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 March 31, 2007

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

For the transition period from                      to                     

EXCHANGE NATIONAL 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)

Top of Form

(Registrant’s telephone number, including area code)

(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

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 May 10, 2007 the registrant had 4,169,847 shares of common stock, par value $1.00 per share, outstanding.

 

 

Index to Exhibits located on page 35

PART I — FINANCIAL INFORMATION

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		March 31, 2007				December 31, 2006
ASSETS
Loans:		$	810,288,974			$	812,312,759
Less allowance for loan losses			9,163,612				9,015,378
Loans, net			801,125,362				803,297,381
Investments in available for sale debt securities, at fair value			184,798,079				183,566,135
Investments in equity securities, at cost			6,293,875				6,207,175
Federal funds sold and securities purchased under agreements to resell			18,975,193				9,922,961
Cash and due from banks			31,306,577				43,077,605
Premises and equipment			36,447,383				34,706,857
Other real estate owned and repossessed assets			3,491,321				2,734,500
Accrued interest receivable			8,074,373				8,773,686
Mortgage servicing rights			1,317,490				1,350,375
Goodwill			40,323,775				40,323,775
Intangible assets			3,507,823				3,753,877
Cash surrender value — life insurance			1,766,461				1,750,420
Other assets			3,124,229				3,247,150
Total assets		$	1,140,551,941			$	1,142,711,897
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Demand deposits		$	131,945,487			$	138,885,883
Time deposits			771,549,706				760,978,851
Total deposits			903,495,193				899,864,734
Federal funds purchased and securities sold under agreements to repurchase			30,223,351				29,460,492
Interest-bearing demand notes to U.S. Treasury			969,688				1,735,638
Subordinated notes			49,486,000				49,486,000
Other borrowed money			39,700,584				47,368,315
Accrued interest payable			4,531,475				4,366,250
Other liabilities			5,476,907				5,485,878
Total liabilities			1,033,883,198				1,037,767,307
Stockholders’ equity:
Common stock — $1 par value; 15,000,000 shares authorized; 4,298,353 issued			4,298,353				4,298,353
Surplus			22,294,510				22,248,319
Retained earnings			82,862,711				81,431,713
Accumulated other comprehensive loss, net of tax			(134,322	)			(381,286	)
Treasury stock, 128,506 shares at cost			(2,652,509	)			(2,652,509	)
Total stockholders’ equity			106,668,743				104,944,590
Total liabilities and stockholders’ equity		$	1,140,551,941			$	1,142,711,897

See accompanying notes to unaudited condensed consolidated financial statements.

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

		Three Months Ended
		March 31,
		2007				2006
Interest income:
Interest and fees on loans		$	15,559,314			$	14,724,479
Interest on debt securities:
Taxable			1,545,812				1,400,870
Nontaxable			500,907				484,133
Interest on federal funds sold and securities purchased under agreements to resell			312,318				93,554
Interest on interest-bearing deposits			34,854				26,291
Dividends and interest on equity securities			77,478				63,539
Total interest income			18,030,683				16,792,866
Interest Expense:
NOW accounts			345,782				390,569
Savings accounts			68,655				77,774
Money market accounts			1,323,747				1,134,006
Certificates of deposit:
$100,000 and over			1,709,604				1,058,128
Other time deposits			3,558,144				2,714,061
Federal funds purchased and securities sold under agreements to repurchase			346,363				510,861
Subordinated notes			892,711				841,739
Advances from Federal Home Loan Bank			641,319				602,523
Other borrowed money			8,658				4,659
Total interest expense			8,894,983				7,334,320
Net interest income			9,135,700				9,458,546
Provision for loan losses			225,000				317,500
Net interest income after provision for loan losses			8,910,700				9,141,046

Continued on next page

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

		Three Months Ended
		March 31,
		2007				2006
Noninterest income:
Service charges on deposit accounts		$	1,279,955			$	1,360,830
Trust department income			236,372				179,710
Mortgage loan servicing fees, net			94,969				114,682
Gain on sale of mortgage loans, net			129,295				112,234
Loss on sales and calls of debt securities			(1,747	)			(18,351	)
Other			784,544				276,806
Total noninterest income			2,523,388				2,025,911
Noninterest expense:
Salaries and employee benefits			4,822,700				4,345,246
Occupancy expense			506,780				452,342
Furniture and equipment expense			580,008				519,627
Postage, printing and supplies			266,846				292,373
Legal, examination, and professional fees			310,924				294,223
Processing expense			268,452				212,783
Amortization of intangible assets			246,054				275,697
Other			1,132,036				919,301
Total noninterest expense			8,133,800				7,311,592
Income before income taxes			3,300,288				3,855,365
Income taxes			993,621				1,166,758
Net income		$	2,306,667			$	2,688,607
Basic earning per share		$	0.55			$	0.64
Diluted earnings per share		$	0.55			$	0.64
Weighed average shares of common stock outstanding
Basic			4,169,847				4,169,847
Diluted			4,222,766				4,203,607
Dividends per share:
Declared		$	0.21			$	0.21
Paid		$	0.21			$	0.21

See accompanying notes to unaudited condensed consolidated financial statements.

