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, and

• changes may occur in the securities markets.

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

We have described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, 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

Through the branch network of its subsidiary bank, our Company, Hawthorn Bancshares, Inc., 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.

Much of our Company's business is commercial, commercial real estate development, and mortgage lending. Our Company has experienced soft loan demand in the communities within which we operate during the current economic slowdown. Our Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancings.

The successes of our Company's growth strategy depends primarily on the ability of our banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. Our Company's financial performance also depends, in part, on our ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of our Company's growth strategy depends on our ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond our control.

Our subsidiary Bank is a full service bank conducting a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, our Bank provides trust services.

The deposit accounts of our Bank are insured by the Federal Deposit Insurance Corporation or "FDIC" to the extent provided by law. The operations of our Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of our Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. Hawthorn Bancshares is subject to supervision and examination by the Federal Reserve Board.

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 policies 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. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on our business operations is provided in Note 1 to our Company's consolidated financial statements and is also discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of our Company.

Valuation of Investment Securities

At the time of purchase, debt securities are classified into one of two categories: available-for-sale or held-to-maturity. Held-to-maturity securities are those securities which our Company has the positive intent and ability to hold until maturity. All debt securities not classified as held-to-maturity are classified as available-for-sale. Our Company's securities are classified as available-for-sale and are carried at fair value. Changes in fair value, excluding certain losses

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

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 forwards and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, 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 we expect to realize the deferred tax asset. 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 penalties and interest related to income taxes in income tax expense.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral 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 initially recorded as held for sale at the lower of the loan balance or fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. Our Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The write-downs are recorded as other real estate expense. Our Company establishes a valuation allowance related to other real estate owned on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the "cost" of a parcel of other real estate.

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for our
Company as of and for each of the three months ended March 31, 2012 and 2011,
respectively. 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
                                                                      Ended
                                                                    March 31,
 (In thousands, except per share data)                          2012         2011
 Per Share Data
 Basic earnings per common share                               $  0.21      $  0.10
 Diluted earnings per common share                                0.21         0.10
 Dividends paid on preferred stock                                 378          378
 Amortization of discount on preferred stock                       119          119
 Dividends paid on common stock                                    233          224
 Book value per common share                                     15.99        16.31
 Market price per common share                                    7.51         9.03

 Selected Ratios
 (Based on average balance sheets)
 Return on average total assets                                   0.49 %       0.32 %
 Return on average common stockholders' equity                    5.21 %       2.56 %
 Average common stockholders' equity to average total assets      8.68 %       6.10 %
 (Based on end-of-period data)
 Efficiency ratio (1)                                            74.15 %      74.80 %
 Period-end common stockholders' equity to period-end assets      8.61 %       8.46 %
 Period-end stockholders' equity to period-end assets             6.17 %       6.06 %
 Total risk-based capital ratio                                  18.28        17.29
 Tier 1 risk-based capital ratio                                 15.45        14.51
 Leverage ratio                                                  11.43        11.12

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

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

                                                                    Three months ended
                                                                        March 31,
(Dollars in thousands)                            2012           2011          $ Change          % Change
Net interest income                             $ 10,815       $ 10,481       $      334              3.2  %
Provision for loan losses                          1,700          1,750              (50 )            (2.9 )
Noninterest income                                 1,970          2,052              (82 )            (4.0 )
Noninterest expense                                9,480          9,378              102               1.1
Income before income taxes                         1,605          1,405              200              14.2
Income tax expense                                   154            451             (297 )           (65.9 )

Net income                                      $  1,451       $    954       $      497             52.1  %

Less: preferred dividends                            370            370               -                 -
and accretion of discount                            119            119               -                 -

Net income available to common shareholders     $    962       $    465       $      497             52.1  %

Our Company's consolidated net income of $1,451,000 for the three months ended March 31, 2012 increased $497,000 compared to consolidated net income of $954,000 for the three months ended March 31, 2011. Our Company recorded preferred stock dividends and accretion on preferred stock of $489,000 for the three months ended March 31, 2012, resulting in $962,000 of net income available for common shareholders compared to net income of $465,000 for the three months ended March 31, 2011. Diluted earnings per share increased from $0.10 per common share to $0.21 per common share. The provision for loan losses decreased $50,002, or 2.9%, from March 31, 2011 to March 31, 2012. Our Company's net interest income, on a tax equivalent basis, increased $317,000, or 3.0%, to $10,957,000 for the three months ended March 31, 2012 compared to $10,640,000 for the three months ended March 31, 2011. The $297,000 decrease in income tax expenses includes a $371,000 immaterial correction of a prior period error.

For the three months ended March 31, 2012, the return on average assets was 0.49%, the return on average common stockholders' equity was 5.21%, and the efficiency ratio was 74.1%. Net interest margin increased from 3.84% to 3.98% from March 31, 2011 to 2012, respectively. Total assets at March 31, 2012 were $1,205,981,000, compared to $1,171,161,000 at December 31, 2011, an increase of $34,820,000, or 3.0%. On July 1, 2011, our Company distributed a four percent stock dividend for the third consecutive year to common shareholders of record at the close of business May 12, 2011. For all periods presented, share information, including basic and diluted earnings per share, have been adjusted retroactively to reflect the stock dividend.

