##### 



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
 Commission file number 001-32434
 MERCANTILE BANCORP, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    37-1149138(State or other jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification No.)
 440 Maine Street
Quincy, ILLINOIS 62301
(Address of principal executive offices including zip code)
 (217) 223-7300
(Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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MERCANTILE BANCORP, INC.
 FORM 10-Q
 TABLE OF CONTENTS
  
 PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Income
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    6-8Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    9-22Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    23Item 1A.
    
    Risk Factors
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3.
    
    Defaults Upon Senior Securities
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5.
    
    Other Information
    
    
    23Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    24ExhibitsSection 302 Certifications
    
    25-26Section 906 Certifications
    
    27-28
  2




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##### 



PART I
 FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements .
 MERCANTILE BANCORP, INC.
 
 Consolidated Balance Sheets
 (In thousands, except par value and share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)AssetsCash and due from banks
    
    $
    24,077
    
    
    $
    28,854Interest-bearing demand deposits
    
    
    16,167
    
    
    
    29,188Federal funds sold
    
    
    30,766
    
    
    
    41,105Cash and cash equivalents
    
    
    71,010
    
    
    
    99,147Available-for-sale securities
    
    
    180,769
    
    
    
    176,179Held-to-maturity securities
    
    
    11,668
    
    
    
    12,400Loans held for sale
    
    
    3,199
    
    
    
    1,660Loans, net of allowance for loan losses of $11,172 and $10,613
    
    
    1,017,927
    
    
    
    1,021,043Interest receivable
    
    
    9,247
    
    
    
    10,277Foreclosed assets held for sale, net
    
    
    179
    
    
    
    291Federal Home Loan Bank stock
    
    
    5,759
    
    
    
    5,699Equity method investments in common stock
    
    
    4,160
    
    
    
    4,119Cost method investments in common stock
    
    
    3,694
    
    
    
    3,190Deferred income taxes
    
    
    3,683
    
    
    
    3,071Mortgage servicing rights
    
    
    989
    
    
    
    994Cash surrender value of life insurance
    
    
    18,324
    
    
    
    18,143Premises and equipment
    
    
    26,773
    
    
    
    25,693Goodwill
    
    
    32,124
    
    
    
    32,120Core deposit and other intangibles
    
    
    2,057
    
    
    
    2,110Other
    
    
    6,131
    
    
    
    6,691Total assets
    
    $
    1,397,693
    
    
    $
    1,422,827Liabilities and Stockholders EquityDepositsDemand
    
    $
    103,667
    
    
    $
    111,131Savings, NOW and money market
    
    
    366,600
    
    
    
    349,250Time
    
    
    537,877
    
    
    
    551,688Brokered time
    
    
    137,167
    
    
    
    154,745Total deposits
    
    
    1,145,311
    
    
    
    1,166,814Short-term borrowings
    
    
    26,351
    
    
    
    26,338Long-term debt
    
    
    62,660
    
    
    
    66,010Junior subordinated debentures
    
    
    41,239
    
    
    
    41,239Interest payable
    
    
    5,994
    
    
    
    6,039Other
    
    
    5,146
    
    
    
    6,531Total liabilities
    
    
    1,286,701
    
    
    
    1,312,971Commitments and Contingent LiabilitiesMinority Interest
    
    
    9,453
    
    
    
    9,198Stockholders EquityCommon stock, $0.42 par value; authorized 12,000,000 shares;
Issued  5,924,790 shares at March 31, 2007 and December 31, 2006
Outstanding  5,831,745 shares at March 31, 2007 and December
31, 2006
    
    
    2,469
    
    
    
    2,469Additional paid-in capital
    
    
    13,197
    
    
    
    13,142Retained earnings
    
    
    87,967
    
    
    
    86,648Accumulated other comprehensive income (loss)
    
    
    (470
    )
    
    
    23103,163
    
    
    
    102,282Treasury stock, at cost
Common; 93,045 shares at March 31, 2007 and December 31, 2006
    
    
    (1,624
    )
    
    
    (1,624
    )Total stockholders equity
    
    
    101,539
    
    
    
    100,658Total liabilities and stockholders equity
    
    $
    1,397,693
    
    
    $
    1,422,827
  3




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##### 



MERCANTILE BANCORP, INC.
 
