##### 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 MARCH 31, 2006
 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 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
    
    9-21Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    21Item 4.
    
    Controls and Procedures
    
    21PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    22Item 1A.
    
    Risk Factors
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    22Item 5.
    
    Other Information
    
    22Item 6.
    
    Exhibits
    
    22Signatures
    
    23ExhibitsSection 302 Certifications
    
    24-25Section 906 Certifications
    
    26Certification of the Chief Executive Officer to Rule 13a-14(a)Certification of the Chief Financial Officer to Rule 13a-14(a)Certification of the Chief Executive Officer to 18 U.S.C. Section 1350Certification of the Chief Financial Officer to 18 U.S.C. Section 1350
  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)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCash and due from banks
    
    $
    30,422
    
    
    $
    27,761Interest-bearing demand deposits
    
    
    15,298
    
    
    
    14,548Federal funds sold
    
    
    161
    
    
    
    1,845Cash and cash equivalents
    
    
    45,881
    
    
    
    44,154Available-for-sale securities
    
    
    141,130
    
    
    
    150,196Held-to-maturity securities
    
    
    13,899
    
    
    
    14,870Loans held for sale
    
    
    3,836
    
    
    
    3,635Loans, net of allowance for loan losses of $8,327 and $8,082
    
    
    859,632
    
    
    
    849,566Interest receivable
    
    
    7,675
    
    
    
    7,896Foreclosed assets held for sale, net
    
    
    390
    
    
    
    341Federal Home Loan Bank stock
    
    
    5,464
    
    
    
    5,432Equity method investments in common stock
    
    
    7,187
    
    
    
    7,105Cost method investments in common stock
    
    
    3,350
    
    
    
    3,350Deferred income taxes
    
    
    4,475
    
    
    
    4,254Mortgage servicing rights
    
    
    1,030
    
    
    
    1,018Cash surrender value of life insurance
    
    
    16,101
    
    
    
    15,930Premises and equipment
    
    
    18,507
    
    
    
    18,242Goodwill
    
    
    5,208
    
    
    
    5,208Core deposit intangibles
    
    
    2,291
    
    
    
    2,360Other
    
    
    4,689
    
    
    
    4,267Total assets
    
    $
    1,140,745
    
    
    $
    1,137,824Liabilities and Stockholders EquityDepositsDemand
    
    $
    100,724
    
    
    $
    104,320Savings, NOW and money market
    
    
    266,890
    
    
    
    264,008Time
    
    
    460,232
    
    
    
    450,336Brokered time
    
    
    137,496
    
    
    
    127,465Total deposits
    
    
    965,342
    
    
    
    946,129Interest rate swaps at fair value
    
    
    200
    
    
    
    238Short-term borrowings
    
    
    15,928
    
    
    
    32,587Long-term debt
    
    
    48,870
    
    
    
    51,720Interest payable
    
    
    3,706
    
    
    
    3,134Other
    
    
    6,196
    
    
    
    4,967Total liabilities
    
    
    1,040,242
    
    
    
    1,038,775Commitments and Contingent LiabilitiesMinority Interest
    
    
    7,757
    
    
    
    7,561Stockholders EquityCommon stock, $1.25 par value; authorized 12,000,000
shares; 1,974,930 shares issued and 1,963,680 shares
outstanding
    
    
    2,469
    
    
    
    2,469Additional paid-in capital
    
    
    12,917
    
    
    
    12,924Retained earnings
    
    
    79,656
    
    
    
    78,200Accumulated other comprehensive loss
    
    
    (1,039
    )
    
    
    (848
    )94,003
    
    
    
    92,745Treasury stock, at cost  11,250 shares
    
    
    (1,257
    )
    
    
    (1,257
    )Total stockholders equity
    
    
    92,746
    
    
    
    91,488Total liabilities and stockholders equity
    
    $
    1,140,745
    
    
    $
    1,137,824
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##### Table of Contents



MERCANTILE BANCORP, INC.
 
 Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
 Three Months Ended March 31
    
    2006
    
    
    2005Interest and Dividend IncomeLoansTaxable
    
    $
    14,529
    
    
    $
    11,589Tax exempt
    
    
    205
    
    
    
    158SecuritiesTaxable
    
    
    1,220
    
    
    
    1,208Tax exempt
    
    
    443
    
    
    
    373Federal funds sold
    
    
    43
    
    
    
    44Dividends on Federal Home Loan Bank Stock
    
    
    51
    
    
    
    61Deposits with financial institutions and other
    
    
    183
    
    
    
    94Total interest and dividend income
    
    
    16,674
    
    
    
    13,527Interest ExpenseDeposits
    
    
    6,790
    
    
    
    4,503Short-term borrowings
    
    
    274
    
    
    
    105Long-term debt
    
    
    658
    
    
    
    575Total interest expense
    
    
    7,722
    
    
    
    5,183Net Interest Income
    
    
    8,952
    
    
    
    8,344Provision for Loan Losses
    
    
    635
    
    
    
    549Net Interest Income After Provision For Loan Losses
    
    
    8,317
    
    
    
    7,795Noninterest IncomeFiduciary activities
    
    
    485
    
    
    
    450Brokerage fees
    
    
    319
    
    
    
    124Customer service fees
    
    
    822
    
    
    
    737Other service charges and fees
    
    
    170
    
    
    
    152Net gains on loan sales
    
    
    144
    
    
    
    90Net gains on sales of foreclosed assets
    
    
    
    
    
    
    27Loan servicing fees
    
    
    99
    
    
    
    75Net increase in cash surrender value of life insurance
    
    
    171
    
    
    
    152Income on equity method investments in common stock
    
    
    95
    
    
    
    13Other
    
    
    30
    
    
    
    164Total noninterest income
    
    
    2,335
    
    
    
    1,984Noninterest ExpenseSalaries and employee benefits
    
    
    4,400
    
    
    
    4,102Net occupancy expense
    
    
    471
    
    
    
    384Equipment expense
    
    
    443
    
    
    
    395Deposit insurance premium
    
    
    33
    
    
    
    34Professional fees
    
    
    328
    
    
    
    298Postage and supplies
    
    
    245
    
    
    
    240Amortization of mortgage servicing rights
    
    
    50
    
    
    
    26Other
    
    
    1,815
    
    
    
    1,373Total noninterest expense
    
    
    7,785
    
    
    
    6,852Minority Interest
    
    
    225
    
    
    
    94Income Before Income Taxes
    
    
    2,642
    
    
    
    2,833Provision For Income Taxes
    
    
    718
    
    
    
    816Net Income
    
    $
    1,924
    
    
    $
    2,017Basic Earnings Per Share
    
    $
    0.99
    
    
    $
    1.03Weighted Average Shares Outstanding
    
    
    1,949,415
    
    
    
    1,963,680
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MERCANTILE BANCORP, INC.
 
 Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Three Months Ended March 31
    
    2006
    
    
    2005Operating ActivitiesNet income
    
    $
    1,924
    
    
    $
    2,017Items not requiring (providing) cashDepreciation
    
    
    383
    
    
    
    287Provision for loan losses
    
    
    635
    
    
    
    549Amortization of premiums and discounts on securities
    
    
    639
    
    
    
    264Amortization of core deposit intangibles
    
    
    69
    
    
    
    20Deferred income taxes
    
    
    (111
    )
    
    
    (300
    )Net gains on loan sales
    
    
    (144
    )
    
    
    (90
    )Loss on sale of premises and equipment
    
    
    18
    
    
    
    Net gains on sales of foreclosed assets
    
    
    
    
    
    
    (27
    )Amortization of mortgage servicing rights
    
    
    50
    
    
    
    26Income on equity method investments in common stock
    
    
    (95
    )
    
    
    (13
    )Federal Home Loan Bank stock dividends
    
    
    (28
    )
    
    
    (61
    )Net increase in cash surrender value of life insurance
    
    
    (171
    )
    
    
    (152
    )Minority interest in earnings of subsidiaries
    
    
    225
    
    
    
    94Changes inLoans originated for sale
    
    
    (9,118
    )
    
    
    (4,603
    )Proceeds from sales of loans
    
    
    8,999
    
    
    
    4,952Interest receivable
    
    
    221
    
    
    
    550Other assets
    
    
    (422
    )
    
