##### Table of Contents



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 JUNE 30, 2008
 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.)
 200 North 33 rd Street
Quincy, ILLINOIS 62301
(Address of principal executive offices including zip code)
 (217) 223-7300
(Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company 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
    
    6-12Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13-31Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    32PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    33Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3.
    
    Defaults Upon Senior Securities
    
    
    33Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    33Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    34Signatures
    
    
    35ExhibitsSection 302 CertificationsSection 906 CertificationsCertification of CEOCertification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO
  2




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##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements .
 MERCANTILE BANCORP, INC.
 
 Consolidated Balance Sheets
 (In thousands, except par value and share data)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsCash and due from banks
    
    $
    42,386
    
    
    $
    38,172Interest-bearing demand deposits
    
    
    20,508
    
    
    
    18,259Federal funds sold
    
    
    17,610
    
    
    
    19,628Cash and cash equivalents
    
    
    80,504
    
    
    
    76,059Available-for-sale securities
    
    
    196,939
    
    
    
    201,739Held-to-maturity securities
    
    
    12,410
    
    
    
    14,518Loans held for sale
    
    
    6,073
    
    
    
    3,338Loans, net of allowance for loan losses of $16,463 and $12,794
    
    
    1,238,298
    
    
    
    1,188,757Interest receivable
    
    
    9,753
    
    
    
    11,343Foreclosed assets held for sale, net
    
    
    4,669
    
    
    
    3,172Federal Home Loan Bank stock
    
    
    8,367
    
    
    
    7,790Cost method investments in common stock
    
    
    5,610
    
    
    
    6,105Deferred income taxes
    
    
    5,651
    
    
    
    2,457Mortgage servicing rights
    
    
    1,344
    
    
    
    1,307Cash surrender value of life insurance
    
    
    24,759
    
    
    
    24,248Premises and equipment
    
    
    41,459
    
    
    
    42,003Goodwill
    
    
    43,934
    
    
    
    43,934Core deposit and other intangibles
    
    
    4,258
    
    
    
    4,514Other
    
    
    8,709
    
    
    
    7,861Total assets
    
    $
    1,692,737
    
    
    $
    1,639,145Liabilities and Stockholders EquityDepositsDemand
    
    $
    135,556
    
    
    $
    133,890Savings, NOW and money market
    
    
    453,254
    
    
    
    420,394Time
    
    
    663,880
    
    
    
    611,676Brokered time
    
    
    144,714
    
    
    
    153,499Total deposits
    
    
    1,397,404
    
    
    
    1,319,459Short-term borrowings
    
    
    29,657
    
    
    
    45,589Long-term debt
    
    
    77,500
    
    
    
    81,500Junior subordinated debentures
    
    
    61,858
    
    
    
    61,858Interest payable
    
    
    5,281
    
    
    
    6,040Other
    
    
    7,073
    
    
    
    6,971Total liabilities
    
    
    1,578,773
    
    
    
    1,521,417Commitments and Contingent LiabilitiesMinority Interest
    
    
    8,667
    
    
    
    9,446Stockholders EquityCommon stock, $.42 par value; authorized 12,000,000 shares;Issued  8,887,113 shares at June 30, 2008 and December 31, 2007Outstanding  8,703,455 shares at June 30, 2008 and 8,709,655
at December 31, 2007
    
    
    3,629
    
    
    
    3,629Additional paid-in capital
    
    
    11,925
    
    
    
    11,989Retained earnings
    
    
    93,093
    
    
    
    94,552Accumulated other comprehensive income (loss)
    
    
    (1,058
    )
    
    
    305107,589
    
    
    
    110,475Treasury stock, at costCommon; 183,658 shares at June 30, 2008 and 177,458 at
December 31, 2007
    
    
    (2,292
    )
    
    
    (2,193
    )Total stockholders equity
    
    
    105,297
    
    
    
    108,282Total liabilities and stockholders equity
    
    $
    1,692,737
    
    
    $
    1,639,145
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##### Table of Contents



MERCANTILE BANCORP, INC.
 
 Consolidated Statements of Income
 (In thousands, except per share data)
(Unaudited)
 Three months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest and Dividend IncomeLoansTaxable
    
    $
    20,399
    
    
    $
    19,923
    
    
    $
    41,933
    
    
    $
    39,460Tax exempt
    
    
    173
    
    
    
    258
    
    
    
    349
    
    
    
    514SecuritiesTaxable
    
    
    1,982
    
    
    
    1,946
    
    
    
    3,951
    
    
    
    3,834Tax exempt
    
    
    473
    
    
    
    413
    
    
    
    1,013
    
    
    
    844Federal funds sold
    
    
    81
    
    
    
    264
    
    
    
    240
    
    
    
    735Dividends on Federal Home Loan Bank Stock
    
    
    30
    
    
    
    52
    
    
    
    66
    
    
    
    102Deposits with financial institutions and other
    
    
    84
    
    
    
    204
    
    
    
    234
    
    
    
    479Total interest and dividend income
    
    
    23,222
    
    
    
    23,060
    
    
    
    47,786
    
    
    
    45,968Interest ExpenseDeposits
    
    
    10,064
    
    
    
    10,708
    
    
    
    21,877
    
    
    
    21,287Short-term borrowings
    
    
    235
    
    
    
    475
    
    
    
    583
    
    
    
    843Long-term debt and junior subordinated
debentures
    
    
    2,023
    
    
    
    1,465
    
    
    
    4,227
    
    
    
    3,025Total interest expense
    
    
    12,322
    
    
    
    12,648
    
    
    
    26,687
    
    
    
    25,155Net Interest Income
    
    
    10,900
    
    
    
    10,412
    
    
    
    21,099
    
    
    
    20,813Provision for Loan Losses
    
    
    1,834
    
    
    
    426
    
    
    
    6,603
    
    
    
    1,181Net Interest Income After Provision For Loan Losses
    
    
    9,066
    
    
    
    9,986
    
    
    
    14,496
    
    
    
    19,632Noninterest IncomeFiduciary activities
    
    
    690
    
    
    
    572
    
    
    
    1,380
    
    
    
    1,145Brokerage fees
    
    
    501
    
    
    
    454
    
    
    
    917
    
    
    
    762Customer service fees
    
    
    1,125
    
    
    
