Edgar Filing: HAWTHORN BANCSHARES, INC.

e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2010


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

For the transition period from ______________to______________

Commission File Number: 0-23636

HAWTHORN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


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

300 Southwest Longview Boulevard, Lee’s Summit, Missouri 64081
(Address of principal executive offices) (Zip Code)

(816) 347-8100
(Registrant’s telephone number, including area code)

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

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

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

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


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

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

As of November 9, 2010 the registrant had 4,474,033 shares of common stock, par value $1.00 per share, outstanding.

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)


	September 30,			December 31,
	2010			2009

ASSETS
Loans	$	933,456,302		$	991,614,007
Allowances for loan losses		(13,953,687	)		(14,796,549	)

Net loans		919,502,615			976,817,458

Investment in available-for-sale securities, at fair value		165,172,611			152,926,685
Federal funds sold and securities purchased under agreements to resell		125,820			89,752
Cash and due from banks		52,099,695			24,575,943
Premises and equipment — net		37,236,395			38,623,293
Other real estate owned and repossessed assets		10,012,412			8,490,914
Accrued interest receivable		6,020,411			6,625,557
Mortgage servicing rights		2,198,887			2,020,964
Intangible assets — net		1,095,535			1,503,986
Cash surrender value — life insurance		1,979,466			1,929,910
Other assets		19,622,328			22,866,092

Total assets	$	1,215,066,175		$	1,236,470,554

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand	$	143,143,196		$	135,017,639
Savings, interest checking and money market		363,916,607			354,284,004
Time deposits $100,000 and over		127,609,669			137,860,435
Other time deposits		315,904,482			329,160,719

Total deposits		950,573,954			956,322,797

Federal funds purchased and securities sold under agreements to repurchase		31,460,010			36,645,434
Subordinated notes		49,486,000			49,486,000
Other borrowed money		67,168,047			79,317,302
Accrued interest payable		1,344,701			2,438,121
Other liabilities		5,112,064			4,489,617

Total liabilities		1,105,144,776			1,128,699,271

Stockholders’ equity:
Preferred stock, $1,000 par value
Authorized and issued 30,255 shares		28,722,124			28,364,768
Common stock, $1 par value
Authorized 15,000,000 shares; issued 4,635,891 and 4,463,813 shares, respectively		4,635,891			4,463,813
Surplus		28,909,244			26,970,745
Retained earnings		48,828,486			50,576,551
Accumulated other comprehensive income, net of tax		2,342,472			912,224
Treasury stock; 161,858 shares, at cost		(3,516,818	)		(3,516,818	)

Total stockholders’ equity		109,921,399			107,771,283

Total liabilities and stockholders’ equity	$	1,215,066,175		$	1,236,470,554

See accompanying notes to consolidated financial statements.

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

INTEREST INCOME
Interest and fees on loans	$	13,234,729	$	14,340,996	$	40,286,802	$	43,332,581
Interest on debt securities:
Taxable		1,054,667		1,152,935		3,236,744		3,430,153
Nontaxable		273,538		350,839		894,293		1,088,561
Interest on federal funds sold and securities purchased under agreements to resell		50		60		133		253
Interest on interest-bearing deposits		27,851		11,556		63,373		43,565
Dividends on other securities		33,577		53,742		119,024		110,010

Total interest income		14,624,412		15,910,128		44,600,369		48,005,123

INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		511,442		693,242		1,696,648		2,390,089
Time deposit accounts $100,000 and over		594,334		949,273		1,956,968		3,056,793
Other time deposit accounts		1,758,850		2,532,085		5,607,583		8,311,234
Interest on federal funds purchased and securities sold under agreements to repurchase		19,690		23,458		59,353		64,028
Interest on subordinated notes		353,536		588,554		1,201,082		1,878,657
Interest on other borrowed money		527,818		687,535		1,794,832		2,320,481

Total interest expense		3,765,670		5,474,147		12,316,466		18,021,282

Net interest income		10,858,742		10,435,981		32,283,903		29,983,841
Provision for loan losses		2,450,000		1,250,000		7,105,000		4,404,000

Net interest income after provision for loan losses		8,408,742		9,185,981		25,178,903		25,579,841

NON-INTEREST INCOME
Service charges on deposit accounts		1,427,130		1,547,038		4,150,420		4,380,248
Trust department income		186,989		237,939		566,495		623,258
Gain on sale of mortgage loans, net		1,011,253		489,069		1,533,027		2,437,169
Other		284,932		326,560		1,115,838		732,189

Total non-interest income		2,910,304		2,600,606		7,365,780		8,172,864

NON-INTEREST EXPENSE
Salaries and employee benefits		4,256,523		4,454,183		13,463,964		13,403,853
Occupancy expense, net		654,687		599,555		1,881,093		1,762,990
Furniture and equipment expense		472,657		506,469		1,499,307		1,794,400
FDIC insurance assessment		442,965		421,690		1,288,163		2,085,472
Legal, examination, and professional fees		348,792		311,780		932,115		985,274
Advertising and promotion		311,219		301,348		886,242		901,066
Postage, printing, and supplies		299,997		271,434		874,353		833,846
Processing expense		853,710		845,288		2,560,570		2,538,067
Other real estate expense		882,264		239,747		2,895,010		575,008
Other		842,703		1,088,245		2,535,084		2,815,972

Total non-interest expense		9,365,517		9,039,739		28,815,901		27,695,948

Income before income taxes		1,953,529		2,746,848		3,728,782		6,056,757
Less income taxes		531,327		840,070		1,030,346		1,889,060

Net income		1,422,202		1,906,778		2,698,436		4,167,697
Preferred stock dividends		378,187		378,187		1,130,360		1,134,562
Accretion of discount on preferred stock		119,119		119,119		357,356		357,356

Net income available to common shareholders	$	924,896	$	1,409,472	$	1,210,720	$	2,675,779

Basic earnings per share	$	0.21	$	0.32	$	0.27	$	0.60
Diluted earnings per share	$	0.21	$	0.32	$	0.27	$	0.60

See accompanying notes to consolidated financial statements.

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


										Accumulated					Total
										other					Stock -
	Preferred		Common				Retained			Comprehensive		Treasury			holders’
	Stock		Stock		Surplus		Earnings			Income (Loss)		Stock			Equity

Balance, December 31, 2009	$	28,364,768	$	4,463,813	$	26,970,745	$	50,576,551		$	912,224	$	(3,516,818	)	$	107,771,283

Net income		—		—		—		2,698,436			—		—			2,698,436
Change in unrealized gain (loss) on securities:
Unrealized gain on debt and equity securities available-for-sale, net of tax		—		—		—		—			1,394,275		—			1,394,275
Defined benefit pension plans:
Amortization of prior service cost included in net periodic pension cost, net of tax		—		—		—		—			35,973		—			35,973

Total other comprehensive income																1,430,248

Total comprehensive income																4,128,684

Stock based compensation expense		—		—		68,009		—			—		—			68,009
Accretion of preferred stock discount		357,356		—		—		(357,356	)		—		—			—
Stock dividend		—		172,078		1,870,490		(2,042,568	)		—		—			—
Cash dividends declared, preferred stock								(1,134,562	)							(1,134,562	)
Cash dividends declared, common stock		—		—		—		(912,015	)		—		—			(912,015	)

Balance, September 30, 2010	$	28,722,124	$	4,635,891	$	28,909,244	$	48,828,486		$	2,342,472	$	(3,516,818	)	$	109,921,399



Balance, December 31, 2008	$	27,888,294	$	4,298,353	$	25,144,323	$	51,598,678		$	1,005,553	$	(3,516,818	)	$	106,418,383

Net income		—		—		—		4,167,697			—		—			4,167,697
Change in unrealized gain (loss) on securities:
Unrealized loss on debt and equity securities available-for-sale, net of tax		—		—		—		—			558,218		—			558,218
Defined benefit pension plans:
Amortization of prior service cost included in net periodic pension cost, net of tax		—		—		—		—			36,142		—			36,142

Total other comprehensive loss																594,360

Total comprehensive income																4,762,057

Stock based compensation expense		—		—		99,697		—			—		—			99,697
Accretion of preferred stock discount		357,355		—		—		(357,355	)		—		—			—
Stock dividend		—		165,460		1,695,963		(1,861,423	)		—		—			—
Cash dividends declared, preferred stock								(991,691	)							(991,691	)
Cash dividends declared, common stock		—		—		—		(1,796,893	)		—		—			(1,796,893	)

Balance, September 30, 2009	$	28,245,649	$	4,463,813	$	26,939,983	$	50,759,013		$	1,599,913	$	(3,516,818	)	$	108,491,553

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows (Unaudited)


	Nine months Ended September 30,
	2010			2009

Cash flows from operating activities:
Net income	$	2,698,436		$	4,167,697
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		7,105,000			4,404,000
Depreciation expense		1,484,686			1,540,942
Net amortization of debt securities, premiums, and discounts		454,671			366,383
Amortization of intangible assets		408,451			475,592
Stock based compensation expense		68,009			99,697
Loss on sales and dispositions of premises and equipment		59,621			147,166
Other real estate owned impairment charges		1,595,638			62,535
Decrease in deferred tax asset, net		728,912			380,001
Decrease in accrued interest receivable		605,146			598,071
Increase in cash surrender value -life insurance		(49,556	)		(57,750	)
Decrease in other assets		578,938			93,894
Decrease in accrued interest payable		(1,093,420	)		(1,455,466	)
Increase in other liabilities		871,960			1,808,432
Origination of mortgage loans held for sale		(72,437,349	)		(125,186,177	)
Proceeds from the sale of mortgage loans held for sale		69,193,376			127,623,346
Gain on sale of mortgage loans, net		(1,533,027	)		(2,437,169	)
Other, net		398,872			371,107

Net cash provided by operating activities		11,138,364			13,002,301

Cash flows from investing activities:
Net decrease in loans		42,321,380			6,768,359
Purchase of available-for-sale debt securities		(154,204,703	)		(110,865,517	)
Proceeds from maturities of available-for-sale debt securities		105,724,703			83,996,365
Proceeds from calls of available-for-sale debt securities		38,065,100			17,805,000
Proceeds from sales of FHLB stock		995,600			—
Purchases of premises and equipment		(320,967	)		(420,575	)
Proceeds from sales of premises and equipment		34,528			582,816
Proceeds from sales of other real estate owned and repossessions		9,185,427			1,929,955

Net cash provided (used) by investing activities		41,801,068			(203,597	)

Cash flows from financing activities:
Net increase in non-interest-bearing demand deposits		8,125,557			871,554
Net increase in savings, interest checking, and money market accounts		9,632,603			15,278,667
Net decrease in time deposits		(23,507,003	)		(3,311,738	)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(5,185,424	)		3,235,954
Proceeds from other borrowed money		10,000,000			—
Repayment of other borrowed money		(22,149,255	)		(57,576,317	)
Cash dividends paid — preferred stock		(1,134,562	)		(991,691	)
Cash dividends paid — common stock		(1,161,528	)		(2,192,342	)

Net cash used by financing activities		(25,379,612	)		(44,685,913	)

Net increase (decrease) in cash and cash equivalents		27,559,820			(31,887,209	)
Cash and cash equivalents, beginning of year		24,665,695			53,827,468

Cash and cash equivalents, end of period	$	52,225,515		$	21,940,259


Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	13,409,886		$	19,476,748
Income taxes		200,000			390,000

Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans	$	12,665,463		$	5,739,740

See accompanying notes to consolidated financial statements.

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Operating results for the three and nine-month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. Our Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

These unaudited condensed consolidated interim financial statements should be read in conjunction with our Company’s audited consolidated financial statements included in its 2009 Annual Report to Shareholders under the caption Consolidated Financial Statements and incorporated by reference into its Annual Report on Form 10-K for the year ended December 31, 2009 as Exhibit 13.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed and omitted. These financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our Company’s consolidated financial position as of September 30, 2010, the consolidated statements of operations for the three and nine-month periods ended September 30, 2010 and 2009, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2010 and 2009.