    
    11Interest payable
    
    
    572
    
    
    
    279Other liabilities
    
    
    1,229
    
    
    
    754Net cash provided by operating activities
    
    
    4,875
    
    
    
    4,557Investing ActivitiesPurchases of available-for-sale securities
    
    
    (12,130
    )
    
    
    (16,605
    )Proceeds from maturities of available-for-sale securities
    
    
    20,274
    
    
    
    21,628Proceeds from maturities of held-to-maturity securities
    
    
    921
    
    
    
    1,288Net change in loans
    
    
    (10,866
    )
    
    
    (13,156
    )Purchases of premises and equipment
    
    
    (666
    )
    
    
    (852
    )Proceeds from the sales of foreclosed assets
    
    
    116
    
    
    
    128Purchase of Federal Home Loan Bank stock
    
    
    (4
    )
    
    
    Purchase of equity method investment in common stock
    
    
    
    
    
    
    (984
    )Net cash used in investing activities
    
    
    (2,355
    )
    
    
    (8,553
    )Financing ActivitiesNet increase (decrease) in demand deposits, money market, NOW and
savings accounts
    
    
    (714
    )
    
    
    4,930Net increase in time and brokered time deposits
    
    
    19,927
    
    
    
    6,657Net decrease in short-term borrowings
    
    
    (16,659
    )
    
    
    (1,556
    )Proceeds from long-term debt
    
    
    150
    
    
    
    984Payments on long-term debt
    
    
    (3,000
    )
    
    
    (4,000
    )Proceeds from issuance of stock to minority interest of Mid-America
    
    
    275
    
    
    
    879Purchase of stock from minority interest of Mid-America
    
    
    (304
    )
    
    
    Dividends paid
    
    
    (468
    )
    
    
    (118
    )Dividends paid to minority interest
    
    
    
    
    
    
    (54
    )Net cash provided by (used in) financing activities
    
    
    (793
    )
    
    
    7,722Increase In Cash and Cash Equivalents
    
    
    1,727
    
    
    
    3,726Cash and Cash Equivalents, Beginning of Period
    
    
    44,154
    
    
    
    39,719Cash and Cash Equivalents, End of Period
    
    $
    45,881
    
    
    $
    43,445Supplemental Cash Flows InformationInterest paid
    
    $
    7,150
    
    
    $
    4,904Income taxes paid
    
    $
    25
    
    
    $
    435Real estate acquired in settlement of loans
    
    $
    165
    
    
    $
    231Decrease in additional paid-in-capital due to purchase of stock
from minority interest of Mid-America
    
    $
    (7
    )
    
    $
    
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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 PRONOUNCEMENT
 Accounting for Servicing of Financial Assets, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,
 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 31,2006
    
    
    2005Net income
    
    $
    1,924
    
    
    $
    2,017Other comprehensive loss:Unrealized appreciation (depreciation)
on available-for-sale securities:Unrealized appreciation
(depreciation) on
available-for-sale securities,
net of tax expense (benefit) of
$(126) for 2006 and (535) for
2005
    
    
    (207
    )
    
    
    (837
    )Less reclassification adjustment
for realized gains (losses), net
of tax expense (benefit) of $0
for 2006 and 2005
    
    
    
    
    
    
    Net change in unrealized
appreciation (depreciation)
on available-for-sale
securities, net of tax
expense (benefit) of $(126)
for 2006 and $(535) for 2005
    
    
    (207
    )
    
    
    (837
    )Accumulated other comprehensive loss
of equity method investee
    
    
    (8
    )
    
    
    (21
    )Unrealized loss on interest rate swaps:Unrealized holding losses, net of
tax benefit of $(8) for 2006 and
$(42) for 2005
    
    
    (12
    )
    
    
    (67
    )Less reclassification adjustment
to interest income, net of tax
expense (benefit) of $(23) for
2006 and $(6) for 2005
    
    
    (36
    )
    
    
    11Net change in unrealized gain
(loss) on interest rate
swaps, net of tax expense
(benefit) of $(14) for 2006
and $(48) for 2005
    
    
    24
    
    
    
    (78
    )Total other comprehensive loss, net of tax
    
    
    (191
    )
    