    983
    
    
    
    2,225
    
    
    
    1,854Other service charges and fees
    
    
    234
    
    
    
    173
    
    
    
    434
    
    
    
    355Net gain (loss) on sales of assets
    
    
    (15
    )
    
    
    1
    
    
    
    376
    
    
    
    (1
    )Net gain on loan sales
    
    
    280
    
    
    
    177
    
    
    
    643
    
    
    
    285Loan servicing fees
    
    
    138
    
    
    
    99
    
    
    
    273
    
    
    
    201Net increase in cash surrender value of life
insurance
    
    
    243
    
    
    
    276
    
    
    
    511
    
    
    
    443Gain (loss) on investments in common stock
    
    
    680
    
    
    
    (5
    )
    
    
    680
    
    
    
    (8
    )Other
    
    
    92
    
    
    
    44
    
    
    
    282
    
    
    
    95Total noninterest income
    
    
    3,968
    
    
    
    2,774
    
    
    
    7,721
    
    
    
    5,131Noninterest ExpenseSalaries and employee benefits
    
    
    6,997
    
    
    
    5,562
    
    
    
    13,898
    
    
    
    11,190Net occupancy expense
    
    
    865
    
    
    
    642
    
    
    
    1,750
    
    
    
    1,277Equipment expense
    
    
    916
    
    
    
    641
    
    
    
    1,690
    
    
    
    1,253Deposit insurance premium
    
    
    118
    
    
    
    38
    
    
    
    223
    
    
    
    74Professional fees
    
    
    548
    
    
    
    579
    
    
    
    1,123
    
    
    
    1,074Postage and supplies
    
    
    333
    
    
    
    254
    
    
    
    634
    
    
    
    517(Gain) loss on foreclosed assets
    
    
    (11
    )
    
    
    
    
    
    
    493
    
    
    
    15Net loss on securities
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Amortization of mortgage servicing rights
    
    
    60
    
    
    
    36
    
    
    
    153
    
    
    
    62Other
    
    
    2,180
    
    
    
    1,672
    
    
    
    4,132
    
    
    
    3,170Total noninterest expense
    
    
    12,006
    
    
    
    9,424
    
    
    
    24,097
    
    
    
    18,632Minority Interest
    
    
    (105
    )
    
    
    159
    
    
    
    (392
    )
    
    
    334Income (Loss) Before Income Taxes
    
    
    1,133
    
    
    
    3,177
    
    
    
    (1,488
    )
    
    
    5,797Income Tax Expense (Benefit)
    
    
    (130
    )
    
    
    801
    
    
    
    (1,074
    )
    
    
    1,577Net Income (Loss)
    
    $
    1,263
    
    
    $
    2,376
    
    
    $
    (414
    )
    
    $
    4,220Basic Earnings (Loss) Per Share
    
    $
    .15
    
    
    $
    0.27
    
    
    $
    (0.05
    )
    
    $
    0.48Dividends Paid Per Share
    
    $
    .06
    
    
    $
    .06
    
    
    $
    .12
    
    
    $
    .12Weighted Average Shares Outstanding
    
    
    8,705,499
    
    
    
    8,744,156
    
    
    
    8,707,577
    
    
    
    8,745,878
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MERCANTILE BANCORP, INC.
 
 Consolidated Statements of Cash Flows
 (In thousands)
(Unaudited)
 Six Months Ended June 30
    
    2008
    
    
    2007Operating ActivitiesNet income (loss)
    
    $
    (414
    )
    
    $
    4,220Items not requiring (providing) cashDepreciation
    
    
    1,454
    
    
    
    959Provision for loan losses
    
    
    6,603
    
    
    
    1,181Net accretion of premiums and discounts on securities
    
    
    (17
    )
    
    
    (1
    )Amortization (depreciation) of core deposit intangibles and other
purchase accounting adjustments
    
    
    (175
    )
    
    
    139Deferred income taxes
    
    
    (2,339
    )
    
    
    (295
    )(Gain) loss on investments in common stock
    
    
    (680
    )
    
    
    8Net gains on loan sales
    
    
    (643
    )
    
    
    (285
    )(Gains) Losses on sale of assets
    
    
    (376
    )
    
    
    1Losses on foreclosed assets
    
    
    493
    
    
    
    15Amortization of mortgage servicing rights
    
    
    153
    
    
    
    63Federal Home Loan Bank stock dividends
    
    
    (21
    )
    
    
    (24
    )Net increase in cash surrender value of life insurance
    
    
    (511
    )
    
    
    (443
    )Minority interest in earnings of subsidiaries
    
    
    (392
    )
    
    
    334Changes inLoans originated for sale
    
    
    (62,941
    )
    
    
    (21,485
    )Proceeds from sales of loans
    
    
    60,571
    
    
    
    17,584Interest receivable
    
    
    1,590
    
    
    
    595Other assets
    
    
    (860
    )
    
    
    21Interest payable
    
    
    (759
    )
    
    
    (603
    )Other liabilities
    
    
    135
    
    
    
    (2,447
    )Net cash provided by (used in) operating activities
    
    
    871
    
    
    
    (463
    )Investing ActivitiesPurchases of available-for-sale securities
    
    
    (35,029
    )
    
    
    (31,343
    )Proceeds from maturities of available-for-sale securities
    
    
    33,357
    
    
    
    19,511Proceeds from the sales of available-for-sale securities
    
    
    4,947
    
    
    
    Proceeds from maturities of held-to-maturity securities
    
    
    2,105
    
    
    
    1,627Net change in loans
    
    
    (58,226
    )
    
    
    (5,629
    )Purchases of premises and equipment
    
    
    (1,317
    )
    
    
    (4,225
    )Proceeds from sales of premises and equipment
    
    
    769
    
    
    
    2Proceeds from sales of foreclosed assets
    
    
    542
    
    
    
    115Purchase of Federal Home Loan Bank stock
    
    
    (836
    )
    
    
    (61
    )Proceeds from sales of Federal Home Loan Bank stock
    
    
    280
    
    
    
    Purchase of cost method investment in common stock
    
    
    
    
    
    
    (1,554
    )Proceeds from sales of cost method investments
    
    
    495
    
    
    
    Goodwill acquired in connection with Royal Palm acquisition
    
    
    