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Three Months Ended March 31,
		2007				2006
Cash flow from operating activities:
Net income		$	2,306,667			$	2,688,607
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			225,000				317,500
Depreciation expense			476,473				435,333
Net amortization (accretion) of debt securities premiums and discounts			(12,123	)			31,553
Amortization of intangible assets			246,054				275,697
Stock based compensation expense			46,191				42,393
Decrease in accrued interest receivable			699,313				125,397
Increase in cash surrender value — life insurance			(16,041	)			(16,723	)
(Increase) decrease in other assets			(99,462	)			262,311
Increase in accrued interest payable			165,225				226,934
(Decrease) increase in other liabilities			(8,971	)			347,666
Loss on sales and calls of debt securities			1,747				18,351
Origination of mortgage loans for sale			(9,259,479	)			(6,138,550	)
Proceeds from the sale of mortgage loans held for sale			9,388,774				6,250,784
Gain on sale of mortgage loans			(129,295	)			(112,234	)
Loss on disposition of premises and equipment			297				—
Other, net			142,144				(167,988	)
Net cash provided by operating activities			4,172,514				4,587,031
Cash flow from investing activities:
Net decrease (increase) in loans			1,145,123				(13,175,966	)
Purchase of available-for-sale debt securities			(19,268,852	)			(36,175,158	)
Proceeds from maturities of available-for-sale debt securities			6,578,138				13,003,919
Proceeds from calls of available-for-sale debt securities			4,918,600				610,038
Proceeds from sales of available-for-sale debt securities			6,910,634				1,985,020
Purchase of equity securities			(216,400	)			(806,550	)
Proceeds from sales of equity securities			129,700				8,100
Purchase of premises and equipment			(2,217,296	)			(613,549	)
Proceeds from sales of premises and equipment			—				9,339
Proceeds from sales of other real estate owned and repossessions			45,075				83,501
Net cash used in investing activities			(1,975,278	)			(35,071,306	)

Continued on next page

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

		Three Months Ended March 31,
		2007				2006
Cash flow from financing activities:
Net decrease in demand deposits		$	(6,940,396	)		$	(717,193	)
Net decrease in interest-bearing transaction accounts			(1,390,980	)			(4,091,822	)
Net increase in time deposits			11,961,835				819,681
Net increase in federal funds purchased and securities sold under agreements to repurchase			762,859				19,031,434
Net decrease in interest-bearing demand notes to U.S. Treasury			(765,950	)			(726,158	)
Proceeds from Federal Home Loan Bank advances			42,000,000				47,409,734
Repayment of Federal Home Loan Bank advances			(49,667,731	)			(30,285,923	)
Cash dividends paid			(875,669	)			(875,668	)
Net cash (used) provided by financing activities			(4,916,032	)			30,564,085
Net (decrease) increase in cash and cash equivalents			(2,718,796	)			79,810
Cash and cash equivalents, beginning of period			53,000,566				47,730,549
Cash and cash equivalents, end of period		$	50,281,770			$	47,810,359
Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest		$	8,729,758			$	7,107,386
Income taxes			—				225,000
Supplemental schedule of noncash investing activities -
Other real estate and repossessions acquired in settlement of loans		$	801,896			$	—

See accompanying notes to unaudited condensed consolidated financial statements.

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three Months Ended March 31, 2007 and 2006

     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. Certain amounts in the 2006 condensed consolidated financial statements have been reclassified to conform to the 2007 condensed consolidated presentation. Such reclassifications have no effect on previously reported net income or stockholders’ equity. Operating results for the period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

     These unaudited condensed consolidated interim financial statements should be read in conjunction with our Company’s audited consolidated financial statements included in its 2006 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, 2006 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 March 31, 2007 and the consolidated statement of earnings for the three month-period ended March 31, 2007 and cash flows for the three month-period ended March 31, 2007.

Earnings per Share

     The following table reflects, for the three-month periods ended March 31, 2007 and 2006, the numerators (net income) and denominators (average shares outstanding) for the basic and diluted net income per share computations:

		Three Months Ended
		March 31,
		2007				2006
Net income, basic and diluted		$	2,306,667			$	2,688,607
Average shares outstanding			4,169,847				4,169,847
Effect of dilutive stock options			52,919				33,760
Average shares outstanding including dilutive stock options			4,222,766				4,203,607
Basic earning per share		$	0.55			$	0.64
Diluted earnings per share		$	0.55			$	0.64

Stock Option Plans

     Total stock-based compensation expense was $46,000 ($30,000 after tax) and $42,000 ($28,000 after tax) for the three-month period ended March 31, 2007 and 2006, respectively. As of March 31, 2007, the total unrecognized compensation expense related to non-vested stock awards was $345,000 and the related weighted average period over which it is expected to be recognized is approximately 1.4 years. For the three months ended March 31, 2007, there were no stock options exercised.