 Consolidated Statements of Income
 (In thousands, except per share data)
(Unaudited)
 Three Months Ended March 31
    
    2007
    
    
    2006Interest and Dividend IncomeLoansTaxable
    
    $
    19,537
    
    
    $
    14,529Tax exempt
    
    
    256
    
    
    
    205SecuritiesTaxable
    
    
    1,888
    
    
    
    1,220Tax exempt
    
    
    431
    
    
    
    443Federal funds sold
    
    
    471
    
    
    
    43Dividends on Federal Home Loan Bank Stock
    
    
    50
    
    
    
    51Deposits with financial institutions and other
    
    
    275
    
    
    
    183Total interest and dividend income
    
    
    22,908
    
    
    
    16,674Interest ExpenseDeposits
    
    
    10,579
    
    
    
    6,790Short-term borrowings
    
    
    368
    
    
    
    274Long-term debt and junior subordinated debentures
    
    
    1,560
    
    
    
    658Total interest expense
    
    
    12,507
    
    
    
    7,722Net Interest Income
    
    
    10,401
    
    
    
    8,952Provision for Loan Losses
    
    
    755
    
    
    
    635Net Interest Income After Provision For Loan Losses
    
    
    9,646
    
    
    
    8,317Noninterest IncomeFiduciary activities
    
    
    573
    
    
    
    485Brokerage fees
    
    
    308
    
    
    
    319Customer service fees
    
    
    871
    
    
    
    822Other service charges and fees
    
    
    182
    
    
    
    170Net loss on sales of assets
    
    
    (2
    )
    
    
    Net gains on loan sales
    
    
    108
    
    
    
    144Net losses on sales of foreclosed assets
    
    
    (15
    )
    
    
    Loan servicing fees
    
    
    102
    
    
    
    99Net increase in cash surrender value of life insurance
    
    
    167
    
    
    
    171Income (loss) on equity method investments in common stock
    
    
    (3
    )
    
    
    95Other
    
    
    51
    
    
    
    30Total noninterest income
    
    
    2,342
    
    
    
    2,335Noninterest ExpenseSalaries and employee benefits
    
    
    5,628
    
    
    
    4,400Net occupancy expense
    
    
    635
    
    
    
    471Equipment expense
    
    
    612
    
    
    
    443Deposit insurance premium
    
    
    36
    
    
    
    33Professional fees
    
    
    495
    
    
    
    328Postage and supplies
    
    
    263
    
    
    
    245Amortization of mortgage servicing rights
    
    
    26
    
    
    
    50Other
    
    
    1,498
    
    
    
    1,815Total noninterest expense
    
    
    9,193
    
    
    
    7,785Minority Interest
    
    
    175
    
    
    
    225Income Before Income Taxes
    
    
    2,620
    
    
    
    2,642Provision For Income Taxes
    
    
    776
    
    
    
    718Net Income
    
    $
    1,844
    
    
    $
    1,924Basic Earnings Per Share
    
    $
    0.32
    
    
    $
    0.33Weighted Average Shares Outstanding
    
    
    5,831,745
    
    
    
    5,848,245
  4




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MERCANTILE BANCORP, INC.
 
 Consolidated Statements of Cash Flows
 (In thousands)
(Unaudited)
 Three Months Ended March 31
    
    2007
    
    
    2006Operating ActivitiesNet income
    
    $
    1,844
    
    
    $
    1,924Items not requiring (providing) cashDepreciation
    
    
    491
    
    
    
    383Provision for loan losses
    
    
    755
    
    
    
    635Amortization of premiums and discounts on securities
    
    
    15
    
    
    
    639Amortization of core deposit intangibles
    
    
    70
    
    
    
    69Deferred income taxes
    
    
    (201
    )
    
    
    (111
    )Net losses on loan sales
    
    
    (129
    )
    
    
    (144
    )Loss on sale of assets
    
    
    2
    
    
    
    18Net gains on sales of foreclosed assets
    
    
    15
    
    
    
    Amortization of mortgage servicing rights
    
    
    26
    
    
    