    
    
    
    (5
    )Purchase of intangible assets
    
    
    
    
    
    
    (17
    )Net cash used in investing activities
    
    
    (52,913
    )
    
    
    (21,579
    )Financing ActivitiesNet increase in demand deposits, money market, NOW and savings accounts
    
    
    34,525
    
    
    
    24,864Net increase (decrease) in time and brokered time deposits
    
    
    43,488
    
    
    
    (70,709
    )Net increase (decrease) in short-term borrowings
    
    
    (15,931
    )
    
    
    31,016Proceeds from long-term debt
    
    
    17,000
    
    
    
    1,750Payments on long-term debt
    
    
    (21,000
    )
    
    
    (12,100
    )Proceeds from issuance of stock to minority interest of Mid-America
    
    
    81
    
    
    
    161Purchase of stock from minority interest of Mid-America
    
    
    (531
    )
    
    
    (67
    )Purchase of treasury stock
    
    
    (100
    )
    
    
    (563
    )Dividends paid
    
    
    (1,045
    )
    
    
    (1,049
    )Dividends paid to minority interest of Mid-America
    
    
    
    
    
    
    (73
    )Net cash provided by (used in) financing activities
    
    
    56,487
    
    
    
    (26,770
    )Increase (Decrease) In Cash and Cash Equivalents
    
    
    4,445
    
    
    
    (48,812
    )Cash and Cash Equivalents, Beginning of Period
    
    
    76,059
    
    
    
    99,147Cash and Cash Equivalents, End of Period
    
    $
    80,504
    
    
    $
    50,335Supplemental Cash Flows InformationInterest paid
    
    $
    27,446
    
    
    $
    25,758Income taxes paid
    
    $
    237
    
    
    $
    1,776Real estate acquired in settlement of loans
    
    $
    2,532
    
    
    $
    351Net (decrease) increase in additional paid-in-capital due to
(purchase) issuance of stock (from) to minority interest of
Mid-America
    
    $
    (64
    )
    
    $
    40
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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
    6




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4. FAIR VALUE MEASUREMENT
    Level 1
    
    
    
    Valuations for assets and liabilities traded in active exchange markets,
such as the New York Stock Exchange. Valuations are obtained from readily available
pricing sources for market transactions involving identical assets or liabilities.Level 2
    
    
    
    Valuations for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing services for identical or
comparable assets or liabilities which use observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.Level 3
    
    
    
    Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
  Available-for-Sale Securities
   Fair Value Measurements UsingQuotes Prices in
    
    
    
    
    
    SignificantActive Markets for
    
    Significant Other
    
    UnobservableIdentical Assets
    
    Observable Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Available-for-sale securities
    
    $
    196,939
    
    
    $
    5,370
    
    
    $
    178,192
    
    
    $
    13,377
 7




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Available-for-sale SecuritiesBalance, April 1, 2008
    
    $
    10,036Total realized and unrealized gains and losses:Included in net income
    
    
    Included in other comprehensive income
    
    
    Purchases, issuances and settlements
    
    
    3,341Transfers in and/or out of Level 3
    
    
    Balance, June 30, 2008
    
    $
    13,377Total gains or losses for the period included
in net income attributable to the change in
unrealized gains or losses related to assets
and liabilities still held at the reporting
date
    
    $
    
  Available-for-sale SecuritiesBalance, December 31, 2007
    
    $
    11,400Total realized and unrealized gains and losses:Included in net income
    
    
    Included in other comprehensive income
    
    
    Purchases, issuances and settlements
    
    
    1,977Transfers in and/or out of Level 3
    
    
    Balance, June 30, 2008
    
    $
    13,377Total gains or losses for the period included
in net income attributable to the change in
unrealized gains or losses related to assets
and liabilities still held at the reporting
date
    
    $
    
  Fair Value Measurements UsingQuotes Prices in
    
    
    
    
    
    SignificantActive Markets for
    
    Significant Other
    
    UnobservableIdentical Assets
    
    Observable Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Impaired Loans
    
    $
    23,794
    
    
    $
    
    
    
    $
    
    
    
    $
    23,794
 Impaired Loans
  8




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5. OFF BALANCE SHEET CREDIT COMMITMENTS
    9




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6. CRITICAL ACCOUNTING POLICIES
        10




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##### Table of Contents



7. COMPREHENSIVE INCOME (LOSS)
  For the Three MonthsEnded June 30,2008
    
    
    2007Net income
    
    $
    1,263
    
    
    $
    2,376Other comprehensive income (loss):Unrealized appreciation (depreciation) on
available-for-sale securities:Unrealized appreciation (depreciation)
on available-for-sale securities, net of
tax expense (benefit) of $(1,545) for
2008 and $(1,068) for 2007
    
    
    (2,546
    )
    
    
    (1,779
    )Less reclassification adjustment for
realized gains (losses) included in
income net of tax expense (benefit) of
$258 for 2008 and $(2) for 2007
    
    
    422
    
    
    
    (3
    )Total Unrealized appreciation (depreciation)
on available-for-sale securities, net of tax
expense (benefit) of $(1,803) for 2008 and
$(1,066) for 2007
    
    
    (2,968
    )
    
    
    (1,776
    )Accumulated other comprehensive income of
equity method investee
    
    
    
    
    
    
    (42
    )Adjustment of SFAS 158 liability, net of tax
expense of $27 for 2008 and $0 for 2007
    
    
    45
    
    
    
    Total other comprehensive income (loss), net of tax
    
    
    (2,923
    )
    
    
    (1,818
    )Comprehensive income (loss)
    
    $
    (1,660
    )
    
    $
    558
 For the Six MonthsEnded June 30,2008
    
    
    2007Net income (loss)
    
    $
    (414
    )
    
    $
    4,220Other comprehensive income (loss):Unrealized appreciation (depreciation) on
available-for-sale securities:Unrealized appreciation (depreciation)
on available-for-sale securities, net of
tax expense (benefit) of $(610) for 2008
and $(1,481) and for 2007
    
    
    (961
    )
    
    
    (2,287
    )Less reclassification adjustment for
realized gains (losses) included in
income net of tax expense (benefit) of
$258 for 2008 and $(3) for 2007
    
    
    422
    
    
    