The following table summarizes our Company’s stock option activity for the three-month period ended March 31, 2007:

														Weighted
						Weighted				Aggregate				Average
						Average				Intrinsic				Contractual
						Exercise				Value				Term
		Options				Price				(000)				(in years)
Outstanding, January 1, 2007			202,738			$	24.54
Granted			—				—
Exercised			—				—
Expired			—				—
Forfeited			(1,186	)			28.45
Outstanding, March 31, 2007			201,552				24.52			$	2,127				6.5
Exercisable, March 31, 2007			141,220				23.52				1,790				5.8

     Options outstanding at March 31, 2007 had an intrinsic value of $2,127,000. Options exercisable at March 31, 2007 had an intrinsic value of approximately $1,790,000. On April 27, 2007, 48,104 stock options were granted. On March 3, 2006, 46,380 stock options were granted.

Comprehensive Income

     Comprehensive income for the three-month periods ended March 31, 2007 and 2006 is summarized as follows:

		Three Months Ended
		March 31,
		2007				2006
Net income		$	2,306,667			$	2,688,607
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) on debt and equity securities available-for-sale, net of tax			234,397				(287,814	)
Adjustment for loss on sales and calls of debt and equity securities, net of tax			1,136				11,928
Defined benefit pension plans:
Amortization of prior service cost included in net periodic pension cost, net of tax			11,431				—
Total other comprehensive income (loss)			246,964				(275,886	)
Comprehensive income		$	2,553,631			$	2,412,721

Intangible Assets

     The gross carrying amount and accumulated amortization of our Company’s amortized intangible assets as of March 31, 2007 and December 31, 2006 is as follows:

		March 31, 2007								December 31, 2006
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Core deposit intangible		$	7,060,224				(3,552,401	)		$	7,060,224				(3,306,347	)

     The aggregate amortization expense of core deposit intangible subject to amortization for the three-month period ended March 31, 2007 and 2006 is as follows:

		Three Months Ended
		March 31,
		2007				2006
Aggregate amortization expense		$	246,054				275,697

     The estimated amortization expense for the next five years is as follows:

Estimated amortization expense:
For the nine months ending December, 2007		$	676,283
For year ending 2008			701,443
For year ending 2009			626,111
For year ending 2010			526,477
For year ending 2011			434,763

Mortgage Servicing Rights

     Mortgage loans serviced for others totaled approximately $215,133,000 and $216,697,000 at March 31, 2007 and 2006, respectively. Mortgage servicing rights totaled approximately $1,318,000 and $1,487,000 at March 31, 2007 and 2006, respectively.

     Changes in the balance of servicing assets related to the loans serviced by The Exchange National Bank of Jefferson City for the three-month period ended March 31, 2007 and 2006 are as follows:

		March 31,
		2007				2006
Balance, beginning of period		$	1,350,375				1,536,331
Originated mortgage servicing rights			74,885				53,745
Amortization			(107,770	)			(103,529	)
Balance, end of period		$	1,317,490				1,486,547
Mortgage loans serviced		$	215,132,837				216,696,646
Mortgage servicing rights as a percentage of loans serviced			0.61	%			0.69	%

     Our Company’s mortgage servicing rights are amortized in proportion to the related estimated net servicing income over the estimated lives of the related mortgages, which is seven years. Changes in mortgage servicing rights, net of amortization, for the periods indicated were as follows:

Estimated amortization expense:
For the nine months ending December 31, 2007		$	239,000
For year ending 2008			303,000
For year ending 2009			229,000
For year ending 2010			156,000
For year ending 2011			130,000

Income Taxes

     On January 1, 2007, our Company adopted the provisions of FIN 48. As of January 1, 2007 our Company had $1,026,000 of gross unrecognized tax benefits of which $683,000 would impact the effective tax rate, if recognized. If these tax benefits are not recognized, the result would be cash tax payments. Our Company expects a reduction of $234,000 in gross unrecognized tax benefits during the remaining nine-month period ending December 31, 2007 as a result of the statute of limitations closing for the 2003 tax year. The unrecognized tax benefits are related to various federal and state tax strategies.

     In addition, our Company recognizes interest expense related to unrecognized tax positions as a component of the Income Tax Provision. As of January 1, 2007, interest accrued was approximately $124,000. There were no penalties related to tax matters accrued at January 1, 2007, nor did our Company recognize any penalties during the three months ended March 31, 2007.

