105		0		6,475		1
Real estate - residential	5,479		40		4,082		20
Real estate - commercial	4,594		0		13,634		26
Consumer	343		0		45		0
Total	$	15,133	$	48	$	27,499	$	54
Total impaired loans	$	39,479	$	141	$	41,826	$	108

Schedule of aging information for the Company's past due and non-accrual loans

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
March 31, 2014
Commercial, Financial, and Agricultural	$	129,201	$	513	$	0	$	2,632	$	132,346
Real Estate Construction - Residential	19,821		96		0		2,143		22,060
Real Estate Construction - Commercial	51,347		56		1		5,936		57,340
Real Estate Mortgage - Residential	222,827		3,350		194		3,939		230,310
Real Estate Mortgage - Commercial	372,245		2,047		0		9,838		384,130
Installment and Other Consumer	18,535		261		9		316		19,121
Total	$	813,976	$	6,323	$	204	$	24,804	$	845,307
December 31, 2013
Commercial, Financial, and Agricultural	$	131,091	$	942	$	0	$	1,684	$	133,717
Real Estate Construction - Residential	18,738		66		0		2,204		21,008
Real Estate Construction - Commercial	48,230		595		0		6,251		55,076
Real Estate Mortgage - Residential	217,179		4,068		129		4,165		225,541
Real Estate Mortgage - Commercial	372,651		725		100		9,074		382,550
Installment and Other Consumer	21,048		291		14		302		21,655
Total	$	808,937	$	6,687	$	243	$	23,680	$	839,547

Schedule of risk categories by class

(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and other Consumer		Total
At March 31, 2014
Watch	$	16,988	$	2,485	$	5,928	$	26,615	$	24,169	$	285	$	76,470
Substandard	5,558		91		1,029		10,030		10,233		230		27,171
Non-accrual	2,632		2,143		5,936		3,939		9,838		316		24,804
Total	$	25,178	$	4,719	$	12,893	$	40,584	$	44,240	$	831	$	128,445
At December 31, 2013
Watch	$	15,016	$	2,007	$	6,111	$	26,331	$	23,662	$	388	$	73,515
Substandard	7,553		92		1,403		8,579		14,510		281		32,418
Non-accrual	1,684		2,204		6,251		4,165		9,074		302		23,680
Total	$	24,253	$	4,303	$	13,765	$	39,075	$	47,246	$	971	$	129,613

Summary of loans that were modified as TDRs

	Three Months Ended March 31,
	2014					2013
	Recorded Investment (1)					Recorded Investment (1)
(in thousands)	Number of Contracts	Pre- Modification		Post- Modification		Number of Contracts	Pre- Modification		Post- Modification
Troubled Debt Restructurings
Commercial, financial and agricultural	2	$	244	$	244	0	$	0	$	0
Real estate construction - commercial	0	0		0		0	0		0
Real estate mortgage - residential	1	1,256		1,185		1	619		619
Real estate mortgage - commercial	0	0		0		0	0		0
Consumer	0	0		0		0	0		0
Total	3	$	1,500	$	1,429	1	$	619	$	619

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

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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2014

Fair Value of Financial Instruments

Fair Value of Financial Instruments

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

Investment Securities

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

Federal Home Loan Bank (FHLB) Stock

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

Federal Funds Sold, Cash, and Due from Banks

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

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future 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 future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings 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 amount. 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 of the short maturity for these financial instruments.

Deposits

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

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

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

Subordinated Notes and Other Borrowings

The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.