    (5
    )Total Unrealized appreciation (depreciation)
on available-for-sale securities, net of tax
expense (benefit) of $(868) for 2008 and
$(1,478) for 2007
    
    
    (1,383
    )
    
    
    (2,282
    )Accumulated other comprehensive income of
equity method investee
    
    
    
    
    
    
    (29
    )Adjustment of SFAS 158 liability, net of tax
expense of $12 for 2008 and $0 for 2007
    
    
    20
    
    
    
    Total other comprehensive income (loss), net of tax
    
    
    (1,363
    )
    
    
    (2,311
    )Comprehensive income (loss)
    
    $
    (1,777
    )
    
    $
    1,909
 11




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##### Table of Contents



8. SUBSEQUENT EVENTS
  9. NONCOMPLIANCE WITH DEBT COVENANTS
    12




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##### Table of Contents



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.
  13




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##### Table of Contents



New Accounting Standards Adopted During 2008
    General
  Wholly-Owned Subsidiaries
 §
    
    Mercantile Bank (Mercantile), located in Quincy, Illinois;§
    
    Marine Bank & Trust (Marine), located in Carthage, Illinois;§
    
    Perry State Bank (Perry), located in Perry, Missouri;§
    
    Brown County State Bank (Brown County), located in Mt. Sterling, Illinois;§
    
    Royal Palm Bancorp, Inc. (Royal Palm), the sole shareholder of Royal Palm Bank of
Florida (Royal Palm Bank), located in Naples, Florida; and§
    
    HNB Financial Services, Inc. (HNB Financial), the sole shareholder of HNB
National Bank (HNB), located in Hannibal, Missouri.
 Majority-Owned Subsidiaries.
 Other Investments in Financial Institutions.
 
    
    5.0% of Integrity Bank (Integrity), located in Jupiter, Florida;
    
    0.8% 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;
 14




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##### Table of Contents




    
    0.1% 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;
    
    4.4% of Solera National Bancorp, Inc. (Solera), the sole shareholder of Solera
National Bank, located in Lakewood, Colorado;
    
    5.0% of Manhattan Bancorp, Inc. (Manhattan), the sole shareholder of Bank of
Manhattan, located in Los Angeles, California; and
    
    5.0% of Brookhaven Bank (Brookhaven), located in Atlanta, Georgia.
      Results of Operations
 Comparison of Operating Results for the Three Months Ended June 30, 2008 and 2007
 Overview.
   Net Interest Income.
 15




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##### Table of Contents



16




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##### Table of Contents



For the three months ended June 302008
    
    
    2007Income/
    
    
    
    
    
    
    
    
    
    
    Income/Average Balance
    
    
    Expense
    
    
    Yield/Rate
    
    
    Average Balance
    
    
    Expense
    
    
    Yield/Rate(dollars in thousands)AssetsInterest-bearing demand
deposits
    
    $
    17,490
    
    
    $
    84
    
    
    
    1.92
    %
    
    $
    14,712
    
    
    $
    204
    
    
    
    5.55
    %Federal funds sold
    
    
    16,510
    
    
    
    81
    
    
    
    1.96
    %
    
    
    17,998
    
    
    
    264
    
    
    
    5.87
    %Securities:TaxableU.S. treasuries
and government
agencies
    
    
    9,587
    
    
    
    114
    
    
    
    4.76
    %
    
    
    22,941
    
    
    
    299
    
    
    
    5.21
    %Mortgage-backed
securities
    
    
    53,603
    
    
    
    622
    
    
    
    4.64
    %
    
    
    43,854
    
    
    
    563
    
    
    
    5.14
    %Other securities
    
    
    91,325
    
    
    
    1,246
    
    
    
    5.46
    %
    
    
    82,084
    
    
    
    1,084
    
    
    
    5.28
    %Total taxable
    
    
    154,515
    
    
    
    1,982
    
    
    
    5.13
    %
    
    
    148,879
    
    
    
    1,946
    
    
    
    5.23
    %Non-taxable  State and
political subdivision (3)
    
    
    52,442
    
    
    
    473
    
    
    
    3.61
    %
    
    
    45,404
    
    
    
    413
    
    
    
    3.64
    %Loans (net of unearned
discount) (1)(2)
    
    
    1,240,179
    
    
    
    20,572
    
    
    
    6.64
    %
    
    
    1,031,215
    
    
    
    20,181
    
    
    
    7.83
    %Federal Home Loan Bank stock
    
    
    8,300
    
    
    
    30
    
    
    
    1.45
    %
    
    
    5,605
    
    
    
    52
    
    
    
    3.71
    %Total
interest-earning
assets (1)
    
    
    1,489,436
    
    
    $
    23,222
    
    
    
    6.24
    %
    
    
    1,263,813
    
    
    $
    23,060
    
    
    
    7.30
    %Cash and due from banks
    
    
    36,698
    
    
    
    
    
    
    
    
    
    
    
    23,283Premises and equipment
    
    
    41,682
    
    
    
    
    
    
    
    
    
    
    
    27,285Foreclosed assets held for
sale, net
    
    
    4,839
    
    
    
    
    
    
    
    
    
    
    
    328Equity method investments
in common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,142Cost method investments in
common stock
    
    
    5,981
    
    
    
    
    
    
    
    
    
    
    
    4,044Interest receivable
    
    
    9,915
    
    
    
    
    
    
    
    
    
    
    
    9,332Cash surrender value of
life insurance
    
    
    24,682
    
    
    
    
    
    
    
    
    
    
    
    18,453Allowance for loan loss
    
    
    (17,064
    )
    
    
    
    
    
    
    
    
    
    
    (11,306
    )Goodwill
    
    
    44,348
    
    
    
    
    
    
    
    
    
    
    
    29,043Intangible assets
    
    
    5,215
    
    
    
    
    
    
    
    
    
    
    
    6,088Other
    
    
    18,929
    
    
    
    
    
    
    
    
    
    
    
    11,153Total assets
    
    $
    1,664,661
    
    
    
    
    
    
    
    
    
    
    $
    1,385,658Liabilities and Stockholders EquityInterest-bearing
transaction deposits
    