     Our Company and subsidiaries file income tax returns in the U. S. federal jurisdiction and the state of Missouri. Management believes the accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. This assessment relies on estimates and assumptions. Our Company’s federal and state income tax returns for 2003 to 2006 are open tax years. As of March 31, 2007, there were no federal or state income tax examinations in process.

Defined Benefit Retirement Plan

     Our Company provides a noncontributory defined benefit pension plan for all full-time employees over the age of 21 who have completed at least on year of qualified service.

     Pension expense for the three month-periods ended March 31, 2007 and 2006 is as follows:

		Estimated				Estimated
		2007				2006
Service cost — benefits earned during the year		$	797,675			$	620,564
Interest cost on projected benefit obligations			364,493				318,142
Expected return on plan assets			(377,180	)			(369,164	)
Amortization of prior service cost			78,628				78,628
Amortization of net gains			(8,279	)			(2,601	)
Pension expense — Annual		$	855,337			$	645,569
Pension expense — three months ended March 31 (actual)		$	213,834			$	161,392

Under the provisions of the Pension Protection Act of 2006 our Company may make a contribution to the defined benefit pension plan during 2007.

Segment reporting

     Through the respective branch network, Exchange National Bank, Hawthorn Bank, and Bank 10 provide similar products and services in four defined geographic areas. The products and services offered include 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. Loans include real estate, commercial, installment and other consumer loans. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City, Clinton, and Belton, Missouri. The products and services are offered to customers primarily within their respective geographical areas. The business segments results that follow are consistent with our Company’s internal reporting system which is consistent, in all material respects, with accounting principles generally accepted in the United States of America and practices prevalent in the banking industry.

		March 31, 2007
		The Exchange
		National
		Bank of				Hawthorn				Bank 10				Corporate
		Jefferson City				Bank				of Belton				and other				Total
Balance sheet information:
Loans, net of allowance for loan losses		$	356,195,293			$	298,131,743			$	146,798,326			$	—			$	801,125,362
Debt and equity securities			83,298,773				76,613,760				29,693,421				1,486,000				191,091,954
Goodwill			4,382,098				20,814,638				15,127,039				—				40,323,775
Intangible assets			—				317,445				3,190,378				—				3,507,823
Total assets			472,881,321				449,809,107				216,531,471				1,330,042				1,140,551,941
Deposits			385,626,712				365,318,011				163,803,250				(11,252,780	)			903,495,193
Stockholders’ equity		$	51,520,943			$	57,720,760			$	35,429,179			$	(38,002,139	)		$	106,668,743

		December 31, 2006
		The Exchange
		National
		Bank of				Hawthorn				Bank 10				Corporate
		Jefferson City				Bank				of Belton				and other				Total
Balance sheet information
Loans, net of allowance for loan losses		$	350,563,084			$	304,588,049			$	148,146,248			$	—			$	803,297,381
Debt and equity securities			85,177,657				74,515,470				28,594,183				1,486,000				189,773,310
Goodwill			4,382,098				20,814,638				15,127,039				—				40,323,775
Intangible assets			—				367,908				3,385,969				—				3,753,877
Total assets			475,048,886				451,182,848				214,955,317				1,524,846				1,142,711,897
Deposits			384,413,021				366,964,822				157,263,345				(8,776,454	)			899,864,734
Stockholders’ equity		$	51,168,606			$	46,046,673			$	37,033,766			$	(29,304,455	)		$	104,944,590

		Three Months Ended March 31, 2007
		The Exchange
		National
		Bank of				Hawthorn				Bank 10				Corporate
		Jefferson City				Bank				of Belton				and other				Total
Statement of earnings:
Total interest income		$	8,010,205			$	6,685,684			$	3,307,987			$	26,807			$	18,030,683
Total interest expense			3,467,996				3,017,843				1,536,179				872,965				8,894,983
Net interest income			4,542,209				3,667,841				1,771,808				(846,158	)			9,135,700
Provision for loan losses			150,000				75,000				—				—				225,000
Noninterest income			1,032,797				634,957				448,498				407,136				2,523,388
Noninterest expense			2,811,499				2,691,688				1,706,349				924,264				8,133,800
Income taxes			845,800				457,609				140,062				(449,850	)			993,621
Net income (loss)		$	1,767,707			$	1,078,501			$	373,895			$	(913,436	)		$	2,306,667

