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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-26719
 MERCANTILE BANK CORPORATION
  Michigan
    
    38-3360865(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)310 Leonard Street NW, Grand
Rapids, Michigan
    
    49504(Address of principal executive offices)
    
    (Zip Code)
 (616) 406-3000  (Registrants telephone number, including area code)
  Title of each class
    
    Name of each exchange on which registeredCommon Stock
    
    The Nasdaq Stock Market LLC
  o þ
 o þ
 þ o
 o
  o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM IB. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESEXHIBIT INDEXDirector Fee SummarySubsidiaries of the CompanyConsent of Independent Registered Public Accounting FirmRule 13a-14(a) CertificationsSection 1350 Chief Executive Officer CertificationSection 1350 Chief Financial Officer Certification    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS
 The Company
     Our Bank
  th
 2.




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Our Mortgage Company
  Our Insurance Company
  Our Real Estate Company
  The Mercantile Trust
  3.




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Effect of Government Monetary Policies
  Regulation and Supervision
      4.




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Employees
  Lending Policy
     Lending Activity
 Commercial Loans.
 5.




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Single-Family Residential Real Estate Loans.
  Consumer Loans.
   6.




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Loan and Lease Portfolio Quality
     Allowance for Loan and Lease Losses
  7.




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Investments
 Bank Holding Company Investments
  8.




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Our Banks Investments
  Competition
  Selected Statistical Information
  9.




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Return on Equity and Assets
  Available Information
  
 ITEM 1A. RISK FACTORS
  Adverse changes in economic conditions or interest rates may negatively affect our earnings,
capital and liquidity.
  Our credit losses could increase and our allowance for loan and lease losses may not be adequate to
cover actual loan losses.
  10.




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We rely heavily on our management and other key personnel, and the loss of any of them may
adversely affect our operations.
    Decline in the availability of out-of-area deposits could cause liquidity or interest rate margin
concerns, or limit our growth.
  Future sales of our common stock or other securities may dilute the value of our common stock.
  11.




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Our growth and expansion may be limited by many factors.
   Our future success is dependent on our ability to compete effectively in the highly competitive
banking industry.
  We are subject to significant government regulation, and any regulatory changes may adversely
affect us.
  12.




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We continually encounter technological change, and we may have fewer resources than our competitors
to continue to invest in technological improvements.
  Our Articles of Incorporation and By-laws and the laws of Michigan contain provisions that may
discourage or prevent a takeover of our company and reduce any takeover premium.
   There is a limited trading market for our common stock.
    13.




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Our business is subject to operational risks.
   
 ITEM IB. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   14.




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th
    
 ITEM 3. LEGAL PROCEEDINGS
  15.




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
   High
    
    Low
    
    Dividend2006First Quarter
    
    $
    38.20
    
    
    $
    35.71
    
    
    $
    0.12Second Quarter
    
    
    40.55
    
    
    
    35.30
    
    
    
    0.13Third Quarter
    
    
    41.05
    
    
    
    36.92
    
    
    
    0.13Fourth Quarter
    
    
    40.81
    
    
    
    37.06
    
    
    
    0.132005First Quarter
    
    $
    41.52
    
    
    $
    34.65
    
    
    $
    0.10Second Quarter
    
    
    41.67
    
    
    
    35.56
    
    
    
    0.11Third Quarter
    
    
    45.95
    
    
    
    39.68
    
    
    
    0.11Fourth Quarter
    
    
    40.92
    
    
    
    35.67
    
    
    
    0.11
   16.




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(c) Total Number of
    
    (d) Maximum Number(a) Total
    
    
    
    
    
    Shares Purchased as
    
    of Shares that MayNumber of
    
    (b) Average
    
    Part of Publicly
    
    Yet Be PurchasedShares
    
    Price Paid Per
    
    Announced Plans or
    
    Under thePeriod
    
    Purchased
    
    Share
    
    Programs
    
    Plans or ProgramsOctober 1  31
    
    
    0
    
    
    $
    N/A
    
    
    
    0
    
    
    
    0November 1  30
    
    
    421
    
    
    
    38.35
    
    
    
    0
    
    
    
    0December 1  31
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    0Total
    
    
    421
    
    
    $
    38.35
    
    
    
    0
    
    
    
    0
    17.




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Period EndingIndex
    
    12/31/01
    
    12/31/02
    
    12/31/03
    
    12/31/04
    
    12/30/05
    
    12/31/06Mercantile Bank Corporation
    
    
    100.00
    
    
    
    139.90
    
    
    
    229.27
    
    
    
    263.15
    
    
    
    272.06
    
    
    
    283.42NASDAQ Composite
    
    
    100.00
    
    
    
    68.76
    
    
    
    103.67
    
    
    
    113.16
    
    
    
    115.57
    
    
    
    127.58SNL NASDAQ Bank Index
    
    
    100.00
    
    
    
    102.85
    
    
    
    132.76
    
    
    
    152.16
    
    
    
    147.52
    
    
    
    165.62
 
 ITEM 6. SELECTED FINANCIAL DATA
  
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  18.




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  Internal Control  Integrated Framework Internal Control  Integrated Framework
 
 ITEM 9B. OTHER INFORMATION
  19.




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PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
    Number of securitiesremaining available forfuture issuance underNumber of securities to
    
    Weighted average
    
    equity compensationbe issued upon exercise
    
    exercise price of
    
    plans (excludingof outstanding options,
    
    outstanding options,
    
    securities reflected inPlan Category
    
    warrants and rights
    
    warrants and rights
    
    column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
(1)
    
    
    275,369
    
    
    $
    25.28
    
    
    
    550,884
    (2)Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    275,369
    
    
    $
    25.28
    
    
    
    550,884
 20.




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(1)
    
    These plans are Mercantiles 1997 Employee Stock Option Plan, 2000 Employee Stock Option Plan,
2004 Employee Stock Option Plan, Independent Director Stock Option Plan and the Stock Incentive
Plan of 2006.(2)
    
    These securities are available under the Stock Incentive Plan of 2006. Incentive awards may
include, but are not limited to, stock options, restricted stock, stock appreciation rights and
stock awards. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
           21.




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EXHIBIT NO.
    
    EXHIBIT DESCRIPTION3.1
    
    Our Articles of Incorporation are incorporated by reference to
exhibit 3.1 of our Form 10-Q for the quarter ended June 30,
20043.2
    
    Our Amended and Restated Bylaws dated as of January 16, 2003
are incorporated by reference to exhibit 3.2 of our
Registration Statement on Form S-3 (Commission File No.
333-103376) that became effective on February 21, 200310.1
    
    Our 1997 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Registration Statement on
Form SB-2 (Commission File No. 333-33081) that became
effective on October 23, 1997 *10.2
    
    Our 2000 Employee Stock Option Plan is incorporated by
reference to exhibit 10.14 of our Form 10-K for the year ended
December 31, 2000 *10.3
    
    Our 2004 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 10-Q for the quarter
ended September 30, 2004 *10.4
    
    Form of Stock Option Agreement for options under the 2004
Employee Stock Option Plan is incorporated by reference to
exhibit 10.2 of our Form 10-Q for the quarter ended September
30, 2004 *10.5
    
    Our Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.26 of our Form 10-K for the year ended
December 31, 2002 *10.6
    
    Form of Stock Option Agreement for options under the
Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 8-K dated October 21,
2004 *10.7
    
    Nonlender Bonus Plan is incorporated by reference to exhibit
10.3 of our Form 10-Q for the quarter ended September 30, 2004
*10.8
    
    Mercantile Bank of West Michigan Deferred Compensation Plan
for Members of the Board of Directors (1999) is incorporated
by reference to Exhibit 10.6 of the Registration Statement of
the company and our trust on Form SB-2 (Commission File Nos.
333-84313 and 333-84313-01) that became effective on September
13, 1999 *10.9
    
    Agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.3 of our Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on October 23, 199710.10
    
    Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated May 12, 2000 extending the
agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.15 of our Form 10-K for the year ended December 31, 200010.11
    
    Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated November 22, 2002 extending
the agreement between Fiserv Solutions, Inc. and our bank
dated September 10, 1997, is incorporated by reference to
exhibit 10.5 of our Form 10-K for the year ended December 31,
2002
 22.




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EXHIBIT NO.
    
    EXHIBIT DESCRIPTION10.12
    
    Amended and Restated Employment Agreement dated as of October
18, 2001, among the company, our bank and Gerald R. Johnson,
Jr., is incorporated by reference to exhibit 10.21 of our Form
10-K for the year ended December 31, 2001 *10.13
    
    Amended and Restated Employment Agreement dated as of October
18, 2001, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K
for the year ended December 31, 2001 *10.14
    
    Employment Agreement dated as of October 18, 2001, among the
company, our bank and Robert B. Kaminski, Jr., is incorporated
by reference to exhibit 10.23 of our Form 10-K for the year
ended December 31, 2001 *10.15
    
    Employment Agreement dated as of October 18, 2001, among the
company, our bank and Charles E. Christmas, is incorporated by
reference to exhibit 10.23 of our Form 10-K for the year ended
December 31, 2001 *10.16
    
    Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Gerald R. Johnson, Jr.,
is incorporated by reference to exhibit 10.21 of our Form 10-K
for the year ended December 31, 2002 *10.17
    
    Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K
for the year ended December 31, 2002 *10.18
    
    Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Robert B. Kaminski, Jr.,
is incorporated by reference to exhibit 10.23 of our Form 10-K
for the year ended December 31, 2002 *10.19
    
    Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Charles E. Christmas, is
incorporated by reference to exhibit 10.24 of our Form 10-K
for the year ended December 31, 2002 *10.20
    
    Amendment to Employment Agreement dated as of October 28,
2004, among the company, our bank and Robert B. Kaminski, Jr.,
is incorporated by reference to exhibit 10.21 of our Form 10-K
for the year ended December 31, 2004 *10.21
    
    Junior Subordinated Indenture between us and Wilmington Trust
Company dated September 16, 2004 providing for the issuance of
the Series A and Series B Floating Rate Junior Subordinated
Notes due 2034 is incorporated by reference to exhibit 10.1 of
our Form 8-K dated December 15, 200410.22
    
    Amended and Restated Trust Agreement dated September 16, 2004
for Mercantile Bank Capital Trust I is incorporated by
reference to exhibit 10.2 of our Form 8-K dated December 15,
200410.23
    
    Placement Agreement between us, Mercantile Bank Capital Trust
I, and SunTrust Capital Markets, Inc. dated September 16, 2004
is incorporated by reference to exhibit 10.3 of our Form 8-K
dated December 15, 200410.24
    
    Guarantee Agreement dated September 16, 2004 between
Mercantile as Guarantor and Wilmington Trust Company as
Guarantee Trustee is incorporated by reference to exhibit 10.4
of our Form 8-K dated December 15, 2004
 23.




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EXHIBIT NO.
    
    EXHIBIT DESCRIPTION10.25
    
    Non-Lender Bonus Plan 2006, is incorporated by reference to
exhibit 10.1 of our Form 8-K dated November 22, 2005 *10.26
    
    Form of Agreement Amending Stock Option Agreement, dated
November 17, 2005 issued under our 2004 Employee Stock Option
Plan, is incorporated by reference to exhibit 10.1 of our Form
8-K dated December 12, 2005 *10.27
    
    Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Gerald R. Johnson,
Jr. is incorporated by reference to exhibit 10.28 of our Form
10-K for the year ended December 31, 2005 *10.28
    
    Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Michael H. Price is
incorporated by reference to exhibit 10.29 of our Form 10-K
for the year ended December 31, 2005 *10.29
    
    Third Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Robert B. Kaminski,
Jr. is incorporated by reference to exhibit 10.30 of our Form
10-K for the year ended December 31, 2005 *10.30
    
    Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Charles E. Christmas
is incorporated by reference to exhibit 10.31 of our Form 10-K
for the year ended December 31, 2005 *10.31
    
    Form of Mercantile Bank of Michigan Executive Deferred
Compensation Agreement, that has been entered into between our
bank and each of Gerald R. Johnson, Jr., Michael H. Price,
Robert B. Kaminski, Jr., Charles E. Christmas, and certain
other officers of our bank is incorporated by reference to
exhibit 10.32 of our Form 10-K for the year ended December 31,
2005 *10.32
    
    Form of Mercantile Bank of Michigan Split Dollar Agreement
that has been entered into between our bank and each of Gerald
R. Johnson, Jr., Michael H. Price, Robert B. Kaminski, Jr.,
Charles E. Christmas, and certain other officers of our bank
is incorporated by reference to exhibit 10.33 of our Form 10-K
for the year ended December 31, 2005 *10.33
    
    Director Fee Summary *10.34
    
    Lease Agreement between our bank and Joe D. Pentecost Trust
dated April 29, 2005 for our East Lansing, Michigan office is
incorporated by reference to exhibit 10.35 of our Form 10-K
for the year ended December 31, 200510.35
    
    Lease Agreement between our bank and The Conlin Company dated
July 12, 2005 for our Ann Arbor, Michigan office is
incorporated by reference to exhibit 10.36 of our Form 10-K
for the year ended December 31, 200510.36
    
    Stock Incentive Plan of 2006 is incorporated by reference to
Appendix A of our proxy statement for our April 27, 2006
annual meeting of shareholders that was filed with the
Securities and Exchange Commission *
 24.




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EXHIBIT NO.
    
    EXHIBIT DESCRIPTION10.37
    
    Form of Notice of Grant of Incentive Stock Option and Stock
Option Agreement for incentive stock options granted under our
Stock Incentive Plan of 2006 is incorporated by reference to
exhibit 10.1 of our Form 8-K dated November 22, 2006 *10.38
    
    Form of Restricted Stock Award Agreement Notification of Award
and Terms and Conditions of Award for restricted stock under
our Stock Incentive Plan of 2006 is incorporated by reference
to exhibit 10.2 of our Form 8-K dated November 22, 2006 *10.39
    
    Executive Officer Bonus Plan for 2007 is incorporated by
reference to exhibit 10.1 of our Form 8-K dated January 29,
2007 *21
    
    Subsidiaries of the company23
    
    Consent of Independent Registered Public Accounting Firm31
    
    Rule 13a-14(a) Certifications32.1
    
    Section 1350 Chief Executive Officer Certification32.2
    
    Section 1350 Chief Financial Officer Certification
 
 *
    
    Management contract or compensatory plan(c)
    
    Financial Statements Not Included In Annual ReportNot applicable 25.