    $
    140,372
    
    
    $
    326
    
    
    $
    0.93
    %
    
    $
    115,628
    
    
    $
    531
    
    
    $
    1.84
    %Savings deposits
    
    
    86,656
    
    
    
    290
    
    
    
    1.34
    %
    
    
    72,171
    
    
    
    467
    
    
    
    2.59
    %Money-market deposits
    
    
    224,802
    
    
    
    1,197
    
    
    
    2.13
    %
    
    
    179,467
    
    
    
    1,765
    
    
    
    3.93
    %Time and brokered time
deposits
    
    
    776,023
    
    
    
    8,251
    
    
    
    4.24
    %
    
    
    655,583
    
    
    
    7,945
    
    
    
    4.85
    %Short-term borrowings
    
    
    33,776
    
    
    
    235
    
    
    
    3.17
    %
    
    
    36,593
    
    
    
    475
    
    
    
    5.19
    %Long-term debt
    
    
    83,610
    
    
    
    1,084
    
    
    
    5.15
    %
    
    
    56,381
    
    
    
    761
    
    
    
    5.40
    %Subordinated debenture bonds
    
    
    61,858
    
    
    
    939
    
    
    
    6.07
    %
    
    
    41,239
    
    
    
    704
    
    
    
    6.83
    %Total
interest-bearing
liabilities
    
    
    1,407,097
    
    
    $
    12,322
    
    
    $
    3.51
    %
    
    
    1,157,062
    
    
    $
    12,648
    
    
    $
    4.37
    %Demand deposits
    
    
    129,714
    
    
    
    
    
    
    
    
    
    
    
    106,157Interest payable
    
    
    5,708
    
    
    
    
    
    
    
    
    
    
    
    6,109Other liabilities
    
    
    6,467
    
    
    
    
    
    
    
    
    
    
    
    5,207Minority interest
    
    
    8,856
    
    
    
    
    
    
    
    
    
    
    
    9,492Stockholders equity
    
    
    106,819
    
    
    
    
    
    
    
    
    
    
    
    101,631Total
liabilities and
stockholders
equity
    
    $
    1,664,661
    
    
    
    
    
    
    
    
    
    
    $
    1,385,658Interest spread
    
    
    
    
    
    
    
    
    
    
    2.73
    %
    
    
    
    
    
    
    
    
    
    
    2.93
    %Net interest income
    
    
    
    
    
    $
    10,900
    
    
    
    
    
    
    
    
    
    
    $
    10,412Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.93
    %
    
    
    
    
    
    
    
    
    
    
    3.30
    %Interest-earning assets to
interest-bearing
liabilities
    
    
    105.85
    %
    
    
    
    
    
    
    
    
    
    
    109.23
    %
 
 (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. 17




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##### Table of Contents



For the three months ended June 30,2008 vs. 2007Increase (Decrease) Due toChange inVolume
    
    
    Rate
    
    
    TotalIncrease (decrease) in interest income:Interest-bearing bank deposits
    
    $
    33
    
    
    $
    (153
    )
    
    $
    (120
    )Federal funds sold
    
    
    (20
    )
    
    
    (163
    )
    
    
    (183
    )Investment securities:U.S. Treasuries and Agencies
    
    
    (161
    )
    
    
    (24
    )
    
    
    (185
    )Mortgage-backed securities
    
    
    117
    
    
    
    (58
    )
    
    
    59States and political subdivision (1)
    
    
    64
    
    
    
    (4
    )
    
    
    60Other securities
    
    
    125
    
    
    
    37
    
    
    
    162Loans (net of unearned discounts)
    
    
    3,734
    
    
    
    (3,343
    )
    
    
    391Federal Home Loan Bank stock
    
    
    18
    
    
    
    (40
    )
    
    
    (22
    )Change in interest income (1)
    
    
    3,910
    
    
    
    (3,748
    )
    
    
    162Increase (decrease) in interest expense:Interest-bearing transaction deposits
    
    
    97
    
    
    
    (302
    )
    
    
    (205
    )Savings deposits
    
    
    80
    
    
    
    (257
    )
    
    
    (177
    )Money-market deposits
    
    
    373
    
    
    
    (941
    )
    
    
    (568
    )Time and brokered time deposits
    
    
    1,352
    
    
    
    (1,047
    )
    
    
    305Short-term borrowings
    
    
    (34
    )
    
    
    (206
    )
    
    
    (240
    )Long-term debt
    
    
    673
    
    
    
    (114
    )
    
    
    559Change in interest expense
    
    
    2,541
    
    
    
    (2,867
    )
    
    
    (326
    )Increase (decrease) in net interest income (1)
    
    $
    1,369
    
    
    $
    (881
    )
    
    $
    488
 
 (1)
    
    The tax exempt income for state and political subdivisions is not recorded on a tax equivalent basis. Provision for Loan Losses.
 Noninterest Income.
 18




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##### Table of Contents



For the Three Months EndedJune 30:2008
    
    
    2007Fiduciary activities
    
    $
    690
    
    
    $
    572Brokerage fees
    
    
    501
    
    
    
    454Customer service fees
    
    
    1,125
    
    
    
    983Other service charges and fees
    
    
    234
    
    
    
    173Net gain (loss) on sales of assets
    
    
    (15
    )
    
    
    1Net gain on loan sales
    
    
    280
    
    
    
    177Loan servicing fees
    
    
    138
    
    
    
    99Net increase in cash surrender value of life insurance
    
    
    243
    
    
    
    276Gain (loss) on investments in common stock
    
    
    680
    
    
    
    (5
    )Other
    
    
    92
    
    
    
    44Total noninterest income
    
    $
    3,968
    
    
    $
    2,774
      Noninterest Expense.
 19




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##### Table of Contents



For the Three Months EndedJune 302008
    
    
    2007Salaries and employee benefits
    
    $
    6,997
    
    
    $
    5,562Net occupancy expense
    
    
    865
    
    
    
    642Equipment expense
    
    
    916
    
    
    
    641Deposit insurance premium
    
    
    118
    
    
    
    38Professional fees
    
    
    548
    
    
    
    579Postage and supplies
    
    
    333
    
    
    
    254(Gain) loss on sales of foreclosed assets
    
    
    (11
    )
    
    
    Amortization of mortgage servicing rights
    
    
    60
    
    
    
    36Other
    
    
    2,180
    
    
    