A summary of the carrying amounts and fair values of the Company’s financial instruments at March 31, 2014 and December 31, 2013 is as follows:

					March 31, 2014
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	March 31, 2014				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	24,314	$	24,314	$	24,314	$	0	$	0
Federal funds sold and overnight interest-bearing deposits	16,920		16,920		16,920		0		0
Investment in available-for-sale securities	213,227		213,227		1,001		212,226		0
Loans, net	832,462		835,199		0		0		835,199
Investment in FHLB stock	2,315		2,315		0		2,315		0
Mortgage servicing rights	3,040		3,040		0		0		3,040
Cash surrender value - life insurance	2,233		2,233				2,233		0
Accrued interest receivable	4,441		4,441		4,441		0		0
	$	1,098,952	$	1,101,689	$	46,676	$	216,774	$	838,239
Liabilities:
Deposits:
Non-interest bearing demand	$	189,925	$	189,925	$	189,925	$	0	$	0
Savings, interest checking and money market	453,724		453,724		453,724		0		0
Time deposits	344,087		346,442		0		0		346,442
Federal funds purchased and securities sold under agreements to repurchase	20,761		20,761		20,761		0		0
Subordinated notes	49,486		34,081		0		34,081		0
Federal Home Loan Bank advances	24,000		25,261		0		25,261		0
Accrued interest payable	412		412		412		0		0
	$	1,082,395	$	1,070,606	$	664,822	$	59,342	$	346,442

					December 31, 2013
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2013				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	27,079	$	27,079	$	27,079	$	0	$	0
Federal funds sold and overnight interest-bearing deposits	1,360		1,360		1,360		0		0
Investment in available-for-sale securities	205,985		205,985		1,003		204,982		0
Loans, net	825,828		829,223		0		0		829,223
Investment in FHLB stock	2,354		2,354		0		2,354		0
Mortgage servicing rights	3,036		3,036		0		0		3,036
Cash surrender value - life insurance	2,213		2,213				2,213		0
Accrued interest receivable	4,999		4,999		4,999		0		0
	$	1,072,854	$	1,076,249	$	34,441	$	209,549	$	832,259
Liabilities:
Deposits:
Non-interest bearing demand	$	187,382	$	187,382	$	187,382	$	0	$	0
Savings, interest checking and money market	419,085		419,085		419,085		0		0
Time deposits	350,004		352,432		0		0		352,432
Federal funds purchased and securities sold under agreements to repurchase	31,084		31,084		31,084		0		0
Subordinated notes	49,486		32,048		0		32,048		0
Federal Home Loan Bank advances	24,000		25,366		0		25,366		0
Accrued interest payable	426		426		426		0		0
	$	1,061,467	$	1,047,823	$	637,977	$	57,414	$	352,432

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. 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 instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.

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Employee Benefit Plans

3 Months Ended

Mar. 31, 2014

Employee Benefit Plans

Employee Benefit Plans

(8) Employee Benefit Plans

Employee Benefits

Employee benefits charged to operating expenses are summarized in the table below for the periods indicated.

	Threee Months Ended March 31,
(in thousands)	2014		2013
Payroll taxes	$	293	$	304
Medical plans	518		491
401k match and profit sharing	153		75
Pension plan	236		286
Other	11		47
Total employee benefits	$	1,211	$	1,203

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

Pension

The Company provides a noncontributory defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company has not made any contributions to the defined benefit plan for the current plan year. The minimum required contribution for the 2014 plan year is estimated to be $1.3 million. The Company has not determined whether it will make any contributions other than the minimum required funding contribution for 2014.

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

The following items are components of net pension cost for the periods indicated:

	Estimated			Actual
(in thousands)	2014			2013
Service cost - benefits earned during the year	$	981		$	1,174
Interest costs on projected benefit obligations	732			646
Expected return on plan assets	(887		)	(797		)
Expected administrative expenses	40			40
Amortization of prior service cost	79			79
Amortization of unrecognized net loss	0			31
Net periodic pension expense	$	945		$	1,173
Pension expense - three months ended March 31 (actual)	$	236		$	286

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Earnings (Loss) per Share (Details 2)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Summary of anti-dilutive shares
Anti-dilutive shares	103,150	487,109
Option shares
Summary of anti-dilutive shares
Anti-dilutive shares	103,150	188,491
Warrant shares
Summary of anti-dilutive shares
Anti-dilutive shares		298,618

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Income Taxes

3 Months Ended

Mar. 31, 2014

Income Taxes

Income Taxes

(6) Income Taxes

Income taxes as a percentage of earnings (loss) before income taxes as reported in the consolidated financial statements were 34.5% for the three months ended March 31, 2014 compared to 31.3% for the three months ended March 31, 2013.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences at March 31, 2014 and, therefore, did not establish a valuation reserve.