    
    (936
    )Comprehensive income
    
    $
    1,733
    
    
    $
    1,081
 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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##### Table of Contents



General
  
    
    Mercantile Trust & Savings Bank (MTSB), located in Quincy, Illinois;
    
    State Bank of Augusta (Augusta), located in Augusta, Illinois;
    
    Marine Bank & Trust (Marine Bank), located in Carthage, Illinois;
    
    Perry State Bank (Perry), located in Perry, Missouri;
    
    Golden State Bank (Golden), located in Golden, Illinois;
    
    Brown County State Bank (Brown County), located in Mt. Sterling, Illinois; and
    
    Farmers State Bank of Northern Missouri (Farmers), located in Savannah, Missouri.  
    
    Security State Bank of Hamilton (Hamilton), located in Hamilton, Illinois, in which the
Company owns 92.8% of the outstanding voting stock; and
    
    Mid-America Bancorp, Inc. (Mid-America), the sole shareholder of Heartland Bank
(Heartland), located in Leawood, Kansas, in which the Company owns 55.7% of the
outstanding voting stock.  
    
    36.5% of New Frontier Bancshares, Inc. (New Frontier), the sole shareholder of New
Frontier Bank, located in St. Charles, Missouri;
    
    19.6% of NorthStar Bancshares, Inc. (NorthStar), the sole shareholder of NorthStar Bank
N.A., located in Liberty, Missouri;
    
    5.0% of GBC Bancorp, Inc. (GBC), the sole shareholder of Gwinnett Banking Company, located
in Lawrenceville, Georgia;
    
    5.0% of Integrity Bank, located in Jupiter, Florida; and
    
    1.6% of Premier Bancshares, Inc. (Premier), the sole shareholder of Premier Bank,
located in Jefferson City, Missouri.   10




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Results of Operations  Comparison of Operating Results for the Three Months Ended March 31, 2006 and 2005
 Overview
  Net Interest Income
 11




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For the three months ended March 312006
    
    
    2005Income/
    
    
    
    
    
    
    
    
    
    Income/Average Balance
    
    
    Expense
    
    
    Yield/Rate
    
    
    Average Balance
    
    
    Expense
    
    
    Yield/Rate(dollars in thousands)AssetsInterest-bearing demand
deposits
    
    $
    22,791
    
    
    $
    183
    
    
    
    3.21
    %
    
    $
    11,312
    
    
    $
    94
    
    
    
    3.32
    %Federal funds sold
    
    
    3,976
    
    
    
    43
    
    
    
    4.33
    %
    
    
    7,611
    
    
    
    44
    
    
    
    2.31
    %Securities:TaxableU.S. treasuries
and government
agencies
    
    
    10,087
    
    
    
    89
    
    
    
    3.53
    %
    
    
    6,445
    
    
    
    43
    
    
    
    2.67
    %Mortgage-backed
securities
    
    
    47,766
    
    
    
    535
    
    
    
    4.48
    %
    
    
    60,100
    
    
    
    614
    
    
    
    4.09
    %Other securities
    
    
    54,358
    
    
    
    596
    
    
    
    4.39
    %
    
    
    65,481
    
    
    
    551
    
    
    
    3.37
    %Total taxable
    
    
    112,211
    
    
    
    1,220
    
    
    
    4.35
    %
    
    
    132,026
    
    
    
    1,208
    
    
    
    3.66
    %Non-taxable  State and
political subdivision (3)
    
    
    48,765
    
    
    
    443
    
    
    
    3.63
    %
    
    
    38,577
    
    
    
    373
    
    
    
    3.87
    %Loans (net of unearned
discount ) (1)(2)
    
    
    860,351
    
    
    
    14,734
    
    
    
    6.85
    %
    
    
    774,289
    
    
    
    11,747
    
    
    
    6.07
    %Federal Home Loan Bank
stock
    
    
    5,435
    
    
    
    51
    
    
    
    3.75
    %
    
    
    5,124
    
    
    
    61
    
    
    
    4.76
    %Total
interest-earning
assets (1)
    
    $
    1,053,529
    
    
    $
    16,674
    
    
    
    6.33
    %
    
    $
    968,939
    
    
    $
    13,527
    
    
    