    50(Income) loss on equity method investments in common stock
    
    
    3
    
    
    
    (95
    )Federal Home Loan Bank stock dividends
    
    
    (12
    )
    
    
    (28
    )Net increase in cash surrender value of life insurance
    
    
    (181
    )
    
    
    (171
    )Minority interest in earnings of subsidiaries
    
    
    176
    
    
    
    225Changes inLoans originated for sale
    
    
    (7,400
    )
    
    
    (9,118
    )Proceeds from sales of loans
    
    
    5,969
    
    
    
    8,999Interest receivable
    
    
    1,030
    
    
    
    221Other assets
    
    
    561
    
    
    
    (422
    )Interest payable
    
    
    (45
    )
    
    
    572Other liabilities
    
    
    (1,385
    )
    
    
    1,229Net cash provided by operating activities
    
    
    1,604
    
    
    
    4,875Investing ActivitiesPurchases of available-for-sale securities
    
    
    (17,412
    )
    
    
    (12,130
    )Proceeds from maturities of available-for-sale securities
    
    
    11,894
    
    
    
    20,274Proceeds from maturities of held-to-maturity securities
    
    
    729
    
    
    
    921Net change in loans
    
    
    2,353
    
    
    
    (10,866
    )Purchases of premises and equipment
    
    
    (1,576
    )
    
    
    (666
    )Proceeds from the sales of foreclosed assets
    
    
    105
    
    
    
    116Proceeds from sales of assets
    
    
    2
    
    
    
    Purchase of Federal Home Loan Bank stock
    
    
    (48
    )
    
    
    (4
    )Purchase of cost method investment in common stock
    
    
    (504
    )
    
    
    Goodwill acquired in connection with Royal Palm acquisition
    
    
    (4
    )
    
    
    Purchase of intangible assets
    
    
    (17
    )
    
    
    Net cash used in investing activities
    
    
    (4,478
    )
    
    
    (2,355
    )Financing ActivitiesNet increase (decrease) in demand deposits, money market, NOW and
savings accounts
    
    
    9,886
    
    
    
    (714
    )Net increase (decrease) in time and brokered time deposits
    
    
    (31,389
    )
    
    
    19,927Net increase (decrease) in short-term borrowings
    
    
    13
    
    
    
    (16,659
    )Proceeds from long-term debt
    
    
    250
    
    
    
    150Payments on long-term debt
    
    
    (3,600
    )
    
    
    (3,000
    )Proceeds from issuance of stock to minority interest of Mid-America
    
    
    102
    
    
    
    275Purchase of stock from minority interest of Mid-America
    
    
    
    
    
    
    (304
    )Dividends paid
    
    
    (525
    )
    
    
    (468
    )Net cash used in financing activities
    
    
    (25,263
    )
    
    
    (793
    )Increase (Decrease) In Cash and Cash Equivalents
    
    
    (28,137
    )
    
    
    1,727Cash and Cash Equivalents, Beginning of Period
    
    
    99,147
    
    
    
    44,154Cash and Cash Equivalents, End of Period
    
    $
    71,010
    
    
    $
    45,881Supplemental Cash Flows InformationInterest paid
    
    $
    12,552
    
    
    $
    7,150Income taxes paid
    
    $
    
    
    
    $
    25Real estate acquired in settlement of loans
    
    $
    8
    
    
    $
    165Increase in additional paid-in-capital due to issuance of stock to
minority interest of Mid-America
    
    $
    24
    
    
    $
    (7
    )
  5




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MERCANTILE BANCORP, INC.
 