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MERCANTILE BANK CORPORATION
 CONSOLIDATED FINANCIAL STATEMENTS
 F-1




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SELECTED FINANCIAL DATA
    
    
    F-3MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    F-4REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-26REPORT BY MERCANTILE BANK CORPORATIONS MANAGEMENT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
    
    
    F-28CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS
    
    
    F-29CONSOLIDATED STATEMENTS OF INCOME
    
    
    F-30CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
    
    
    F-31CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    F-33NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-35
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SELECTED FINANCIAL DATA
 2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in thousands except per share data)Consolidated Results of Operations:Interest income
    
    $
    137,260
    
    
    $
    102,130
    
    
    $
    69,022
    
    
    $
    54,658
    
    
    $
    47,632Interest expense
    
    
    75,673
    
    
    
    46,838
    
    
    
    26,595
    
    
    
    23,395
    
    
    
    24,026Net interest income
    
    
    61,587
    
    
    
    55,292
    
    
    
    42,427
    
    
    
    31,263
    
    
    
    23,606Provision for loan and lease losses
    
    
    5,775
    
    
    
    3,790
    
    
    
    4,674
    
    
    
    3,800
    
    
    
    3,002Noninterest income
    
    
    5,261
    
    
    
    5,661
    
    
    
    4,302
    
    
    
    4,409
    
    
    
    3,101Noninterest expense
    
    
    32,262
    
    
    
    31,117
    
    
    
    23,198
    
    
    
    18,071
    
    
    
    12,781Income before income tax expense
    
    
    28,811
    
    
    
    26,046
    
    
    
    18,857
    
    
    
    13,801
    
    
    
    10,924Income tax expense
    
    
    8,964
    
    
    
    8,145
    
    
    
    5,136
    
    
    
    3,785
    
    
    
    3,167Net income
    
    $
    19,847
    
    
    $
    17,901
    
    
    $
    13,721
    
    
    $
    10,016
    
    
    $
    7,757Consolidated Balance Sheet Data:Total assets
    
    $
    2,067,268
    
    
    $
    1,838,210
    
    
    $
    1,536,119
    
    
    $
    1,203,337
    
    
    $
    922,360Cash and cash equivalents
    
    
    51,380
    
    
    
    36,753
    
    
    
    20,811
    
    
    
    16,564
    
    
    
    28,117Securities
    
    
    202,419
    
    
    
    181,614
    
    
    
    152,965
    
    
    
    121,510
    
    
    
    96,893Loans and leases, net of deferred fees
    
    
    1,745,478
    
    
    
    1,561,812
    
    
    
    1,317,124
    
    
    
    1,035,963
    
    
    
    771,554Allowance for loan and lease losses
    
    
    21,411
    
    
    
    20,527
    
    
    
    17,819
    
    
    
    14,379
    
    
    
    10,890Bank owned life insurance policies
    
    
    30,858
    
    
    
    28,071
    
    
    
    23,750
    
    
    
    16,441
    
    
    
    14,876Deposits
    
    
    1,646,903
    
    
    
    1,419,352
    
    
    
    1,159,181
    
    
    
    902,892
    
    
    
    754,113Securities sold under agreements to repurchase
    
    
    85,472
    
    
    
    72,201
    
    
    
    56,317
    
    
    
    49,545
    
    
    
    50,335Federal Home Loan Bank advances
    
    
    95,000
    
    
    
    130,000
    
    
    
    120,000
    
    
    
    90,000
    
    
    
    15,000Subordinated debentures
    
    
    32,990
    
    
    
    32,990
    
    
    
    32,990
    
    
    
    16,495
    
    
    
    16,495Shareholders equity
    
    
    171,915
    
    
    
    155,125
    
    
    
    141,617
    
    
    
    130,201
    
    
    
    79,834Consolidated Financial Ratios:Return on average assets
    
    
    1.01
    %
    
    
    1.05
    %
    
    
    0.99
    %
    
    
    0.96
    %
    
    
    0.97
    %Return on average shareholders equity
    
    
    12.19
    %
    
    
    12.05
    %
    
    
    10.16
    %
    
    
    10.61
    %
    
    
    10.30
    %Average shareholders equity to average assets
    
    
    8.31
    %
    
    
    8.73
    %
    
    
    9.79
    %
    
    
    9.00
    %
    
    
    9.45
    %Nonperforming loans and leases to total loans and leases
    
    
    0.49
    %
    
    
    0.26
    %
    
    
    0.22
    %
    
    
    0.17
    %
    
    
    0.10
    %Allowance for loan and lease losses to total loans and leases
    
    
    1.23
    %
    
    
    1.31
    %
    
    
    1.35
    %
    
    
    1.39
    %
    
    
    1.41
    %Tier 1 leverage capital
    
    
    10.04
    %
    
    
    10.45
    %
    
    
    11.53
    %
    
    
    12.49
    %
    
    
    10.72
    %Tier 1 leverage risk-based capital
    
    
    10.37
    %
    
    
    10.82
    %
    
    
    11.82
    %
    
    
    12.60
    %
    
    
    10.85
    %Total risk-based capital
    
    
    11.45
    %
    
    
    12.00
    %
    
    
    13.03
    %
    
    
    13.84
    %
    
    
    12.10
    %Per Share Data:Net Income:Basic
    
    $
    2.48
    
    
    $
    2.25
    
    
    $
    1.73
    
    
    $
    1.49
    
    
    $
    1.23Diluted
    
    
    2.45
    
    
    
    2.20
    
    
    
    1.69
    
    
    
    1.46
    
    
    
    1.22Book value at end of period
    
    
    21.43
    
    
    
    19.46
    
    
    
    17.78
    
    
    
    16.40
    
    
    
    12.66Dividends declared
    
    
    0.51
    
    
    
    0.41
    
    
    
    0.32
    
    
    
    0.27
    
    
    NADividend payout ratio
    
    
    20.34
    %
    
    
    17.79
    %
    
    
    18.60
    %
    
    
    18.41
    %
    
    NA
  F-3




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
   CRITICAL ACCOUNTING POLICIES AND ESTIMATES
    F-4




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##### Table of Contents



INTRODUCTION
       FINANCIAL CONDITION
  F-5




---



##### Table of Contents



Earning Assets
     0-1
    
    
    1-5
    
    
    After 5Year
    
    
    Years
    
    
    Years
    
    
    TotalConstruction and land development
    
    $
    246,656,000
    
    
    $
    33,858,000
    
    
    $
    13,142,000
    
    
    $
    293,656,000Real estate  secured by 1-4 family
properties
    
    
    64,832,000
    
    
    
    53,131,000
    
    
    
    13,681,000
    
    
    
    131,644,000Real estate  secured by multi-family
properties
    
    
    16,005,000
    
    
    
    14,566,000
    
    
    
    432,000
    
    
    
    31,003,000Real estate  secured by
nonresidential properties
    
    
    310,559,000
    
    
    
    466,547,000
    
    
    
    31,153,000
    
    
    
    808,259,000Commercial
    
    
    380,139,000
    
    
    
    86,222,000
    
    
    
    4,911,000
    
    
    
    471,272,000Leases
    
    
    33,000
    
    
    
    1,355,000
    
    
    
    0
    
    
    
    1,388,000Consumer
    
    
    3,303,000
    
    
    
    4,208,000
    
    
    
    745,000
    
    
    
    8,256,000$
    1,021,527,000
    
    
    $
    659,887,000
    
    
    $
    64,064,000
    
    
    $
    1,745,478,000Fixed rate loans
    
    $
    93,126,000
    
    
    $
    658,425,000
    
    
    $
    64,064,000
    
    
    $
    815,615,000Floating rate loans
    
    
    928,401,000
    
    
    
    1,462,000
    
    
    
    0
    
    
    
    929,863,000$
    1,021,527,000
    
    
    $
    659,887,000
    
    
    $
    64,064,000
    
    
    $
    1,745,478,000
  F-6




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##### Table of Contents



December 31,2006
    
    
    December 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Loans and leases on
nonaccrual status
    
    $
    7,752,000
    
    
    $
    3,601,000
    
    
    $
    2,842,000
    
    
    $
    233,000
    
    
    $
    796,000Loans and leases 90
days or more past
due and accruing
interest
    
    
    819,000
    
    
    
    394,000
    
    
    
    0
    
    
    
    1,552,000
    
    
    
    0Troubled debt
restructurings
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    8,571,000
    
    
    $
    3,995,000
    
    
    $
    2,842,000
    
    
    $
    1,785,000
    
    
    $
    796,000
 F-7




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##### Table of Contents



2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Loan and leases outstanding at year-end
    
    $
    1,745,478,000
    
    
    $
    1,561,812,000
    
    
    $
    1,317,124,000
    
    
    $
    1,035,963,000
    
    
    $
    771,554,000Daily average balance of loans and
leases outstanding
    
    $
    1,660,284,000
    
    
    $
    1,432,609,000
    
    
    $
    1,177,568,000
    
    
    $
    887,512,000
    
    
    $
    669,781,000Balance of allowance at beginning of
year
    
    $
    20,527,000
    
    
    $
    17,819,000
    
    
    $
    14,379,000
    
    
    $
    10,890,000
    
    
    $
    8,494,000Loans and leases charged-off:Commercial, financial and agricultural
    
    
    (5,208,000
    )
    
    
    (718,000
    )
    
    
    (1,328,000
    )
    
    
    (471,000
    )
    
    
    (696,000
    )Construction and land development
    
    
    0
    
    
    
    (521,000
    )
    
    
    0
    
    
    
    0
    
    
    
    0Leases
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Residential real estate
    
    
    (50,000
    )
    
    
    (131,000
    )
    
    
    (16,000
    )
    
    
    (26,000
    )
    
    
    0Instalment loans to individuals
    
    
    (131,000
    )
    
    
    (22,000
    )
    
    
    (61,000
    )
    
    
    (99,000
    )
    
    
    (10,000
    )Total loans and leases charged-off
    
    
    (5,389,000
    )
    
    
    (1,392,000
    )
    
    
    (1,405,000
    )
    
    
    (596,000
    )
    
    
    (706,000
    )Recoveries of previously charged-off
loans and leases:Commercial, financial and agricultural
    
    
    487,000
    
    
    
    298,000
    
    
    
    150,000
    
    
    
    257,000
    
    
    
    78,000Construction and land development
    
    
    0
    
    
    
    2,000
    
    
    
    0
    
    
    
    0
    
    
    
    0Leases
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Residential real estate
    
    
    2,000
    
    
    
    6,000
    
    
    
    0
    
    
    
    22,000
    
    
    
    4,000Instalment loans to individuals
    
    
    9,000
    
    
    
    4,000
    
    
    
    21,000
    
    
    
    6,000
    
    
    
    18,000Total recoveries
    
    
    498,000
    
    
    
    310,000
    
    
    
    171,000
    
    
    
    285,000
    
    
    
    100,000Net charge-offs
    
    
    (4,891,000
    )
    
    
    (1,082,000
    )
    
    
    (1,234,000
    )
    
    
    (311,000
    )
    
    
    (606,000
    )Provision for loan and leases losses
    
    
    5,775,000
    
    
    
    3,790,000
    
    
    
    4,674,000
    
    
    
    3,800,000
    
    
    
    3,002,000Balance of allowance at year-end
    
    $
    21,411,000
    
    
    $
    20,527,000
    
    
    $
    17,819,000
    
    
    $
    14,379,000
    
    
    $
    10,890,000Ratio of net charge-offs during the
period to average loans and leases
outstanding during the period
    
    
    (0.29
    %)
    
    
    (0.08
    %)
    
    
    (0.10
    %)
    
    
    (0.04
    %)
    
    
    (0.09
    %)Ratio of allowance to loans and leases
outstanding at end of the period
    
    
    1.23
    %
    
    
    1.31
    %
    
    
    1.35
    %
    
    
    1.39
    %
    
    
    1.41
    %
   F-8




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##### Table of Contents



December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Amount
    
    
    Loan Portfolio
    
    
    Amount
    
    
    Loan Portfolio
    
    
    Amount
    
    
    Loan Portfolio
    
    
    Amount
    
    
    Loan Portfolio
    
    
    Amount
    
    
    Loan PortfolioCommercial,
financial and
agricultural
    
    $
    15,706
    
    
    
    75.1
    %
    
    $
    16,507
    
    
    
    76.9
    %
    
    $
    15,457
    
    
    
    79.8
    %
    
    $
    12,220
    
    
    
    79.0
    %
    
    $
    9,188
    
    
    
    77.9
    %Construction and
land development
    
    
    3,975
    
    
    
    16.8
    
    
    
    2,868
    
    
    
    14.5
    
    
    
    1,581
    
    
    
    10.3
    
    
    
    1,571
    
    
    
    11.4
    
    
    
    1,143
    
    
    
    13.5Leases
    
    
    15
    
    
    
    0.1
    
    
    
    30
    
    
    
    0.1
    
    
    
    39
    
    
    
    0.2
    
    
    
    26
    
    
    
    0.2
    
    
    
    11
    
    
    
    0.1Residential real
estate
    
    
    1,591
    
    
    
    7.5
    
    
    
    1,020
    
    
    
    8.2
    
    
    
    557
    
    
    
    9.3
    
    
    
    450
    
    
    
    8.9
    
    
    
    443
    
    
    
    7.9Instalment loans to
individuals
    
    
    124
    
    
    
    0.5
    
    
    
    102
    
    
    
    0.3
    
    
    
    185
    
    
    
    0.4
    
    
    
    112
    
    
    
    0.5
    
    
    
    105
    
    
    
    0.6Unallocated
    
    
    0
    
    
    NA
    
    
    
    0
    
    
    NA
    
    
    
    0
    
    
    NA
    
    
    
    0
    
    
    NA
    

    
    