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Stockholders' Equity

3 Months Ended

Mar. 31, 2014

Stockholders' Equity

Stockholders' Equity

(7) Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss)

The following details the change in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2014 and 2013:

							Accumulated
				Unrecognized Net			Other
				Pension and			Comprehensive
	Unrealized Loss			Postretirement			(Loss)
(in thousands)	on Securities (1)			Costs (2)			Income
Balance, December 31, 2013	$	(1,491	)	$	722		$	(769	)
Other comprehensive income, before reclassifications	886			0			886
Amounts reclassified from accumulated other comprehensive income	0			19			19
Current period other comprehensive income, before tax	886			19			905
Income tax expense	(337		)	(7		)	(344		)
Current period other comprehensive income, net of tax	549			12			561
Balance, March 31, 2014	$	(942	)	$	734		$	(208	)
Balance, December 31, 2012	$	3,265		$	(1,440	)	$	1,825
Other comprehensive (loss) income, before reclassifications	(957		)	0			(957		)
Amounts reclassified from accumulated other comprehensive income	(294		)	27			(267		)
Current period other comprehensive (loss) income, before tax	(1,251		)	27			(1,224		)
Income tax benefit (expense)	529			(11		)	518
Current period other comprehensive (loss) income, net of tax	(722		)	16			(706		)
Balance, March 31, 2013	$	2,543		$	(1,424	)	$	1,119

(1) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in gain on sale of investment securities in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in the computation of net periodic pension cost.

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Stock Compensation

3 Months Ended

Mar. 31, 2014

Stock Compensation

Stock Compensation

(9) Stock Compensation

The Company’s stock option plan provides for the grant of options to purchase up to 547,492 shares of the Company’s common stock to officers and other key employees of the 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 11,578 shares that vested immediately.

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

					Weighted
			Weighted		Average	Aggregate
	Number		average		Contractual	Intrinsic
	of		Exercise		Term	Value
	Shares		Price		(in years)	($000)
Outstanding, beginning of period	121,405		$	24.14
Granted	0		0.00
Exercised	0		0.00
Forfeited	0		0.00
Expired	(18,255	)	28.97
Outstanding, March 31, 2014	103,150		$	23.28	2.70	$	0.00
Exercisable, March 31, 2014	88,633		$	23.49	2.50	$	0.00

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2013.

Total stock-based compensation expense for the three months ended March 31, 2014 and 2013 was $6,000 and $2,000, respectively. As of March 31, 2014, the total unrecognized compensation expense related to non-vested stock awards was $44,000 and the related weighted average period over which it is expected to be recognized is approximately 1.6 years.