 Notes to Condensed Consolidated Financial Statements
 (table dollar amounts in thousands)
 1. BASIS OF PRESENTATION
    2. EARNINGS PER COMMON SHARE
  3. NEW ACCOUNTING PRONOUNCEMENTS
   4. OFF BALANCE SHEET CREDIT COMMITMENTS
  6




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5. CRITICAL ACCOUNTING POLICIES
     7




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6. COMPREHENSIVE INCOME
  For the Three MonthsEnded March 31,2007
    
    
    2006Net income
    
    $
    1,844
    
    
    $
    1,924Other comprehensive loss:Unrealized appreciation (depreciation)
on available-for-sale securities:Unrealized appreciation
(depreciation) on
available-for-sale securities,
net of tax expense of $(348)and
$(126) for 2007 and 2006
    
    
    (506
    )
    
    
    (207
    )Less reclassification adjustment
for realized gains (losses), net
of tax expense (benefit) of $0
for 2007 and 2006
    
    
    
    
    
    
    Net change in unrealized
appreciation (depreciation)
on available-for-sale
securities, net of tax
expense (benefit) of $(348)
for 2007 and $(126) for 2006
    
    
    (506
    )
    
    
    (207
    )Accumulated other comprehensive loss
of equity method investee
    
    
    13
    
    
    
    (8
    )Unrealized loss on interest rate swaps:Unrealized holding losses, net of
tax benefit of $0 and $(8) for
2007 and 2006
    
    
    
    
    
    
    (12
    )Less reclassification adjustment
to interest income, net of tax
(benefit) of $0 for 2007 and
$(23) for 2006
    
    
    
    
    
    
    (36
    )Net change in unrealized gain
(loss) on interest rate
swaps, net of tax (benefit)
of $0 for 2007 and $(14) for
2006
    
    
    
    
    
    
    24Total other comprehensive loss, net of tax
    
    
    (493
    )
    
    
    (191
    )Comprehensive income
    
    $
    1,351
    
    
    $
    1,733
 7. ACQUISITION
  8. LONG TERM DEBT
  8




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Cautionary Notice Regarding Forward-looking Statements
  
    
    general business and economic conditions in the markets
the Company serves change or are less favorable than it
expected;
    
    deposit attrition, operating costs, customer loss and
business disruption are greater than the Company
expected;
    
    competitive factors including product and pricing
pressures among financial services organizations may
increase;
    
    changes in the interest rate environment reduce the Companys interest margins;
    
    changes in market rates and prices may adversely impact
securities, loans, deposits, mortgage servicing rights,
and other financial instruments;
    
    legislative or regulatory developments including
changes in laws concerning taxes, banking, securities,
insurance and other aspects of the financial securities
industry may adversely affect the Companys business;
    
    personal or commercial bankruptcies increase;
    
    the Companys ability to expand and grow its business
and operations, including the establishment of
additional branches and acquisition of additional banks
or branches of banks may be more difficult or costly
than the Company expected;
    
    any future acquisitions may be more difficult to
integrate than expected and the Company may be unable
to realize any cost savings and revenue enhancements
the Company may have projected in connection with such
acquisitions;
    
    changes in accounting principles, policies or guidelines;
    
    changes occur in the securities markets; and
    
    technology-related changes may be harder to make or more expensive than the Company anticipated.
  9




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New Accounting Standards Adopted During 2007
  General
   
    
    Mercantile Trust & Savings Bank (MTSB), located in Quincy, Illinois;
    
    Marine Bank & Trust (Marine Bank), located in Carthage, Illinois;
    
    Perry State Bank (Perry), located in Perry, Missouri;
    
    Brown County State Bank (Brown County), located in Mt. Sterling, Illinois;
    
    Farmers State Bank of Northern Missouri (Farmers), located in Savannah, Missouri, and
    
    Royal Palm Bancorp, Inc. (Royal Palm), the sole shareholder of Royal
Palm Bank of Florida (Royal Palm Bank), located in Naples, Florida
   
    
    36.4% of New Frontier Bancshares, Inc. (New Frontier), the sole
shareholder of New Frontier Bank, located in St. Charles, Missouri;
    
    5.0% of Integrity Bank, located in Jupiter, Florida;
    
    1.5% of Premier Bancshares, Inc. (Premier), the sole shareholder of
Premier Bank, located in Jefferson City, Missouri;
    
    5.0% of Premier Community Bank of the Emerald Coast (Premier Community),
located in Crestview, Florida;
    
    4.1% of Paragon National Bank (Paragon), located in Memphis, Tennessee;
    
    0.2% of Integrity Bancshares, Inc. (Integrity Bancshares), the sole
shareholder of Integrity Bank, located in Alpharetta, Georgia;
    