    0
    
    
    NATotal
    
    $
    21,411
    
    
    
    100.0
    %
    
    $
    20,527
    
    
    
    100.0
    %
    
    $
    17,819
    
    
    
    100.0
    %
    
    $
    14,379
    
    
    
    100.0
    %
    
    $
    10,890
    
    
    
    100.0
    %
    F-9




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##### Table of Contents



December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Carrying Value
    
    
    Percentage
    
    
    Carrying Value
    
    
    Percentage
    
    
    Carrying Value
    
    
    PercentageU.S. Government
agency debt
obligations
    
    $
    76,836,000
    
    
    
    39.4
    %
    
    $
    63,712,000
    
    
    
    36.7
    %
    
    $
    56,025,000
    
    
    
    38.3
    %Mortgage-backed
securities
    
    
    53,083,000
    
    
    
    27.2
    
    
    
    48,237,000
    
    
    
    27.7
    
    
    
    37,801,000
    
    
    
    25.9Municipal general
obligations
    
    
    56,870,000
    
    
    
    29.2
    
    
    
    53,685,000
    
    
    
    30.9
    
    
    
    45,063,000
    
    
    
    30.8Municipal revenue
bonds
    
    
    7,073,000
    
    
    
    3.6
    
    
    
    7,081,000
    
    
    
    4.1
    
    
    
    7,278,000
    
    
    
    5.0Mutual fund
    
    
    1,048,000
    
    
    
    0.6
    
    
    
    1,012,000
    
    
    
    0.6
    
    
    
    0
    
    
    NATotal
    
    $
    194,910,000
    
    
    
    100.0
    %
    
    $
    173,727,000
    
    
    
    100.0
    %
    
    $
    146,167,000
    
    
    
    100.0
    %
 Accounting for Certain Investments in Debt and Equity Securities
 (1)
 Carrying
    
    
    AverageValue
    
    
    Yield(Dollars in thousands)U.S. Treasury securities and obligations of U.S.Government agencies and corporationsOne year or less
    
    $
    0
    
    
    NAOver one through five years
    
    
    17,647,000
    
    
    
    4.72
    %Over five through ten years
    
    
    59,189,000
    
    
    
    5.21Over ten years
    
    
    0
    
    
    NA76,836,000
    
    
    
    5.10Obligations of states and political subdivisionsOne year or less
    
    
    2,593,000
    
    
    
    7.11Over one through five years
    
    
    8,798,000
    
    
    
    6.87Over five through ten years
    
    
    11,533,000
    
    
    
    6.38Over ten years
    
    
    41,019,000
    
    
    
    6.3963,943,000
    
    
    
    6.48Mortgage-backed securities
    
    
    53,083,000
    
    
    
    5.03Mutual fund
    
    
    1,048,000
    
    
    
    4.36$
    194,910,000
    
    
    
    5.53
    %
 
 (1)
    
    Yields on tax-exempt securities are computed on a fully taxable-equivalent
basis. F-10




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##### Table of Contents



Source of Funds
    F-11




---



##### Table of Contents



RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006 and 2005
 Summary
  F-12




---



##### Table of Contents



2006
    
    
    2005Return on average total assets
    
    
    1.01
    %
    
    
    1.05
    %Return on average equity
    
    
    12.19
    
    
    
    12.05Dividend payout ratio
    
    
    20.34
    
    
    
    17.79Average equity to average assets
    
    
    8.31
    
    
    
    8.73
 Net Interest Income
    F-13




---



##### Table of Contents



(Dollars in thousands)
    
    Years ended December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateTaxable securities
    
    $
    128,382
    
    
    $
    6,557
    
    
    
    5.11
    %
    
    $
    114,097
    
    
    $
    5,588
    
    
    
    4.90
    %
    
    $
    82,107
    
    
    $
    3,935
    
    
    
    4.79
    %Tax  exempt
securities
    
    
    61,949
    
    
    
    3,930
    
    
    
    6.34
    
    
    
    58,005
    
    
    
    3,703
    
    
    
    6.38
    
    
    
    48,322
    
    
    
    3,174
    
    
    
    6.57Total securities
    
    
    190,331
    
    
    
    10,487
    
    
    
    5.51
    
    
    
    172,102
    
    
    
    9,291
    
    
    
    5.40
    
    
    
    130,429
    
    
    
    7,109
    
    
    
    5.45Loans and leases
    
    
    1,660,284
    
    
    
    127,470
    
    
    
    7.68
    
    
    
    1,432,609
    
    
    
    93,666
    
    
    
    6.54
    
    
    
    1,177,568
    
    
    
    62,791
    
    
    
    5.33Short  term
investments
    
    
    320
    
    
    
    12
    
    
    
    3.75
    
    
    
    582
    
    
    
    14
    
    
    
    2.41
    
    
    
    593
    
    
    
    4
    
    
    
    0.67Federal funds sold
    
    
    9,745
    
    
    
    482
    
    
    
    4.95
    
    
    
    8,156
    
    
    
    266
    
    
    
    3.26
    
    
    
    5,942
    
    
    
    75
    
    
    
    1.26Total earning
assets
    
    
    1,860,680
    
    
    
    138,451
    
    
    
    7.44
    
    
    
    1,613,449
    
    
    
    103,237
    
    
    
    6.40
    
    
    
    1,314,532
    
    
    
    69,979
    
    
    
    5.32Allowance for loan
and lease losses
    
    
    (21,464
    )
    
    
    
    
    
    
    
    
    
    
    (19,048
    )
    
    
    
    
    
    
    
    
    
    
    (16,203
    )Cash and due
from banks
    
    
    38,298
    
    
    
    
    
    
    
    
    
    
    
    36,827
    
    
    
    
    
    
    
    
    
    
    
    31,587Other non  earning
assets
    
    
    82,419
    
    
    
    
    
    
    
    
    
    
    
    70,769
    
    
    
    
    
    
    
    
    
    
    
    49,262Total assets
    
    $
    1,959,933
    
    
    
    
    
    
    
    
    
    
    $
    1,701,997
    
    
    
    
    
    
    
    
    
    
    $
    1,379,178Interest  bearing
demand deposits
    
    $
    36,530
    
    
    $
    1,069
    
    
    
    2.93
    %
    
    $
    36,319
    
    
    $
    707
    
    
    
    1.95
    %
    
    $
    32,994
    
    
    $
    427
    
    
    
    1.29
    %Savings deposits
    
    
    93,046
    
    
    
    3,328
    
    
    
    3.58
    
    
    
    113,945
    
    
    
    2,934
    
    
    
    2.57
    
    
    
    136,214
    
    
    
    2,497
    
    
    
    1.83Money market
accounts
    
    
    10,326
    
    
    
    325
    
    
    
    3.15
    
    
    
    9,478
    
    
    
    211
    
    
    
    2.23
    
    
    
    8,788
    
    
    
    129
    
    
    
    1.47Time deposits
    
    
    1,289,777
    
    
    
    60,033
    
    
    
    4.65
    
    
    
    1,036,457
    
    
    
    35,032
    
    
    
    3.38
    
    
    
    780,867
    
    
    
    18,733
    
    
    
    2.40Total interest 
bearing deposits
    
    
    1,429,679
    
    
    
    64,755
    
    
    
    4.53
    
    
    
    1,196,199
    
    
    
    38,884
    
    
    
    3.25
    
    
    
    958,863
    
    
    
    21,786
    
    
    
    2.27Short  term
borrowings
    
    
    75,885
    
    
    
    2,867
    
    
    
    3.78
    
    
    
    66,814
    
    
    
    1,795
    
    
    
    2.69
    
    
    
    55,816
    
    
    
    877
    
    
    
    1.57Federal Home Loan Bank advances
    
    
    121,932
    
    
    
    5,393
    
    
    
    4.42
    
    
    
    131,137
    
    
    
    4,200
    
    
    
    3.20
    
    
    
    112,869
    
    
    
    2,471
    
    
    
    2.19Long  term
borrowings
    
    
    35,895
    
    
    
    2,658
    
    
    
    7.40
    
    
    
    35,014
    
    
    
    1,959
    
    
    
    5.59
    
    
    
    18,938
    
    
    
    1,461
    
    
    
    7.71Total interest 
bearing liabilities
    
    
    1,663,391
    
    
    
    75,673
    
    
    
    4.55
    
    
    
    1,429,164
    
    
    
    46,838
    
    
    
    3.28
    
    
    
    1,146,486
    
    
    
    26,595
    
    
    
    2.32Demand deposits
    
    
    115,390
    
    
    
    
    
    
    
    
    
    
    
    111,892
    
    
    
    
    
    
    
    
    
    
    
    90,534Other liabilities
    
    
    18,371
    
    
    
    
    
    
    
    
    
    
    
    12,352
    
    
    
    
    
    
    
    
    
    
    
    7,156Total liabilities
    
    
    1,797,152
    
    
    
    
    
    
    
    
    
    
    
    1,553,408
    
    
    
    
    
    
    
    
    
    
    
    1,244,176Average equity
    
    
    162,781
    
    
    
    
    
    
    
    
    
    
    
    148,589
    
    
    
    
    
    
    
    
    
    
    
    135,002Total liabilities
and equity
    
    $
    1,959,933
    
    
    
    
    
    
    
    
    
    
    $
    1,701,997
    
    
    
    
    
    
    
    
    
    
    $
    1,379,178Net interest
income
    
    
    
    
    
    $
    62,778
    
    
    
    
    
    
    
    
    
    
    $
    56,399
    
    
    
    
    
    
    
    
    
    
    $
    43,384Rate spread
    
    
    
    
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    
    
    
    
    3.12
    %
    
    
    
    
    
    
    
    
    
    
    3.00
    %Net interest
margin
    
    
    
    
    
    
    
    
    
    
    3.37
    %
    
    
    
    
    
    
    
    
    
    
    3.50
    %
    
    
    
    
    
    
    
    
    
    
    3.30
    %
 F-14




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##### Table of Contents



Years ended December 31,2006 over 2005
    
    
    2005 over 2004Total
    
    
    Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    RateIncrease (decrease) in interest incomeTaxable securities
    
    $
    969,000
    
    
    $
    722,000
    
    
    $
    247,000
    
    
    $
    1,653,000
    
    
    $
    1,565,000
    
    
    $
    88,000Tax exempt securities
    
    
    227,000
    
    
    
    250,000
    
    
    
    (23,000
    )
    
    
    529,000
    
    
    
    620,000
    
    
    
    (91,000
    )Loans
    
    
    33,804,000
    
    
    
    16,123,000
    
    
    
    17,681,000
    
    
    
    30,875,000
    
    
    
    15,104,000
    
    
    
    15,771,000Short term investments
    
    
    (2,000
    )
    
    
    (8,000
    )
    
    
    6,000
    
    
    
    10,000
    
    
    
    0
    
    
    
    10,000Federal funds sold
    
    
    216,000
    
    
    
    59,000
    
    
    
    157,000
    
    
    
    191,000
    
    
    
    36,000
    
    
    
    155,000Net change in tax-equivalent
income
    
    
    35,214,000
    
    
    
    17,146,000
    
    
    
    18,068,000
    
    
    
    33,258,000
    
    
    
    17,325,000
    
    
    
    15,933,000Increase (decrease) in interest expenseInterest-bearing demand deposits
    
    
    362,000
    
    
    
    4,000
    
    
    
    358,000
    
    
    
    280,000
    
    
    
    47,000
    
    
    
    233,000Savings deposits
    
    
    394,000
    
    
    
    (605,000
    )
    
    
    999,000
    
    
    
    437,000
    
    
    
    (456,000
    )
    
    
    893,000Money market accounts
    
    
    114,000
    
    
    
    20,000
    
    
    
    94,000
    
    
    
    82,000
    
    
    
    11,000
    
    
    
    71,000Time deposits
    
    
    25,001,000
    
    
    
    9,832,000
    
    
    
    15,169,000
    
    
    
    16,299,000
    
    
    
    7,246,000
    
    
    
    9,053,000Short term borrowings
    
    
    1,072,000
    
    
    
    268,000
    
    
    
    804,000
    
    
    
    918,000
    
    
    
    199,000
    
    
    
    719,000Federal Home Loan Bank
advances
    
    
    1,193,000
    
    
    
    (312,000
    )
    
    
    1,505,000
    
    
    
    1,729,000
    
    
    
    448,000
    
    
    
    1,281,000Long term borrowings
    
    
    699,000
    
    
    
    50,000
    
    
    
    649,000
    
    
    
    498,000
    
    
    
    983,000
    
    
    
    (485,000
    )Net change in interest
expense
    
    
    28,835,000
    
    
    
    9,257,000
    
    
    
    19,578,000
    
    
    
    20,243,000
    
    
    
    8,478,000
    
    
    
    11,765,000Net change in tax-equivalent
net interest income
    
    $
    6,379,000
    
    
    $
    7,889,000
    
    
    $
    (1,510,000
    )
    
    $
    13,015,000
    
    
    $
    8,847,000
    
    
    $
    4,168,000
     F-15




---



##### Table of Contents



Provision for Loan and Lease Losses
    F-16




---



##### Table of Contents



Noninterest Income
  Noninterest Expense
   Federal Income Tax Expense
  RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 Summary
   F-17




---



##### Table of Contents



2005
    
    
    2004Return on average total assets
    
    
    1.05
    %
    
    
    0.99
    %Return on average equity
    
    
    12.05
    
    
    
    10.16Dividend payout ratio
    
    
    17.79
    
    
    
    18.60Average equity to average assets
    
    
    8.73
    
    
    
    9.79
 Net Interest Income
      F-18




---



##### Table of Contents



Provision for Loan and Lease Losses
    F-19




---



##### Table of Contents



Noninterest Income
  Noninterest Expense
    Federal Income Tax Expense
  CAPITAL RESOURCES
 
 F-20




---



##### Table of Contents



LIQUIDITY
     F-21




---



##### Table of Contents



One Year or Less
    
    
    One to Three Years
    
    
    Three to Five Years
    
    
    Over Five Years
    
    
    TotalDeposits without a stated maturity
    
    $
    274,919,000
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    274,919,000Certificates of deposits
    