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Fair Value Measurements (Details 4) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Fair Value Measurements
Impaired loans with a specific allowance	$ 14,720,000	$ 25,700,000	$ 16,266,000
Specific allowance related to impaired loans	4,753,000	4,100,000	4,796,000
Charge-offs related to impaired loans with a specific allowance	1,100,000	1,400,000
Commercial, financial, and agricultural
Fair Value Measurements
Impaired loans with a specific allowance	2,737,000		1,548,000
Specific allowance related to impaired loans	1,069,000		721,000
Real estate construction - residential
Fair Value Measurements
Impaired loans with a specific allowance	2,100,000		2,160,000
Specific allowance related to impaired loans	307,000		392,000
Real estate construction - commercial
Fair Value Measurements
Impaired loans with a specific allowance	103,000		514,000
Specific allowance related to impaired loans	36,000		304,000
Real estate mortgage - residential
Fair Value Measurements
Impaired loans with a specific allowance	5,367,000		4,396,000
Specific allowance related to impaired loans	1,808,000		1,374,000
Real estate mortgage - commercial
Fair Value Measurements
Impaired loans with a specific allowance	4,097,000		7,605,000
Specific allowance related to impaired loans	1,482,000		1,989,000
Consumer
Fair Value Measurements
Impaired loans with a specific allowance	316,000		43,000
Specific allowance related to impaired loans	51,000		16,000
Nonrecurring | Total Fair Value
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	9,967,000	21,638,000
Other real estate owned and repossessed assets	14,054,000	23,128,000
Nonrecurring | Significant Unobservable Inputs (Level 3)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	9,967,000	21,638,000
Other real estate owned and repossessed assets	14,054,000	23,128,000
Nonrecurring | Total Gains (Losses)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Gains (losses) on impaired loans	(1,054,000)	(1,351,000)
Gains (losses) on other real estate owned and repossessed assets	(30,000)	(200,000)
Nonrecurring | Commercial, financial, and agricultural | Total Fair Value
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	1,668,000	737,000
Nonrecurring | Commercial, financial, and agricultural | Significant Unobservable Inputs (Level 3)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	1,668,000	737,000
Nonrecurring | Commercial, financial, and agricultural | Total Gains (Losses)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Gains (losses) on impaired loans	(103,000)	(10,000)
Nonrecurring | Real estate construction - residential | Total Fair Value
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	1,793,000	1,959,000
Nonrecurring | Real estate construction - residential | Significant Unobservable Inputs (Level 3)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	1,793,000	1,959,000
Nonrecurring | Real estate construction - residential | Total Gains (Losses)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Gains (losses) on impaired loans	(60,000)	(119,000)
Nonrecurring | Real estate construction - commercial | Total Fair Value
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	67,000	5,762,000
Nonrecurring | Real estate construction - commercial | Significant Unobservable Inputs (Level 3)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	67,000	5,762,000
Nonrecurring | Real estate construction - commercial | Total Gains (Losses)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Gains (losses) on impaired loans	(414,000)
Nonrecurring | Real estate mortgage - residential | Total Fair Value
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	3,559,000	2,774,000
Nonrecurring | Real estate mortgage - residential | Significant Unobservable Inputs (Level 3)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	3,559,000	2,774,000
Nonrecurring | Real estate mortgage - residential | Total Gains (Losses)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Gains (losses) on impaired loans	(94,000)	(235,000)
Nonrecurring | Real estate mortgage - commercial | Total Fair Value
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	2,615,000	10,368,000
Nonrecurring | Real estate mortgage - commercial | Significant Unobservable Inputs (Level 3)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	2,615,000	10,368,000
Nonrecurring | Real estate mortgage - commercial | Total Gains (Losses)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Gains (losses) on impaired loans	(365,000)	(987,000)
Nonrecurring | Consumer | Total Fair Value
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	265,000	38,000
Nonrecurring | Consumer | Significant Unobservable Inputs (Level 3)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Impaired loans	265,000	38,000
Nonrecurring | Consumer | Total Gains (Losses)
Valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis
Gains (losses) on impaired loans	$ (18,000)

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Repurchase Reserve Liability (Details) (USD $)	3 Months Ended		6 Months Ended	12 Months Ended
	Mar. 31, 2014 item	Sep. 30, 2013 item	Mar. 31, 2014 item	Dec. 31, 2013 item
Repurchase Reserve Liability
Repurchase reserve liability	$ 160,000		$ 160,000
Number of investors notifying foreclosed loans		1
Number of investors		2
Numbers of loans foreclosed		15
Balance of foreclosed loans	1,500,000		1,500,000
Payment for reimbursement of costs incurred by Freddie Mac on loan foreclosures			119,000
Numbers of loans foreclosed whose costs have been reimbursed to Freddie Mac			3
Numbers of loans foreclosed for which no additional costs have been incurred	12
Number of loans sold to the secondary market	3,158			3,114
Balance of loans sold to the secondary market	$ 319,300,000		$ 319,300,000	$ 322,500,000