    1.3% of Enterprise Financial Services Corp. (Enterprise), the sole
shareholder of Enterprise Bank & Trust, based in Clayton, Missouri; and
    
    0.5% of First Charter Corporation (First Charter), based in Charlotte,
North Carolina.
  10




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Results of Operations
 Comparison of Operating Results for the Three Months Ended March 31, 2007 and 2006
 Overview
   Net Interest Income
 11




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12




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For the three months ended March 312007
    
    2006Income/
    
    
    
    
    
    
    
    
    
    
    Income/Average Balance
    
    
    Expense
    
    
    Yield/Rate
    
    
    Average Balance
    
    
    Expense
    
    
    Yield/Rate(dollars in thousands)AssetsInterest-bearing demand
deposits
    
    $
    19,198
    
    
    
    275
    
    
    
    5.73
    %
    
    $
    22,791
    
    
    $
    183
    
    
    
    3.21
    %Federal funds sold
    
    
    35,069
    
    
    
    471
    
    
    
    5.37
    %
    
    
    3,976
    
    
    
    43
    
    
    
    4.33
    %Securities:TaxableU.S. treasuries
and government
agencies
    
    
    22,219
    
    
    
    284
    
    
    
    5.11
    %
    
    
    10,087
    
    
    
    89
    
    
    
    3.53
    %Mortgage-backed
securities
    
    
    40,127
    
    
    
    510
    
    
    
    5.08
    %
    
    
    47,766
    
    
    
    535
    
    
    
    4.48
    %Other securities
    
    
    80,648
    
    
    
    1,094
    
    
    
    5.43
    %
    
    
    54,358
    
    
    
    596
    
    
    
    4.39
    %Total taxable
    
    
    142,994
    
    
    
    1,888
    
    
    
    5.28
    %
    
    
    112,211
    
    
    
    1,220
    
    
    
    4.35
    %Non-taxable  State and
political subdivision (3)
    
    
    47,550
    
    
    
    431
    
    
    
    3.63
    %
    
    
    48,765
    
    
    
    443
    
    
    
    3.63
    %Loans (net of unearned
discount ) (1)(2)
    
    
    1,029,444
    
    
    
    19,793
    
    
    
    7.69
    %
    
    
    860,351
    
    
    
    14,734
    
    
    
    6.85
    %Federal Home Loan Bank stock
    
    
    5,703
    
    
    
    50
    
    
    
    3.51
    %
    
    
    5,435
    
    
    
    51
    
    
    
    3.75
    %Total
interest-earning
assets (1)
    
    $
    1,279,958
    
    
    
    22,908
    
    
    
    7.16
    %
    
    $
    1,053,529
    
    
    $
    16,674
    
    
    
    6.33
    %Cash and due from banks
    
    $
    25,609
    
    
    
    
    
    
    
    
    
    
    $
    24,680Premises and equipment
    
    
    25,313
    
    
    
    
    
    
    
    
    
    
    
    18,475Foreclosed assets held for
sale, net
    
    
    254
    
    
    
    
    
    
    
    
    
    
    
    402Equity method investments
in common stock
    
    
    4,143
    
    
    
    
    
    
    
    
    
    
    
    7,153Cost method investments in
common stock
    
    
    3,694
    
    
    
    
    
    
    
    
    
    
    
    3,350Interest receivable
    
    
    9,559
    
    
    
    
    
    
    
    
    
    
    
    7,675Cash surrender value of
life insurance
    
    
    18,225
    
    
    
    
    
    
    
    
    
    
    
    16,014Allowance for loan loss
    
    
    (10,760
    )
    
    
    
    
    
    
    
    
    
    
    (8,132
    )Goodwill
    
    
    29,255
    
    
    
    
    
    
    
    
    
    
    
    1,985Intangible assets
    
    
    6,162
    
    
    
    
    
    
    
    
    
    
    
    6,561Other
    
    
    10,514
    
    
    
    
    
    
    
    
    
    
    
    8,102Total assets
    
    $
    1,401,926
    
    
    
    
    
    
    
    
    
    
    $
    1,139,794Liabilities and Stockholders EquityInterest-bearing
transaction deposits
    
    $
    118,436
    
    
    