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 March 31, 2012 and March 31, 2011, respectively.

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                                                                        The Three Months Ended March 31,
(Dollars In thousands)                                        2012                                            2011
                                                              Interest         Rate                           Interest         Rate
                                             Average          Income/        Earned/         Average          Income/         Earned/
                                             Balance         Expense(1)      Paid(1)         Balance         Expense(1)       Paid(1)
ASSETS
Loans: (2) (4)
Commercial                                 $   128,376      $      1,655         5.17 %    $   128,986      $      1,737          5.46 %
Real estate construction-residential            23,333               461         7.92           32,317               417          5.23
Real estate construction-commercial             42,940               482         4.50           55,288               604          4.43
Real estate mortgage-residential               212,745             2,936         5.54          205,345             2,915          5.76
Real estate mortgage-commercial                703,846             5,265         5.23          432,766             5,908          5.54
Consumer                                        28,304               469         6.65           30,767               535          7.05

Total Loans                                $ 1,139,544      $     11,268        5.38  %    $   885,469      $     12,116          5.55 %

Investment in securities: (3)
U.S. treasury                              $     2,071      $          8         1.55 %    $     1,028      $          5          1.97 %
Government sponsored enterprises                75,817               297         1.57           62,845               349          2.25
Asset backed securities                        109,429               800         2.93          100,830               790          3.18
State and municipal                             33,307               363         4.37           33,600               418          5.05

Total Investment securities                $   220,624      $      1,468        2.67  %    $   198,303      $      1,562          3.19 %

Restricted Investments                           4,335                31         2.87            5,827                44          3.06
Federal funds sold                                  75                -            -               133                -             -
Interest bearing deposits in other
financial institutions                          39,694                21         0.21           34,035                20          0.24

Total interest earning assets              $ 1,404,272      $     12,788         4.64 %    $ 1,123,767      $     13,742          4.96 %

All other assets                               101,964                                          98,967
Allowance for loan losses                      (13,882 )                                       (14,577 )

Total assets                               $ 1,492,354                                     $ 1,208,157

LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts                               $   195,768      $        189         0.39 %    $   189,883      $        275          0.59 %
Savings                                         63,516                20         0.13           57,155                34          0.24
Money market                                   154,053               116         0.30          157,871               174          0.45
Time deposits of
$100,000 and over                              135,522               229         0.68          123,428               463          1.52
Other time deposits                            275,158               784         1.14          302,249             1,424          1.91

Total time deposits                        $   824,017      $      1,338         0.65 %    $   830,586      $      2,370          1.16 %

Federal funds purchased and securities
sold under agreements to repurchase             22,528                 5         0.09           29,993                13          0.18
Subordinated notes                              49,486               354         2.87           49,486               399          3.27
Federal Home Loan Advances                      28,388               134         1.89           56,929               320          2.28

Total borrowings                           $   100,402      $        493         1.97 %    $   136,408      $        732          2.18 %

Total interest bearing liabilities         $   924,419      $      1,831         0.79 %    $   966,994      $      3,102          1.30 %

Demand deposits                                156,047                                         134,203
Other liabilities                                8,411                                           4,430

Total liabilities                            1,088,877                                       1,105,627
Stockholders' equity                           103,477                                         102,530

Total liabilities and stockholders'
equity                                     $ 1,192,354                                     $ 1,208,157

Net interest income (FTE)                                   $     10,957                                    $     10,640

Net interest spread                                                              3.85 %                                           3.66 %
Net interest margin                                                              3.98 %                                           3.84 %

(1) Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $142,000 and $160,000 for the three months ended March 31, 2012 and 2011, respectively.

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

(3) Average balances based on amortized cost.

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

Financial results for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 included an increase in net interest income, on a tax equivalent basis, of $317,000, or 3.0%. Average interest-earning assets decreased $19,495,000, or 1.7% to $1,104,272,000 at March 31, 2012 compared to $1,123,767,000 at March 31, 2011 and average interest bearing liabilities decreased $42,575,000, or 4.4%, to $924,419,000 at March 31, 2012 compared to $966,994,000 at March 31, 2011.

Average loans outstanding decreased $45,925,000 or 5.2% to $839,544,000 at March 31, 2012 compared to $885,469,000 at March 31, 2011. See the Lending and Credit Management section for further discussion of changes in the composition of our lending portfolio. Average investment securities and federal funds sold increased $22,263,000, or 11.2% to $220,624,000 at March 31, 2012 compared to $198,436,000 at March 31, 2011. Average interest bearing deposits in other financial institutions increased $5,659,000 to $39,694,000 at March 31, 2012 compared to $34,035,000 at March 31, 2011. See the Liquidity Management section for further discussion.

Average time deposits decreased $6,569,000 to $824,017,000 at March 31, 2012 compared to $830,586,000 at March 31, 2011. Average borrowings on Federal Home Loan Bank advances decreased $28,541,000 to $28,388,000 at March 31, 2012 compared to $56,929,000 at March 31, 2011. See the Liquidity Management section for further discussion.

Rate and volume analysis

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