On July 1, 2010, our Company paid a special stock dividend of four percent to common shareholders of record at the close of business on May 19, 2010. For all periods presented, share information, including basic and diluted earnings per share, have been adjusted retroactively to reflect this change.

Loans and Allowance for Loan Losses

Major classifications in our Company’s loan portfolio at September 30, 2010 and December 31, 2009 are as follows:


	September 30,		December 31,
	2010		2009

Commercial, financial, and agricultural	$	132,919,752	$	151,399,300
Real estate construction — residential		38,229,395		38,840,664
Real estate construction — commercial		76,586,537		77,936,569
Real estate mortgage — residential		217,802,375		232,332,124
Real estate mortgage — commercial		433,930,074		453,975,271
Installment loans to individuals		33,821,909		36,966,018
Unamortized loan origination fees and costs, net		166,260		164,061

Total loans	$	933,456,302	$	991,614,007

The Bank grants real estate, commercial, and installment 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 loans consist primarily of the financing of vehicles.

As shown in the above table, our Company’s total loans have declined $58,158,000, or 5.9%, since December 31, 2009. Of this decline $8,466,000 represents loans charged-off and $12,665,000 represents loans that were foreclosed on and moved to other real estate owned and repossessed assets. Of the remaining $37,027,000 decrease, $21,400,000 represents payoffs/paydowns of six large credits.

A summary of impaired loans as of September 30, 2010 and December 31, 2009 is as follows:


	September 30, 2010		December 31, 2009

Loans classified as impaired:
Non-accrual loans	$	49,847,089	$	34,153,731
Impaired loans continuing to accrue interest		16,635,933		39,713,014

Total impaired loans	$	66,483,022	$	73,866,745


Balance of impaired loans with reserves	$	34,715,944	$	26,294,560
Balance of impaired loans without reserves		31,767,078		47,572,185

Total impaired loans	$	66,483,022	$	73,866,745


Reserves for impaired loans	$	7,797,557	$	6,414,729
Average balance of impaired loans during the period		64,700,592		39,048,298
Balance of trouble debt restructured loans included in impaired loans		22,457,385		11,233,326

The table above shows our Company’s investment in impaired loans at September 30, 2010 and December 31, 2009. These loans consist of loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings. Although our non-accrual loans significantly increased from $34,153,731 at December 31, 2009 to $49,847,089 at September 30, 2010, total impaired loans decreased $7,383,723. The balance of impaired loans without reserves was 48% of total impaired loans at September 30, 2010 and 64% at December 31, 2009. Management believes the excess value in the collateral was sufficient at September 30, and December 31, and these loans did not require additional reserves.

The following is a summary of the allowance for loan losses for the three and nine-months ended September 30, 2010:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Balance at beginning of period	$	12,231,596		$	13,704,736		$	14,796,549		$	12,666,546

Additions:
Provision for loan losses		2,450,000			1,250,000			7,105,000			4,404,000

Total additions		2,450,000			1,250,000			7,105,000			4,404,000

Deductions:
Loans charged off		899,795			1,198,165			8,466,456			3,549,572
Less recoveries on loans		(171,886	)		(170,963	)		(518,594	)		(406,560	)

Net loans charged off		727,909			1,027,202			7,947,862			3,143,012

Balance at end of period	$	13,953,687		$	13,927,534		$	13,953,687		$	13,927,534

Investment Securities

A summary of investment securities by major category, at fair value, consisted of the following at September 30, 2010 and December 31, 2009.


	September 30,		December 31,
	2010		2009

U.S. treasury	$	1,040,234	$	—
Government sponsored enterprises		46,898,658		44,380,798
Asset-backed securities		85,822,384		69,434,650
Obligations of states and political subdivisions		31,411,335		39,111,237


Total available for sale securities	$	165,172,611	$	152,926,685

Most of our Company’s investment securities are classified as available for sale, as discussed in more detail below. Asset backed securities include agency mortgage-backed securities, which are guaranteed by government sponsored agencies such as the FHLMC, FNMA and GNMA. Our Company does not invest in subprime originated mortgage-backed or collateralized debt obligation instruments. Investment securities which are classified as restricted equity securities primarily consist of Federal Home Loan Bank Stock and our Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of $6,150,250 and $6,753,550, as of September 30, 2010 and December 31, 2009 respectively.

The amortized cost and fair value of securities classified as available-for-sale at September 30, 2010 and December 31, 2009 are as follows:


			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses		Fair value

September 30, 2010
U.S. treasury	$	999,808	$	40,426	$	—	$	1,040,234
Government sponsored enterprises		46,285,100		614,861		1,303		46,898,658
Asset-backed securities		82,943,924		2,878,460		—		85,822,384
Obligations of states and political subdivisions		30,340,035		1,073,842		2,542		31,411,335


Total available for sale securities	$	160,568,867	$	4,607,589	$	3,845	$	165,172,611


December 31, 2009
Government sponsored enterprises	$	44,059,540	$	371,258	$	50,000	$	44,380,798
Asset-backed securities		68,092,852		1,585,774		243,976		69,434,650
Obligations of states and political subdivisions		38,456,246		708,196		53,205		39,111,237


Total available for sale securities	$	150,608,638	$	2,665,228	$	347,181	$	152,926,685

The amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2010 and December 31, 2009, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.


	Amortized		Fair
	cost		value

Due in one year or less	$	3,716,849	$	3,766,402
Due after one year through five years		57,445,491		58,400,399
Due after five years through ten years		12,604,036		13,176,191
Due after ten years		3,858,567		4,007,235

		77,624,943		79,350,227
Asset-backed securities		82,943,924		85,822,384

Total available for sale investment securities	$	160,568,867	$	165,172,611

Debt securities with carrying values aggregating approximately $141,473,000 and $132,322,000 at September 30, 2010 and December 31, 2009, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009, were as follows:


	Less than 12 months					12 months or more						Total
										Number of
	Fair		Unrealized			Fair		Unrealized		Investment		Fair		Unrealized
	Value		Losses			Value		Losses		Positions		Value		Losses

At September 30, 2010
Government sponsored enterprises	$	998,697	$	(1,303	)	$	—	$	—		1	$	998,697	$	(1,303	)
Obligations of states and political subdivisions		365,173		(2,542	)		—		—		2		365,173		(2,542	)

	$	1,363,870	$	(3,845	)	$	—	$	—		3	$	1,363,870	$	(3,845	)


	Less than 12 months					12 months or more							Total
											Number of
	Fair		Unrealized			Fair		Unrealized			Investment		Fair		Unrealized
At December 31, 2009	Value		Losses			Value		Losses			Positions		Value		Losses

Government sponsored enterprises	$	5,943,819	$	(50,000	)	$	—	$	—			6	$	5,943,819		(50,000	)
Asset-backed securities		14,600,160		(243,904	)		20,551		(72	)		15		14,620,711	$	(243,976	)
Obligations of states and political subdivisions		3,576,780		(53,205	)		—		—			14		3,576,780		(53,205	)

	$	24,120,759	$	(347,109	)	$	20,551	$	(72	)		35	$	24,141,310	$	(347,181	)

Our Company’s available for sale portfolio consisted of approximately 304 securities at September 30, 2010, of which 3 securities were temporarily impaired. None of these securities have been in the loss position for 12 months or longer. Our Company believes the $4,000 in unrealized losses included in other comprehensive income at September 30, 2010 is attributable to changes in market interest rates and not the credit quality of the issuer and are not considered other-than-temporarily impaired. Our Company does not intend to sell these investments and it is not more likely than not that our Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

Our Company’s available for sale portfolio consisted of approximately 305 securities at December 31, 2009. One of these securities had been in the loss position for 12 months or longer. The $72 unrealized loss included in other comprehensive income at December 31, 2009 on this asset-backed security was caused by interest rate increases. Because the decline in fair value is attributable to changes in interest rates and not credit quality this investment was not

considered other-than-temporarily impaired. As of September 30, 2010, this security was not in the unrealized loss position.

During the nine months ended September 30, 2010 and September 30, 2009, there were no proceeds from sales of securities and no components of investment securities gains and losses which have been recognized in earnings.

Intangible Assets

A summary of other intangible assets at September 30, 2010 and December 31, 2009 is as follows:


	September 30, 2010							December 31, 2009
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
	Amount		Amortization			Amount		Amount		Amortization			Amount

Amortizable intangible assets:
Core deposit intangible	$	7,060,224	$	(5,964,689	)	$	1,095,535	$	7,060,224	$	(5,556,238	)	$	1,503,986
Mortgage servicing rights		2,880,735		(681,848	)		2,198,887		2,945,019		(924,055	)		2,020,964


Total amortizable intangible assets	$	9,940,959	$	(6,646,537	)	$	3,294,422	$	10,005,243	$	(6,480,293	)	$	3,524,950

Changes in the net carrying amount of other intangible assets for the nine months ended September 30, 2010 are as follows:


	Core
	Deposit			Mortgage
	Intangible			Servicing
	Asset			Rights

Balance at December 31, 2009	$	1,503,986		$	2,020,964
Additions		—			772,880
Amortization		(408,451	)		(594,957	)

Balance at September 30, 2010	$	1,095,535		$	2,198,887

Mortgage servicing rights (MSRs) are amortized over the shorter of 7 years or the life of the loan. They are periodically reviewed for impairment and if impairment is indicated, recorded at fair value. At September 30, 2010 and December 31, 2009, no temporary impairment was recognized. The fair value of MSRs is based on the present value of expected cash flows, as further discussed in Fair Value of Financial Instruments. Mortgage loans serviced for others totaled approximately $285,888,000 and $269,475,000 at September 30, 2010 and December 31, 2009, respectively. Included in other noninterest income were real estate servicing fees for the nine months ended September 30, 2010 and 2009 of $682,000 and $648,000, respectively.

Our Company’s amortization expense on intangible assets in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions. The following table shows the estimated future amortization expense based on existing asset balances and the interest rate environment as of September 30, 2010 and for the next five years:


	Core
	Deposit		Mortgage
	Intangible		Servicing
	Asset		Rights

2010	$	118,026	$	440,000
2011		434,763		477,000
2012		408,062		363,000
2013		134,684		277,000
2014		—		212,000
2015		—		162,000

The aggregate amortization expense of intangible assets subject to amortization for the three and nine-month periods ended September 30, 2010 is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Aggregate amortization expense	2010		2009		2010		2009

Core deposit intangible asset	$	118,026	$	150,519	$	408,451	$	475,592
Mortgage servicing rights		307,981		156,365		594,957		746,682

Income Taxes

At September 30, 2010 and December 31, 2009, our Company had $562,000 of gross unrecognized tax benefits that if recognized would affect the effective tax rate. Our Company believes that during the next twelve months it is reasonably possible that there would be a reduction of $222,000 in gross unrecognized tax benefits as a result of the lapse of statute of limitations for the 2006 tax year. At September 30, 2010, total interest accrued on unrecognized tax benefits was approximately $59,000. As of September 30, 2010, there were no federal or state income tax examinations in process.

Our Company recognizes deferred tax assets only to the extent that they are expected to be used to reduce amounts that have been paid or will be paid to tax authorities. Management believes, based on all positive and negative evidence available to it, that the deferred tax asset at September 30, 2010 is more likely-than-not-to be realized, and accordingly, no valuation allowance has been recorded. Future facts and circumstances may require a valuation allowance. Charges to establish a valuation allowance could have a material adverse effect on our results of operations and financial position.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 27.2% for the three months ended September 30, 2010 compared to 30.6% for the three months ended September 30, 2009. Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 27.6% for the nine months ended September 30, 2010 compared to 31.2% for the nine months ended September 30, 2009. The effective tax rate for the three and nine months ended September 30, 2010 reflects the increase in tax-exempt income as a percentage of total taxable income.

Employee Benefit Plans

Employee benefits charged to operating expenses are summarized for the three and nine-month periods ended September 30, 2010 in the table below.