    528
    
    
    
    1.78
    %
    
    $
    110,952
    
    
    $
    365
    
    
    
    1.32
    %Savings deposits
    
    
    67,316
    
    
    
    394
    
    
    
    2.34
    %
    
    
    50,402
    
    
    
    129
    
    
    
    1.02
    %Money-market deposits
    
    
    168,831
    
    
    
    1,633
    
    
    
    3.87
    %
    
    
    102,316
    
    
    
    688
    
    
    
    2.69
    %Time and brokered time
deposits
    
    
    682,942
    
    
    
    8,024
    
    
    
    4.70
    %
    
    
    587,522
    
    
    
    5,608
    
    
    
    3.82
    %Short-term borrowings
    
    
    29,681
    
    
    
    368
    
    
    
    4.96
    %
    
    
    26,674
    
    
    
    274
    
    
    
    4.11
    %Long term debt
    
    
    64,988
    
    
    
    854
    
    
    
    5.26
    %
    
    
    41,234
    
    
    
    501
    
    
    
    4.86
    %Subordinated debenture bonds
    
    
    41,239
    
    
    
    706
    
    
    
    6.85
    %
    
    
    10,310
    
    
    
    157
    
    
    
    6.09
    %Total
interest-bearing
liabilities
    
    $
    1,173,433
    
    
    
    12,507
    
    
    
    4.26
    %
    
    $
    929,410
    
    
    $
    7,722
    
    
    
    3.32
    %Demand deposits
    
    $
    105,609
    
    
    
    
    
    
    
    
    
    
    $
    101,007Interest payable
    
    
    6,280
    
    
    
    
    
    
    
    
    
    
    
    3,600Other liabilities
    
    
    5,779
    
    
    
    
    
    
    
    
    
    
    
    5,204Minority interest
    
    
    9,386
    
    
    
    
    
    
    
    
    
    
    
    7,660Stockholders equity
    
    
    101,439
    
    
    
    
    
    
    
    
    
    
    
    92,913Total
liabilities and
stockholders
equity
    
    $
    1,401,926
    
    
    
    
    
    
    
    
    
    
    $
    1,139,794Interest spread
    
    
    
    
    
    
    
    
    
    
    2.90
    %
    
    
    
    
    
    
    
    
    
    
    3.01
    %Net interest income
    
    
    
    
    
    
    10,401
    
    
    
    
    
    
    
    
    
    
    
    8,952Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.25
    %
    
    
    
    
    
    
    
    
    
    
    3.40
    %Interest-earning assets to
interest-bearing
liabilities
    
    
    109.08
    %
    
    
    
    
    
    
    
    
    
    
    113.35
    %
 
 (1)
    
    Non-accrual loans have been included in average loans, net of unearned discount(2)
    
    Includes loans held for sale(3)
    
    The tax exempt income for state and political subdivisions in not recorded on a tax
equivalent basis. 13




---



##### 



For the three months ended March 31,2007 vs. 2006Increase (Decrease) Due toChange inVolume
    
    
    Rate
    
    
    TotalIncrease (decrease) in interest income:Interest-bearing bank deposits
    
    $
    (33
    )
    
    $
    125
    
    
    $
    92Federal funds sold
    
    
    415
    
    
    
    13
    
    
    
    428Investment securities:U.S. Treasuries and Agencies
    
    
    142
    
    
    
    53
    
    
    
    195Mortgage-backed securities
    
    
    (92
    )
    
    
    67
    
    
    
    (25
    )States and political subdivision (1)
    
    
    (11
    )
    
    
    (1
    )
    
    
    (12
    )Other securities
    
    
    334
    
    
    
    164
    
    
    
    498Loans (net of unearned discounts)
    
    
    3,115
    
    
    
    1,944
    
    
    
    5,059Federal Home Loan Bank stock
    
    
    2
    
    
    
    (3
    )
    
    
    (1
    )Change in interest income (1)
    
    
    3,872
    
    
    
    2,362
    
    
    
    6,234Increase in interest expense:Interest-bearing transaction deposits
    
    
    26
    
    
    
    137
    
    
    
    163Savings deposits
    
    
    55
    
    
    