    
    1,027,309,000
    
    
    
    313,680,000
    
    
    
    30,995,000
    
    
    
    0
    
    
    
    1,371,984,000Short term borrowings
    
    
    95,272,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    95,272,000Federal Home Loan Bank advances
    
    
    80,000,000
    
    
    
    15,000,000
    
    
    
    0
    
    
    
    0
    
    
    
    95,000,000Subordinated debentures
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    32,990,000
    
    
    
    32,990,000Other borrowed money
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3,316,000
    
    
    
    3,316,000Operating leases
    
    
    207,000
    
    
    
    324,000
    
    
    
    83,000
    
    
    
    0
    
    
    
    614,000
   December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Commercial unused lines of credit
    
    $
    345,195,000
    
    
    $
    303,115,000
    
    
    $
    226,935,000Unused lines of credit secured by
1-4 family residential
properties
    
    
    29,314,000
    
    
    
    27,830,000
    
    
    
    24,988,000Credit card unused lines of credit
    
    
    8,510,000
    
    
    
    7,971,000
    
    
    
    8,307,000Other consumer unused lines of credit
    
    
    7,197,000
    
    
    
    10,791,000
    
    
    
    5,155,000Commitments to make loans
    
    
    60,850,000
    
    
    
    83,280,000
    
    
    
    55,440,000Standby letters of credit
    
    
    73,241,000
    
    
    
    59,058,000
    
    
    
    56,464,000Total
    
    $
    524,307,000
    
    
    $
    492,045,000
    
    
    $
    377,289,000
 MARKET RISK ANALYSIS
  F-22




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##### Table of Contents



Within
    
    
    Three to
    
    
    One to
    
    
    AfterThree
    
    
    Twelve
    
    
    Five
    
    
    FiveMonths
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalAssets:Commercial loans (1)
    
    $
    893,234
    
    
    $
    60,125
    
    
    $
    601,193
    
    
    $
    49,638
    
    
    $
    1,604,190Leases
    
    
    11
    
    
    
    22
    
    
    
    1,355
    
    
    
    0
    
    
    
    1,388Residential real estate loans
    
    
    60,235
    
    
    
    4,597
    
    
    
    53,131
    
    
    
    13,681
    
    
    
    131,644Consumer loans
    
    
    3,169
    
    
    
    134
    
    
    
    4,208
    
    
    
    745
    
    
    
    8,256Securities (2)
    
    
    8,711
    
    
    
    2,478
    
    
    
    34,159
    
    
    
    157,071
    
    
    
    202,419Short term investments
    
    
    282
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    282Allowance for loan and lease losses
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (21,411
    )Other assets
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    140,500Total assets
    
    
    965,642
    
    
    
    67,356
    
    
    
    694,046
    
    
    
    221,135
    
    
    
    2,067,268Liabilities:Interest-bearing checking
    
    
    39,943
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    39,943Savings
    
    
    92,370
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    92,370Money market accounts
    
    
    9,409
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    9,409Time deposits under $100,000
    
    
    34,550
    
    
    
    53,196
    
    
    
    42,424
    
    
    
    0
    
    
    
    130,170Time deposits $100,000 and over
    
    
    351,745
    
    
    
    587,818
    
    
    
    302,251
    
    
    
    0
    
    
    
    1,241,814Short term borrowings
    
    
    95,272
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    95,272Federal Home Loan Bank advances
    
    
    30,000
    
    
    
    50,000
    
    
    
    15,000
    
    
    
    0
    
    
    
    95,000Long term borrowings
    
    
    36,306
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    36,306Noninterest-bearing checking
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    133,197Other liabilities
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    21,872Total liabilities
    
    
    689,595
    
    
    
    691,014
    
    
    
    359,675
    
    
    
    0
    
    
    
    1,895,353Shareholders equity
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    171,915Total sources of funds
    
    
    689,595
    
    
    
    691,014
    
    
    
    359,675
    
    
    
    0
    
    
    
    2,067,268Net asset (liability) GAP
    
    $
    276,047
    
    
    $
    (623,658
    )
    
    $
    334,371
    
    
    $
    221,135Cumulative GAP
    
    $
    276,047
    
    
    $
    (347,611
    )
    
    $
    (13,240
    )
    
    $
    207,895Percent of cumulative GAP to
total assets
    
    
    13.4
    %
    
    
    (16.8
    )%
    
    
    (0.6
    )%
    
    
    10.1
    %
 
 (1)
    
    Floating rate loans that are currently at interest rate ceilings are treated as
fixed rate loans and are reflected using maturity date and not repricing frequency.(2)
    
    Mortgage-backed securities are categorized by expected maturities based upon
prepayment trends as of December 31, 2006. F-23




---



##### Table of Contents



Within
    
    
    Three to
    
    
    One to
    
    
    AfterThree
    
    
    Twelve
    
    
    Five
    
    
    FiveMonths
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalAssets:Commercial loans (1)
    
    $
    947,769
    
    
    $
    37,000
    
    
    $
    408,931
    
    
    $
    32,832
    
    
    $
    1,426,532Leases
    
    
    6
    
    
    
    485
    
    
    
    1,295
    
    
    
    0
    
    
    
    1,786Residential real estate loans
    
    
    61,448
    
    
    
    3,861
    
    
    
    49,302
    
    
    
    13,500
    
    
    
    128,111Consumer loans
    
    
    1,699
    
    
    
    134
    
    
    
    3,011
    
    
    
    539
    
    
    
    5,383Securities (2)
    
    
    8,899
    
    
    
    1,007
    
    
    
    32,095
    
    
    
    139,613
    
    
    
    181,614Short term investments
    
    
    545
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    545Allowance for loan and lease losses
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (20,527
    )Other assets
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    114,766Total assets
    
    
    1,020,366
    
    
    
    42,487
    
    
    
    494,634
    
    
    
    186,484
    
    
    
    1,838,210Liabilities:Interest-bearing checking
    
    
    39,792
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    39,792Savings
    
    
    106,247
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    106,247Money market accounts
    
    
    10,344
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    10,344Time deposits under $100,000
    
    
    30,475
    
    
    
    37,109
    
    
    
    36,370
    
    
    
    0
    
    
    
    103,954Time deposits $100,000 and over
    
    
    255,351
    
    
    
    465,018
    
    
    
    317,818
    
    
    
    0
    
    
    
    1,038,187Short term borrowings
    
    
    81,801
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    81,801Federal Home Loan Bank advances
    
    
    25,000
    
    
    
    75,000
    
    
    
    30,000
    
    
    
    0
    
    
    
    130,000Long term borrowings
    
    
    35,337
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    35,337Noninterest-bearing checking
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    120,828Other liabilities
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    16,595Total liabilities
    
    
    584,347
    
    
    
    577,127
    
    
    
    384,188
    
    
    
    0
    
    
    
    1,683,085Shareholders equity
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    155,125Total sources of funds
    
    
    584,347
    
    
    
    577,127
    
    
    
    384,188
    
    
    
    0
    
    
    
    1,838,210Net asset (liability) GAP
    
    $
    436,019
    
    
    $
    (534,640
    )
    
    $
    110,446
    
    
    $
    186,484Cumulative GAP
    
    $
    436,019
    
    
    $
    (98,621
    )
    
    $
    11,825
    
    
    $
    198,309Percent of cumulative GAP to
total assets
    
    
    23.7
    %
    
    
    (5.4
    )%
    
    
    0.6
    %
    
    
    10.8
    %
 
 (1)
    
    Floating rate loans that are currently at interest rate ceilings are treated as
fixed rate loans and are reflected using maturity date and not repricing frequency.(2)
    
    Mortgage-backed securities are categorized by expected maturities based upon
prepayment trends as of December 31, 2005.  F-24




---



##### Table of Contents



Dollar Change In
    
    Percent Change InInterest Rate Scenario
    
    Net Interest Income
    
    Net Interest IncomeInterest rates down 200 basis points
    
    $
    (2,776,000
    )
    
    
    (4.4
    )%Interest rates down 100 basis points
    
    
    (2,064,000
    )
    
    
    (3.3
    )No change in interest rates
    
    
    (1,438,000
    )
    
    
    (2.3
    )Interest rates up 100 basis points
    
    
    569,000
    
    
    
    0.9Interest rates up 200 basis points
    
    
    2,552,000
    
    
    
    4.0
  F-25




---



##### Table of Contents



/s/ Crowe Chizek and Company LLCCrowe Chizek and Company LLC 
 F-26




---



##### Table of Contents



/s/ Crowe Chizek and Company LLCCrowe Chizek and Company LLC 
 F-27




---



##### Table of Contents



Internal Control 
Integrated Framework
   /s/ Gerald R. Johnson, Jr.Gerald R. Johnson, Jr.Chairman and Chief Executive Officer/s/ Charles E. ChristmasCharles E. ChristmasSenior Vice President  Chief Financial Officer
 F-28




---



##### Table of Contents



2006
    
    
    2005ASSETSCash and due from banks
    
    $
    51,098,000
    
    
    $
    36,208,000Short term investments
    
    
    282,000
    
    
    
    545,000Total cash and cash equivalents
    
    
    51,380,000
    
    
    
    36,753,000Securities available for sale
    
    
    130,967,000
    
    
    
    112,961,000Securities held to maturity (fair value of $65,025,000 at
December 31, 2006 and $62,850,000 at December 31, 2005)
    
    
    63,943,000
    
    
    
    60,766,000Federal Home Loan Bank stock
    
    
    7,509,000
    
    
    
    7,887,000Total loans and leases
    
    
    1,745,478,000
    
    
    
    1,561,812,000Allowance for loan and lease losses
    
    
    (21,411,000
    )
    
    
    (20,527,000
    )Total loans and leases, net
    
    
    1,724,067,000
    
    
    
    1,541,285,000Premises and equipment, net
    
    
    33,539,000
    
    
    
    30,206,000Bank owned life insurance policies
    
    
    30,858,000
    
    
    
    28,071,000Accrued interest receivable
    
    
    10,287,000
    
    
    
    8,274,000Other assets
    
    
    14,718,000
    
    
    
    12,007,000Total assets
    
    $
    2,067,268,000
    
    
    $
    1,838,210,000LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing
    
    $
    133,197,000
    
    
    $
    120,828,000Interest-bearing
    
    
    1,513,706,000
    
    
    
    1,298,524,000Total
    
    
    1,646,903,000
    
    
    
    1,419,352,000Securities sold under agreements to repurchase
    
    
    85,472,000
    
    
    
    72,201,000Federal funds purchased
    
    
    9,800,000
    
    
    
    9,600,000Federal Home Loan Bank advances
    
    
    95,000,000
    
    
    
    130,000,000Subordinated debentures
    
    
    32,990,000
    
    
    
    32,990,000Other borrowed money
    
    
    3,316,000
    
    
    
    2,347,000Accrued expenses and other liabilities
    
    
    21,872,000
    
    
    
    16,595,000Total liabilities
    
    
    1,895,353,000
    
    
    
    1,683,085,000Shareholders equityPreferred stock, no par value; 1,000,000 shares
authorized, none issued
    
    
    0
    
    
    
    0Common stock, no par value; 20,000,000 shares
authorized; 8,022,221 and 7,590,526 shares issued
and outstanding at December 31, 2006 and 2005
    
    
    161,223,000
    
    
    
    148,533,000Retained earnings
    
    
    11,794,000
    
    
    
    8,000,000Accumulated other comprehensive income (loss)
    
    
    (1,102,000
    )
    
    
    (1,408,000
    )Total shareholders equity
    
    
    171,915,000
    
    
    
    155,125,000Total liabilities and shareholders equity
    
    $
    2,067,268,000
    
    
    $
    1,838,210,000
  F-29




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Interest incomeLoans and leases, including fees
    
    $
    127,470,000
    
    
    $
    93,666,000
    
    
    $
    62,791,000Securities, taxable
    
    
    6,557,000
    
    
    
    5,588,000
    
    
    
    3,935,000Securities, tax-exempt
    
    
    2,739,000
    
    
    
    2,596,000
    
    
    
    2,217,000Federal funds sold
    
    
    482,000
    
    
    
    266,000
    
    
    
    75,000Short-term investments
    
    
    12,000
    
    
    
    14,000
    
    
    
    4,000Total interest income
    
    
    137,260,000
    
    
    
    102,130,000
    
    
    
    69,022,000Interest expenseDeposits
    
    
    64,755,000
    
    
    
    38,884,000
    
    
    
    21,786,000Short-term borrowings
    
    
    2,867,000
    
    
    
    1,795,000
    
    
    
    877,000Federal Home Loan Bank advances
    
    
    5,393,000
    
    
    
    4,200,000
    
    
    
    2,471,000Long-term borrowings
    
    
    2,658,000
    
    
    
    1,959,000
    
    
    
    1,461,000Total interest expense
    
    
    75,673,000
    
    
    
    46,838,000
    
    
    
    26,595,000Net interest income
    
    
    61,587,000
    
    
    
    55,292,000
    
    
    
    42,427,000Provision for loan and lease losses
    
    
    5,775,000
    
    
    
    3,790,000
    
    
    
    4,674,000Net interest income after provision for loan and lease losses
    
    
    55,812,000
    
    
    
    51,502,000
    
    
    
    37,753,000Noninterest incomeService charges on accounts
    
    
    1,386,000
    
    
    
    1,391,000
    
    
    
    1,255,000Increase in cash surrender value of bank owned life
insurance policies
    
    
    1,165,000
    
    
    
    997,000
    
    
    
    735,000Letter of credit fees
    
    
    443,000
    
    
    
    422,000
    
    
    
    450,000Residential mortgage banking fees
    
    
    553,000
    
    
    
    634,000
    
    
    
    440,000Gain on sale of commercial loans
    
    
    29,000
    
    
    
    84,000
    
    
    
    225,000Gain on sale of securities
    
    
    0
    
    
    
    0
    
    
    
    78,000Other income
    
    
    1,685,000
    
    
    
    2,133,000
    
    
    
    1,119,000Total noninterest income
    
    
    5,261,000
    
    
    
    5,661,000
    
    
    
    4,302,000Noninterest expenseSalaries and benefits
    
    
    18,983,000
    
    
    