		Three Months Ended March 31, 2006
		The Exchange
		National
		Bank of				Hawthorn				Bank 10				Corporate
		Jefferson City				Bank				of Belton				and other				Total
Statement of earnings:
Total interest income		$	7,741,073			$	5,895,867			$	3,130,650			$	25,276			$	16,792,866
Total interest expense			3,054,113				2,415,842				1,041,914				822,451				7,334,320
Net interest income			4,686,960				3,480,025				2,088,736				(797,175	)			9,458,546
Provision for loan losses			225,000				85,500				7,000				—				317,500
Noninterest income			979,511				566,725				498,581				(18,906	)			2,025,911
Noninterest expense			2,863,097				2,595,306				1,691,910				161,279				7,311,592
Income taxes			827,400				389,634				284,224				(334,500	)			1,166,758
Net income (loss)		$	1,750,974			$	976,310			$	604,183			$	(642,860	)		$	2,688,607

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE WORDS “SHOULD”, “EXPECT”, “ANTICIPATE”, “BELIEVE”, “INTEND”, “MAY”, “HOPE”, “FORECAST” AND SIMILAR EXPRESSIONS MAY IDENTIFY FORWARD LOOKING STATEMENTS. IN PARTICULAR, STATEMENTS CONCERNING OUR COMPANY’S ABILITY TO EXPAND ITS PRESENCE IN THE KANSAS CITY, MISSOURI METROPOLITAN MARKET, CONCERNING OUR EXPECTED CONTRIBUTIONS TO ANY OF OUR BANK’S BENEFIT PLANS, CONCERNING OUR AMORTIZATION OF CORE DEPOSIT INTANGIBLES OR OTHER ASSETS, CONCERNING OUR INTENT AND ABILITY TO HOLD SECURITIES UNTIL MATURITY, THAT THE PERIODIC REVIEW OF OUR LOAN PORTFOLIO KEEPS MANAGEMENT INFORMED OF POSSIBLE LOAN PROBLEMS AND THAT THE ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON SPECIFIC CREDITS ARE ALL FORWARD-LOOKING STATEMENTS. OUR COMPANY’S ACTUAL RESULTS, FINANCIAL CONDITION, OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION, OR BUSINESS, OR FROM THE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS CONDITIONS SPECIFICALLY AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS HAVING A SPECIFIC IMPACT ON OUR COMPANY INCLUDING, BUT NOT LIMITED TO, FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND REGULATIONS APPLICABLE TO OUR COMPANY AND CHANGES THEREIN; COMPETITIVE CONDITIONS IN THE MARKETS IN WHICH OUR COMPANY CONDUCTS ITS OPERATIONS, INCLUDING COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER RESOURCES THAN OUR COMPANY, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS AND SERVICES NOT OFFERED BY OUR COMPANY; AND THE ABILITY OF OUR COMPANY TO RESPOND TO CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES WERE DISCUSSED UNDER THE CAPTION “FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS,” IN OUR COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005, AS WELL AS THOSE DISCUSSED ELSEWHERE IN OUR COMPANY’S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Overview

     This overview of management’s discussion and analysis highlights selected information in this report and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire report. These have an impact on our Company’s financial condition and results of operation.

     Business Strategy: On December 1, 2006, our Company announced its development of a strategic plan in which, among other things, Exchange National Bank, Citizens Union State Bank, Osage Valley Bank and Bank 10 would be consolidated into a single bank under a Missouri state trust charter.

     The first step in this consolidation process was accomplished on March 16, 2007 when Osage Valley Bank and Citizens Union State Bank were combined. Exchange National Bank and Bank 10 plan to complete the consolidation process before December 31, 2007 when they combine with Citizens Union State Bank.

     The second step was accomplished on April, 20, 2007, when our Company issued a press release announcing that Hawthorn Bank had been selected as the new name for its combined subsidiary banks. As of April 23, 2007 Citizens Union State Bank began using the name “Hawthorn Bank”. It was also announced that our shareholders would be asked to approve the change of our Company’s name to Hawthorn Bancshares, Inc. at the 2007 annual meeting of shareholders. It is anticipated that by the time the aforementioned consolidation is completed, the resulting consolidated bank would be known as “Hawthorn Bank.” Our Company’s name change is being proposed in anticipation of this consolidation and would reflect the name under which our consolidated bank is to operate. Our board of directors believes that the name change would provide continuity between us and our consolidated bank, and would allow us to better leverage the “Hawthorn” brand identity than if we were to retain our current name.

     Material Challenges and Risks: Our Company may experience difficulties managing growth and effectively integrating newly established branches. As part of our general strategy, our Company may continue to acquire banks and establish de novo branches that we believe provide a strategic fit. To the extent that our Company does grow, there can be no assurances that we will be able to adequately and profitably manage such growth. The successes of our Company’s growth strategy will depend primarily on the ability of our banking subsidiaries 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. Furthermore, the success of our Company’s growth strategy will depend on our ability to maintain sufficient regulatory capital levels and on general economic conditions that are beyond our control.