    1,672Total noninterest expense
    
    $
    12,006
    
    
    $
    9,424
      Income Tax Expense (Benefit).
  20




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##### Table of Contents



Results of Operations   Comparison of Operating Results for the Six Months Ended June 30, 2008 and 2007
 Overview.
  Net Interest Income.
   21




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##### Table of Contents



For the six months ended June 302008
    
    
    2007Average
    
    
    Income/
    
    
    
    
    
    
    Average
    
    
    Income/Balance
    
    
    Expense
    
    
    Yield/Rate
    
    
    Balance
    
    
    Expense
    
    
    Yield/Rate(dollars in thousands)AssetsInterest-bearing demand
deposits
    
    $
    18,109
    
    
    $
    234
    
    
    
    2.58
    %
    
    $
    17,031
    
    
    $
    479
    
    
    
    5.63
    %Federal funds sold
    
    
    17,792
    
    
    
    240
    
    
    
    2.70
    %
    
    
    26,581
    
    
    
    735
    
    
    
    5.53
    %Securities:TaxableU.S. treasuries
and government
agencies
    
    
    17,649
    
    
    
    322
    
    
    
    3.65
    %
    
    
    22,645
    
    
    
    583
    
    
    
    5.15
    %Mortgage-backed
securities
    
    
    49,004
    
    
    
    1,182
    
    
    
    4.82
    %
    
    
    41,995
    
    
    
    1,073
    
    
    
    5.11
    %Other securities
    
    
    86,141
    
    
    
    2,447
    
    
    
    5.68
    %
    
    
    81,372
    
    
    
    2,178
    
    
    
    5.35
    %Total taxable
    
    
    152,794
    
    
    
    3,951
    
    
    
    5.17
    %
    
    
    146,012
    
    
    
    3,834
    
    
    
    5.25
    %Non-taxable  State and
political subdivision (3)
    
    
    54,796
    
    
    
    1,013
    
    
    
    3.70
    %
    
    
    46,470
    
    
    
    844
    
    
    
    3.63
    %Loans (net of unearned
discount) (1)(2)
    
    
    1,223,233
    
    
    
    42,282
    
    
    
    6.91
    %
    
    
    1,030,181
    
    
    
    39,974
    
    
    
    7.76
    %Federal Home Loan Bank stock
    
    
    8,119
    
    
    
    66
    
    
    
    1.63
    %
    
    
    5,690
    
    
    
    102
    
    
    
    3.59
    %Total
interest-earning
assets (1)
    
    
    1,474,843
    
    
    $
    47,786
    
    
    
    6.48
    %
    
    
    1,271,965
    
    
    $
    45,968
    
    
    
    7.23
    %Cash and due from banks
    
    
    35,159
    
    
    
    
    
    
    
    
    
    
    
    25,907Premises and equipment
    
    
    41,681
    
    
    
    
    
    
    
    
    
    
    
    26,312Foreclosed assets held for
sale, net
    
    
    4,342
    
    
    
    
    
    
    
    
    
    
    
    291Equity method investments
in common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,142Cost method investments in
common stock
    
    
    6,034
    
    
    
    
    
    
    
    
    
    
    
    3,869Interest receivable
    
    
    10,354
    
    
    
    
    
    
    
    
    
    
    
    9,417Cash surrender value of
life insurance
    
    
    24,487
    
    
    
    
    
    
    
    
    
    
    
    18,338Allowance for loan loss
    
    
    (15,073
    )
    
    
    
    
    
    
    
    
    
    
    (11,035
    )Goodwill
    
    
    44,469
    
    
    
    
    
    
    
    
    
    
    
    29,148Intangible assets
    
    
    5,215
    
    
    
    
    
    
    
    
    
    
    
    6,152Other
    
    
    22,680
    
    
    
    
    
    
    
    
    
    
    
    10,813Total assets
    
    $
    1,654,191
    
    
    
    
    
    
    
    
    
    
    $
    1,395,319Liabilities and Stockholders EquityInterest-bearing
transaction deposits
    
    $
    137,606
    
    
    $
    726
    
    
    
    1.06
    %
    
    $
    117,060
    
    
    $
    1,059
    
    
    
    1.81
    %Savings deposits
    
    
    83,506
    
    
    
    643
    
    
    
    1.54
    %
    
    
    69,760
    
    
    
    861
    
    
    
    2.47
    %Money-market deposits
    
    
    218,433
    
    
    
    2,721
    
    
    
    2.49
    %
    
    
    173,793
    
    
    
    3,398
    
    
    
    3.91
    %Time and brokered time
deposits
    
    
    773,388
    
    
    
    17,787
    
    
    
    4.60
    %
    
    
    670,331
    
    
    
    15,969
    
    
    
    4.76
    %Short-term borrowings
    
    
    34,963
    
    
    
    583
    
    
    
    3.35
    %
    
    
    33,157
    
    
    
    843
    
    
    
    5.08
    %Long term debt
    
    
    86,692
    
    
    
    2,260
    
    
    
    5.17
    %
    
    
    60,686
    
    
    
    1,615
    
    
    
    5.32
    %Subordinated debenture bonds
    
    
    61,858
    
    
    
    1,967
    
    
    
    6.36
    %
    
    
    41,239
    
    
    
    1,410
    
    
    
    6.84
    %Total
interest-bearing
liabilities
    
    
    1,396,446
    
    
    $
    26,687
    
    
    
    3.82
    %
    
    
    1,166,026
    
    
    $
    25,155
    
    
    
    4.31
    %Demand deposits
    
    
    127,183
    
    
    
    
    
    
    
    
    
    
    
    107,088Interest payable
    
    
    6,217
    
    
    
    
    
    
    
    
    
    
    
    6,221Other liabilities
    
    
    7,285
    
    
    
    
    
    
    
    
    
    
    
    5,010Minority interest
    
    
    9,117
    
    
    
    
    
    
    
    
    
    
    
    9,439Stockholders equity
    
    
    107,943
    
    
    
    
    
    
    
    
    
    
    
    101,535Total
liabilities and
stockholders
equity
    
    $
    1,654,191
    
    
    
    
    
    
    
    
    
    
    $
    1,395,319Interest spread
    
    
    
    
    
    
    
    
    