	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2010			2009		2010		2009

Payroll taxes	$	257,947		$	246,232	$	863,587	$	855,230
Medical plans		372,789			370,113		1,171,144		1,127,477
401k match		84,300			81,045		238,088		227,902
Pension plan		216,298			229,000		648,895		687,000
Profit-sharing		(72,468	)		99,000		2		233,350
Other		28,288			28,906		102,304		81,538


Total employee benefits	$	887,154		$	1,054,296	$	3,024,020	$	3,212,497

Our Company provides a noncontributory defined benefit pension plan for all full-time employees. Pension expense for the periods indicated is as follows:


	Estimated			Actual
	2010			2009

Service cost — benefits earned during the year	$	844,178		$	850,940
Interest cost on projected benefit obligations		556,047			509,482
Expected return on plan assets		(613,659	)		(539,283	)
Amortization of prior service cost		78,628			78,628
Amortization of net gains		—			(9,075	)

Net periodic pension expense — Annual	$	865,194		$	890,692


Pension expense — three months ended September 30, (actual)	$	216,298		$	229,000

Pension expense — nine months ended September 30, (actual)	$	648,895		$	687,000

Our Company made a $1,000,000 contribution to the defined benefit plan in 2009, and the minimum required contribution for 2010 is estimated to be $864,000. Our Company has contributed $554,000 through October 2010.

Stock-Based Compensation

Our Company’s stock option plan provides for the grant of options to purchase up to 486,720 shares of our Company’s common stock to officers and other key employees of our Company and its subsidiaries. All options have been granted at exercise prices equal to fair value and vest over periods ranging from four to five years, except 10,294 options issued in 2008 that vested immediately.

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


							Weighted
			Weighted		Aggregate		Average
			Average		Intrinsic		Contractual
			Exercise		Value		Term
	Options		Price		(000)		(in years)

Outstanding at January 1, 2010*		286,948	$	24.11
Granted		—		—
Exercised		—		—
Forfeited		—		—
Canceled		—		—

Outstanding at September 30, 2010		286,948	$	24.11	$	—		4.2

Exercisable at September 30, 2010		245,617	$	23.96	$	—		3.7


*		Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2010.

Total stock-based compensation expense for the three and nine months ended September 30, 2010 and 2009 was $19,000 and $31,000, respectively, and $68,000 and $100,000, respectively. As of September 30, 2010, the total unrecognized compensation expense related to non-vested stock awards was $100,000 and the related weighted average period over which it is expected to be recognized is approximately three years.

Comprehensive Income

Comprehensive income for the three and nine months ended September 30, 2010 and 2009 is summarized as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009

Net income	$	1,422,202	$	1,906,778	$	2,698,436	$	4,167,697
Other comprehensive income:
Unrealized gain on securities:
Unrealized gain on debt and equity securities available-for-sale, net of tax		249,006		808,079		1,394,275		558,218
Defined benefit pension plan:
Amortization of prior service cost included in net periodic pension cost, net of tax		11,991		12,052		35,973		36,142

Total other comprehensive income		260,997		820,131		1,430,248		594,360

Comprehensive income	$	1,683,199	$	2,726,909	$	4,128,684	$	4,762,057

Preferred Stock

On December 19, 2008, our Company announced its participation in the U.S. Treasury Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. This program was designed to attract broad participation by banking institutions to help stabilize the financial system by encouraging lending. Our Company has used the funds received, as discussed below, to continue to provide loans to its customers and to look for ways to deploy additional funds to benefit the communities in our Company’s market area.

Participation in this program included our Company’s issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 265,471 shares of common stock (see below for additional information) to the U.S. Department of Treasury in exchange for $30,255,000. The proceeds received were allocated between the preferred stock and the common stock warrant based upon their relative fair values. This resulted in the recording of a discount on the preferred stock upon issuance that reflects the value allocated to the warrant. The discount on the preferred stock will be accreted over five years, consistent with management’s estimate of the life of the preferred stock. Such accretion will be treated as additional dividends on the preferred stock. The allocated carrying values of the senior preferred stock and common stock warrants at September 30, 2010 were $28,722,000 and $2,382,000, respectively.

The preferred shares carry a 5% cumulative dividend for the first five years and 9% thereafter if not redeemed. The preferred shares are redeemable after three years at par plus accrued dividends, or before three years if our Company raises Tier 1 capital in an amount equal to the preferred stock issued. The preferred stock generally does not have any voting rights, subject to an exception in the event our Company fails to pay dividends on the preferred stock for nine or more quarterly periods, whether or not consecutive. Under such circumstances, the Treasury will be entitled to vote to elect two directors to the board until all unpaid dividends have been paid or declared and set apart for payment. Our Company is prohibited from paying any dividends with respect to shares of common stock unless all accrued and unpaid dividends are paid in full on the senior preferred stock for all past dividend periods. The Treasury Department may also transfer the senior preferred stock to a third party at any time.

The common stock warrant is exercisable immediately with a ten year term, in whole or in part, at an exercise price of $17.10 per share. The preferred stock and warrant are classified as stockholders’ equity in the consolidated balance sheets and qualify, for regulatory capital purposes, as Tier I capital. For the nine months ended September 30, 2010, our Company had declared and paid dividends in the amount of $1,135,000 on the preferred stock.

Earnings per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the three and nine months ending September 30, 2010. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the three and nine months ending September 30, 2010.

The weighted average common and diluted shares outstanding and earnings per share amounts have been adjusted to give effect to the 4% stock dividend on July 1, 2010. The calculations of basic and diluted earnings per share are as follows:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Basic income per common share:
Net income	$	1,422,202	$	1,906,778	$	2,698,436	$	4,167,697
Less:
Preferred stock dividends		378,187		378,187		1,130,360		1,134,562
Accretion of discount on preferred stock		119,119		119,119		357,356		357,356

Net income available to common shareholders	$	924,896	$	1,409,472	$	1,210,720	$	2,675,779

Basic earnings per share	$	0.21	$	0.32	$	0.27	$	0.60


Diluted earnings per common share:

Net income	$	1,422,202	$	1,906,778	$	2,698,436	$	4,167,697
Less:
Preferred stock dividends		378,187		378,187		1,130,360		1,134,562
Accretion of discount on preferred stock		119,119		119,119		357,356		357,356

Net income available to common shareholders	$	924,896	$	1,409,472	$	1,210,720	$	2,675,779

Average shares outstanding		4,474,033		4,474,033		4,474,033		4,474,033
Effect of dilutive stock options		—		—		—		—

Average shares outstanding including dilutive stock options		4,474,033		4,474,033		4,474,033		4,474,033

Diluted earnings per share	$	0.21	$	0.32	$	0.27	$	0.60

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

The following options and warrant to purchase shares during the three and nine months ended 2010 and 2009 were not included in the respective computations of diluted earnings per share because the exercise price, 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 September 30,				Nine months ended September 30,
	2010		2009		2010		2009

Anti-dilutive shares — option shares		286,948		286,948		286,948		286,948
Anti-dilutive shares — warrant shares		265,471		265,471		265,471		265,471

Fair Value Measurements

Our Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The Financial Accounting Standards Board (FASB) Accounting Standards Codification (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 September 30, 2010 and December 31, 2009 there were no transfers into or out of Level 2.

The fair value hierarchy is as follows:

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

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

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

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

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

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:

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

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

Available-for-sale securities

Available-for-sale securities are recorded at fair value on a recurring basis. Available-for-sale securities is the only balance sheet category our Company is required, in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), to carry at fair value on a recurring basis. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, our Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.


			Fair Value Measurements
			At September 30, 2010 Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	September 30, 2010		(Level 1)		(Level 2)		(Level 3)

U.S. treasury	$	1,040,234	$	—	$	1,040,234	$	—
Government sponsored enterprises		46,898,658		—		46,898,658		—
Asset-backed securities		85,822,384		—		85,822,384		—
Obligations of states and political subdivisions		31,411,335		—		31,411,335		—

Total	$	165,172,611	$	—	$	165,172,611	$	—


			Fair Value Measurements
			At December 31, 2009 Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	December 31, 2009		(Level 1)		(Level 2)		(Level 3)

Government sponsored enterprises	$	44,380,798	$	—	$	44,380,798	$	—
Asset-backed securities		69,434,650		—		69,434,650		—
Obligations of states and political subdivisions		39,111,237		—		39,111,237		—

Total	$	152,926,685	$	—	$	152,926,685	$	—

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

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

Impaired Loans

Our Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. The fair value of impaired loans are generally based on market prices for loans with similar collateral determined through independent appraisals, the fair value of the collateral for a collateral-dependent loan, 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 September 30, 2010, our Company identified $34.7 million in impaired loans that had specific allowances for losses aggregating $7.8 million. Related to these loans, there was $7.2 million in charge-offs recorded during 2010. As of December 31, 2009, our Company identified $26.3 million in impaired loans that had specific allowances for losses aggregating $6.4 million. Related to these loans, there was $4.2 million in charge-offs recorded during 2009.

Other Real Estate Owned and Repossessed Assets

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


			Fair Value Measurements
			At September 30, 2010 Using
			Quoted Prices						Nine Months
			in Active						Ended
			Markets for		Other		Significant		September 30,
	Fair Value		Identical		Observable		Unobservable		2010
	September 30,		Assets		Inputs		Inputs		Total Gains
Description	2010		(Level 1)		(Level 2)		(Level 3)		(Losses) *

Impaired loans:
Commercial	$	1,094,006	$	—	$	—	$	1,094,006	$	(1,355,716	)
Construction — residential		1,859,653		—		—		1,859,653		(324,742	)
Construction — commercial		14,372,565		—		—		14,372,565		(64,000	)
Real estate — residential		5,129,696		—		—		5,129,696		(3,238,263	)
Real estate — commercial		4,462,467		—		—		4,462,467		(2,188,893	)

Total	$	26,918,387	$	—	$	—		26,918,387	$	(7,171,614	)

Other real estate owned and repossessed assets	$	10,012,412	$	—	$	—	$	10,012,412	$	(3,002,454	)


*		Total gains (losses) include charge offs, valuation write downs, and net losses taken on impaired loans and other real estate owned during the periods reported.


			Fair Value Measurements
			At December 31, 2009 Using
			Quoted Prices						Year
			in Active						Ended
			Markets for		Other		Significant		December 31,
	Fair Value		Identical		Observable		Unobservable		2009
	December 31,		Assets		Inputs		Inputs		Total Gains
Description	2009		(Level 1)		(Level 2)		(Level 3)		(Losses) *

Impaired loans:
Commercial	$	970,937	$	—	$	—	$	970,937	$	(1,043,465	)
Construction — residential		1,776,267		—		—		1,776,267		(778,041	)
Construction — commercial		272,106		—		—		272,106		(160,727	)
Real estate — residential		7,104,961		—		—		7,104,961		(1,914,530	)
Real estate — commercial		9,755,560		—		—		9,755,560		(323,522	)

Total	$	19,879,831	$	—	$	—		19,879,831	$	(4,220,285	)

Other real estate owned and repossessed assets	$	8,490,914	$	—	$	—	$	8,490,914	$	(1,367,207	)


*		Total gains (losses) include charge offs, valuation write downs, and net losses taken on impaired loans and other real estate owned during the periods reported.

For both recurring and nonrecurring fair value measurements, there were no transfers between the various levels for the nine months ending September 30, 2010 or the year ended December 31, 2009.

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments held by our Company, in addition to a discussion of the methods used and assumptions made in computing those estimates, are set forth below.

Loans

The fair value of loans is estimated based on present values using applicable risk-adjusted spreads to the U. S. Treasury curve to approximate current interest rates applicable to each category of such financial instruments. The fair values of impaired loans are generally based on market prices for similar assets determined through independent appraisals or discounted values of independent appraisals and brokers’ opinions of value. 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 proved in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities.

Federal Funds Sold, Cash, and Due from Banks

For federal funds sold, cash, and due from banks, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is calculated by pooling loans into buckets of loans having similar characteristics and performing a present value analysis of future cash flows utilizing the current market rate. The buckets are created based on individual loans characteristics such as loan age, note rate, product type, and the investor remittance schedule.