     Revenue Source: Through the respective branch network, Exchange National Bank, Hawthorn Bank, and Bank 10 provide similar products and services in three defined geographic areas. The products and services offered include 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. Loans include real estate, commercial, installment, and other consumer loans. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated primarily from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City, Clinton, and Belton, Missouri. The products and services are offered to customers primarily within their respective geographical areas. The business segment results are consistent with our Company’s internal reporting system which is consistent, in all material respects, with generally accepted accounting principles and practices prevalent in the banking industry.

     Much of our Company’s business is commercial, commercial real estate development, and mortgage lending. Our Company has experienced continued strong loan demand in the communities within which we operate even during economic slowdowns. Our Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing.

     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.

     Our Company has prepared the unaudited condensed consolidated financial statements 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.

     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 being reported if conditions or underlying circumstances were to change. The impact and any associated risks related to these policies on our business operations are discussed in the “Lending and Credit Management” section below.

Results of Operations

     Net income for the three months ended March 31, 2007 of $2,307,000 decreased $382,000 when compared to the first quarter of 2006. Diluted earnings per common share for the first quarter of 2007 of $0.55 decreased 9 cents or 14.1% when compared to the first quarter of 2006.

     Net interest income (on a tax equivalent basis) was $9,382,000, or 3.75% of average earning assets, for the three months ended March 31, 2007, compared to $9,723,000, or 3.83% of average earning assets, for the same period in 2006. While the yield on earning assets increased 59 basis points from 6.71% at March 31, 2006 to 7.30% at March 31, 2007, the average rate paid on interest-bearing liabilities increased 78 basis points from 3.27% at March 31, 2006 to 4.05% at March 31, 2007.

     Average interest-earning assets for the three months ended March 31, 2007 were $1,015,528,000, a decrease of $14,787,000 or 1.4%, compared to average interest-earning assets of $1,030,315,000 for the same period of 2006. Average loans outstanding decreased approximately $17,838,000 while other earning assets increased $3,051,000. The decrease in average loans is primarily a result of a general slowdown in the real estate construction market. Our Company has experienced significant reductions in the amount of construction and land development loans outstanding in all our market areas over the past twelve months. Much of this reduction is the result of several large real estate construction loans obtaining permanent financing in the long term financing markets.

Net Interest Income

     Fully taxable equivalent net interest income decreased $341,000 or 3.5% for the three month period ended March 31, 2007 compared to the same period in 2006. The decrease in net interest income for the period ended March 31, 2007 compared to the period ended March 31, 2006 was the result of both decreased earning assets and decreased net interest margin.

     The following table presents average balance sheets, net interest income, average yields of earning assets, and average costs of interest bearing liabilities on a fully taxable equivalent basis for the three month periods ended March 31, 2007 and 2006.

(Dollars expressed in thousands )

		Three Months Ended												Three Months Ended
		March 31, 2007												March 31, 2006
										Rate								Interest				Rate
						Interest Income/				Earned/				Average				Income/				Earned/
		Average Balance				Expense/1/				Paid/1/				Balance				Expense/1/				Paid/1/
ASSETS
Loans:/2/ /3/		$	803,574			$	15,585				7.87	%		$	821,412			$	14,762				7.29	%
Investment in debt and equity securities :/4/
Government sponsored enterprises			124,896				1,521				4.94				136,913				1,370				4.06
State and municipal			53,806				746				5.62				53,585				736				5.57
Other			6,317				78				5.01				7,169				69				3.90
Federal funds sold			24,374				312				5.19				8,571				94				4.45
Interest-bearing deposits			2,561				35				5.54				2,665				26				3.96
Total interest earning assets			1,015,528				18,277				7.30				1,030,315				17,057				6.71
All other assets			124,595												123,069
Allowance for loan losses			(9,043	)											(9,248	)
Total assets		$	1,131,080											$	1,144,136
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW accounts		$	107,292			$	346				1.31	%		$	113,049			$	391				1.40	%
Savings accounts			48,220				68				0.57				55,112				78				0.57
Money market			152,148				1,324				3.53				157,184				1,134				2.93
Deposits of $100 and over			140,111				1,710				4.95				115,460				1,059				3.72
Other time deposits			314,660				3,558				4.59				310,519				2,713				3.54
Total time deposits			762,431				7,006				3.73				751,324				5,375				2.90
Federal funds purchased and securities sold under agreements to repurchase			31,088				346				4.51				52,021				511				3.98
Interest-bearing demand notes to US Treasury			718				9				5.08				480				4				3.38
Subordinated notes			49,486				893				7.32				49,486				842				6.90
Advances from Federal Home Loan Bank			47,943				641				5.42				57,122				602				4.27
Total interest-bearing liabilities			891,666				8,895				4.05				910,433				7,334				3.27
Demand deposits			126,203												127,499
Other liabilities			9,029												8,305
Total liabilities			1,026,898												1,046,237
Stockholders’ equity			104,182												97,899
Total liabilities and stockholders’ equity		$	1,131,080											$	1,144,136
Net interest income						$	9,382											$	9,723
Net interest margin/5/											3.75	%											3.83	%

     The following table presents, on a fully taxable equivalent basis, an analysis of changes in net interest income resulting from changes in average volumes of earning assets and interest bearing liabilities and average rates earned and paid. 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.