    
    2.66
    %
    
    
    
    
    
    
    
    
    
    
    2.91
    %Net interest income
    
    
    
    
    
    $
    21,099
    
    
    
    
    
    
    
    
    
    
    $
    20,813Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.86
    %
    
    
    
    
    
    
    
    
    
    
    3.27
    %Interest-earning assets to
interest-bearing
liabilities
    
    
    105.61
    %
    
    
    
    
    
    
    
    
    
    
    109.09
    %
 
 (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. 22




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For the six months ended June 30,2008 vs. 2007Increase (Decrease) Due toChange inVolume
    
    
    Rate
    
    
    TotalIncrease (decrease) in interest income:Interest-bearing bank deposits
    
    $
    29
    
    
    $
    (274
    )
    
    $
    (245
    )Federal funds sold
    
    
    (194
    )
    
    
    (301
    )
    
    
    (495
    )Investment securities:U.S. Treasuries and Agencies
    
    
    (112
    )
    
    
    (149
    )
    
    
    (261
    )Mortgage-backed securities
    
    
    172
    
    
    
    (63
    )
    
    
    109States and political subdivision (1)
    
    
    154
    
    
    
    15
    
    
    
    169Other securities
    
    
    131
    
    
    
    138
    
    
    
    269Loans (net of unearned discounts)
    
    
    6,974
    
    
    
    (4,666
    )
    
    
    2,308Federal Home Loan Bank stock
    
    
    33
    
    
    
    (69
    )
    
    
    (36
    )Change in interest income (1)
    
    
    7,187
    
    
    
    (5,369
    )
    
    
    1,818Increase in interest expense:Interest-bearing transaction deposits
    
    
    163
    
    
    
    (496
    )
    
    
    (333
    )Savings deposits
    
    
    148
    
    
    
    (366
    )
    
    
    (218
    )Money-market deposits
    
    
    742
    
    
    
    (1,419
    )
    
    
    (677
    )Time and brokered time deposits
    
    
    2,386
    
    
    
    (569
    )
    
    
    1,817Short-term borrowings
    
    
    39
    
    
    
    (299
    )
    
    
    (260
    )Long-term debt
    
    
    1,348
    
    
    
    (145
    )
    
    
    1,203Change in interest expense
    
    
    4,826
    
    
    
    (3,294
    )
    
    
    1,532Increase in net interest income (1)
    
    $
    2,361
    
    
    $
    (2,075
    )
    
    $
    286
 
 (1)
    
    The tax exempt income for state and political subdivisions is not recorded on a tax equivalent basis. Provision for Loan Losses.
 Noninterest Income.
 23




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##### Table of Contents



For the Six Months EndedJune 302008
    
    
    2007Fiduciary activities
    
    $
    1,380
    
    
    $
    1,145Brokerage fees
    
    
    917
    
    
    
    762Customer service fees
    
    
    2,225
    
    
    
    1,854Other service charges and fees
    
    
    434
    
    
    
    355Net gain (loss) on sales of assets
    
    
    376
    
    
    
    (1
    )Net gain on loan sales
    
    
    643
    
    
    
    285Loan servicing fees
    
    
    273
    
    
    
    201Net increase in cash surrender value of life insurance
    
    
    511
    
    
    
    443Gain (loss) on investments in common stock
    
    
    680
    
    
    
    (8
    )Other
    
    
    282
    
    
    
    95Total noninterest income
    
    $
    7,721
    
    
    $
    5,131
        Noninterest Expense.
 24




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##### Table of Contents



For the Six Months EndedJune 302008
    
    
    2007Salaries and employee benefits
    
    $
    13,898
    
    
    $
    11,190Net occupancy expense
    
    
    1,750
    
    
    
    1,277Equipment expense
    
    
    1,690
    
    
    
    1,253Deposit insurance premium
    
    
    223
    
    
    
    74Professional fees
    
    
    1,123
    
    
    
    1,074Postage and supplies
    
    
    634
    
    
    
    517Loss on foreclosed assets
    
    
    493
    
    
    
    15Net loss on securities
    
    
    1
    
    
    
    Amortization of mortgage servicing rights
    
    
    153
    
    
    
    62Other
    
    
    4,132
    
    
    
    3,170Total noninterest expense
    
    $
    24,097
    
    
    $
    18,632
       Income Tax Expense (Benefit).
 25




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##### Table of Contents



Financial Condition   June 30, 2008 Compared to December 31, 2007
 Loan Portfolio.
  June 30, 2008
    
    
    December 31, 2007Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(dollars in thousands)Commercial and financial
    
    $
    182,413
    
    
    
    14.47
    %
    
    $
    173,817
    
    
    
    14.43
    %Agricultural
    
    
    57,745
    
    
    
    4.58
    %
    
    
    64,399
    
    
    
    5.34
    %Real estate  farmland
    
    
    104,865
    
    
    
    8.32
    %
    
    
    91,488
    
    
    
    7.59
    %Real estate  construction
    
    
    237,541
    
    
    
    18.84
    %
    
    
    215,850
    
    
    
    17.91
    %Real estate  commercial
    
    
    211,336
    
    
    
    16.76
    %
    
    
    204,338
    
    
    
    16.96
    %Real estate  residential (1)
    
    
    333,288
    
    
    
    26.43
    %
    
    
    323,936
    
    
    
    26.89
    %Installment loans to individuals
    
    
    133,646
    
    
    
    10.60
    %
    
    
    131,061
    
    
    
    10.88
    %Total loans
    
    
    1,260,834
    
    
    
    100.00
    %
    
    
    1,204,889
    
    
    
    100.00
    %Allowance for loan losses
    
    
    16,463
    
    
    
    
    
    
    
    12,794Total loans, including loans
held for sale, net of allowance
for loan losses
    
    $
    1,244,371
    
    
    
    
    
    
    $
    1,192,095
 
 (1)
    
    Includes loans held for sale Nonperforming Assets
  26




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##### Table of Contents



June 30,
    
    
    December 31,2008
    
    
    2007Nonaccrual loansCommercial and financial
    
    $
    536
    
    
    $
    581Agricultural
    
    
    53
    
    
    
    308Real estate  farmland
    
    
    126
    
    
    
    296Real estate  construction
    
    
    18,609
    
    
    