    210
    
    
    
    265Money-market deposits
    
    
    564
    
    
    
    381
    
    
    
    945Time and brokered time deposits
    
    
    998
    
    
    
    1,418
    
    
    
    2,416Short-term borrowings
    
    
    33
    
    
    
    61
    
    
    
    94Long-term debt
    
    
    790
    
    
    
    112
    
    
    
    902Change in interest expense
    
    
    2,466
    
    
    
    2,319
    
    
    
    4,785Increase in net interest income (1)
    
    $
    1,406
    
    
    $
    43
    
    
    $
    1,449
 
 (1)
    
    The tax exempt income for state and political subdivisions is not recorded on a tax
equivalent basis. Provision for Loan Losses
 Noninterest Income.
 14




---



##### 



For the Three Months EndedMarch 312007
    
    
    2006Fiduciary activities
    
    $
    573
    
    
    $
    485Brokerage fees
    
    
    308
    
    
    
    319Customer service fees
    
    
    871
    
    
    
    822Other service charges and fees
    
    
    182
    
    
    
    170Net loss on sales of assets
    
    
    (2
    )
    
    
    Net gains on loan sales
    
    
    108
    
    
    
    144Net losses on sales of foreclosed assets
    
    
    (15
    )
    
    
    Loan servicing fees
    
    
    102
    
    
    
    99Net increase in cash surrender value of life insurance
    
    
    167
    
    
    
    171Income (loss) on equity method investments in common stock
    
    
    (3
    )
    
    
    95Other
    
    
    51
    
    
    
    30Total noninterest income
    
    $
    2,342
    
    
    $
    2,335
    Noninterest Expense
  For the Three Months EndedMarch 312007
    
    
    2006Salaries and employee benefits
    
    $
    5,628
    
    
    $
    4,400Net occupancy expense
    
    
    635
    
    
    
    471Equipment expense
    
    
    612
    
    
    
    443Deposit insurance premium
    
    
    36
    
    
    
    33Professional fees
    
    
    495
    
    
    
    328Postage and supplies
    
    
    263
    
    
    
    245Amortization of mortgage servicing rights
    
    
    26
    
    
    
    50Other
    
    
    1,498
    
    
    
    1,815Total noninterest expense
    
    $
    9,193
    
    
    $
    7,785
 15




---



##### 



Provision for Income Taxes.
  Financial Condition
 March 31, 2007 Compared to December 31, 2006
 Loan Portfolio
 16




---



##### 



March 31, 2007
    
    
    December 31, 2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(dollars in thousands)Commercial and financial
    
    $
    159,309
    
    
    
    15.43
    %
    
    $
    167,687
    
    
    
    16.23
    %Agricultural
    
    
    54,868
    
    
    
    5.32
    %
    
    
    57,393
    
    
    
    5.55
    %Real estate  farmland
    
    
    73,813
    
    
    
    7.15
    %
    
    
    72,999
    
    
    
    7.06
    %Real estate  construction
    
    
    163,624
    
    
    
    15.85
    %
    
    
    152,553
    
    
    
    14.76
    %Real estate  commercial
    
    
    197,313
    
    
    
    19.11
    %
    
    
    190,724
    
    
    
    18.46
    %Real estate  residential (1)
    
    
    259,103
    
    
    
    25.10
    %
    
    
    267,237
    
    
    
    25.86
    %Installment loans to individuals
    
    
    124,268
    
    
    
    12.04
    %
    
    
    124,723
    
    
    
    12.08
    %Total loans
    
    
    1,032,298
    
    
    
    100.00
    %
    
    
    1,033,316
    
    
    
    100.00
    %Allowance for loan losses
    
    
    11,172
    
    
    
    
    
    
    
    10,613Total loans, including loans
held for sale, net of allowance
for loan losses
    
    $
    1,021,126
    
    
    
    
    
    
    $
    1,022,703
 
 (1)
    
    Includes loans held for sale Nonperforming Assets
  17




---



##### 



March 31,
    
    
    December 31,2007
    
    
    2006Nonaccrual loansCommercial and financial
    
    $
    984
    
    
    $
    429Agricultural
    
    
    453
    
    
    