Accrued Interest Receivable and Payable

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

Deposits

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

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

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

Other Borrowings

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

A summary of the carrying amounts and fair values of our Company’s financial instruments at September 30, 2010 and December 31, 2009 is as follows:


	September 30,				December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value

Assets:
Loans	$	919,502,615	$	925,518,000	$	976,817,458	$	984,305,000
Investment in debt securities		165,172,611		165,172,611		152,926,685		152,926,685
Federal fund sold and securities purchased under agreements to resell		125,820		125,820		89,752		89,752
Cash and due from banks		52,099,695		52,099,695		24,575,943		24,575,943
Mortgage servicing rights		2,198,887		3,082,000		2,020,964		2,904,000
Accrued interest receivable		6,020,411		6,020,411		6,625,557		6,625,557

	$	1,145,120,039	$	1,152,018,537	$	1,163,056,359	$	1,171,426,937


Liabilities:
Deposits:
Demand	$	143,143,196	$	143,143,196	$	135,017,639	$	135,017,639
NOW		148,709,953		148,709,953		139,623,577		139,623,577
Savings		53,502,642		53,502,642		47,637,148		47,637,148
Money market		161,704,012		161,704,012		167,023,279		167,023,279
Time		443,514,151		453,030,000		467,021,154		478,011,000
Federal funds purchased and securities sold under agreements to repurchase		31,460,010		31,460,010		36,645,434		36,645,434
Subordinated notes		49,486,000		21,106,000		49,486,000		18,329,000
Other borrowings		67,168,047		69,695,000		79,317,302		80,557,000
Accrued interest payable		1,344,701		1,344,701		2,438,121		2,438,121

	$	1,100,032,712	$	1,083,695,514	$	1,124,209,654	$	1,105,282,198

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

Forward-Looking Statements

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

•		statements that are not historical in nature, and

•		statements preceded by, followed by or that include the words believes, expects, may, will, should, could, anticipates, estimates, intends or similar expressions.

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

•		competitive pressures among financial services companies may increase significantly,

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

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

•		increases in non-performing assets in our loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,

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

•		legislative or regulatory changes may adversely affect the business in which our Company and its subsidiaries are engaged, including those discussed below in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and

•		changes may occur in the securities markets.

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

We have described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 and in other reports that we file with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that we have not identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.

Overview

Our Company, Hawthorn Bancshares, Inc., is a community-based, financial institution bank holding company headquartered in Lee’s Summit, Missouri. Our Company was incorporated under the laws of the State of Missouri on October 23, 1992 as Exchange National Bancshares, Inc. and changed its name to Hawthorn Bancshares, Inc. in August 2007. Our Company owns all of the issued and outstanding capital stock of Union State Bancshares, Inc., which in turn owns all of the issued and outstanding capital stock of Hawthorn Bank. Our Company conducts operations primarily through our Bank. Our Bank, a state charted bank, had $1.22 billion in assets at September 30, 2010, and 24 full-service banking offices, including its principal office in Jefferson City, Missouri. Our Bank is committed to providing the most

up-to-date financial products and services and delivering these products and services to our market area with superior customer service.

Through our branch network, our Bank provides a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. We also provide a wide range of lending services, including real estate, commercial, installment, and other consumer loans. Other financial services that we provide include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The geographic areas in which we provide our products and services include the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. The products and services are offered to customers primarily within these geographical areas.

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

Critical Accounting Policies

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

Allowance for Loan Losses

We have identified the accounting policy related to the allowance for loan losses as critical to the understanding of our Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Collateral values and historical loss experience are significant inputs and estimates used to measure losses within the reserve methodology. The impact and any associated risks related to these policies on our business operations are discussed in the “Lending and Credit Management” section below.

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing our Company’s future tax consequences of events that have been recognized in the consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forward, and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, our Company would adjust the recorded value of our deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Likewise, our Company would reverse the valuation allowance when the realization of the deferred tax asset is expected. In addition, our Company is subject to the continuous examination of our tax returns by the Internal Revenue Service and other taxing authorities. Our Company accrues for interest related to income taxes in income tax expense. A total interest benefit recognized for the nine months ended September 30, 2010 and 2009 was $35,000 and $23,000, respectively. As of September 30, 2010 and December 31, 2009, total accrued interest was $113,000 and $94,000, respectively

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for our Company as of and for each of the three and nine month periods ended September 30, 2010 and September 30, 2009. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of our Company, including the accompanying notes, presented elsewhere herein.

Selected Financial Data


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
(In thousands, except per share data)	2010			2009			2010			2009

Per Share Data

Basic earnings per common share	$	0.21		$	0.32		$	0.27		$	0.60
Diluted earnings per common share		0.21			0.32			0.27			0.60
Dividends paid on preferred stock		378			378			1,130			1,135
Amortization of discount on preferred stock		119			119			357			357
Dividends paid on common stock		215			455			1,161			2,192
Book value per common share								18.15			17.94
Market price common stock								10.08			9.75

Selected Ratios

(Based on average balance sheets)
Return on average total assets		0.46	%		0.60	%		0.29	%		0.44	%
Return on average common stockholders’ equity		4.52	%		7.03	%		2.01	%		4.51	%
Average common stockholders’ equity to average total assets		6.62	%		6.33	%		6.46	%		6.28	%
(Based on end-of-period data)
Efficiency ratio (1)		68.02	%		69.35	%		72.68	%		72.59	%
Period-end stockholders’ equity to period-end assets								6.68	%		6.47	%
Period-end common stockholders’ equity to period-end assets								9.05	%		8.75	%
Total risk-based capital ratio								17.47			16.50
Tier 1 risk-based capital ratio								14.94			14.01
Leverage ratio								11.61			11.24


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

Results of Operations

Summary


	Three Months										Nine Months
	Ended September 30,										Ended September 30,
(Dollars in thousands)	2010		2009		$ Change			% Change			2010		2009		$ Change			% Change

Net interest income	$	10,859	$	10,436	$	423			4.1	%	$	32,284	$	29,984	$	2,300			7.7	%
Provision for loan losses		2,450		1,250		1,200			96.0			7,105		4,404		2,701			61.3
Noninterest income		2,910		2,600		310			11.9			7,366		8,173		(807	)		(9.9	)
Noninterest expense		9,366		9,040		326			3.6			28,816		27,696		1,120			4.0
Income before income taxes		1,953		2,746		(793	)		(28.9	)		3,729		6,057		(2,328	)		(38.4	)

Income taxes		531		840		(309	)		(36.8	)		1,031		1,889		(858	)		(45.4	)

Net income	$	1,422	$	1,906	$	(484	)		(25.4	)%	$	2,698	$	4,168	$	(1,470	)		(35.3	)%

Less: preferred dividends		378		378								1,130		1,135
Less: accretion of discount on preferred stock		119		119		—			—			357		357		—			—

Net income available to common shareholders	$	925	$	1,409	$	(484	)		(34.4	)%	$	1,211	$	2,676	$	(1,465	)		(54.7	)%

Our Company’s consolidated net income of $1,422,000 for the three months ended September 30, 2010 decreased $484,000, or 25.4%, compared to the three months ended September 30 2009. Our Company recorded preferred stock dividends and accretion on preferred stock of $497,000 in the three months ended September 30, 2010, resulting in $925,000 of net income available to common shareholders, compared to $1,409,000 for the three months ended September 30, 2009. Diluted earnings per share decreased from $0.32 per common share to $0.21 per common share. Results for the three months ended September 30, 2010 were negatively impacted by the $2,450,000 provision for loan losses compared to $1,250,000 for the same period in 2009. Our Company experienced an increase in real estate refinancing activity during the third quarter of 2010 that partially offset the increase in the provision through increasing gains on sale of mortgage loans. For the three months ended September 30, 2010, the annualized return on average assets was 0.46%, the annualized return on average common shareholders’ equity was 4.52%, and the efficiency ratio was 68.0%. Net interest margin increased from 3.57% to 3.81%. Net interest income, on a tax equivalent basis, increased $394,000 or 3.71% from 2009 to 2010.

Our Company’s consolidated net income of $2,698,000 for the nine months ended September 30, 2010 decreased $1,470,000, or 35.3%, compared to the nine months ended September 30, 2009. Our Company recorded preferred stock dividends and accretion on preferred stock of $1,487,000 in the first nine months of 2010, resulting in $1,211,000 of net income available to common shareholders, compared to $2,676,000 for the first nine months of 2009. Diluted earnings per share decreased from $0.60 per common share to $0.27 per common share. Results for the nine months ended September 30, 2010 were negatively impacted by the $7,105,000 provision for loan losses compared to $4,404,000 for the same period in 2009. Although real estate refinancing activity substantially increased during the third quarter of 2010, the overall decrease in noninterest income was primarily due to lower gain on sales of mortgage loans during the first nine months of 2010 in comparison to the same time period during 2009. For the nine months September 30, 2010, the annualized return on average assets was 0.29%, the annualized return on average common shareholders’ equity was 2.01%, and the efficiency ratio was 72.7%. Net interest margin increased from 3.44% to 3.77%. Net interest income, on a tax equivalent basis, increased $2,242,000 or 7.3% from 2009 to 2010.

Total assets at September 30, 2010 were $1,215,066,000, compared to $1,236,470,000 at December 31, 2009, a decrease of $21,404,000, or 1.7%.

Net Interest Income

Net interest income is the largest source of revenue resulting from our 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.

Average Balance Sheets

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 three month periods ended September 30, 2010 and 2009, respectively.


	Three Months Ended September 30,
	2010								2009
				Interest		Rate						Interest		Rate
	Average			Income/		Earned/			Average			Income/		Earned/
(dollars in thousands)	Balance			Expense(1)		Paid(1)			Balance			Expense(1)		Paid(1)

ASSETS
Loans (2)(4)
Commercial	$	136,613		$	1,929		5.60	%	$	149,059		$	2,040		5.43	%
Real estate construction — residential		38,374			516		5.33			43,026			488		4.50
Real estate construction — commercial		76,356			764		3.97			76,115			838		4.37
Real estate mortgage — residential		213,774			3,174		5.89			277,626			3,556		5.08
Real estate mortgage — commercial		439,261			6,266		5.66			421,172			6,786		6.39
Consumer		34,583			615		7.06			35,254			659		7.42
Investment in securities: (3)
U.S. Treasury		1,028			5		1.93			—			—		—
Government sponsored enterprises		49,311			301		2.42			48,915			469		3.80
Asset backed securities		83,450			742		3.53			65,858			662		3.99
State and municipal		31,489			411		5.18			39,527			536		5.38
Restricted investments		6,310			34		2.14			8,875			54		2.41
Federal funds sold		183			—		—			262			—		—
Interest bearing deposits in other financial institutions		36,223			28		0.31			14,288			11		0.31

Total interest earning assets		1,146,955			14,785		5.11			1,179,977			16,099		5.41
All other assets		92,794								89,610
Allowance for loan losses		(12,654	)							(13,857	)

Total assets	$	1,227,095							$	1,255,730

LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts	$	163,142		$	226		0.55	%	$	138,149		$	268		0.77	%
Savings		53,128			33		0.25			47,199			35		0.29
Money market		165,480			253		0.61			178,719			389		0.86
Time deposits of
$100,000 and over		127,889			595		1.85			141,791			950		2.66
Other time deposits		318,075			1,758		2.19			347,783			2,532		2.89

Total time deposits		827,714			2,865		1.37			853,641			4,174		1.94
Federal funds purchased and securities sold under agreements to repurchase		32,149			20		0.25			36,416			23		0.25
Subordinated notes		49,486			353		2.83			49,486			589		4.72
Other borrowed money		68,644			528		3.05			71,603			688		3.81

Total interest bearing liabilities		977,993			3,766		1.53			1,011,146			5,474		2.15
Demand deposits		133,196								125,092
Other liabilities		6,028								11,794

Total liabilities		1,117,217								1,148,032
Stockholders’ equity		109,878								107,698

Total liabilities and stockholders’ equity	$	1,227,095							$	1,255,730

Net interest income (FTE)				$	11,019							$	10,625

Net interest spread							3.58	%							3.26	%
Net interest margin							3.81	%							3.57	%


(1)		Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled $161,000 and $189,000 for the three months ended September 30, 2010 and 2009, 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.