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Fair Value Measurements (Details 3) (Recurring, Level 3 Fair Value Measurements, Mortgage servicing rights)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Recurring | Level 3 Fair Value Measurements | Mortgage servicing rights
Quantitative Information
Weighted average constant prepayment rate (as a percent)	9.07%	17.63%
Weighted average discount rate (as a percent)	9.08%	8.03%
Weighted average expected life (in years)	6 years 2 months 12 days	4 years 1 month 6 days

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Summary of Significant Accounting Policies (Details)	0 Months Ended
	Jul. 02, 2013
Summary of Significant Accounting Policies
Percentage of special stock dividend paid to shareholders	4.00%

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Intangible Assets (Details) (USD $)	3 Months Ended
	Mar. 31, 2013	Dec. 31, 2013
Changes in the net carrying amount of core deposit intangible assets
Amortization	$ (101,000)
Core Deposit Intangible Asset
Intangible assets
Gross Carrying Amount		4,800,000
Changes in the net carrying amount of core deposit intangible assets
Balance at the beginning of period	135,000
Amortization	(101,000)
Balance at the end of period	$ 34,000

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2014

Commitments and Contingencies

Commitments and Contingencies

(14) Commitments and Contingencies

The Company issues financial instruments 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 of the amounts 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 financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At March 31, 2014, no amounts have been accrued for any estimated losses for these financial instruments.

The contractual amount of off-balance-sheet financial instruments as of the periods indicated:

	March 31,		December 31,
(in thousands)	2014		2013
Commitments to extend credit	$	121,100	$	117,880
Commitments to originate residential first and second mortgage loans	1,866		1,852
Standby letters of credit	1,591		1,826

Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The 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 accounts receivable, inventory, furniture and equipment, and real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby letters of credit range from on e month to five years at March 31, 2014.

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. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss is deemed probable or an amount can be estimated.

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Intangible Assets (Tables)

3 Months Ended

Mar. 31, 2014

Intangible Assets

Schedule of changes in the net carrying amount of core deposit intangible assets

	Three Months Ended
(in thousands)	March 31, 2013
Balance at beginning of period	$	135
Additions	0
Amortization	(101		)
Balance at end of period	$	34

Schedule of changes in mortgage servicing rights (MSRs)

	Three Months Ended March 31,
(in thousands)	2014			2013
Balance at beginning of period	$	3,036		$	2,549
Originated mortgage servicing rights	50			197
Changes in fair value:
Due to change in model inputs and assumptions (1)	106			153
Other changes in fair value (2)	(152		)	(210		)
Balance at end of period	$	3,040		$	2,689

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in 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.

Schedule of key data and assumptions used in estimating the fair value of the Company's MSRs

	Three Months Ended March 31,
	2014		2013
Weighted average constant prepayment rate	9.07	%	17.63	%
Weighted average note rate	4.01	%	4.12	%
Weighted average discount rate	9.08	%	8.03	%
Weighted average expected life (in years)	6.20		4.10