    6,716Real estate  commercial
    
    
    2,178
    
    
    
    3,152Real estate  residential
    
    
    4,148
    
    
    
    8,571Installment loans to individuals
    
    
    234
    
    
    
    195Total nonaccrual loans
    
    
    25,884
    
    
    
    19,819Loans 90 days past due and still accruing
    
    
    4,512
    
    
    
    3,184Restructured loans
    
    
    59
    
    
    
    Total nonperforming loans
    
    
    30,455
    
    
    
    23,003Repossessed assets
    
    
    4,755
    
    
    
    3,273Other assets acquired in satisfaction of debt previously
contracted
    
    
    
    
    
    
    Total nonperforming other assets
    
    
    4,755
    
    
    
    3,273Total nonperforming loans and nonperforming other assets
    
    $
    35,210
    
    
    $
    26,276Nonperforming loans to loans, before allowance for loan losses
    
    
    2.42
    %
    
    
    1.91
    %Nonperforming loans and nonperforming other assets to loans,
before allowance for loan losses
    
    
    2.79
    %
    
    
    2.18
    %
 Allowance for Loan Losses
   27




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##### Table of Contents



As of and for
    
    
    As of and forthe Six Months
    
    
    the Year EndedEnded June 30,
    
    
    December 31,2008
    
    
    2007Average loans outstanding during year
    
    $
    1,223,233
    
    
    $
    1,085,606Allowance for loan losses:Balance at beginning of year
    
    $
    12,794
    
    
    $
    10,613Loans charged-off:Commercial and financial
    
    
    428
    
    
    
    493Agricultural
    
    
    127
    
    
    
    75Real estate  farmland
    
    
    
    
    
    
    Real estate  construction
    
    
    1,855
    
    
    
    284Real estate  commercial
    
    
    114
    
    
    
    18Real estate  residential
    
    
    401
    
    
    
    399Installment loans to individuals
    
    
    421
    
    
    
    906Total charge-offs
    
    
    3,346
    
    
    
    2,175Recoveries:Commercial and financial
    
    
    287
    
    
    
    55Agricultural
    
    
    8
    
    
    
    15Real estate  farmland
    
    
    
    
    
    
    Real estate  construction
    
    
    
    
    
    
    2Real estate  commercial
    
    
    28
    
    
    
    1Real estate  residential
    
    
    2
    
    
    
    38Installment loans to individuals
    
    
    87
    
    
    
    150Total recoveries
    
    
    412
    
    
    
    261Net charge-offs
    
    
    2,934
    
    
    
    1,914Provision for loan losses
    
    
    6,603
    
    
    
    2,969Purchased allowance
    
    
    
    
    
    
    1,126Balance at end of year
    
    $
    16,463
    
    
    $
    12,794Allowance for loan losses as a percent of
total loans outstanding at year end
    
    
    1.31
    %
    
    
    1.06
    %Allowance for loan losses as a percent of
total nonperforming loans
    
    
    54.06
    %
    
    
    55.62
    %Ratio of net charge-offs to average total loans
    
    
    .24
    %
    
    
    0.18
    %
 28




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##### Table of Contents



Securities
      Deposits
 Borrowings
  29




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##### Table of Contents



Liquidity and Capital Resources
 Liquidity
       30




---



##### Table of Contents



Capital Resources
  Effect of Inflation and Changing Prices.
  31




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##### Table of Contents



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
 32




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##### Table of Contents



PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number of Shares
    
    Maximum ApproximateSecond Quarter
    
    Total Number of
    
    
    
    
    
    Purchased as Part of
    
    Dollar Value of Shares that2008 Calendar
    
    Shares Purchased
    
    Average Price
    
    Publicly Announced
    
    May Yet Be Purchased UnderMonth
    
    (1)
    
    Paid per Share (1)
    
    Plans or Programs (2)
    
    the Plans or Programs (3)April
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    $
    8,229,424May
    
    
    6,200
    
    
    $
    16.00
    
    
    
    6,200
    
    
    $
    8,130,224June
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    $
    8,130,224Total
    
    
    6,200
    
    
    $
    16.00
    
    
    
    6,200
 
 (1)
    
    The total number of shares purchased and the average price paid per share include, in addition
to other purchases, shares purchased in the open market and through privately negotiated
transactions by the Companys 401(k) Profit Sharing Plan. For the months indicated, there were no
shares purchased by the Plan.(2)
    
    Includes only shares subject to publicly announced stock repurchase program, i.e. the $10
million stock repurchase program approved by the Board on August 15, 2005 and announced on August
17, 2005 (the 2005 Repurchase Program). Does not include shares purchased by the Companys
401(k) Profit Sharing Plan.(3)
    
    Dollar amount of repurchase authority remaining at month-end under the 2005 Repurchase
Program, the Companys only publicly announced repurchase program in effect at such dates. The
2005 Repurchase Program is limited to 883,656 shares (10% of the number of outstanding shares on
the date the Board approved the program, adjusted for the three-for-one stock split in June of 2006
and the three-for-two split in December of 2007) but not to exceed $10 million in repurchases. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  33




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##### Table of Contents



For
    
    WithheldMichael J. Foster
    
    
    8,158,249
    
    
    
    53,855William G. Keller, Jr.
    
    
    8,117,149
    
    
    
    94,955Dennis M. Prock
    
    
    8,159,130
    
    
    
    52,970Frank H. Musholt
    
    
    8,117,149
    
    
    
    94,955Walter D. Stevenson, III
    
    
    8,117,473
    
    
    
    94,631James W. Tracy
    
    
    8,163,386
    
    
    
    48,718Dan S. Dugan
    
    
    7,980,612
    
    
    
    231,492Ted T. Awerkamp
    
    
    8,911,935
    
    
    
    100,169
   
 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.
 34




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##### Table of Contents



SIGNATURES
  Date: August 11, 2008
    
    By:
    
    /s/ Ted T. Awerkamp

Ted T. Awerkamp
President and Chief Executive Officer
(principal executive officer)Date: August 11, 2008
    
    By:
    
    /s/ Michael P. McGrath

Michael P. McGrath
Executive Vice President, Treasurer, Secretary and
Chief Financial Officer
(principal financial officer/
principal accounting officer)
 35