	Nine Months Ended September 30,
	2010								2009
				Interest		Rate						Interest		Rate
	Average			Income/		Earned/			Average			Income/		Earned/
(dollars in thousands)	Balance			Expense(1)		Paid(1)			Balance			Expense(1)		Paid(1)

ASSETS
Loans (2)(4)
Commercial	$	142,976		$	5,939		5.55	%	$	150,876		$	6,117		5.42	%
Real estate construction — residential		38,775			1,530		5.28			35,592			1,617		6.07
Real estate construction — commercial		76,939			2,195		3.81			59,862			2,703		6.04
Real estate mortgage — residential		225,074			9,648		5.73			218,075			10,756		6.59
Real estate mortgage — commercial		440,990			19,033		5.77			508,884			20,274		5.33
Consumer		35,611			2,033		7.63			33,603			1,937		7.71
Investment in securities: (3)
U.S. Treasury		705			10		1.90			—			—		—
Government sponsored enterprises		46,897			946		2.70			49,133			1,419		3.86
Asset backed securities		81,807			2,246		3.67			62,077			1,947		4.19
State and municipal		33,349			1,344		5.39			39,725			1,646		5.54
Restricted investments		6,427			119		2.48			8,875			110		1.66
Federal funds sold		174			—		—			308			—		—
Interest bearing deposits in other financial institutions		34,366			64		0.25			20,551			44		0.29

Total interest earning assets		1,164,090			45,107		5.18			1,187,561			48,570		5.47
All other assets		94,499								89,073
Allowance for loan losses		(13,796	)							(13,303	)

Total assets	$	1,244,793							$	1,263,331

LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts	$	173,206		$	758		0.59	%	$	139,765		$	902		0.86	%
Savings		51,749			97		0.25			45,912			106		0.31
Money market		167,867			842		0.67			176,562			1,382		1.05
Time deposits of
$100,000 and over		131,825			1,957		1.98			140,658			3,057		2.91
Other time deposits		321,827			5,607		2.33			357,403			8,311		3.11

Total time deposits		846,474			9,261		1.46			860,300			13,758		2.14
Federal funds purchased and securities sold under agreements to repurchase		32,963			59		0.24			32,483			64		0.26
Subordinated notes		49,486			1,201		3.24			49,486			1,879		5.08
Other borrowed money		71,586			1,795		3.35			79,874			2,320		3.88

Total interest bearing liabilities		1,000,509			12,316		1.65			1,022,143			18,021		2.36
Demand deposits		128,617								123,206
Other liabilities		6,744								10,606

Total liabilities		1,135,870								1,155,955
Stockholders’ equity		108,923								107,376

Total liabilities and stockholders’ equity	$	1,244,793							$	1,263,331

Net interest income (FTE)				$	32,791							$	30,549

Net interest spread							3.53	%							3.11	%
Net interest margin							3.77	%							3.44	%


(1)		Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled $507,000 and $565,000 for the nine months ended September 30, 2010 and 2009, 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.

Comparison of the three months ended September 30, 2010 and 2009

Financial results for the third quarter of 2010 compared to 2009 included an increase in net interest income, on a tax equivalent basis of $394,000, or 3.7%. Average interest-earning assets decreased $33,022,000, or 2.8%, to $1,146,955,000 for the three months ended September 30, 2010 compared to $1,179,977,000 for the three months ended September 30, 2009. Average interest bearing liabilities decreased $33,153,000, or 3.3%, to $977,993,000 for the three months ended September 30, 2010 compared to $1,011,146,000 for the three months ended September 30, 2009.

Average loans outstanding decreased $63,291,000 or 6.3% to $938,961,000 for the three months ended 2010 compared to $1,002,252,000 for the three months ended September 30, 2009. See the Lending and Credit Management section below for further discussion. The following is a summary of the changes in average loan balance by major category:


	Three Months Ended September 30,
(Dollars in thousands)	2010		2009		$ Change			% Change

Average loans:
Commercial	$	136,613	$	149,059	$	(12,446	)		(8.3)	%
Real estate construction — residential		38,374		43,026		(4,652	)		(10.8	)
Real estate construction — commercial		76,356		76,115		241			0.3
Real estate mortgage — residential		213,774		277,626		(63,852	)		(23.0	)
Real estate mortgage — commercial		439,261		421,172		18,089			4.3
Consumer		34,583		35,254		(671	)		(1.9	)

Total	$	938,961	$	1,002,252	$	(63,291	)		(6.3)	%

Average investment securities and federal funds sold increased $10,899,000, or 7.1%, to $165,461,000 for the three months ended September 30, 2010 compared to $154,562,000 for the three months ended September 30, 2009. Average interest bearing deposits increased $21,935,000 to $36,223,000 for the three months ended September 30, 2010 compared to $14,288,000 for the three months ended September 30, 2009. See the Liquidity Management section below for further discussion.

The overall decrease in average interest bearing liabilities was due to a decrease in time deposits and Federal funds purchased and securities sold under agreements to repurchase. Average time deposits decreased $25,927,000, or 3.0%, to $827,714,000 for the three months ended September 30, 2010 compared to $853,641,000 for the three months ended September 30, 2009. Average Federal funds purchased and securities sold under agreements to repurchase decreased $4,267,000, or 11.7%, to $32,149,000 for the three months ended September 30, 2010 compared to $36,416,000 for the three months ended September 30, 2009. The decrease primarily reflects a decrease in term repurchase agreement average balances.

Comparison of the nine months ended September 30, 2010 and 2009

Financial results for the nine months ended September 30, 2010 compared to 2009 included an increase in net interest income, on a tax equivalent basis of $2,242,000, or 7.3%. Average interest-earning assets decreased $23,471,000, or 2.0%, to $1,164,090,000 for the nine months ended September 30, 2010 compared to $1,187,561,000 for the nine months ended September 30, 2009. Average interest bearing liabilities decreased $21,634,000, or 2.1%, to $1,000,509,000 for the nine months ended September 30, 2010 compared to $1,022,143,000 for the nine months ended September 30, 2009.

Average loans outstanding decreased $46,527,000 or 4.6% to $960,365,000 for the nine months ended 2010 compared to $1,006,892,000 for the nine months ended September 30, 2009. See the Lending and Credit Management section below for further discussion. The following is a summary of the changes in average loan balance by major category:


	Nine Months Ended September 30,
(Dollars in thousands)	2010		2009		$ Change			% Change

Average loans:
Commercial	$	142,976	$	150,876	$	(7,900	)		(5.2)	%
Real estate construction — residential		38,775		35,592		3,183			8.9
Real estate construction — commercial		76,939		59,862		17,077			28.5
Real estate mortgage — residential		225,074		218,075		6,999			3.2
Real estate mortgage — commercial		440,990		508,884		(67,894	)		(13.3	)
Consumer		35,611		33,603		2,008			6.0

Total	$	960,365	$	1,006,892	$	(46,527	)		(4.6)	%

Average investment securities and federal funds sold increased $11,689,000, or 7.7%, to $162,932,000 for the nine months ended September 30, 2010 compared to $151,243,000 for the nine months ended September 30, 2009. Average interest bearing deposits increased $13,815,000 to $34,366,000 for the nine months ended September 30, 2010 compared to $20,551,000 for the nine months ended September 30, 2009. See the Liquidity Management section below for further discussion.

The overall decrease in average interest bearing liabilities was due to a decrease in time deposits and other borrowed money. Average time deposits decreased $13,826,000, or 1.6%, to $846,474,000 for the nine months ended September 30, 2010 compared to $860,300,000 for the nine months ended September 30, 2009. Average other borrowed money decreased $8,288,000, or 10.4%, to $71,586,000 for 2010 compared to $79,874,000 for 2009. The decrease in 2010 reflects a net decrease in Federal Home Loan Bank advances.

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 and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009. 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 September 30,									Nine Months Ended September 30,
	2010 vs. 2009									2010 vs. 2009
				Change due to									Change due to
	Total			Average			Average			Total			Average			Average
(Dollars In thousands)	Change			Volume			Rate			Change			Volume			Rate

Interest income on a fully taxable equivalent basis:
Loans: (1) (3)
Commercial	$	(111	)	$	(170	)	$	59		$	(178	)	$	(320	)	$	142
Real estate construction — residential		28			(57	)		85			(87	)		137			(224	)
Real estate construction — commercial		(74	)		3			(77	)		(508	)		647			(1,155	)
Real estate mortgage — residential		(382	)		(895	)		513			(1,108	)		336			(1,444	)
Real estate mortgage — commercial		(520	)		282			(802	)		(1,241	)		(2,844	)		1,603
Consumer		(44	)		(13	)		(31	)		96			115			(19	)
Investment securities:
U.S. Treasury		5			—			5			10			—			10
Government sponsored entities		(168	)		4			(172	)		(473	)		(62	)		(411	)
Asset backed securities		80			163			(83	)		299			564			(265	)
State and municipal(2)		(125	)		(106	)		(19	)		(302	)		(258	)		(44	)
Restricted investments		(20	)		(15	)		(5	)		9			(35	)		44
Federal funds sold		—			—			—			—			—			—
Interest bearing deposits in other financial institutions		17			17			—			20			27			(7	)

Total interest income		(1,314	)		(787	)		(527	)		(3,463	)		(1,693	)		(1,770	)

Interest expense:
NOW accounts		(42	)		43			(85	)		(144	)		186			(330	)
Savings		(2	)		4			(6	)		(9	)		12			(21	)
Money market		(136	)		(27	)		(109	)		(540	)		(65	)		(475	)
Time deposits of 100,000 and over		(355	)		(86	)		(269	)		(1,100	)		(182	)		(918	)
Other time deposits		(774	)		(202	)		(572	)		(2,704	)		(768	)		(1,936	)
Federal funds purchased and securities sold under agreements to repurchase		(3	)		(3	)		—			(5	)		1			(6	)
Subordinated notes		(236	)		—			(236	)		(678	)		—			(678	)
Other borrowed money		(160	)		(27	)		(133	)		(525	)		(227	)		(298	)

Total interest expense		(1,708	)		(298	)		(1,410	)		(5,705	)		(1,043	)		(4,662	)

Net interest income on a fully taxable equivalent basis	$	394		$	(489	)	$	883		$	2,242		$	(650	)	$	2,892


(1)		Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled $161,000 and $507,000, and $189,000 and $565,000 for the three and nine months ended September 30, 2010 and 2009, respectively.

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

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

Net interest income on a fully taxable equivalent basis increased $394,000, or 3.7%, to $11,019,000 for the three months ended September 30, 2010 compared to $10,625,000 for the three months ended September 30, 2009. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) increased from 3.57% for the three months ended September 30, 2009 to 3.81% for the three months ended September 30, 2010. This increase is primarily the result of a decrease in average earning liabilities. Our Company’s net interest spread increased from 3.26% during the three months ended September 30, 2009 to 3.58% during the same time period in 2010. While our Company was able to decrease the rate paid on interest bearing liabilities to 1.53% during the three months ended September 30, 2010 from 2.15% during the same time period in 2009, this decrease was partially offset by a decrease in the rates earned on interest bearing assets from 5.41% in 2009 to 5.11% in 2010.

Net interest income on a fully taxable equivalent basis increased $2,242,000, or 7.3%, to $32,791,000 for the nine months ended September 30, 2010 compared to $30,549,000 for the nine months ended September 30, 2009. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) increased from 3.44% for the nine months ended September 30, 2009 to 3.77% for the nine months ended September 30, 2010. This increase is primarily the result of a decrease in average earning liabilities. Our Company’s net interest spread increased from 3.11% during the nine months ended September 30, 2009 to 3.53% during the same time period in 2010. While our Company was able to decrease the rate paid on interest bearing liabilities to 1.65% during the nine months ended September 30, 2010 from 2.36% during the same time period in 2009, this decrease was partially offset by a decrease in the rates earned on interest bearing assets from 5.47% in 2009 to 5.18% in 2010.