    18,635,000
    
    
    
    13,956,000Occupancy
    
    
    3,136,000
    
    
    
    2,641,000
    
    
    
    1,588,000Furniture and equipment
    
    
    2,050,000
    
    
    
    1,667,000
    
    
    
    1,093,000Data processing
    
    
    1,657,000
    
    
    
    1,186,000
    
    
    
    880,000Advertising
    
    
    600,000
    
    
    
    554,000
    
    
    
    465,000Other expense
    
    
    5,836,000
    
    
    
    6,434,000
    
    
    
    5,216,000Total noninterest expenses
    
    
    32,262,000
    
    
    
    31,117,000
    
    
    
    23,198,000Income before federal income tax expense
    
    
    28,811,000
    
    
    
    26,046,000
    
    
    
    18,857,000Federal income tax expense
    
    
    8,964,000
    
    
    
    8,145,000
    
    
    
    5,136,000Net income
    
    $
    19,847,000
    
    
    $
    17,901,000
    
    
    $
    13,721,000Earnings per share:Basic
    
    $
    2.48
    
    
    $
    2.25
    
    
    $
    1.73Diluted
    
    $
    2.45
    
    
    $
    2.20
    
    
    $
    1.69
  F-30




---



##### Table of Contents



Accumulated Other
    
    
    TotalCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersStock
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    EquityBalances, January 1, 2004
    
    $
    118,560,000
    
    
    $
    11,421,000
    
    
    $
    220,000
    
    
    $
    130,201,000Payment of 5% stock dividend
    
    
    12,111,000
    
    
    
    (12,115,000
    )
    
    
    
    
    
    
    (4,000
    )Employee stock purchase plan, 2,388 shares
    
    
    79,000
    
    
    
    
    
    
    
    
    
    
    
    79,000Dividend reinvestment plan, 3,754 shares
    
    
    123,000
    
    
    
    
    
    
    
    
    
    
    
    123,000Stock option exercises, 57,011 shares
    
    
    524,000
    
    
    
    
    
    
    
    
    
    
    
    524,000Stock tendered for stock option
exercises, 12,058 shares
    
    
    (387,000
    )
    
    
    
    
    
    
    
    
    
    
    (387,000
    )Cash dividends ($0.34 per share)
    
    
    
    
    
    
    (2,552,000
    )
    
    
    
    
    
    
    (2,552,000
    )Comprehensive income:Net income
    
    
    
    
    
    
    13,721,000
    
    
    
    
    
    
    
    13,721,000Change in net unrealized gain on securities
available for sale, net of reclassifications
and tax effect
    
    
    
    
    
    
    
    
    
    
    (88,000
    )
    
    
    (88,000
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,633,000Balances, December 31, 2004
    
    
    131,010,000
    
    
    
    10,475,000
    
    
    
    132,000
    
    
    
    141,617,000Payment of 5% stock dividend
    
    
    17,187,000
    
    
    
    (17,191,000
    )
    
    
    
    
    
    
    (4,000
    )Employee stock purchase plan, 2,491 shares
    
    
    97,000
    
    
    
    
    
    
    
    
    
    
    
    97,000Dividend reinvestment plan, 4,099 shares
    
    
    159,000
    
    
    
    
    
    
    
    
    
    
    
    159,000Stock option exercises, 41,885 shares
    
    
    396,000
    
    
    
    
    
    
    
    
    
    
    
    396,000Stock tendered for stock option
exercises, 8,043 shares
    
    
    (316,000
    )
    
    
    
    
    
    
    
    
    
    
    (316,000
    )Cash dividends ($0.41 per share)
    
    
    
    
    
    
    (3,185,000
    )
    
    
    
    
    
    
    (3,185,000
    )Comprehensive income:Net income
    
    
    
    
    
    
    17,901,000
    
    
    
    
    
    
    
    17,901,000Change in net unrealized gain (loss) on
securities available for sale, net of
reclassifications and tax effect
    
    
    
    
    
    
    
    
    
    
    (1,540,000
    )
    
    
    (1,540,000
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,361,000Balances, December 31, 2005
    
    
    148,533,000
    
    
    
    8,000,000
    
    
    
    (1,408,000
    )
    
    
    155,125,000
  F-31




---



##### Table of Contents



Accumulated Other
    
    
    TotalCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersStock
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    EquityBalances, December 31, 2005
    
    $
    148,533,000
    
    
    $
    8,000,000
    
    
    $
    (1,408,000
    )
    
    $
    155,125,000Payment of 5% stock dividend
    
    
    12,014,000
    
    
    
    (12,018,000
    )
    
    
    
    
    
    
    (4,000
    )Employee stock purchase plan, 2,774 shares
    
    
    107,000
    
    
    
    
    
    
    
    
    
    
    
    107,000Dividend reinvestment plan, 2,531 shares
    
    
    98,000
    
    
    
    
    
    
    
    
    
    
    
    98,000Stock option exercises, 61,897 shares
    
    
    814,000
    
    
    
    
    
    
    
    
    
    
    
    814,000Stock tendered for stock option
exercises, 14,939 shares
    
    
    (585,000
    )
    
    
    
    
    
    
    
    
    
    
    (585,000
    )Cash dividends ($0.51 per share)
    
    
    
    
    
    
    (4,035,000
    )
    
    
    
    
    
    
    (4,035,000
    )Equity compensation expense
    
    
    242,000
    
    
    
    
    
    
    
    
    
    
    
    242,000Comprehensive income:Net income
    
    
    
    
    
    
    19,847,000
    
    
    
    
    
    
    
    19,847,000Change in net unrealized loss on
securities available for sale, net of
reclassifications and tax effect
    
    
    
    
    
    
    
    
    
    
    306,000
    
    
    
    306,000Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,153,000Balances, December 31, 2006
    
    $
    161,223,000
    
    
    $
    11,794,000
    
    
    $
    (1,102,000
    )
    
    $
    171,915,000
  F-32




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    19,847,000
    
    
    $
    17,901,000
    
    
    $
    13,721,000Adjustments to reconcile net income
to net cash from operating activitiesDepreciation and amortization
    
    
    2,887,000
    
    
    
    2,555,000
    
    
    
    1,699,000Provision for loan and lease losses
    
    
    5,775,000
    
    
    
    3,790,000
    
    
    
    4,674,000Equity compensation expense
    
    
    242,000
    
    
    
    0
    
    
    
    0Federal Home Loan Bank stock dividends
    
    
    0
    
    
    
    (146,000
    )
    
    
    (72,000
    )Gain on sale of commercial loans
    
    
    (29,000
    )
    
    
    (84,000
    )
    
    
    (225,000
    )Gain on sale of securities
    
    
    0
    
    
    
    0
    
    
    
    (78,000
    )Earnings on bank owned life insurance policies
    
    
    (1,166,000
    )
    
    
    (997,000
    )
    
    
    (735,000
    )Net change inAccrued interest receivable
    
    
    (2,013,000
    )
    
    
    (2,630,000
    )
    
    
    (1,546,000
    )Other assets
    
    
    (1,068,000
    )
    
    
    (981,000
    )
    
    
    (1,478,000
    )Accrued expenses and other liabilities
    
    
    5,277,000
    
    
    
    7,190,000
    
    
    
    2,315,000Net cash from operating activities
    
    
    29,752,000
    
    
    
    26,598,000
    
    
    
    18,275,000Cash flows from investing activitiesPurchases of:Securities available for sale
    
    
    (24,886,000
    )
    
    
    (38,217,000
    )
    
    
    (54,718,000
    )Securities held to maturity
    
    
    (4,567,000
    )
    
    
    (10,065,000
    )
    
    
    (8,521,000
    )Federal Home Loan Bank stock
    
    
    0
    
    
    
    (943,000
    )
    
    
    (1,749,000
    )Proceeds from:Sales of securities available for sale
    
    
    0
    
    
    
    0
    
    
    
    1,748,000Maturities, calls and repayments of
securities available for sale
    
    
    7,423,000
    
    
    
    16,686,000
    
    
    
    30,382,000Maturities, calls and repayments of
securities held to maturity
    
    
    1,330,000
    
    
    
    1,586,000
    
    
    
    1,256,000Redemption of Federal Home Loan Bank stock
    
    
    378,000
    
    
    
    0
    
    
    
    0Loan originations and payments, net
    
    
    (190,657,000
    )
    
    
    (247,242,000
    )
    
    
    (282,170,000
    )Purchases of premises and equipment, net
    
    
    (5,911,000
    )
    
    
    (7,677,000
    )
    
    
    (10,516,000
    )Purchases of bank owned life insurance policies
    
    
    (1,621,000
    )
    
    
    (3,324,000
    )
    
    
    (6,574,000
    )Net cash from investing activities
    
    
    (218,511,000
    )
    
    
    (289,196,000
    )
    
    
    (330,862,000
    )Cash flows from financing activitiesNet increase in deposits
    
    
    227,551,000
    
    
    
    260,171,000
    
    
    
    256,289,000Net increase in securities sold under agreements
to repurchase
    
    
    13,271,000
    
    
    
    15,884,000
    
    
    
    6,772,000Proceeds from Federal Home Loan Bank advances
    
    
    80,000,000
    
    
    
    75,000,000
    
    
    
    75,000,000Pay-off of Federal Home Loan Bank advances
    
    
    (115,000,000
    )
    
    
    (65,000,000
    )
    
    
    (45,000,000
    )Proceeds from issuance of subordinated debentures
    
    
    0
    
    
    
    0
    
    
    
    32,990,000Pay-off of subordinated debentures
    
    
    0
    
    
    
    0
    
    
    
    (16,495,000
    )Net increase (decrease) in other borrowed money
    
    
    1,169,000
    
    
    
    (4,662,000
    )
    
    
    9,495,000Cash paid in lieu of fractional shares on stock dividend
    
    
    (4,000
    )
    
    
    (4,000
    )
    
    
    (4,000
    )Employee stock purchase plan
    
    
    107,000
    
    
    
    97,000
    
    
    
    79,000Dividend reinvestment plan
    
    
    98,000
    
    
    
    159,000
    
    
    
    123,000Stock option exercises, net
    
    
    229,000
    
    
    
    80,000
    
    
    
    137,000Cash dividends
    
    
    (4,035,000
    )
    
    
    (3,185,000
    )
    
    
    (2,552,000
    )Net cash from financing activities
    
    
    203,386,000
    
    
    
    278,540,000
    
    
    
    316,834,000
  F-33




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Net change in cash and cash equivalents
    
    
    14,627,000
    
    
    
    15,942,000
    
    
    
    4,247,000Cash and cash equivalents at beginning of period
    
    
    36,753,000
    
    
    
    20,811,000
    
    
    
    16,564,000Cash and cash equivalents at end of period
    
    $
    51,380,000
    
    
    $
    36,753,000
    
    
    $
    20,811,000Supplemental disclosures of cash flow informationCash paid during the year forInterest
    
    $
    67,925,000
    
    
    $
    40,671,000
    
    
    $
    25,107,000Federal income tax
    
    
    10,875,000
    
    
    
    8,657,000
    
    
    
    6,125,000Transfers from loans and leases to foreclosed assets
    
    
    2,129,000
    
    
    
    1,556,000
    
    
    
    0
  F-34




---



##### Table of Contents



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Nature of Operations
      F-35




---



##### Table of Contents



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates
 Cash Flow Reporting
 Securities
   Loans and Leases
   Loans Held for Sale
  F-36




---



##### Table of Contents



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Allowance for Loan and Lease Losses
  Transfers of Financial Assets
 Premises and Equipment
 Long-term Assets
 Foreclosed Assets:
 Bank Owned Life Insurance:
 Repurchase Agreements
  F-37




---



##### Table of Contents



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Financial Instruments and Loan Commitments
 Stock Compensation: Share-based Payment,
  Accounting for
Stock-Based Compensation
 2005
    
    
    2004Net income as reported
    
    $
    17,901,000
    
    
    $
    13,721,000Deduct: Stock-based compensation expense
determined under fair value based method
    
    
    861,000
    
    
    
    323,000Pro forma net income
    
    
    17,040,000
    
    
    
    13,398,000Basic earnings per share as reported
    
    $
    2.25
    
    
    $
    1.73Pro forma basic earnings per share
    
    
    2.14
    
    
    
    1.69Diluted earnings per share as reported
    
    $
    2.20
    
    
    $
    1.69Pro forma diluted earnings per share
    
    
    2.09
    
    
    
    1.65
 Income Taxes
 Fair Values of Financial Instruments
  F-38




---



##### Table of Contents



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Earnings Per Share
 Comprehensive Income
 Contingencies:
 Reclassifications
 Operating Segments
 Adoption of New Accounting Standards Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109 (FIN 48)
  F-39




---



##### Table of Contents



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Effect of Newly Issued But Not Yet Effective Accounting Standards
 NOTE 2  SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value2006U.S. Government agency
debt obligations
    
    $
    77,544,000
    
    
    $
    197,000
    
    
    $
    (905,000
    )
    
    $
    76,836,000Mortgage-backed securities
    
    
    54,039,000
    
    
    
    80,000
    
    
    
    (1,036,000
    )
    
    
    53,083,000Mutual fund
    
    
    1,080,000
    
    
    
    0
    
    
    
    (32,000
    )
    
    
    1,048,000$
    132,663,000
    
    
    $
    277,000
    
    
    $
    (1,973,000
    )
    
    $
    130,967,0002005U.S. Government agency
debt obligations
    
    $
    64,665,000
    
    
    $
    15,000
    
    
    $
    (968,000
    )
    
    $
    63,712,000Mortgage-backed securities
    
    
    49,426,000
    
    
    
    39,000
    
    
    
    (1,228,000
    )
    
    
    48,237,000Mutual fund
    
    
    1,035,000
    
    
    
    0
    
    
    
    (23,000
    )
    
    
    1,012,000$
    115,126,000
    
    
    $
    54,000
    
    
    $
    (2,219,000
    )
    