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Investment Securities (Details 3) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2014 item	Dec. 31, 2013 item
Fair Value
Less than 12 months	$ 117,973,000	$ 108,726,000
12 months or more	12,370,000	6,391,000
Total	130,343,000	115,117,000
Unrealized Losses
Less than 12 months	(2,669,000)	(3,866,000)
12 months or more	(562,000)	(304,000)
Total	(3,231,000)	(4,170,000)
Other disclosure
Number of securities consisted in portfolio	294	348
Number of securities in loss position	97	96
Unrealized loss included in other comprehensive	3,200,000	4,200,000
Government sponsored enterprises
Fair Value
Less than 12 months	42,190,000	25,771,000
Total	42,190,000	25,771,000
Unrealized Losses
Less than 12 months	(566,000)	(767,000)
Total	(566,000)	(767,000)
Asset-backed securities
Fair Value
Less than 12 months	68,052,000	76,048,000
12 months or more	11,736,000	5,941,000
Total	79,788,000	81,989,000
Unrealized Losses
Less than 12 months	(2,013,000)	(2,940,000)
12 months or more	(521,000)	(251,000)
Total	(2,534,000)	(3,191,000)
Obligations of states and political subdivisions
Fair Value
Less than 12 months	7,731,000	6,907,000
12 months or more	634,000	450,000
Total	8,365,000	7,357,000
Unrealized Losses
Less than 12 months	(90,000)	(159,000)
12 months or more	(41,000)	(53,000)
Total	$ (131,000)	$ (212,000)

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Loans and Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	$ 813,976	$ 808,937
30 - 89 Days Past Due	6,323	6,687
90 Days Past Due And Still Accruing	204	243
Non-Accrual	24,804	23,680
Total loans	845,307	839,547
Commercial, Financial, and Agricultural
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	129,201	131,091
30 - 89 Days Past Due	513	942
Non-Accrual	2,632	1,684
Total loans	132,346	133,717
Real Estate Construction - Residential
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	19,821	18,738
30 - 89 Days Past Due	96	66
Non-Accrual	2,143	2,204
Total loans	22,060	21,008
Real Estate Construction - Commercial
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	51,347	48,230
30 - 89 Days Past Due	56	595
90 Days Past Due And Still Accruing	1
Non-Accrual	5,936	6,251
Total loans	57,340	55,076
Real Estate Mortgage - Residential
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	222,827	217,179
30 - 89 Days Past Due	3,350	4,068
90 Days Past Due And Still Accruing	194	129
Non-Accrual	3,939	4,165
Total loans	230,310	225,541
Real Estate Mortgage - Commercial
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	372,245	372,651
30 - 89 Days Past Due	2,047	725
90 Days Past Due And Still Accruing		100
Non-Accrual	9,838	9,074
Total loans	384,130	382,550
Installment and Other Consumer
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	18,535	21,048
30 - 89 Days Past Due	261	291
90 Days Past Due And Still Accruing	9	14
Non-Accrual	316	302
Total loans	$ 19,121	$ 21,655

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Consolidated Statements of Comprehensive Income (Loss)
Net income (loss)	$ 1,987	$ (136)
Investment securities available-for-sale:
Unrealized gain (loss) on investment securities available-for-sale, net of tax	549	(540)
Adjustment for gain on sale of investment securities, net of tax		(182)
Defined benefit pension plans:
Amortization of prior service cost included in net periodic pension cost, net of tax	12	16
Total other comprehensive income (loss)	561	(706)
Total comprehensive income (loss)	$ 2,548	$ (842)

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Real Estate and Other Assets Acquired in Settlement of Loans

3 Months Ended

Mar. 31, 2014

Real Estate and Other Assets Acquired in Settlement of Loans

Real Estate and Other Assets Acquired in Settlement of Loans

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

	March 31,			December 31,
(in thousands)	2014			2013
Real estate construction - residential	$	32		$	114
Real estate construction - commercial	10,020			10,020
Real estate mortgage - residential	332			830
Real estate mortgage - commercial	8,289			8,537
Repossessed assets	23			41
Total	$	18,696		$	19,542
Less valuation allowance for other real estate owned	(4,642		)	(4,675		)
Total other real estate owned and foreclosed assets	$	14,054		$	14,867

Changes in the net carrying amount of other real estate owned and repossessed assets for the three months ended March 31, 2014 and 2013, respectively, were as follows:

	Three Months Ended March 31,
	2014			2013
Balance at beginning of period	$	19,542		$	29,729
Additions	259			2,470
Proceeds from sales	(1,094		)	(604		)
Charge-offs against the valuation allowance for other real estate owned	(156		)	(136		)
Net gain on sales	145			13
Total other real estate owned and repossessed assets	$	18,696		$	31,472
Less valuation allowance for other real estate owned	(4,642		)	(8,344		)
Balance at end of period	$	14,054		$	23,128

During the three months ended March 31, 2014 and 2013, net charge-offs against the allowance for loan losses at the time of foreclosure were approximately $162,000 and $374,000, respectively.

Activity in the valuation allowance for other real estate owned in settlement of loans for the three months ended March 31, 2014 and 2013, respectively, is summarized as follows:

	Three Months Ended March 31,
(in thousands)	2014			2013
Balance, beginning of period	$	4,675		$	6,137
Provision for other real estate owned	123			2,343
Charge-offs	(156		)	(136		)
Balance, end of period	$	4,642		$	8,344

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Stock Compensation (Details) (USD $)	0 Months Ended	3 Months Ended
	Jul. 02, 2013	Mar. 31, 2014	Mar. 31, 2013
Stock compensation
Grant of options to purchase (in shares)		547,492
Options issued in 2008 to acquire shares that vested immediately		11,578
Number of shares
Outstanding at the beginning of period (in shares)		121,405
Expired (in shares)		(18,255)
Outstanding at the end of period (in shares)		103,150
Exercisable at the end of period (in shares)		88,633
Weighted average exercise price
Outstanding at the beginning of period (in dollars per share)		$ 24.14
Expired (in dollars per share)		$ 28.97
Outstanding at the end of period (in dollars per share)		$ 23.28
Exercisable at the end of period (in dollars per share)		$ 23.49
Weighted Average Contractual Term (in years)
Outstanding at the end of period		2 years 8 months 12 days
Exercisable at the end of period		2 years 6 months
Aggregate Intrinsic Value
Outstanding at the end of period		$ 0
Exercisable at the end of period		0
Additional disclosures
Stock dividend (as a percent)	4.00%
Stock based compensation expense		6,000	2,000
Total unrecognized compensation expense related to non-vested stock awards		$ 44,000
Weighted average period is expected to be recognized		1 year 7 months 6 days
Minimum
Stock compensation
Options vest over periods		4 years
Maximum
Stock compensation
Options vest over periods		5 years

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Stockholders' Equity (Tables)

3 Months Ended

Mar. 31, 2014

Stockholders' Equity

Schedule of the change in the components of the accumulated other comprehensive income (loss)

							Accumulated
				Unrecognized Net			Other
				Pension and			Comprehensive
	Unrealized Loss			Postretirement			(Loss)
(in thousands)	on Securities (1)			Costs (2)			Income
Balance, December 31, 2013	$	(1,491	)	$	722		$	(769	)
Other comprehensive income, before reclassifications	886			0			886
Amounts reclassified from accumulated other comprehensive income	0			19			19
Current period other comprehensive income, before tax	886			19			905
Income tax expense	(337		)	(7		)	(344		)
Current period other comprehensive income, net of tax	549			12			561
Balance, March 31, 2014	$	(942	)	$	734		$	(208	)
Balance, December 31, 2012	$	3,265		$	(1,440	)	$	1,825
Other comprehensive (loss) income, before reclassifications	(957		)	0			(957		)
Amounts reclassified from accumulated other comprehensive income	(294		)	27			(267		)
Current period other comprehensive (loss) income, before tax	(1,251		)	27			(1,224		)
Income tax benefit (expense)	529			(11		)	518
Current period other comprehensive (loss) income, net of tax	(722		)	16			(706		)
Balance, March 31, 2013	$	2,543		$	(1,424	)	$	1,119

(1) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in gain on sale of investment securities in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in the computation of net periodic pension cost.