Non-interest Income and Expense

Non-interest income


	Three Months												Nine Months
	Ended September 30,												Ended September 30,
(Dollars in thousands)	2010			2009			$ Change			% Change			2010			2009			$ Change			% Change

Non-interest Income
Service charges on deposit	$	1,427		$	1,547		$	(120	)		(7.8	)%		$4,150		$	4,380		$	(230	)		(5.3)	%
Trust department income		187			238			(51	)		(21.4	)		567			624			(57	)		(9.1	)
Gain on sales of mortgage loans		1,011			489			522			106.7			1,533			2,437			(904	)		(37.1	)
Other		285			326			(41	)		(12.6	)		1,116			732			384			52.5

Total non-interest income	$	2,910		$	2,600		$	310			11.9	%	$	7,366		$	8,173		$	(807	)		(9.9)	%

Non-interest income as a % of total revenue*		21.1	%		19.9	%								18.6	%		21.4	%
Total revenue per full time equivalent employee	$	40.1		$	37.9								$	115.6		$	110.9


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

Three Months Ended September 30, 2010 and 2009

Noninterest income for the three months ended September 30, 2010 was $2,910,000 compared to $2,600,000 for the three months ended September 30, 2009, resulting in a $310,000, or 11.9%, increase. The increase was primarily the result of a $522,000 increase in the gains on sales of mortgage loans due to an increase in refinancing activity during the third quarter of 2010 compared to the same time period in 2009.

Nine Months Ended September 30, 2010 and 2009

Noninterest income for the nine months ended September 30, 2010 was $7,366,000 compared to $8,173,000 for the nine months ended September 30, 2009, resulting in an $807,000, or 9.9%, decrease. Although third quarter experienced a substantial increase in real estate refinancing activity, the decrease in year to date noninterest income was primarily the result of a $904,000 decrease in the gains on sales of mortgage loans in comparison to 2009. Partially offsetting this decrease, other income increased $384,000, or 52.5%, to $1,116,000 compared to the prior period. This was primarily due to a $212,000 increase in credit card income, of which $167,000 was due to a nonmaterial correction and an $186,000 increase in real estate servicing fees.

Non-interest expense


	Three Months												Nine Months
	Ended September 30,												Ended September 30,
(Dollars in thousands)	2010			2009			$ Change			% Change			2010			2009			$ Change			% Change

Non-interest Expense
Salary expense	$	3,369		$	3,400		$	(31	)		(0.9	)%	$	10,440		$	10,191		$	249			2.4	%
Employee benefits		887			1,054			(167	)		(15.8	)		3,024			3,213			(189	)		(5.9	)
Occupancy expense, net		655			600			55			9.2			1,881			1,763			118			6.7
Furniture and equipment expense		473			507			(34	)		(6.7	)		1,499			1,794			(295	)		(16.4	)
FDIC insurance assessment		443			422			21			5.0			1,288			2,086			(798	)		(38.3	)
Legal, examination, and professional fees		349			312			37			11.9			932			985			(53	)		(5.4	)
Advertising and promotion		311			301			10			3.3			886			901			(15	)		(1.7	)
Postage, printing, and supplies		300			271			29			10.7			875			834			41			4.9
Processing expense		854			845			9			1.1			2,561			2,538			23			0.9
Other real estate expense		882			240			642			267.5			2,895			575			2,320			403.5
Other		843			1,088			(245	)		(22.5	)		2,535			2,816			(281	)		(10.0	)

Total non-interest expense	$	9,366		$	9,040		$	326			3.6	%	$	28,816		$	27,696		$	1,120			4.0	%

Efficiency ratio		68.0	%		69.3	%								72.7	%		72.6	%
Salaries and benefits as a % of total non-interest expense		45.4	%		49.3	%								46.7	%		48.4	%
Number of full-time equivalent employees														343			344

Three Months Ended September 30, 2010 and 2009

Noninterest expense for the three months ended September 30, 2010 was $9,366,000 compared to $9,040,000 for the three months ended September 30, 2009 resulting in a $326,000, or 3.6%, increase. Other real estate expense increased $642,000, or 267.5%, partially offset by a decrease in employee benefits of $167,000, or 15.8%, and a decrease in other expenses of $245,000, or 22.5%. The increase in other real estate expense reflects a $644,000 increase in impairment charges and net losses on sales of foreclosed property during the third quarter of 2010 compared to the third quarter of 2009. The decrease in employee benefits expense was primarily due to a $171,000 decrease in our Company’s profit sharing accrual. The decrease in third quarters 2010 other expenses is primarily a result a $178,000 donation of a foreclosed property during September of 2009.

Nine Months Ended September 30, 2010 and 2009

Noninterest expense for the nine months ended September 30, 2010 was $28,816,000 compared to $27,696,000 for the nine months ended September 30, 2009 resulting in a $1,120,000, or 4.0%, increase. Other real estate expense increased $2,320,000, or 403.5%, partially offset by a decrease in furniture and equipment expenses of $295,000, or 16.4%, and a decrease in Federal Deposit Insurance Corporation (FDIC) insurance assessment of $798,000, or 38.3%. The increase in other real estate expense reflects expenses incurred on the increase in our Company’s foreclosed property during 2010. Impairment charges and net losses on sales of foreclosed property increased $1,849,000 during 2010 compared to 2009. Expenses to maintain and prepare these properties for sale also increased $500,000 during 2010. The decrease in furniture and equipment expense primarily was due to an $186,000 net loss on the sale of one of our Company’s branch buildings in September of 2009. The decrease in the FDIC insurance assessment is a result of a decrease in the estimated expense accrued during 2010 in comparison to 2009 and an increase in special assessments during 2009.

Income Taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 27.2% for the three months ended September 30, 2010 compared to 30.6% for the three months ended September 30, 2009. The effective tax rate during the third quarter of 2010 reflects the increase in tax-exempt income as a percentage of total taxable income.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 27.6% for the nine months ended September 30, 2010 compared to 31.2% for the nine months ended September 30, 2009. The effective tax rate during for the nine months ended September 30, 2010 reflects the increase in tax-exempt income as a percentage of total taxable income.

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for our Company. Net loans represented 75.7% of total assets as of September 30, 2010 compared to 79.0% as of December 31, 2009.

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

The following table shows the composition of the loan portfolio by major category and each category as a percentage of the total portfolio as of the dates indicated.


	September 30,					December 31,
(In thousands)	2010					2009
	Amount		%			Amount		%
Commercial, financial, and agricultural	$	132,920		14.2	%	$	151,399		15.3	%
Real estate construction — residential		38,229		4.1			38,841		3.9
Real estate construction — commercial		76,587		8.2			77,937		7.9
Real estate mortgage — residential		217,802		23.3			232,332		23.4
Real estate mortgage — commercial		433,930		46.5			453,975		45.8
Installment loans to individuals		33,822		3.6			36,966		3.7
Deferred fees		166		0.0			164		0.0

Total loans	$	933,456		100.0	%	$	991,614		100.0	%

Our Company’s loan portfolio decreased $58,158,000, or 5.9%, from December 31, 2009 to September 30, 2010. This decrease was primarily a result of a decrease in commercial loans of $18,480,000, or 12.2%, a decrease in real estate mortgage — residential loans of $14,530,000, or 6.3%, a decrease in real estate mortgage — commercial loans of $20,045,000, or 4.4%, and a decrease in individual consumer loans of $3,144,000, or 8.5%. The decrease in commercial loans and real estate mortgage loans primarily reflects the payoff of three large commercial credits and two large real estate mortgage loans. The decrease in individual consumer loans reflects the payoff of one large consumer loan which was secured by a Bank certificate of deposit. Also contributing to the decrease in total loans were gross charge-offs of $8,466,000 and $12,665,000 of assets transferred from loans to other real estate owned and repossessed assets. During the current down-turn in the economy, management continues to focus on the improvement of asset quality. Management has tightened underwriting standards and is focused on lending to credit worthy borrowers with the capacity to service the debts. Where appropriate, management actively works with existing borrowers to modify loan terms and conditions in order to assist the borrowers in servicing their debt obligations to our Company. The decrease in lending activities in the real estate construction market also reflects the slow down in the housing industry and residential construction industry as well as foreclosures on various residential construction properties. Construction lending will continue to be closely monitored.

Our Company does not extend credit to sub-prime residential real estate customers. While much publicity has been directed at this market during recent years, our Company extends credit to its local community market through traditional mortgage products.

Our Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers, but are not funded until our Company has a non-recourse purchase commitment from the secondary market at a predetermined price. At September 30, 2010 our Company was servicing approximately $285,888,000 of loans sold to the secondary market.

Mortgage loans retained in our Company’s portfolio generally include provisions for rate adjustments at one to three year intervals. Commercial loans and real estate construction loans generally have maturities of less than one year. Installment loans to individuals are primarily fixed rate loans with maturities from one to five years.

Management along with senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Currently, loans in excess of $2,000,000 in aggregate and all adversely classified credits identified by management as containing more than usual risk are reviewed. In addition, loans below the above scope are reviewed on a sample basis. On a monthly basis, the senior loan committee reviews and reports to the Board of Directors past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans should be considered impaired. Management follows the guidance provided in the FASB’s ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, allowances are estimated based on the fair value as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management informed of possible problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered adequate by management for probable losses inherent in the loan portfolio.

Provision and Allowance for Loan Losses

The provision for loan losses increased $2,701,000 or 61.3% to $7,105,000 for the nine months ended September 30, 2010 compared to $4,404,000 for the nine months ended September 30, 2009. The current economy has contributed to the deterioration of collateral values. Our Company has taken an active approach to obtain current appraisals and has adjusted the provision to reflect the amounts management determined necessary to maintain the allowance for loan losses at a level adequate to cover probable losses in the loan portfolio. However, due to charge offs taken during the first nine months of 2010, the allowance for loan losses decreased to $13,954,000 or 1.5% of loans outstanding at September 30, 2010 compared to $14,797,000 or 1.5% of loans outstanding at December 31, 2009. The allowance for loan losses expressed as a percentage of nonperforming loans was 21.1% at September 30, 2010 and 34.9% at December 31, 2009.

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


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Dollars in thousands)	2010			2009		2010		2009

Provision for loan losses	$	2,450		$	1,250	$	7,105	$	4,404

Net loan charge-offs:
Commercial, financial, and agricultural		333			157		1,437		417
Real estate construction — residential		(1	)		427		258		988
Real estate construction — commercial		—			—		101		289
Real estate mortgage — residential		306			256		3,625		948
Real estate mortgage — commercial		37			115		2,374		321
Installment loans to individuals		53			72		153		180

Total net loan charge-offs	$	728		$	1,027	$	7,948	$	3,143

As shown in the table above, our Company experienced net loan charge-offs of $7,948,000 during the first nine months of 2010 and $3,143,000 during the first nine months of 2009. Net charge offs on commercial, financial, and agricultural loans increased $1,020,000 from September 30, 2009 to September 30, 2010, and was primarily due to three write-downs taken on two loans to reflect current collateral values. Net charge offs on real estate mortgage — residential properties increased $2,677,000 from September 30, 2009 to September 30, 2010 and was primarily due to write-downs taken on foreclosed properties, from two significant customer relationships, to reflect current collateral values. Net charge offs on real estate mortgage — commercial properties increased $2,053,000 from September 30, 2009 to September 30, 2010 and was primarily due to write-downs taken on five loans to reflect current collateral values. The

ratio of annualized total net loan charge-offs to total average loans was 0.83% at September 30, 2009 compared to 0.31% at September 30, 2010.

Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing interest, and restructured troubled loans totaled $65,879,000 or 7.06% of total loans at September 30, 2010 compared to $42,347,000 or 4.27% of total loans at December 31, 2009.