    $
    112,961,000
  Gross
    
    
    GrossCarrying
    
    
    Unrecognized
    
    
    Unrecognized
    
    
    FairAmount
    
    
    Gains
    
    
    Losses
    
    
    Value2006Municipal general obligation bonds
    
    $
    56,870,000
    
    
    $
    1,098,000
    
    
    $
    (197,000
    )
    
    $
    57,771,000Municipal revenue bonds
    
    
    7,073,000
    
    
    
    198,000
    
    
    
    (17,000
    )
    
    
    7,254,000$
    63,943,000
    
    
    $
    1,296,000
    
    
    $
    (214,000
    )
    
    $
    65,025,0002005Municipal general obligation bonds
    
    $
    53,685,000
    
    
    $
    1,859,000
    
    
    $
    (101,000
    )
    
    $
    55,443,000Municipal revenue bonds
    
    
    7,081,000
    
    
    
    339,000
    
    
    
    (13,000
    )
    
    
    7,407,000$
    60,766,000
    
    
    $
    2,198,000
    
    
    $
    (114,000
    )
    
    $
    62,850,000
  F-40




---



##### Table of Contents



NOTE 2  SECURITIES
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss2006U.S. Government agency
debt obligations
    
    $
    1,971,000
    
    
    $
    (9,000
    )
    
    $
    53,939,000
    
    
    $
    (896,000
    )
    
    $
    55,910,000
    
    
    $
    (905,000
    )Mortgage-backed securities
    
    
    1,831,000
    
    
    
    (12,000
    )
    
    
    40,784,000
    
    
    
    (1,024,000
    )
    
    
    42,615,000
    
    
    
    (1,036,000
    )Mutual fund
    
    
    0
    
    
    
    0
    
    
    
    1,048,000
    
    
    
    (32,000
    )
    
    
    1,048,000
    
    
    
    (32,000
    )Municipal general
obligation bonds
    
    
    9,097,000
    
    
    
    (90,000
    )
    
    
    7,771,000
    
    
    
    (107,000
    )
    
    
    16,868,000
    
    
    
    (197,000
    )Municipal revenue bonds
    
    
    620,000
    
    
    
    (3,000
    )
    
    
    718,000
    
    
    
    (14,000
    )
    
    
    1,338,000
    
    
    
    (17,000
    )$
    13,519,000
    
    
    $
    (114,000
    )
    
    $
    104,260,000
    
    
    $
    (2,073,000
    )
    
    $
    117,779,000
    
    
    $
    (2,187,000
    )2005U.S. Government agency
debt obligations
    
    $
    51,082,000
    
    
    $
    (705,000
    )
    
    $
    5,735,000
    
    
    $
    (263,000
    )
    
    $
    56,817,000
    
    
    $
    (968,000
    )Mortgage-backed securities
    
    
    32,794,000
    
    
    
    (749,000
    )
    
    
    13,284,000
    
    
    
    (479,000
    )
    
    
    46,078,000
    
    
    
    (1,228,000
    )Mutual fund
    
    
    1,012,000
    
    
    
    (23,000
    )
    
    
    0
    
    
    
    0
    
    
    
    1,012,000
    
    
    
    (23,000
    )Municipal general
obligation bonds
    
    
    7,156,000
    
    
    
    (65,000
    )
    
    
    1,565,000
    
    
    
    (36,000
    )
    
    
    8,721,000
    
    
    
    (101,000
    )Municipal revenue bonds
    
    
    0
    
    
    
    0
    
    
    
    723,000
    
    
    
    (13,000
    )
    
    
    723,000
    
    
    
    (13,000
    )$
    92,044,000
    
    
    $
    (1,542,000
    )
    
    $
    21,307,000
    
    
    $
    (791,000
    )
    
    $
    113,351,000
    
    
    $
    (2,333,000
    )
    F-41




---



##### Table of Contents



NOTE 2  SECURITIES
   Held-to-Maturity
    
    
    Available-for-SaleWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Carrying
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    FairYield
    
    
    Amount
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    ValueDue in one year or less
    
    
    7.11
    %
    
    $
    2,593,000
    
    
    $
    2,606,000
    
    
    NA
    
    
    $
    0
    
    
    $
    0Due from one to five years
    
    
    6.87
    
    
    
    8,798,000
    
    
    
    9,060,000
    
    
    
    4.72
    %
    
    
    17,864,000
    
    
    
    17,647,000Due from five to ten years
    
    
    6.38
    
    
    
    11,533,000
    
    
    
    11,789,000
    
    
    
    5.21
    
    
    
    59,680,000
    
    
    
    59,189,000Due after ten years
    
    
    6.39
    
    
    
    41,019,000
    
    
    
    41,570,000
    
    
    NA
    
    
    
    0
    
    
    
    0Mortgage-backed
    
    NA
    

    
    
    0
    
    
    
    0
    
    
    
    5.03
    
    
    
    54,039,000
    
    
    
    53,083,000Mutual fund
    
    NA
    

    
    
    0
    
    
    
    0
    
    
    
    4.36
    
    
    
    1,080,000
    
    
    
    1,048,0006.48
    %
    
    $
    63,943,000
    
    
    $
    65,025,000
    
    
    
    5.06%
    
    
    $
    132,663,000
    
    
    $
    130,967,000
     F-42




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##### Table of Contents



NOTE 3  LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
  PercentDecember 31, 2006
    
    
    December 31, 2005
    
    
    Increase/Balance
    
    
    %
    
    
    Balance
    
    
    %
    
    
    (Decrease)Real Estate:Construction and land
development
    
    $
    293,656,000
    
    
    
    16.8
    %
    
    $
    226,544,000
    
    
    
    14.5
    %
    
    
    29.6
    %Secured by 1  4
family properties
    
    
    131,644,000
    
    
    
    7.5
    
    
    
    128,111,000
    
    
    
    8.2
    
    
    
    2.8Secured by multi
family properties
    
    
    31,003,000
    
    
    
    1.8
    
    
    
    30,114,000
    
    
    
    2.0
    
    
    
    3.0Secured by
nonresidential properties
    
    
    808,259,000
    
    
    
    46.3
    
    
    
    714,963,000
    
    
    
    45.8
    
    
    
    13.0Commercial
    
    
    471,272,000
    
    
    
    27.0
    
    
    
    454,911,000
    
    
    
    29.1
    
    
    
    3.6Leases
    
    
    1,388,000
    
    
    
    0.1
    
    
    
    1,786,000
    
    
    
    0.1
    
    
    
    (22.3
    )Consumer
    
    
    8,256,000
    
    
    
    0.5
    
    
    
    5,383,000
    
    
    
    0.3
    
    
    
    53.4$
    1,745,478,000
    
    
    
    100.0
    %
    
    $
    1,561,812,000
    
    
    
    100.0
    %
    
    
    11.8
    %
  2006
    
    
    2005
    
    
    2004Beginning balance
    
    $
    20,527,000
    
    
    $
    17,819,000
    
    
    $
    14,379,000Provision for loan and lease losses
    
    
    5,775,000
    
    
    
    3,790,000
    
    
    
    4,674,000Charge-offs
    
    
    (5,389,000
    )
    
    
    (1,392,000
    )
    
    
    (1,405,000
    )Recoveries
    
    
    498,000
    
    
    
    310,000
    
    
    
    171,000Ending balance
    
    $
    21,411,000
    
    
    $
    20,527,000
    
    
    $
    17,819,000
  2006
    
    
    2005Year-end loans with no allocated allowance for loan and lease losses
    
    $
    558,000
    
    
    $
    1,390,000Year-end loans with allocated allowance for loan and lease losses
    
    
    3,999,000
    
    
    
    965,000$
    4,557,000
    
    
    $
    2,355,000Amount of the allowance for loan and lease losses allocated
    
    $
    1,149,000
    
    
    $
    399,000Average of impaired loans during the year
    
    
    6,142,000
    
    
    
    2,460,000
   F-43




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##### Table of Contents



NOTE 3  LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
  2006
    
    
    2005Loans and leases past due over 90 days still accruing interest
    
    $
    819,000
    
    
    $
    394,000Nonaccrual loans and leases
    
    
    7,752,000
    
    
    
    3,601,000$
    8,571,000
    
    
    $
    3,995,000
  2006
    
    2005Percentage of
    
    
    
    
    
    Percentage ofBalance
    
    Loan Portfolio
    
    Balance
    
    Loan PortfolioCommercial real estate loans to
lessors of non-residential
buildings
    
    $
    471,222,000
    
    
    
    27.0
    %
    
    $
    417,470,000
    
    
    
    26.7
    %
 NOTE 4  PREMISES AND EQUIPMENT, NET
  2006
    
    
    2005Land and improvements
    
    $
    8,021,000
    
    
    $
    7,135,000Buildings and leasehold improvements
    
    
    23,036,000
    
    
    
    18,450,000Furniture and equipment
    
    
    10,773,000
    
    
    
    10,351,00041,830,000
    
    
    
    35,936,000Less: accumulated depreciation
    
    
    8,291,000
    
    
    
    5,730,000$
    33,539,000
    
    
    $
    30,206,000
   2007
    
    $
    207,0002008
    
    
    160,0002009
    
    
    164,0002010
    
    
    83,000Total
    
    $
    614,000
  F-44




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##### Table of Contents



NOTE 5  DEPOSITS
  PercentDecember 31, 2006
    
    
    December 31, 2005
    
    
    Increase/Balance
    
    
    %
    
    
    Balance
    
    
    %
    
    
    (Decrease)Noninterest-bearing
demand
    
    $
    133,197,000
    
    
    
    8.1
    %
    
    $
    120,828,000
    
    
    
    8.5
    %
    
    
    10.2
    %Interest-bearing
checking
    
    
    39,943,000
    
    
    
    2.4
    
    
    
    39,792,000
    
    
    
    2.8
    
    
    
    0.4Money market
    
    
    9,409,000
    
    
    
    0.6
    
    
    
    10,344,000
    
    
    
    0.7
    
    
    
    (9.0
    )Savings
    
    
    92,370,000
    
    
    
    5.6
    
    
    
    106,247,000
    
    
    
    7.5
    
    
    
    (13.1
    )Time, under $100,000
    
    
    47,840,000
    
    
    
    2.9
    
    
    
    23,906,000
    
    
    
    1.7
    
    
    
    100.1Time, $100,000 and over
    
    
    310,326,000
    
    
    
    18.8
    
    
    
    155,401,000
    
    
    
    11.0
    
    
    
    99.7633,085,000
    
    
    
    38.4
    
    
    
    456,518,000
    
    
    
    32.2
    
    
    
    38.7Out-of-area time,
under $100,000
    
    
    82,330,000
    
    
    
    5.0
    
    
    
    80,048,000
    
    
    
    5.6
    
    
    
    2.9Out-of-area time,
$100,000 and over
    
    
    931,488,000
    
    
    
    56.6
    
    
    
    882,786,000
    
    
    
    62.2
    
    
    
    5.51,013,818,000
    
    
    
    61.6
    
    
    
    962,834,000
    
    
    
    67.8
    
    
    
    5.3$
    1,646,903,000
    
    
    
    100.0
    %
    
    $
    1,419,352,000
    
    
    
    100.0
    %
    
    
    16.0
    %
   2006
    
    
    2005In one year or less
    
    $
    1,027,309,000
    
    
    $
    787,954,000In one to two years
    
    
    258,692,000
    
    
    
    243,652,000In two to three years
    
    
    54,988,000
    
    
    
    68,467,000In three to four years
    
    
    11,111,000
    
    
    
    33,649,000In four to five years
    
    
    19,884,000
    
    
    
    8,419,000$
    1,371,984,000
    
    
    $
    1,142,141,000
  2006
    
    
    2005Up to three months
    
    $
    351,745,000
    
    
    $
    255,351,000Three months to six months
    
    
    246,357,000
    
    
    
    186,830,000Six months to twelve months
    
    
    341,461,000
    
    
    
    278,189,000Over twelve months
    
    
    302,251,000
    
    
    
    317,817,000$
    1,241,814,000
    
    
    $
    1,038,187,000
  F-45




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##### Table of Contents



NOTE 6  SHORT-TERM BORROWINGS
  2006
    
    2005Outstanding balance at year-end
    
    $
    85,472,000
    
    
    $
    72,201,000Weighted average interest rate at year-end
    
    
    3.88
    %
    
    
    3.31
    %Average daily balance during the year
    
    
    72,228,000
    
    
    
    60,743,000Weighted average interest rate during the year
    
    
    3.71
    %
    
    
    2.63
    %Maximum month end balance during the year
    
    
    85,472,000
    
    
    
    74,639,000
  NOTE 7  FEDERAL HOME LOAN BANK ADVANCES
  2006
    
    
    2005Maturities January 2007 through May 2008, fixed rates from
3.70% to 5.69%, averaging 4.90%
    
    $
    95,000,000
    
    
    $
    0Maturities January 2006 through May 2008, fixed rates from
2.13% to 4.92%, averaging 3.68%
    
    
    0
    
    
    
    120,000,000Maturities in May 2006, floating rates tied to Libor indices,
averaging 4.42%
    
    
    0
    
    
    
    10,000,000$
    95,000,000
    
    
    $
    130,000,000
   2007
    
    $
    80,000,0002008
    
    
    15,000,0002009
    
    
    02010
    
    
    02011
    
    
    0
  F-46




---



##### Table of Contents



NOTE 8  FEDERAL INCOME TAXES
  2006
    
    
    2005
    
    
    2004Current
    
    $
    9,438,000
    
    
    $
    9,124,000
    
    
    $
    5,981,000Deferred benefit
    
    
    (474,000
    )
    
    
    (979,000
    )
    
    
    (845,000
    )Tax expense
    
    $
    8,964,000
    
    
    $
    8,145,000
    
    
    $
    5,136,000
  2006
    
    
    2005
    
    
    2004Statutory rates
    
    $
    10,084,000
    
    
    $
    9,116,000
    
    
    $
    6,600,000Increase (decrease) fromTax-exempt interest
    
    
    (795,000
    )
    
    
    (792,000
    )
    
    
    (708,000
    )Life insurance
    
    
    (408,000
    )
    
    
    (349,000
    )
    
    
    (257,000
    )Rehabilitation tax credits
    
    
    0
    
    
    