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Loans and Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$ 4,753	$ 4,796
Collectively evaluated for impairment	8,092	8,923
Total	12,845	13,719	14,545	14,842
Loans outstanding:
Individually evaluated for impairment	36,038	34,816
Collectively evaluated for impairment	809,269	804,731
Total loans	845,307	839,547
Commercial, Financial, and Agricultural
Allowance for loan losses:
Individually evaluated for impairment	1,069	721
Collectively evaluated for impairment	1,383	1,653
Total	2,452	2,374	1,828	1,937
Loans outstanding:
Individually evaluated for impairment	4,919	4,015
Collectively evaluated for impairment	127,427	129,702
Total loans	132,346	133,717
Real Estate Construction - Residential
Allowance for loan losses:
Individually evaluated for impairment	307	392
Collectively evaluated for impairment	172	539
Total	479	931	899	732
Loans outstanding:
Individually evaluated for impairment	2,143	2,204
Collectively evaluated for impairment	19,917	18,804
Total loans	22,060	21,008
Real Estate Construction - Commercial
Allowance for loan losses:
Individually evaluated for impairment	36	304
Collectively evaluated for impairment	514	327
Total	550	631	1,811	1,711
Loans outstanding:
Individually evaluated for impairment	5,936	6,615
Collectively evaluated for impairment	51,404	48,461
Total loans	57,340	55,076
Real Estate Mortgage - Residential
Allowance for loan losses:
Individually evaluated for impairment	1,808	1,374
Collectively evaluated for impairment	1,282	1,585
Total	3,090	2,959	2,921	3,387
Loans outstanding:
Individually evaluated for impairment	7,472	6,517
Collectively evaluated for impairment	222,838	219,024
Total loans	230,310	225,541
Real Estate Mortgage - Commercial
Allowance for loan losses:
Individually evaluated for impairment	1,482	1,989
Collectively evaluated for impairment	4,537	4,534
Total	6,019	6,523	6,840	6,834
Loans outstanding:
Individually evaluated for impairment	15,252	15,422
Collectively evaluated for impairment	368,878	367,128
Total loans	384,130	382,550
Installment Loans to Individuals
Allowance for loan losses:
Individually evaluated for impairment	51	16
Collectively evaluated for impairment	204	278
Total	255	294	243	239
Loans outstanding:
Individually evaluated for impairment	316	43
Collectively evaluated for impairment	18,805	21,612
Total loans	19,121	21,655
Unallocated
Allowance for loan losses:
Collectively evaluated for impairment		7
Total		$ 7	$ 3	$ 2

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Repurchase Reserve Liability

3 Months Ended

Mar. 31, 2014

Repurchase Reserve Liability

Repurchase Reserve Liability

(13) Repurchase Reserve Liability

The Company’s repurchase reserve liability for estimated losses incurred on sold loans that are included in gain on sales of mortgage loans was $160,000 at March 31, 2014. This liability represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans originated for sale that may arise from representation and warranty claims that could relate to a variety of issues, including but not limited to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines. Although the Company has not experienced any historical repurchase losses, it was notified during the third quarter of 2013 by one of its two investors, Freddie Mac, that fifteen loans which were foreclosed upon from 2007 to the present, are being reviewed for quality control purposes and may result in loss indemnification payments to the investor as reimbursement for losses. The balance of these loans at foreclosure date totaled $1.5 million. During the fourth quarter of 2013 and through March 31, 2014, the Company settled these loan foreclosures resulting in payments totaling $119,000 for reimbursement of costs incurred by Freddie Mac on three of these foreclosures. The remaining twelve foreclosures were settled without incurring any additional costs. At March 31, 2014, the Company was servicing 3,158 loans sold to the secondary market with a balance of approximately $319.3 million compared to 3,114 loans sold with a balance of approximately $322.5 million at December 31, 2013.