The following table summarizes our Company’s nonperforming assets at the dates indicated:


	September 30,			December 31,
(Dollars in thousands)	2010			2009

Nonaccrual loans:
Commercial, financial, and agricultural	$	1,854		$	2,067
Real estate construction — residential		3,086			2,678
Real estate construction — commercial		22,580			9,277
Real estate mortgage — residential		6,457			6,692
Real estate mortgage — commercial		15,769			13,161
Installment loans to individuals		101			279

Total nonaccrual loans		49,847			34,154

Loans contractually past — due 90 days or more and still accruing:
Commercial, financial, and agricultural		—			2
Real estate mortgage — residential		73			—
Installment loans to individuals		1			—

Total loans contractually past -due 90 days or more and still accruing		74			2
Troubled debt restructured loans		15,958			8,191

Total nonperforming loans		65,879			42,347
Other real estate and repossessions		10,012			8,491

Total nonperforming assets	$	75,891		$	50,838

Loans	$	933,456		$	991,614
Allowance for loan losses to loans		1.49	%		1.49	%
Nonperforming loans to loans		7.06	%		4.27	%
Allowance for loan losses to nonperforming loans		21.18	%		34.94	%
Nonperforming assets to loans and foreclosed assets		8.04	%		5.08	%

It is our Company’s policy to discontinue the accrual of interest income on loans when the full collection of principal or interest is in doubt, or when the payment of principal or interest has become contractually 90 days past due unless the obligation is 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 collectibles of such principal; otherwise, such receipts are recorded as interest income. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was approximately $1,874,000 and $1,152,000 for the nine months ended September 30, 2010 and 2009, respectively. Approximately $11,000 and $42,000 was recorded as interest income on such loans for the nine months ended September 30, 2010 and 2009, respectively.

Total non-accrual loans at September 30, 2010 increased $15,693,000 from December 31, 2009. The increase resulted primarily from an increase of $13,303,000 in real estate construction - commercial non-accrual loans. This increase primarily represents four commercial customers with balances totaling $15,886,000. Although our non-accrual loans significantly increased from $34,154,000 at December 31, 2009 to $49,847,000 at September 30, 2010, total impaired loans decreased $7,384,000.

Loans past due 90 days and still accruing interest increased $72,000 from December 31, 2009 to September 30, 2010. Foreclosed real estate and other repossessions increased $1,521,000 to $10,012,000. At September 30, 2010, loans classified as troubled debt restructured loans (TDR) totaled $22,457,000, of which $6,499,000 was on non-accrual status and $15,958,000 was on accrual status. At December 31, 2009, loans classified as TDR totaled $11,233,000, of which $3,042,000 was on non-accrual status and $8,191,000 was on accrual status. The increase in TDR loans is primarily reflected by one large hotel credit of $11,091,000.

The ratio of nonperforming loans to loans increased from 4.27% at December 31, 2009 to 7.06% at September 30, 2010. Our Company has experienced an increase in its loan delinquencies much like the rest of the banking industry as current economic conditions negatively impact our borrowers’ ability to keep their debt payments current.

The increase in the levels of charge offs has contributed to the decrease in the ratio of allowance for loan losses to nonperforming loans from 41.11% at September 30, 2009 to 34.94% at December 31, 2009, and to 21.18% at September 30, 2010. Management believes that based on detailed analysis of each nonperforming credit and the value of any associated collateral that the allowance for loan losses at September 30, 2010 is sufficient to cover probable losses in the nonperforming loans.

The fair value of impaired loans are generally based on market prices for loans with similar collateral determined through independent appraisals, the fair value of the collateral for a collateral-dependent loan, or by discounting the total expected future cash flows. Once the fair value of collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. At September 30, 2010, $7,798,000 of our Company’s allowance for loan losses was allocated to impaired loans totaling approximately $66,483,000 compared to $6,415,000 of our Company’s allowance for loan losses was allocated to impaired loans totaling approximately $73,877,000 at December 31, 2009. Based on detailed analysis of all impaired loans, management has determined that $31,767,000, or 48%, of impaired loans require no reserve allocation at September 30, 2010 compared to $47,572,000, or 64%, at December 31, 2009. Management believes the excess value in the collateral was sufficient at September 30, and December 31, and these loans did not require additional reserves.

In addition to nonaccrual loans and TDR’s at September 30, 2010 included in the table above, which were considered impaired, management has identified additional loans totaling approximately $678,000 which were not included in the table above but are considered by management to be impaired compared to $31,522,000 at December 31, 2009. Management has allocated $524,000 of reserves for these credits at September 31, 2010.

As of September 30, 2010 and December 31, 2009 approximately $18,640,000 and $15,944,000, respectively, of loans not included in the table above have been classified by management as having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. The $2,696,000 increase in classified loans is the result of several borrowers who have experienced cash flow problems as well as some deterioration in collateral value. Management elected to allocate non-specific reserves to these credits based upon the inherent risk present.

The allowance for loan losses is available to absorb probable loan losses regardless of the category of loan to be charged off. The allowance for loan losses consists of asset-specific reserves, and reserves based on expected loss estimates and unallocated reserves.

The asset-specific component applies to loans evaluated individually for impairment and is based on management’s best estimate of proceeds from liquidating collateral. The actual timing and amount of repayments and the ultimate realizable value of the collateral may differ from management’s estimate.

The expected loss component is generally determined by applying percentages to pools of loans by asset type. These percentages are determined by using a combination of average historical loss percentages and migration analysis. These expected loss estimates are sensitive to changes in delinquency status, realizable value of collateral, and other risk factors.

The unallocated portion of the allowance is based on management’s evaluation of conditions that are not directly reflected in the determination of the asset-specific component and the expected loss component discussed above. The evaluation of inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. Conditions evaluated in connection with the unallocated portion of the allowance include general economic and business conditions affecting our key lending areas, credit quality trends (including trends in substandard loans expected to result from existing conditions), collateral values, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of our internal loan review department.

The underlying assumptions, estimates and assessments used by management to determine these components are continually evaluated and updated to reflect management’s current view of overall economic conditions and relevant factors impacting credit quality and inherent losses. Changes in such estimates could significantly impact the allowance and provision for credit losses. Our Company could experience credit losses that are different from the current estimates made by management.

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


	September 30,		December 31,
(Dollars in thousands)	2010		2009

Allocation of allowance for loan losses at end of period:
Commercial, financial, and agricultural	$	2,123	$	2,773
Real estate construction — residential		995		348
Real estate construction — commercial		3,875		1,740
Real estate mortgage — residential		2,700		3,488
Real estate mortgage — commercial		3,259		4,693
Installment loans to individuals		262		380
Unallocated		740		1,375

Total	$	13,954	$	14,797

At September 30, 2010, management allocated $13,214,000 of the $13,954,000 total allowance for loan losses to specific loans and loan categories and $740,000 was unallocated. At December 31, 2009, management allocated $13,422,000 of the $14,497,000 total allowance for loan losses to specific loans and loan categories and $1,375,000 was unallocated. The decrease in the portion of the allowance for loan losses related to non asset-specific reserves is the result of management analyzing and assessing this portion of the allowance for loan losses on a more detailed level by homogeneous loan categories for loans not considered impaired. Such analysis measured reserve requirements based on historical loss experiences of loans in those individual categories and therefore provided a more robust reserve methodology. Such reserve methodology considers the loss experience for certain types of loans and loan grades for the past nine quarters. Given the enhancements to the methodology for historical loss experience, the unallocated reserves for certain qualitative factors have been reduced accordingly. Management considers the non asset-specific portion of the allowance for loan losses at September 30, 2010 to be adequate as part of the overall reserves to cover losses in the loan portfolio not identified by specific loss methodologies.

Our Company does not lend funds for the type of transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, our Company does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table. Our Company does not have any interest-earning assets which would have been included in nonaccrual, past due, or restructured loans if such assets were loans.

Financial Condition

Total assets decreased $21,404,000 or 1.7% to $1,215,066,000 at September 30, 2010 compared to $1,236,470,000 at December 31, 2009. Earning assets at September 30, 2010 were $1,140,114,000 and consisted of 81.9% in loans and 14.5% in available for sale investment securities, compared to 85.9% and 13.3%, respectively at December 31, 2009. Total liabilities decreased $23,554,000 or 2.1% to $1,105,145,000 compared to $1,128,699,000 at December 31, 2009. Stockholders’ equity increased $2,150,000 or 2.0% to $109,921,000 compared to $107,771,000 at December 31, 2009.

As described in further detail in the “Lending and Credit Management” section above, during the first nine months of 2010, total period end loans decreased $58,158,000 to $933,456,000 at September 30, 2010 compared to $991,614,000 at December 31, 2009. This decrease was primarily the result of an $18,480,000 decrease in commercial loans, an $14,530,000 decrease in real estate - residential loans, a $20,045,000 decrease in real estate — commercial loans, and a $3,144,000 decrease in consumer loans.

Investment in debt securities classified as available-for-sale, excluding fair value adjustments, increased $9,960,000 or 6.6% to $160,569,000 at September 30, 2010 compared to $150,609,000 at December 31, 2009. The net increase primarily consisted of an increase in mortgage-backed securities of $14,851,000, an increase in federal agency securities of $2,225,000, partially offset by an $8,116,000 reduction in municipal obligations.

Total deposits decreased $5,749,000 or 0.6% to $950,574,000 at September 30, 2010 compared to $956,323,000 at December 31, 2009. The increase is primarily a result of an decrease in public fund deposits.

Federal funds purchased and securities sold under agreements to repurchase decreased $5,185,000 or 14.2% to $31,460,000 at September 30, 2010 compared to $36,645,000 at December 31, 2009. The decrease mostly consisted of a $4,980,000 decrease in federal funds purchased compared to December 31, 2009.

Other borrowed money decreased $12,149,000 or 15.3% to $67,168,000 at September 30, 2010 compared to $79,317,000 at December 31, 2009. The decrease reflects the net repayment of Federal Home Loan Bank advances.

Stockholders’ equity increased $2,150,000 or 2.0% to $109,921,000 at September 30, 2010 compared to $107,771,000 at December 31, 2009. The increase in stockholders’ equity reflects net income of $2,698,000 less cash dividends declared of $2,047,000, a $1,394,000 change in unrealized holding gains, net of taxes, on investment in debt securities available-for-sale, $36,000 amortization of prior service cost for defined benefit plan, and a $68,000 increase, net of taxes, related to stock option compensation expense.

Liquidity and Capital Resources

Liquidity Management

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

Our Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for our Company’s liquidity position and profile. A combination of daily, weekly and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital and exposure to contingent draws on our Company’s liquidity. No material changes in our Company’s liquidity or capital resources have occurred since September 30, 2010.

Our Company has a number of sources of funds to meet liquidity needs on a daily basis. Our Company’s most liquid assets are comprised of available for sale marketable investment securities, federal funds sold, and securities purchased under agreements to resell, and excess reserves held at the Federal Reserve as follows:


	September 30,		December 31,
(dollars in thousands)	2010		2009

Liquid assets:
Federal funds sold	$	126	$	90
Federal Reserve — excess reserves		34,680		2,216
Available for sale investments securities		165,173		152,927

Total	$	199,979	$	155,233

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 $165,173,000 at September 30, 2010 and included an unrealized net gain of $4,604,000. The portfolio includes maturities of approximately $7,501,000 over the next twelve months, which offer resources to meet either new loan demand or reductions in our Company’s deposit base. Our Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowing capacity at the Federal Reserve Bank.

At September 30, 2010, total investment securities pledged for these purposes were as follows:


	September 30,
(dollars in thousands)	2010

Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	3,306
Repurchase agreements		40,589
Other Deposits		97,578

Total pledged, at fair value	$	141,473

At September 30, 2010, our Company’s unpledged securities in the available for sale portfolio totaled approximately $23,699,000.

Liquidity is also available from our Company’s base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At September 30, 2010, such deposits totaled $507,060,000 and represented 53.3% of our Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of our Company through long lasting relationships. Time deposits and certificates of deposit of $100,000 and over totaled $443,514,000 at September 30, 2010. These accounts are normally considered more volatile and higher costing representing 46.7% of total deposits at September 30, 2010.