     Dollars expressed in thousands)

		Three Months Ended March 31, 2007
		Compared to
		Three Months Ended March 31, 2006
		Total				Change due to
		Change				Volume /3/				Rate /4/
Interest income on a fully taxable equivalent basis:
Loans:/1/		$	823				(327	)			1,150
Investment in debt and equity securities :/3/
Government sponsored enterprises			151				(127	)			278
State and municipal			10				3				7
Other			9				(9	)			18
Federal funds sold			218				200				18
Interest-bearing deposits			9				(1	)			10
Total interest income			1,220				(261	)			1,481
Interest expense:
NOW accounts		$	(44	)			(20	)			(24	)
Savings accounts			(10	)			(10	)			—
Money market			190				(37	)			227
Deposits of $100 and over			652				255				397
Other time deposits			844				36				808
Federal funds purchased and securities sold under agreements to repurchase			(165	)			(226	)			61
Interest-bearing demand notes of U.S. Treasury			4				3				1
Subordinated debentures			51				—				51
Other borrowed money			39				(107	)			146
Total interest expense			1,561				(106	)			1,667
Net interest income on a fully taxable equivalent basis		$	(341	)			(155	)			(186	)

THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006

     Our Company’s primary source of earnings is net interest income, which is the difference between the interest earned on interest earning assets and the interest paid on interest bearing liabilities. Net interest income on a fully taxable equivalent basis decreased $341,000 or 3.5% to $9,382,000 or 3.75% of average earning assets for the first quarter of 2007 compared to $9,723,000 or 3.83% of average earning assets for the same period of 2006. The provision for loan losses was $225,000 and $318,000 for the three months ended March 31, 2007 and 2006 respectively. Net charge-offs were $77,000 for the first quarter of 2007 compared to $17,000 for the first quarter of 2006. The decrease in the provision for loan losses for the first quarter of 2007 compared to first quarter 2006 reflects the expected loss in the loan portfolio based upon managements’ analysis of the risk in the portfolio. See Lending and Credit Management in this report for further discussion of first quarter 2007 charge-offs.

     Noninterest income and noninterest expense for the three-month periods ended March 31, 2007 and 2006 were as follows:

(Dollars expressed in thousands)

		Three Months Ended
		March 31,								Increase (decrease)
		2007				2006				Amount				%
Noninterest Income
Service charges on deposit accounts		$	1,280			$	1,361			$	(81	)			(6.0	)%
Trust department income			236				180				56				31.1
Mortgage loan servicing fees, net			95				114				(19	)			(16.7	)
Gain on sale of mortgage loans			129				112				17				15.2
Loss on sales and calls of debt securities			(2	)			(18	)			16				(88.9	)
Other			785				277				508				183.4
		$	2,523			$	2,026			$	497				24.5	%
Noninterest Expense
Salaries and employee benefits		$	4,823			$	4,345			$	478				11.0	%
Occupancy expense			507				452				55				12.2
Furniture and equipment expense			580				520				60				11.5
Postage, printing and supplies			267				292				(25	)			(8.6	)
Legal, examination, and professional fees			311				294				17				5.8
Amortization — CDI			246				276				(30	)			(10.9	)
Processing expense			268				213				55				25.8
Other			1,132				919				213				23.2
		$	8,134			$	7,311			$	823				11.3	%

     Noninterest income increased $497,000 or 24.5% to $2,523,000 for the first quarter of 2007 compared to $2,026,000 for the same period of 2006. Service charges on deposit accounts decreased $81,000 or 6.0% as a result of decreased overdraft and insufficient check fee income, ATM fee income, debit card fee income. Trust department income increased $56,000 or 31.1% due to the collection of additional trust distribution fees. Gain on sale of mortgage loans increased $17,000 or 15.2% due to an increase in volume of loans originated and sold to the secondary market from approximately $6,139,000 in the first quarter of 2006 to approximately $9,259,000 for the first quarter of 2007. Our Company recognized $2,000 in loss on sales and calls of debt securities during the first quarter of 2007 versus losses of $18,000 during the first quarter of 2006. Other noninterest income increased $508,000 or $183.4%. $425,000 of the increase represents the amount received from the sale of Osage Valley Bank’s state bank charter.