    0
    
    
    
    (429,000
    )Other
    
    
    83,000
    
    
    
    170,000
    
    
    
    (70,000
    )Tax expense
    
    $
    8,964,000
    
    
    $
    8,145,000
    
    
    $
    5,136,000
  2006
    
    
    2005Deferred tax assetsAllowance for loan and lease losses
    
    $
    7,494,000
    
    
    $
    7,184,000Unrealized loss on securities available for sale
    
    
    594,000
    
    
    
    758,000Deferred loan fees
    
    
    231,000
    
    
    
    307,000Deferred compensation
    
    
    1,181,000
    
    
    
    821,000Other
    
    
    234,000
    
    
    
    239,0009,734,000
    
    
    
    9,309,000Deferred tax liabilitiesDepreciation
    
    
    1,052,000
    
    
    
    947,000Other
    
    
    525,000
    
    
    
    515,0001,577,000
    
    
    
    1,462,000Net deferred tax asset
    
    $
    8,157,000
    
    
    $
    7,847,000
   F-47




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##### Table of Contents



NOTE 9  STOCK-BASED COMPENSATION
     2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at
beginning
of year
    
    
    314,830
    
    
    $
    21.81
    
    
    
    310,495
    
    
    $
    17.77
    
    
    
    321,203
    
    
    $
    13.56Granted
    
    
    24,640
    
    
    
    39.84
    
    
    
    47,540
    
    
    
    37.68
    
    
    
    46,303
    
    
    
    36.43Exercised
    
    
    (61,897
    )
    
    
    13.14
    
    
    
    (41,885
    )
    
    
    9.45
    
    
    
    (57,011
    )
    
    
    9.19Forfeited or expired
    
    
    (2,204
    )
    
    
    33.55
    
    
    
    (1,320
    )
    
    
    35.36
    
    
    
    0
    
    
    
    0.00Outstanding at
end of year
    
    
    275,369
    
    
    $
    25.28
    
    
    
    314,830
    
    
    $
    21.81
    
    
    
    310,495
    
    
    $
    17.77Options exercisable
at year-end
    
    
    223,505
    
    
    $
    22.63
    
    
    
    269,700
    
    
    $
    20.17
    
    
    
    241,658
    
    
    $
    13.62
  F-48




---



##### Table of Contents



NOTE 9  STOCK-BASED COMPENSATION
   2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.60
    %
    
    
    4.12
    %
    
    
    3.45
    %Expected option life
    
    5 Years
    
    7 Years
    
    7 YearsExpected stock price volatility
    
    
    26
    %
    
    
    26
    %
    
    
    22
    %Dividend yield
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
  Outstanding
    
    
    ExercisableWeighted Average
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Contractual
    
    
    Exercise
    
    
    
    
    
    
    ExercisePrices
    
    Number
    
    
    Life
    
    
    Price
    
    
    Number
    
    
    Price$4.00 - $8.00
    
    
    8,952
    
    
    0.6 Years
    
    $
    7.46
    
    
    
    8,952
    
    
    $
    7.46$8.01 - $12.00
    
    
    42,208
    
    
    3.0 Years
    
    
    9.20
    
    
    
    42,208
    
    
    
    9.20$12.01 - $16.00
    
    
    29,306
    
    
    4.8 Years
    
    
    13.07
    
    
    
    29,306
    
    
    
    13.07$16.01 - $20.00
    
    
    37,907
    
    
    5.6 Years
    
    
    16.84
    
    
    
    37,907
    
    
    
    16.84$20.01 - $24.00
    
    
    7,272
    
    
    5.8 Years
    
    
    21.19
    
    
    
    0
    
    
    NA$24.01 - $28.00
    
    
    30,592
    
    
    6.8 Years
    
    
    27.94
    
    
    
    30,592
    
    
    
    27.94$32.01 - $36.00
    
    
    41,783
    
    
    7.7 Years
    
    
    35.29
    
    
    
    34,847
    
    
    
    35.36$36.01 - $40.00
    
    
    70,186
    
    
    8.2 Years
    
    
    38.44
    
    
    
    39,693
    
    
    
    37.68$40.01 - $44.00
    
    
    7,163
    
    
    7.8 Years
    
    
    42.29
    
    
    
    0
    
    
    NAOutstanding at year end
    
    
    275,369
    
    
    6.1 Years
    
    $
    25.28
    
    
    
    223,505
    
    
    $
    22.63
   2006
    
    2005
    
    2004Minimum exercise price
    
    $
    7.46
    
    
    $
    7.46
    
    
    $
    7.46Maximum exercise price
    
    
    42.29
    
    
    
    42.29
    
    
    
    42.29Average remaining option term
    
    6.1 Years
    
    
    6.5 Years
    
    
    6.5 Years
  F-49




---



##### Table of Contents



NOTE 9  STOCK-BASED COMPENSATION
  2006
    
    2005
    
    2004Intrinsic value of stock options exercised
    
    $
    1,616,000
    
    
    $
    1,243,000
    
    
    $
    1,310,000Cash received from stock option exercises
    
    
    229,000
    
    
    
    80,000
    
    
    
    137,000Tax benefit realized from stock option exercises
    
    
    0
    
    
    
    0
    
    
    
    0Weighted average fair value of stock options granted
    
    
    11.44
    
    
    
    13.51
    
    
    
    9.82
    NOTE 10  RELATED PARTIES
  2006
    
    
    2005Beginning balance
    
    $
    8,865,000
    
    
    $
    10,210,000New loans
    
    
    2,356,000
    
    
    
    761,000Repayments
    
    
    (2,424,000
    )
    
    
    (2,106,000
    )Ending balance
    
    $
    8,797,000
    
    
    $
    8,865,000
  NOTE 11  COMMITMENTS AND OFF-BALANCE-SHEET RISK
   F-50




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##### Table of Contents



NOTE 11  COMMITMENTS AND OFF-BALANCE-SHEET RISK
    2006
    
    
    2005Commercial unused lines of credit
    
    $
    345,195,000
    
    
    $
    303,115,000Unused lines of credit secured by 1  4 family
residential properties
    
    
    29,314,000
    
    
    
    27,830,000Credit card unused lines of credit
    
    
    8,510,000
    
    
    
    7,971,000Other consumer unused lines of credit
    
    
    7,197,000
    
    
    
    10,791,000Commitments to make loans
    
    
    60,850,000
    
    
    
    83,280,000Standby letters of credit
    
    
    73,241,000
    
    
    
    59,058,000$
    524,307,000
    
    
    $
    492,045,000
   2006
    
    2005Contract
    
    Carrying
    
    Contract
    
    CarryingAmount
    
    Value
    
    Amount
    
    ValueStandby letters of credit
    
    $
    73,241,000
    
    
    $
    279,000
    
    
    $
    59,058,000
    
    
    $
    205,000
   F-51




---



##### Table of Contents



NOTE 12  BENEFIT PLANS
      F-52




---



##### Table of Contents



NOTE 13  FAIR VALUES OF FINANCIAL INSTRUMENTS
  2006
    
    2005Carrying
    
    Fair
    
    Carrying
    
    FairValues
    
    Values
    
    Values
    
    ValuesFinancial assetsCash and cash equivalents
    
    $
    51,380,000
    
    
    $
    51,380,000
    
    
    $
    36,753,000
    
    
    $
    36,753,000Securities available for sale
    
    
    130,967,000
    
    
    
    130,967,000
    
    
    
    112,961,000
    
    
    
    112,961,000Securities held to maturity
    
    
    63,943,000
    
    
    
    65,025,000
    
    
    
    60,766,000
    
    
    
    62,850,000Federal Home Loan Bank stock
    
    
    7,509,000
    
    
    
    7,509,000
    
    
    
    7,887,000
    
    
    
    7,887,000Loans, net
    
    
    1,724,067,000
    
    
    
    1,707,039,000
    
    
    
    1,541,285,000
    
    
    
    1,540,183,000Bank owned life insurance policies
    
    
    30,858,000
    
    
    
    30,858,000
    
    
    
    28,071,000
    
    
    
    28,071,000Accrued interest receivable
    
    
    10,287,000
    
    
    
    10,287,000
    
    
    
    8,274,000
    
    
    
    8,274,000Financial liabilitiesDeposits
    
    
    1,646,903,000
    
    
    
    1,654,798,000
    
    
    
    1,419,352,000
    
    
    
    1,425,606,000Securities sold under agreements
to repurchase
    
    
    85,472,000
    
    
    
    85,472,000
    
    
    
    72,201,000
    
    
    
    72,201,000Federal funds purchased
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,600,000
    
    
    
    9,600,000Federal Home Loan Bank advances
    
    
    95,000,000
    
    
    
    94,801,000
    
    
    
    130,000,000
    
    
    
    129,942,000Accrued interest payable
    
    
    20,213,000
    
    
    
    20,213,000
    
    
    
    12,465,000
    
    
    
    12,465,000Subordinated debentures
    
    
    32,990,000
    
    
    
    32,984,000
    
    
    
    32,990,000
    
    
    
    32,990,000
   F-53




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##### Table of Contents



NOTE 14  EARNINGS PER SHARE
  2006
    
    
    2005
    
    
    2004BasicNet income
    
    $
    19,847,000
    
    
    $
    17,901,000
    
    
    $
    13,721,000Weighted average common shares outstanding
    
    
    8,003,013
    
    
    
    7,959,338
    
    
    
    7,909,687Basic earnings per common share
    
    $
    2.48
    
    
    $
    2.25
    
    
    $
    1.73DilutedNet income
    
    $
    19,847,000
    
    
    $
    17,901,000
    
    
    $
    13,721,000Weighted average common shares outstanding for
basic earnings per common share
    
    
    8,003,013
    
    
    
    7,959,338
    
    
    
    7,909,687Add: Dilutive effects of assumed exercises of
stock options
    
    
    109,342
    
    
    
    177,826
    
    
    
    198,110Average shares and dilutive potential
common shares
    
    
    8,112,355
    
    
    
    8,137,163
    
    
    
    8,107,797Diluted earnings per common share
    
    $
    2.45
    
    
    $
    2.20
    
    
    $
    1.69
  NOTE 15  SUBORDINATED DEBENTURES
    F-54




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##### Table of Contents



NOTE 16  REGULATORY MATTERS
    Minimum Requiredto be WellMinimum Required
    
    Capitalized Underfor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action RegulationsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2006Total capital (to risk
weighted assets)Consolidated
    
    $
    226,428
    
    
    
    11.5
    %
    
    $
    158,196
    
    
    
    8.0
    %
    
    $
    NA
    
    
    NABank
    
    
    222,812
    
    
    
    11.3
    
    
    
    158,019
    
    
    
    8.0
    
    
    
    197,524
    
    
    
    10.0
    %Tier 1 capital (to risk
weighted assets)Consolidated
    
    
    205,017
    
    
    
    10.4
    
    
    
    79,098
    
    
    
    4.0
    
    
    NA
    
    
    NABank
    
    
    201,401
    
    
    
    10.2
    
    
    
    79,010
    
    
    
    4.0
    
    
    
    118,514
    
    
    
    6.0Tier 1 capital (to average
assets)Consolidated
    
    
    205,017
    
    
    
    10.0
    
    
    
    81,682
    
    
    
    4.0
    
    
    NA
    

    
    NABank
    
    
    201,401
    
    
    
    9.9
    
    
    
    81,623
    
    
    
    4.0
    
    
    
    102,029
    
    
    
    5.0
  F-55




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##### Table of Contents



NOTE 16  REGULATORY MATTERS
 Minimum Requiredto be WellMinimum Required
    
    Capitalized Underfor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action RegulationsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2005Total capital (to risk
weighted assets)Consolidated
    
    $
    209,060
    
    
    
    12.0
    %
    
    $
    139,337
    
    
    
    8.0
    %
    
    $
    NA
    
    
    NABank
    
    
    205,642
    
    
    
    11.8
    
    
    
    139,158
    
    
    
    8.0
    
    
    
    173,947
    
    
    
    10.0
    %Tier 1 capital (to risk
weighted assets)Consolidated
    
    
    188,533
    
    
    
    10.8
    
    
    
    69,669
    
    
    
    4.0
    
    
    NA
    

    
    NABank
    
    
    185,115
    
    
    
    10.6
    
    
    
    69,579
    
    
    
    4.0
    
    
    
    104,368
    
    
    
    6.0Tier 1 capital (to average
assets)Consolidated
    
    
    188,533
    
    
    
    10.5
    
    
    
    72,163
    
    
    
    4.0
    
    
    NA
    

    
    NABank
    
    
    185,115
    
    
    
    10.3
    
    
    
    72,100
    
    
    
    4.0
    
    
    
    90,124
    
    
    
    5.0
   NOTE 17  OTHER COMPREHENSIVE INCOME/(LOSS)
  2006
    
    
    2005
    
    
    2004Unrealized holding gains and losses on
available-for-sale securities
    
    $
    470,000
    
    
    $
    (2,368,000
    )
    
    $
    (208,000
    )Reclassification adjustments for gains
and losses later recognized in income
    
    
    0
    
    
    
    0
    
    
    
    (78,000
    )Net unrealized gains and losses
    
    
    470,000
    
    
    
    (2,368,000
    )
    
    
    (130,000
    )Tax effect of unrealized holding gains and
losses on available-for-sale securities
    
    
    (164,000
    )
    
    
    828,000
    
    
    
    70,000Tax effect of reclassification adjustments for
gains and losses later recognized in income
    
    
    0
    
    
    
    0
    
    
    
    (28,000
    )Other comprehensive income/(loss)
    
    $
    306,000
    
    
    $
    (1,540,000
    )
    
    $
    (88,000
    )
  F-56




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##### Table of Contents



NOTE 18  QUARTERLY FINANCIAL DATA (UNAUDITED)
 Interest
    
    Net Interest
    
    Net
    
    Earnings per ShareIncome
    
    Income
    
    Income
    
    Basic
    Fully Diluted2006First quarter
    
    $
    31,099,000
    
    
    $
    15,099,000
    
    
    $
    4,929,000
    
    
    $
    0.62
    
    
    $
    0.61Second quarter
    
    
    33,746,000
    
    
    