    473Real estate  farmland
    
    
    12
    
    
    
    12Real estate  construction
    
    
    591
    
    
    
    1,147Real estate  commercial
    
    
    1,992
    
    
    
    2,083Real estate  residential
    
    
    2,075
    
    
    
    1,040Installment loans to individuals
    
    
    246
    
    
    
    213Total nonaccrual loans
    
    
    6,353
    
    
    
    5,397Loans 90 days past due and still accruing
    
    
    1,289
    
    
    
    993Restructured loans
    
    
    
    
    
    
    4Total nonperforming loans
    
    
    7,642
    
    
    
    6,394Repossessed assets
    
    
    227
    
    
    
    361Other assets acquired in satisfaction of debt previously
contracted
    
    
    
    
    
    
    Total nonperforming other assets
    
    
    227
    
    
    
    361Total nonperforming loans and nonperforming other assets
    
    $
    7,869
    
    
    $
    6,755Nonperforming loans to loans, before allowance for loan losses
    
    
    0.74
    %
    
    
    0.62
    %Nonperforming loans and nonperforming other assets to loans,
before allowance for loan losses
    
    
    0.76
    %
    
    
    0.65
    %
 Allowance for Loan Losses
 18




---



##### 



19




---



##### 



As of and forthe Three
    
    
    As of and forMonths Ended
    
    
    the Year EndedMarch 31,
    
    
    December 31,2007
    
    
    2006Average loans outstanding during year
    
    $
    1,029,444
    
    
    $
    907,671Allowance for loan losses:Balance at beginning of year
    
    $
    10,613
    
    
    $
    8,082Loans charged-off:Commercial and financial
    
    
    6
    
    
    
    1,833Agricultural
    
    
    39
    
    
    
    85Real estate  farmland
    
    
    
    
    
    
    Real estate  construction
    
    
    
    
    
    
    Real estate  commercial
    
    
    
    
    
    
    139Real estate  residential
    
    
    15
    
    
    
    139Installment loans to individuals
    
    
    211
    
    
    
    1,129Total charge-offs
    
    
    271
    
    
    
    3,325Recoveries:Commercial and financial
    
    
    17
    
    
    
    47Agricultural
    
    
    3
    
    
    
    20Real estate  farmland
    
    
    
    
    
    
    Real estate  construction
    
    
    1
    
    
    
    1Real estate  commercial
    
    
    
    
    
    
    1Real estate  residential
    
    
    9
    
    
    
    12Installment loans to individuals
    
    
    45
    
    
    
    136Total recoveries
    
    
    75
    
    
    
    217Net charge-offs
    
    
    196
    
    
    
    3,108Provision for loan losses
    
    
    755
    
    
    
    3,914Purchased allowance
    
    
    
    
    
    
    1,725Balance at end of year
    
    $
    11,172
    
    
    $
    10,613Allowance for loan losses as a percent of
total loans outstanding at year end
    
    
    1.08
    %
    
    
    1.03
    %Allowance for loan losses as a percent of
total nonperforming loans
    
    
    146.19
    %
    
    
    165.98
    %Ratio of net charge-offs to average total loans
    
    
    0.02
    %
    
    
    0.34
    %
 Securities
  20




---



##### 



Deposits
 Borrowings
   Liquidity and Capital Resources
 Liquidity
   21




---



##### 



Capital Resources
  Effect of Inflation and Changing Prices.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk .
  
 Item 4. Controls and Procedures .
 Evaluation of disclosure controls and procedures.
 Changes in internal controls over financial reporting
 22




---



##### 



PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    Identification of Exhibit31.1
    
    Certification of the Chief Executive
Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.31.2
    
    Certification of the Chief Financial
Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.32.1
    
    Certification of the Chief Executive
Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial
Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 23




---



##### 



SIGNATURES
  Date: May 10, 2007
    By:
    /s/ Ted T. AwerkampTed T. AwerkampPresident and Chief Executive Officer
(principal executive officer)Date: May 10, 2007
    By:
    /s/ Michael P. McGrathMichael P. McGrathExecutive Vice President, Treasurer, Secretary and
Chief Financial Officer
(principal financial officer/
principal accounting officer) 24