     Noninterest expense increased $823,000 or 11.3% to $8,134,000 for the first quarter of 2007 compared to $7,311,000 for the first quarter of 2006. Salaries and benefits increased $478,000 or 11.0%, occupancy expense increased $55,000 or 12.2%, furniture and equipment expense increased $60,000 or 11.5%, amortization expense decreased $30,000 or 10.9%, processing expense increased $55,000 or 25.8%, and other noninterest expense increased $213,000 or 23.2%. In addition to the increase in salaries and employees benefits represented by normal salary increases, additional hires resulting from staffing for a new branch facility to open during second quarter 2007 in a new market area and additional holding company hires required for the implementation of our Company’s strategic plan, $47,000 reflects increased pension expense. Partially offsetting these increases is a $27,000 decreased profit sharing expense. The $55,000 increase in occupancy expense is primarily reflected by higher property tax accruals as a result of the completion of several branch projects and the associated increase in assessed valuations. The $60,000 increase in furniture and equipment expense reflects additional depreciation expense, equipment repair expense, and equipment maintenance costs. The $55,000 increase in processing expense reflects higher costs associated with the various data processing systems utilized by our Company and costs associated with preparing for consolidation of the bank charters. The $213,000 increase in other noninterest expense reflects higher expenses in various other categories including, but not limited to, directors fees, travel, meals & entertainment, and other insurance.

     Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements were 30.1% for the first quarter of 2007 compared to 30.3% for the first quarter of 2006.

Lending and Credit Management

     Interest earned on the loan portfolio is a primary source of interest income for our Company. Net loans represented 70.2% of total assets as of March 31, 2007 compared to 70.3% as of December 31, 2006 and 70.4% as of March 31, 2006.

     Lending activities are conducted pursuant to written loan policies approved by our Banks’ Boards of Directors. Larger credits are reviewed by our Banks’ Discount Committees. These committees are comprised of members of senior management.

     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 March 31, 2007, our Company was servicing approximately $215,133,000 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.

     The provision for loan losses is based on management’s evaluation of the loan portfolio in light of national and local economic conditions, changes in the composition and volume of the loan portfolio, changes in the volume of past due and nonaccrual loans, value of underlying collateral and other relevant factors. The allowance for loan losses which is reported as a deduction from loans is available for loan charge-offs. This allowance is increased by the provision charged to expense and is reduced by loan charge-offs net of loan recoveries. Management formally reviews all loans in excess of certain dollar amounts (periodically established) at least annually. In addition, on a monthly basis, management reviews past due, “classified”, and “watch list” loans in order to classify or reclassify loans as “loans requiring attention,” “substandard,” “doubtful,” or “loss”. During that review, management also determines which loans should be considered to be “impaired”. Management follows the guidance provided in Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114) 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. Once a loan has been identified as impaired management generally measures impairment based upon the fair value of the underlying collateral. 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.

     The allowance for loan losses was decreased by net loan charge-offs of $77,000 for the first quarter of 2007 compared to $17,000 for the first quarter of 2006. The allowance for loan losses was increased by a provision charged to expense of $225,000 for the first quarter of 2007. That compares to a provision of $318,000 for the first quarter of 2006.

     The balance of the allowance for loan losses was $9,164,000 at March 31, 2007 compared to $9,015,000 at December 31, 2006 and $9,385,000 at March 31, 2006. The allowance for loan losses as a percent of outstanding loans was 1.13% at March 31, 2007 compared to 1.11% at December 31, 2006 and 1.14% at March 31, 2006. Based upon an analysis of the probable losses in the loan portfolio management believes the current balance of the allowance for loan losses is at an acceptable level.

     Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and restructured loans totaled $5,203,000 or 0.64% of total loans at March 31, 2007 compared to $5,066,000 or 0.62% of total loans at December 31, 2006. Detail of those balances plus other real estate and repossessions is as follows:

(Dollars expressed in thousands)

		March 31, 2007								December 31, 2006
						% of Gross								% of Gross
		Balance				Loans				Balance				Loans
Nonaccrual loans:
Commercial		$	3,059				0.38	%		$	2,495				0.31	%
Real estate:
Construction			1,051				0.13				1,657				0.20
Mortgage			795				0.10				644				0.08
Consumer			77				0.01				73				0.01
			4,982				0.62				4,869				0.60
Loans contractually past-due 90 days or more and still accruing:
Commercial			3				—				5				—
Real estate:
Construction			—				—				—				—
Mortgage			197				0.02				170				0.02
Consumer			21				—				22				—
			221				0.02				197				0.02
Restructured loans			—				—				—				—
Total nonperforming loans			5,203				0.64	%			5,066				0.62	%
Other real estate			3,491								2,720
Repossessions			—								15
Total nonperforming assets		$	8,694							$	7,801