    5.58
    %Cash and due from banks
    
    $
    24,680
    
    
    
    
    
    
    
    
    
    
    $
    23,314Interest receivable
    
    
    7,675
    
    
    
    
    
    
    
    
    
    
    
    6,167Foreclosed assets held for
sale, net
    
    
    402
    
    
    
    
    
    
    
    
    
    
    
    502Equity method investments
in common stock
    
    
    7,153
    
    
    
    
    
    
    
    
    
    
    
    5,704Cost method investments in
common stock
    
    
    3,350
    
    
    
    
    
    
    
    
    
    
    
    1,849Cash surrender value of
life insurance
    
    
    16,014
    
    
    
    
    
    
    
    
    
    
    
    15,393Premises and equipment
    
    
    18,475
    
    
    
    
    
    
    
    
    
    
    
    16,346Other
    
    
    16,648
    
    
    
    
    
    
    
    
    
    
    
    12,407Allowance for loan loss
    
    
    (8,132
    )
    
    
    
    
    
    
    
    
    
    
    (7,247
    )Total assets
    
    $
    1,139,794
    
    
    
    
    
    
    
    
    
    
    $
    1,043,374Liabilities and Stockholders EquityInterest-bearing
transaction deposits
    
    $
    110,952
    
    
    $
    365
    
    
    
    1.32
    %
    
    $
    112,505
    
    
    $
    223
    
    
    
    0.79
    %Savings deposits
    
    
    50,402
    
    
    
    129
    
    
    
    1.02
    %
    
    
    54,937
    
    
    
    128
    
    
    
    0.93
    %Money-market deposits
    
    
    102,316
    
    
    
    688
    
    
    
    2.69
    %
    
    
    91,695
    
    
    
    310
    
    
    
    1.35
    %Time and brokered time
deposits
    
    
    587,522
    
    
    
    5,608
    
    
    
    3.82
    %
    
    
    526,028
    
    
    
    3,842
    
    
    
    2.92
    %Short-term borrowings
    
    
    26,674
    
    
    
    274
    
    
    
    4.11
    %
    
    
    19,472
    
    
    
    105
    
    
    
    2.16
    %Long-term borrowings
    
    
    51,544
    
    
    
    658
    
    
    
    5.11
    %
    
    
    50,255
    
    
    
    575
    
    
    
    4.58
    %Total
interest-bearing
liabilities
    
    $
    929,410
    
    
    $
    7,722
    
    
    
    3.32
    %
    
    $
    854,892
    
    
    $
    5,183
    
    
    
    2.43
    %Demand deposits
    
    $
    101,007
    
    
    
    
    
    
    
    
    
    
    $
    91,430Interest payable
    
    
    3,600
    
    
    
    
    
    
    
    
    
    
    
    2,407Other liabilities
    
    
    5,204
    
    
    
    
    
    
    
    
    
    
    
    4,284Minority interest
    
    
    7,660
    
    
    
    
    
    
    
    
    
    
    
    3,873Stockholders equity
    
    
    92,913
    
    
    
    
    
    
    
    
    
    
    
    86,488Total
liabilities and
stockholders
equity
    
    $
    1,139,794
    
    
    
    
    
    
    
    
    
    
    $
    1,043,374Interest spread
    
    
    
    
    
    
    
    
    
    
    3.01
    %
    
    
    
    
    
    
    
    
    
    
    3.16
    %Net interest income
    
    
    
    
    
    
    8,952
    
    
    
    
    
    
    
    
    
    
    $
    8,344Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.40
    %
    
    
    
    
    
    
    
    
    
    
    3.44
    %Interest-earning assets to
interest-bearing
liabilities
    
    
    113.35
    %
    
    
    
    
    
    
    
    
    
    
    113.34
    %
 
 (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




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##### Table of Contents



For the three months ended March 31,2006 vs. 2005Increase (Decrease) Due toChange inVolume
    
    
    Rate
    
    
    TotalIncrease (decrease) in interest income:Interest-bearing bank deposits
    
    $
    92
    
    
    $
    (3
    )
    
    $
    89Federal funds sold
    
    
    (27
    )
    
    
    26
    
    
    
