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Hawthorn Bancshares Announces Earnings

Hawthorn Bancshares Inc. (NASDAQ: HWBK), today reported consolidated financial results for the Company, including its main operating subsidiary, Hawthorn Bank, for the third quarter ended September 30.

On a consolidated basis, Hawthorn Bancshares generated net income for the quarter of $1.4 million, up from $0.8 million and $0.5 million reported for the second and first quarters of 2010 respectively, and down from $1.9 million for the third quarter of 2009. After deducting accrued dividends and accretion on preferred stock issued to the U.S. Treasury, income available to common shareholders was $0.9 million for the third quarter compared to $0.3 million for the second quarter and $0.0 million for the first quarter. 2009 third quarter net income to common shareholders was $1.4 million. From a diluted earnings per common share basis, Hawthorn generated $0.21 for the third quarter compared to $0.06 and $0.00 for the second and first quarters of 2010 respectively. Diluted earnings per common share for the third quarter of 2009 was $0.32.

Hawthorn Bank, which is the main operating subsidiary of Hawthorn Bancshares, reported third quarter earnings of $2.1 million compared to $2.0 million and $1.3 million generated during the second and first quarters respectively. “Hawthorn Bank’s core operations continue to be profitable in such a challenging economic cycle,” said Chairman and CEO James E. Smith. The net income available to common shareholders of Hawthorn Bancshares was reduced by parent company operating expenses; non-bank impairment charges related to assets transferred out of Hawthorn Bank and preferred dividends on stock issued to the U.S. Treasury under the Capital Purchase Program.

Operating Results

Net Interest IncomeNet interest income for the quarter ended September 30, 2010 increased 4.1% to $10.9 million from $10.4 million for the same period in 2009. The increase is attributed to strengthening of the Company’s net interest margin which increased from 3.57% for the third quarter of 2009 to 3.81% for the third quarter of 2010. The higher net interest margin is primarily the result of the decrease in rates paid on interest bearing liabilities outpacing the decrease in rates earned on interest bearing assets.

Loan Loss ReserveHawthorn’s level of non-performing loans was 7.06% of total loans at September 30, 2010, up from 6.58% at June 30, 2010, 6.44% at March 31, 2010 and 4.27% at year-end 2009. During the quarter, the Company recognized net charge-offs of $0.7 million compared to $4.6 million and $2.6 million for the second and first quarters of 2010, respectively. Net charge-offs realized during third quarter 2009 totaled $1.0 million. The Company provided an additional $2.5 million to the allowance for loan losses for the third quarter of 2010, compared to $2.1 million provided for the second quarter and $2.5 million for the first quarter of 2010. The third quarter 2009 provision was $1.3 million. The allowance for loan losses at September 30, 2010 was $14.0 million, or 1.49% of outstanding loans and 21.18% of non-performing loans as of September 30, 2010. At December 31, 2009, the allowance for loan losses was $14.8 million, or 1.49% of outstanding loans and 34.94% of non-performing loans.

In commenting on asset quality, Mr. Smith said, “The current economy has contributed to 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.”

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