	September 30,		December 31,
(dollars in thousands)	2010		2009

Core deposit base:
Non-interest bearing demand	$	143,143	$	135,018
Interest checking		148,710		139,624
Savings and money market		215,207		214,660

Total	$	507,060	$	489,302

Other components of liquidity are the level of borrowings from third party sources and the availability of future credit. Our Company’s outside borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, FHLB advances, and subordinated notes as follows:


	September 30,		December 31,
(dollars in thousands)	2010		2009

Borrowings:
Federal funds purchased	$	—	$	4,980
Securities sold under agreements to repurchase		31,460		31,665
FHLB advances		67,168		79,317
Subordinated notes		49,486		49,486

Total	$	148,114	$	165,448

Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which our Company maintains approved credit lines. As of September 30, 2010, under agreements with these unaffiliated banks, the Bank may borrow up to $35,684,000 in federal funds on an unsecured basis and $8,905,000 on a secured basis. There were no federal funds purchased outstanding at September 30, 2010. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of our Company’s investment portfolio. At September 30, 2010 there was $31,460,000 in repurchase agreements. Our Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window; although no such borrowings were outstanding at the current quarter end. 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 September 30, 2010, the Bank had $67,168,000 in outstanding borrowings with the FHLB. In addition, our Company has $49,486,000 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

Our Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and borrow from these entities. Based on the type and value of collateral pledged, our Company may draw advances against this collateral. The following table reflects collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to our Company at September 30, 2010:


				September 30, 2010
(dollars in thousands)	FHLB			Federal Reserve		Other

Collateral value pledged		$273,909		$	3,306	$	7,573
Letters of Credit		(96	)
Advances outstanding		(67,168	)		—		—

Total	$	206,645		$	3,306	$	7,573

Sources and Uses of Funds

Cash and cash equivalents were $52,226,000 at September 30, 2010 compared to $24,666,000 at December 31, 2009. The $27,560,000 increase resulted from changes in the various cash flows produced by operating, investing, and financing activities of our Company, as shown in the accompanying consolidated statements of cash flows for the nine months ended September 30, 2010. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $11,138,000 during the first nine months of 2010. Investing activities, consisting mainly of purchases, sales and maturities of available for sale securities, and changes in the level of the loan portfolio, provided cash of $41,801,000. The cash outflow primarily consisted of purchases of $154,205,000 of investment securities offset by a $42,321,000 decrease in the loan portfolio, $143,790,000 in proceeds from maturities, calls, and pay-downs of investment securities, and $9,185,000 in proceeds from sales of other real estate owned and repossessions. Financing activities used total cash of $25,380,000, resulting primarily from $22,149,000 repayments of FHLB advances, $23,507,000 decrease in time deposits, $2,296,000 in dividends paid, and $5,185,000 decrease in federal funds purchased and securities sold under agreements to repurchase, partially offset by a $17,758,000 increase in interest-bearing transaction accounts. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2010.

During 2008, liquidity risk became a heightened concern affecting the general banking industry. Because of the uncertainty in the economy, our Company decided to participate in the U.S. Treasury Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. During 2009, our Company elected to cease market purchases of treasury stock and preserve its cash and capital position.

In the normal course of business, our Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through our Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of our Company’s liquidity. Our Company had $116,219,000 in unused loan commitments and standby letters of credit as of September 30, 2010. While this commitment level would be difficult to fund given our Company’s current liquidity resources, we know that the nature of these commitments are such that the likelihood of such a funding demand is very low.

Our Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. Our Company’s ongoing liquidity needs primarily include funding its operating expenses and paying cash dividends to its common and preferred shareholders. During the nine months ended September 30, 2010 and 2009, our Company paid cash dividends to its common and preferred shareholders totaling $2,296,000 and $3,184,000, respectively. A large portion of our Company’s liquidity is obtained from the Bank in the form of dividends. For the first nine months ended September 30, 2010, the Bank declared and paid dividends of $2,700,000. At September 30, 2010 and December 31, 2009, our Company had cash and cash equivalents totaling $11,640,000 and $14,738,000 respectively.

Regulatory Capital

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

Quantitative measures established by regulations to ensure capital adequacy require our Company and our Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of September 30, 2010 and December 31, 2009, our Company and our Bank each meet all capital adequacy requirements to which they are subject.

The following table summarizes our Company’s risk-based capital and leverage ratios at the dates indicated.


						Minimum					Well-Capitalized
	Actual					Capital requirements					Capital Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio

September 30, 2010
Total capital (to risk-weighted assets):
Company	$	166,430		17.47	%	$	76,233		8.00	%		—		—
Hawthorn Bank		137,113		14.64			74,908		8.00		$	93,635		10.00	%

Tier I capital (to risk-weighted assets):
Company	$	142,343		14.94		$	38,117		4.00	%		—		—
Hawthorn Bank		125,387		13.39			37,454		4.00		$	56,181		6.00	%

Tier I capital (to adjusted average assets):
Company	$	142,343		11.61		$	36,769		3.00	%		—		—
Hawthorn Bank		125,387		10.42			36,089		3.00		$	60,148		5.00	%


						Minimum					Well-Capitalized
	Actual					Capital requirements					Capital Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio

December 31, 2009
Total capital (to risk-weighted assets):
Company	$	165,969		16.49	%	$	80,502		8.00	%		—		—
Hawthorn Bank		134,673		13.62			79,129		8.00		$	98,911		10.00	%

Tier I capital (to risk-weighted assets):
Company	$	140,974		14.01		$	40,251		4.00	%		—		—
Hawthorn Bank		122,285		12.36			39,564		4.00		$	59,347		6.00	%

Tier I capital (to adjusted average assets):
Company	$	140,974		11.35		$	37,254		3.00	%		—		—
Hawthorn Bank		122,285		10.04			36,556		3.00		$	60,926		5.00	%


Item 3.		Quantitative and Qualitative Disclosures about Market Risk

Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. Our Company faces market risk in the form of interest rate risk through transactions other than trading activities. Our Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by our Company’s Asset/Liability Committee and approved by the Board of Directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as our Company feels it has no primary exposure to specific points on the yield curve. For the period ended September 30, 2010, our Company utilized a 300 basis point immediate and gradual move in interest rates (both upward and downward) applied to both a parallel and proportional yield curve.

The following table represents estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of September 30, 2010:


														Over
														5 years or
														no stated
(Dollars in thousands)	Year 1			Year 2			Year 3			Year 4		Year 5		Maturity		Total

ASSETS
Investment securities	$	4,065		$	3,349		$	12,621		$	21,432	$	19,714	$	103,992	$	165,173
Interest-bearing deposits		35,209			—			—			—		—		—		35,209
Other restricted investments		6,150			—			—			—		—		—		6,150
Federal funds sold and securities purchased under agreements to resell		126			—			—			—		—		—		126
Loans		479,656			183,927			177,327			44,055		15,188		33,303		933,456

Total	$	525,206		$	187,276		$	189,948		$	65,487	$	34,902	$	137,295	$	1,140,114


LIABILITIES

Savings, Now deposits	$	—		$	—		$	141,499		$	—	$		$		$	141,499
Rewards checking, Super Now, money market deposits		222,871			—			—			—		—		—		222,871
Time deposits		325,525			58,962			48,382			4,359		5,833		—		443,061
Federal funds purchased and securities sold under agreements to repurchase		31,460			—			—			—		—		—		31,460
Subordinated notes		49,486			—			—			—		—		—		49,486
Other borrowed money		48,683			293			18,190			2		—		—		67,168

Total	$	678,025		$	59,255		$	208,071		$	4,361	$	5,833	$	—	$	955,545


Interest-sensitivity GAP
Periodic GAP	$	(152,819	)	$	128,021		$	(18,123	)	$	61,126	$	29,069	$	137,295	$	184,569

Cumulative GAP	$	(152,819	)	$	(24,798	)	$	(42,921	)	$	18,205	$	47,274	$	184,569	$	184,569


Ratio of interest-earnings assets to interest-bearing liabilities
Periodic GAP		0.77			3.16			0.91			15.02		5.98	NM			1.19
Cumulative GAP		0.77			0.97			0.95			1.02		1.05		1.19		1.19


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 September 30, 2010. 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 fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Impact of New Accounting Standards

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 which amends ASC Topic 820, Fair Value Measurements and Disclosures. This update will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This is effective for financial statements issued for interim and annual periods ending after December 15, 2009. The interim disclosures required by this update are reported in the notes to our Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-10 which amends ASC Topic 810, Consolidation. The objective of this update is to defer the effective date of the amendments to the consolidation requirements made by FASB Statement 167 to a reporting entity’s interest in certain types of entities and clarify other aspects of the Statement 167 amendments. As a result of the deferral, a reporting entity will not be required to apply the Statement 167 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity that meets the criteria to qualify for deferral. However, the amendments in this Update do not defer the disclosure requirements in the Statement 167 amendments to Topic 810. This is effective for financial statements issued for the first annual period beginning after November 15, 2009, and for interim periods with the first annual reporting period. The interim disclosures required by this new update did not have a material effect in the notes to our Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20 — Receivables (ASC Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires expanded credit risk disclosures intended to provide investors with greater transparency regarding the allowance for credit losses and the credit quality of financing receivables. Under this ASU, companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information, credit quality indicators, changes in the allowance for credit losses, and the nature and extent of troubled debt restructurings and their effect on the allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class based on the level of disaggregation that management uses when assessing its allowance for credit losses and managing its credit exposure. The disclosures as of the end of a reporting period will be effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. Our Company is currently evaluating the disclosure requirements under this ASU and the impact on our consolidated financial statements and the disclosures presented in our consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was incorporated into ASC Topic 855 Subsequent Events (ASC 855). ASC 855 provides guidance on management’s assessment of subsequent events. The statement is not expected to significantly change practice because its guidance is similar to that in American Institute of Certified Public Accountants Professional Standards U.S. Auditing Standards Section 560, Subsequent Events, with some modifications. This statement became effective for our Company on June 15, 2009. The adoption of this statement did not have a material effect on our financial statements. In February 2010, the FASB issued ASU No. 2010-09 Subsequent Events — Amendments to Certain Recognition and Disclosure Requirements, which removed the requirements in ASC 855 for an SEC filer to disclose the date through which subsequent events

have been evaluated for both issued and revised financial statements. This update became effective upon issuance for our Company and the adoption of this update did not have a material effect on our financial statements

In June 2009, the FASB issued authoritative guidance on accounting for transfers of financial assets, which was subsequently incorporated into ASC Topic 860, Transfers and Servicing. The new guidance amends ASC Topic 860 and requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. This became effective for the first annual period beginning after November 15, 2009, and for interim periods within the first annual reporting period, and must be applied to transfers occurring on or after the effective date. Our Company follows the requirements of the new guidance, which did not significantly impact our consolidated financial statements or the disclosures presented in our consolidated financial statements.

PART II — OTHER INFORMATION


Item 1. Legal Proceedings		None

Item 1A. Risk Factors		None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		None

Item 3. Defaults Upon Senior Securities		None

Item 4. (Removed and Reserved)		None

Item 5. Other Information		None

Item 6. Exhibits


Exhibit No.		Description
3.1		Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on August 9, 2007 and incorporated herein by reference).

3.1.1		Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008, dated December 17, 2008 (filed as Exhibit 3.1.1 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).

3.2		Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on June 8, 2009 and incorporated herein by reference).

4.1		Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference).

4.2		Specimen certificate representing shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008 (filed as Exhibit 4.2 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).

4.3		Warrant to purchase shares of our Company’s $1.00 par value Common Stock, dated December 19, 2008 (filed as Exhibit 4.3 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).

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

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

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

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

SIGNATURES

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


		HAWTHORN BANCSHARES, INC.

Date
		/s/ James E. Smith
November 9, 2010		James E. Smith, Chairman of the Board
		and Chief Executive Officer (Principal Executive Officer)

		/s/ Richard G. Rose
November 9, 2010		Richard G. Rose, Chief Financial Officer (Principal Financial
		Officer and Principal Accounting Officer)

HAWTHORN BANCSHARES, INC.

INDEX TO EXHIBITS

September 30, 2010 Form 10-Q


Exhibit No.	Description	Page No.
3.1	Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on August 9, 2007 and incorporated herein by reference).	**

3.1.1	Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008, dated December 17, 2008 (filed as Exhibit 3.1.1 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).	**

3.2	Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on June 8, 2009 and incorporated herein by reference).	**

4.1	Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference).	**

4.2	Specimen certificate representing shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008 (filed as Exhibit 4.2 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).	**

4.3	Warrant to purchase shares of our Company’s $1.00 par value Common Stock, dated December 19, 2008 (filed as Exhibit 4.3 to our Company’s current report on Form 8-K on December 23, 2008 and incorporated herein by reference).	**

31.1	Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	46

31.2	Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	47

32.1	Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	48

32.2	Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	49


**		Incorporated by reference.