    (1
    )Investment securities:U.S. Treasuries and Agencies
    
    
    29
    
    
    
    17
    
    
    
    46Mortgage-backed securities
    
    
    (134
    )
    
    
    55
    
    
    
    (79
    )States and political subdivision (1)
    
    
    94
    
    
    
    (24
    )
    
    
    70Other securities
    
    
    (104
    )
    
    
    149
    
    
    
    45Loans (net of unearned discounts)
    
    
    1,384
    
    
    
    1,603
    
    
    
    2,987Federal Home Loan Bank stock
    
    
    4
    
    
    
    (14
    )
    
    
    (10
    )Change in interest income (1)
    
    
    1,338
    
    
    
    1,809
    
    
    
    3,147Increase (decrease) in interest expense:Interest-bearing transaction deposits
    
    
    (3
    )
    
    
    145
    
    
    
    142Savings deposits
    
    
    (11
    )
    
    
    12
    
    
    
    1Money-market deposits
    
    
    40
    
    
    
    338
    
    
    
    378Time and brokered time deposits
    
    
    487
    
    
    
    1,279
    
    
    
    1,766Short-term borrowings
    
    
    49
    
    
    
    120
    
    
    
    169Long-term debt
    
    
    15
    
    
    
    68
    
    
    
    83Change in interest expense
    
    
    577
    
    
    
    1,962
    
    
    
    2,539Increase (decrease) in net interest income (1)
    
    $
    761
    
    
    $
    (153
    )
    
    $
    608
 
 (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




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##### Table of Contents



For the Three Months EndedMarch 312006
    
    
    2005Fiduciary activities
    
    $
    485
    
    
    $
    450Brokerage fees
    
    
    319
    
    
    
    124Customer service fees
    
    
    822
    
    
    
    737Other service charges and fees
    
    
    170
    
    
    
    152Net gains on loan sales
    
    
    144
    
    
    
    90Net gains on sales of foreclosed assets
    
    
    
    
    
    
    27Loan servicing fees
    
    
    99
    
    
    
    75Net increase in cash surrender value of life insurance
    
    
    171
    
    
    
    152Income on equity method investments in common stock
    
    
    95
    
    
    
    13Other
    
    
    30
    
    
    
    164Total noninterest income
    
    $
    2,335
    
    
    $
    1,984
     Noninterest Expense
  For the Three Months EndedMarch 312006
    
    
    2005Salaries and employee benefits
    
    $
    4,400
    
    
    $
    4,102Net occupancy expense
    
    
    471
    
    
    
    384Equipment expense
    
    
    443
    
    
    
    395Deposit insurance premium
    
    
    33
    
    
    
    34Professional fees
    
    
    328
    
    
    
    298Postage and supplies
    
    
    245
    
    
    
    240Amortization of mortgage servicing rights
    
    
    50
    
    
    
    26Other
    
    
    1,815
    
    
    
    1,373Total noninterest expense
    
    $
    7,785
    
    
    $
    6,852
 15




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##### Table of Contents



Provision for Income Taxes.
 Financial Condition  March 31, 2006 Compared to December 31, 2005
 Loan Portfolio
  March 31, 2006
    
    
    December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(dollars in thousands)Commercial, financial, and
agricultural
    
    $
    232,548
    
    
    
    26.67
    %
    
    $
    240,231
    
    
    
    27.89
    %Real estate  farmland
    
    
    67,001
    
    
    
    7.69
    %
    
    
    66,172
    
    
    
    7.68
    %Real estate  construction
    
    
    50,992
    
    
    
    5.85
    %
    
    
    48,612
    
    
    
    5.64
    %Real estate  commercial
    
    
    181,117
    
    
    
    20.78
    %
    
    
    178,395
    
    
    
    20.71
    %Real estate  residential (1)
    
    
    224,964
    
    
    
    25.80
    %
    
    
    213,581
    
    
    
    24.80
    %Installment loans to individuals
    
    
    115,173
    
    
    
    13.21
    %
    
    
    114,292
    
    
    
    13.28
    %Total loans
    
    
    871,795
    
    
    
    100.00
    %
    
    
    861,283
    
    
    
    100.00
    %Allowance for loan losses
    
    
    8,327
    
    
    
    
    
    
    
    8,082Total loans, including loans
held for sale, net of allowance
for loan losses
    
    $
    863,468
    
    
    
    
    
    
    $
    853,201
 
 (1)
    
    Includes loans held for sale 16




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##### Table of Contents



Nonperforming Assets
   March 31,
    
    
    December 31,2006
    
    
    2005Nonaccrual loansCommercial, financial, and agricultural
    
    $
    1,427
    
    
    $
    1,727Real estate  farmland
    
    
    89
    
    
    
    105Real estate  construction
    
    
    
    
    
    
    Real estate  commercial
    
    
    404
    
    
    
    417Real estate  residential
    
    
    624
    
    
    
    839Installment loans to individuals
    
    
    347
    
    
    
    544Total nonaccrual loans
    
    
    2,891
    
    
    
    3,632Loans 90 days past due and still accruing
    
    
    2,166
    
    
    
    1,342Restructured loans
    
    
    6
    
    
    
    6Total nonperforming loans
    
    
    5,063
    
    
    
    4,980Repossessed assets
    
    
    562
    
    
    
    494Other assets acquired in satisfaction of debt previously
contracted
    
    
    
    
    
    
    Total nonperforming other assets
    
    
    562
    
    
    
    494Total nonperforming loans and nonperforming other assets
    
    $
    5,625
    
    
    $
    5,474Nonperforming loans to loans, before allowance for loan losses
    
    
    0.58
    %
    
    
    0.58
    %Nonperforming loans and nonperforming other assets to loans,
before allowance for loan losses
    
    
    0.65
    %
    
    
    0.64
    %
 Allowance for Loan Losses
 17




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##### Table of Contents



18




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##### Table of Contents



As of and forthe Three
    
    
    As of and forMonths Ended
    
    
    the Year EndedMarch 31,
    
    
    December 31,2006
    
    
    2005Average loans outstanding during year
    
    $
    860,351
    
    
    $
    806,955Allowance for loan losses:Balance at beginning of year
    
    $
    8,082
    
    
    $
    7,115Loans charged-off:Commercial, financial, and agricultural
    
    
    131
    
    
    
    483Real estate  farmland
    
    
    
    
    
    
    80Real estate  construction
    
    
    
    
    
    
    50Real estate  commercial
    
    
    20
    
    
    
    Real estate  residential
    
    
    24
    
    
    
    172Installment loans to individuals
    
    
    285
    
    
    
    956Total charge-offs
    
    
    460
    
    
    
    1,741RecoveriesCommercial, financial, and agricultural
    
    
    16
    
    
    
    138Real estate  farmland
    
    
    
    
    
    
    Real estate  construction
    
    
    
    
    
    
    2Real estate  commercial
    
    
    
    
    
    
    36Real estate  residential
    
    
    1
    
    
    
    24Installment loans to individuals
    
    
    53
    
    
    
    140Total recoveries
    
    
    70
    
    
    
    340Net charge-offs
    
    
    390
    
    
    
    1,401Provision for loan losses
    
    
    635
    
    
    
    2,368Adjustments
    
    
    
    
    
    
    Balance at end of year
    
    $
    8,327
    
    
    $
    8,082Allowance for loan losses as a percent of
total loans outstanding at year end
    
    
    0.96
    %
    
    
    0.94
    %Allowance for loan losses as a percent of
total nonperforming loans
    
    
    164.47
    %
    
    
    162.29
    %Ratio of net charge-offs to average total loans
    
    
    0.05
    %
    
    
    0.17
    %
 Securities
  19




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##### Table of Contents



Deposits
 Borrowings
   Liquidity and Capital Resources
 Liquidity
   20




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##### Table of Contents



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
 21




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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
  
 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.
 22




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##### Table of Contents



SIGNATURES
  Date: May 11, 2006
    
    By:
    
    /s/ Dan S. DuganDan S. DuganChairman, President and Chief Executive Officer(principal executive officer)Date: May 11, 2006
    
    By:
    
    /s/ Michael P. McGrathMichael P. McGrathVice President, Treasurer andChief Financial Officer(principal financial officer/principal accounting officer)
 23