    15,646,000
    
    
    
    5,111,000
    
    
    
    0.64
    
    
    
    0.63Third quarter
    
    
    35,675,000
    
    
    
    15,547,000
    
    
    
    5,202,000
    
    
    
    0.65
    
    
    
    0.64Fourth quarter
    
    
    36,740,000
    
    
    
    15,295,000
    
    
    
    4,605,000
    
    
    
    0.57
    
    
    
    0.572005First quarter
    
    $
    21,705,000
    
    
    $
    12,655,000
    
    
    $
    4,362,000
    
    
    $
    0.58
    
    
    $
    0.56Second quarter
    
    
    24,346,000
    
    
    
    13,608,000
    
    
    
    4,690,000
    
    
    
    0.62
    
    
    
    0.61Third quarter
    
    
    26,764,000
    
    
    
    14,072,000
    
    
    
    4,300,000
    
    
    
    0.57
    
    
    
    0.56Fourth quarter
    
    
    29,315,000
    
    
    
    14,957,000
    
    
    
    4,549,000
    
    
    
    0.60
    
    
    
    0.592004First quarter
    
    $
    15,354,000
    
    
    $
    9,489,000
    
    
    $
    2,973,000
    
    
    $
    0.40
    
    
    $
    0.39Second quarter
    
    
    16,130,000
    
    
    
    10,000,000
    
    
    
    3,146,000
    
    
    
    0.42
    
    
    
    0.41Third quarter
    
    
    17,819,000
    
    
    
    10,856,000
    
    
    
    3,114,000
    
    
    
    0.41
    
    
    
    0.40Fourth quarter
    
    
    19,719,000
    
    
    
    12,082,000
    
    
    
    4,488,000
    
    
    
    0.59
    
    
    
    0.58
 NOTE 19  MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
   2006
    
    
    2005ASSETSCash and cash equivalents
    
    $
    2,323,000
    
    
    $
    2,045,000Investment in bank subsidiary
    
    
    200,300,000
    
    
    
    183,707,000Other assets
    
    
    2,890,000
    
    
    
    2,898,000Total assets
    
    $
    205,513,000
    
    
    $
    188,650,000LIABILITIES AND SHAREHOLDERS EQUITYLiabilities
    
    $
    608,000
    
    
    $
    535,000Subordinated debentures
    
    
    32,990,000
    
    
    
    32,990,000Shareholders equity
    
    
    171,915,000
    
    
    
    155,125,000Total liabilities and shareholders equity
    
    $
    205,513,000
    
    
    $
    188,650,000
  F-57




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##### Table of Contents



NOTE 19  MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
  2006
    
    
    2005
    
    
    2004IncomeDividends from subsidiaries
    
    $
    6,440,000
    
    
    $
    4,832,000
    
    
    $
    4,032,000Other
    
    
    73,000
    
    
    
    46,000
    
    
    
    25,000Total income
    
    
    6,513,000
    
    
    
    4,878,000
    
    
    
    4,057,000ExpensesInterest expense
    
    
    2,429,000
    
    
    
    1,837,000
    
    
    
    1,402,000Other operating expenses
    
    
    1,917,000
    
    
    
    942,000
    
    
    
    1,666,000Total expenses
    
    
    4,346,000
    
    
    
    2,779,000
    
    
    
    3,068,000Income before income tax benefit and equity in
undistributed net income of subsidiary
    
    
    2,167,000
    
    
    
    2,099,000
    
    
    
    989,000Federal income tax benefit
    
    
    (1,392,000
    )
    
    
    (936,000
    )
    
    
    (1,051,000
    )Equity in undistributed net income of subsidiary
    
    
    16,288,000
    
    
    
    14,866,000
    
    
    
    11,681,000Net income
    
    $
    19,847,000
    
    
    $
    17,901,000
    
    
    $
    13,721,000
  F-58




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##### Table of Contents



NOTE 19  MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
  2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    19,847,000
    
    
    $
    17,901,000
    
    
    $
    13,721,000Adjustments to reconcile net income to net
cash from operating activitiesEquity in undistributed income of subsidiary
    
    
    (16,288,000
    )
    
    
    (14,866,000
    )
    
    
    (11,681,000
    )Equity compensation expense
    
    
    242,000
    
    
    
    0
    
    
    
    0Change in other assets
    
    
    9,000
    
    
    
    (98,000
    )
    
    
    553,000Change in other liabilities
    
    
    73,000
    
    
    
    317,000
    
    
    
    (140,000
    )Net cash from operating activities
    
    
    3,883,000
    
    
    
    3,254,000
    
    
    
    2,453,000Cash flows from investing activitiesNet capital investment into subsidiaries
    
    
    0
    
    
    
    0
    
    
    
    (16,495,000
    )Net cash from investing activities
    
    
    0
    
    
    
    0
    
    
    
    (16,495,000
    )Cash flows from financing activitiesProceeds from the issuance of subordinated debentures
    
    
    0
    
    
    
    0
    
    
    
    32,990,000Pay-off of subordinated debentures
    
    
    0
    
    
    
    0
    
    
    
    (16,495,000
    )Stock option exercises, net
    
    
    229,000
    
    
    
    80,000
    
    
    
    137,000Employee stock purchase plan
    
    
    107,000
    
    
    
    97,000
    
    
    
    79,000Dividend reinvestment plan
    
    
    98,000
    
    
    
    159,000
    
    
    
    123,000Cash dividends
    
    
    (4,035,000
    )
    
    
    (3,185,000
    )
    
    
    (2,552,000
    )Fractional shares paid
    
    
    (4,000
    )
    
    
    (4,000
    )
    
    
    (4,000
    )Net cash from financing activities
    
    
    (3,605,000
    )
    
    
    (2,853,000
    )
    
    
    14,278,000Net change in cash and cash equivalents
    
    
    278,000
    
    
    
    401,000
    
    
    
    236,000Cash and cash equivalents at beginning of period
    
    
    2,045,000
    
    
    
    1,644,000
    
    
    
    1,408,000Cash and cash equivalents at end of period
    
    $
    2,323,000
    
    
    $
    2,045,000
    
    
    $
    1,644,000
 F-59




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##### Table of Contents



SIGNATURES
  MERCANTILE BANK CORPORATION/s/ Gerald R. Johnson, Jr.Gerald R. Johnson, Jr.Chairman of the Board and Chief Executive Officer  /s/ Betty S. Burton
    
    
    
    /s/ Susan K. JonesBetty S. Burton, Director
    
    
    
    Susan K. Jones, Director/s/ David M. Cassard
    
    
    
    /s/ Lawrence W. LarsenDavid M. Cassard, Director
    
    
    
    Lawrence W. Larsen, Director/s/ Edward J. Clark
    
    
    
    /s/ Calvin D. MurdockEdward J. Clark, Director
    
    
    
    Calvin D. Murdock, Director/s/ Peter A. Cordes
    
    
    
    /s/ Michael H. PricePeter A. Cordes, Director
    
    
    
    Michael H. Price, Director, President
and Chief Operating Officer/s/ C. John Gill
    
    
    
    /s/ Merle J. PrinsC. John Gill, Director
    
    
    
    Merle J. Prins, Director/s/ Doyle A. Hayes
    
    
    
    /s/ Dale J. VisserDoyle A. Hayes, Director
    
    
    
    Dale J. Visser, Director/s/ David M. Hecht
    
    
    
    /s/ Donald Williams, Sr.David M. Hecht, Director
    
    
    
    Donald Williams, Sr., Director/s/ Gerald R. Johnson, Jr.
    
    
    
    /s/ Charles E. ChristmasGerald R. Johnson, Jr., Chairman
of the Board and Chief Executive
Officer (principal executive
officer)
    
    
    
    Charles E. Christmas, Senior Vice
President, Chief Financial Officer and
Treasurer (principal financial and
accounting officer)




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##### Table of Contents



EXHIBIT INDEX
 EXHIBIT NO.
    
    EXHIBIT DESCRIPTION3.1
    
    Our Articles of Incorporation are incorporated by reference to
exhibit 3.1 of our Form 10-Q for the quarter ended June 30,
20043.2
    
    Our Amended and Restated Bylaws dated as of January 16, 2003
are incorporated by reference to exhibit 3.2 of our
Registration Statement on Form S-3 (Commission File No.
333-103376) that became effective on February 21, 200310.1
    
    Our 1997 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Registration Statement on
Form SB-2 (Commission File No. 333-33081) that became
effective on October 23, 1997 *10.2
    
    Our 2000 Employee Stock Option Plan is incorporated by
reference to exhibit 10.14 of our Form 10-K for the year ended
December 31, 2000 *10.3
    
    Our 2004 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 10-Q for the quarter
ended September 30, 2004 *10.4
    
    Form of Stock Option Agreement for options under the 2004
Employee Stock Option Plan is incorporated by reference to
exhibit 10.2 of our Form 10-Q for the quarter ended September 30, 2004 *10.5
    
    Our Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.26 of our Form 10-K for the year ended
December 31, 2002 *10.6
    
    Form of Stock Option Agreement for options under the
Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 8-K dated October 21,
2004 *10.7
    
    Nonlender Bonus Plan is incorporated by reference to exhibit
10.3 of our Form 10-Q for the quarter ended September 30, 2004 *10.8
    
    Mercantile Bank of West Michigan Deferred Compensation Plan
for Members of the Board of Directors (1999) is incorporated
by reference to Exhibit 10.6 of the Registration Statement of
the company and our trust on Form SB-2 (Commission File Nos.
333-84313 and 333-84313-01) that became effective on September
13, 1999 *10.9
    
    Agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.3 of our Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on October 23, 199710.10
    
    Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated May 12, 2000 extending the
agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.15 of our Form 10-K for the year ended December 31, 200010.11
    
    Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated November 22, 2002 extending
the agreement between Fiserv Solutions, Inc. and our bank
dated September 10, 1997, is incorporated by reference to
exhibit 10.5 of our Form 10-K for the year ended December 31,
2002




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##### Table of Contents



EXHIBIT NO.
    
    EXHIBIT DESCRIPTION10.12
    
    Amended and Restated Employment Agreement dated as of October
18, 2001, among the company, our bank and Gerald R. Johnson,
Jr., is incorporated by reference to exhibit 10.21 of our Form
10-K for the year ended December 31, 2001 *10.13
    
    Amended and Restated Employment Agreement dated as of October
18, 2001, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K
for the year ended December 31, 2001 *10.14
    
    Employment Agreement dated as of October 18, 2001, among the
company, our bank and Robert B. Kaminski, Jr., is incorporated
by reference to exhibit 10.23 of our Form 10-K for the year
ended December 31, 2001 *10.15
    
    Employment Agreement dated as of October 18, 2001, among the
company, our bank and Charles E. Christmas, is incorporated by
reference to exhibit 10.23 of our Form 10-K for the year ended
December 31, 2001 *10.16
    
    Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Gerald R. Johnson, Jr.,
is incorporated by reference to exhibit 10.21 of our Form 10-K
for the year ended December 31, 2002 *10.17
    
    Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K
for the year ended December 31, 2002 *10.18
    
    Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Robert B. Kaminski, Jr.,
is incorporated by reference to exhibit 10.23 of our Form 10-K
for the year ended December 31, 2002 *10.19
    
    Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Charles E. Christmas, is
incorporated by reference to exhibit 10.24 of our Form 10-K
for the year ended December 31, 2002 *10.20
    
    Amendment to Employment Agreement dated as of October 28,
2004, among the company, our bank and Robert B. Kaminski, Jr.,
is incorporated by reference to exhibit 10.21 of our Form 10-K
for the year ended December 31, 2004 *10.21
    
    Junior Subordinated Indenture between us and Wilmington Trust
Company dated September 16, 2004 providing for the issuance of
the Series A and Series B Floating Rate Junior Subordinated
Notes due 2034 is incorporated by reference to exhibit 10.1 of
our Form 8-K dated December 15, 200410.22
    
    Amended and Restated Trust Agreement dated September 16, 2004
for Mercantile Bank Capital Trust I is incorporated by
reference to exhibit 10.2 of our Form 8-K dated December 15,
200410.23
    
    Placement Agreement between us, Mercantile Bank Capital Trust
I, and SunTrust Capital Markets, Inc. dated September 16, 2004
is incorporated by reference to exhibit 10.3 of our Form 8-K
dated December 15, 200410.24
    
    Guarantee Agreement dated September 16, 2004 between
Mercantile as Guarantor and Wilmington Trust Company as
Guarantee Trustee is incorporated by reference to exhibit 10.4
of our Form 8-K dated December 15, 200410.25
    
    Non-Lender Bonus Plan 2006, is incorporated by reference to
exhibit 10.1 of our Form 8-K dated November 22, 2005 *




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##### Table of Contents



EXHIBIT NO.
    
    EXHIBIT DESCRIPTION10.26
    
    Form of Agreement Amending Stock Option Agreement, dated
November 17, 2005 issued under our 2004 Employee Stock Option
Plan, is incorporated by reference to exhibit 10.1 of our Form
8-K dated December 12, 2005 *10.27
    
    Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Gerald R. Johnson,
Jr. is incorporated by reference to exhibit 10.28 of our Form
10-K for the year ended December 31, 2005 *10.28
    
    Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Michael H. Price is
incorporated by reference to exhibit 10.29 of our Form 10-K
for the year ended December 31, 2005 *10.29
    
    Third Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Robert B. Kaminski,
Jr. is incorporated by reference to exhibit 10.30 of our Form
10-K for the year ended December 31, 2005 *10.30
    
    Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Charles E. Christmas
is incorporated by reference to exhibit 10.31 of our Form 10-K
for the year ended December 31, 2005 *10.31
    
    Form of Mercantile Bank of Michigan Executive Deferred
Compensation Agreement, that has been entered into between our
bank and each of Gerald R. Johnson, Jr., Michael H. Price,
Robert B. Kaminski, Jr., Charles E. Christmas, and certain
other officers of our bank is incorporated by reference to
exhibit 10.32 of our Form 10-K for the year ended December 31,
2005 *10.32
    
    Form of Mercantile Bank of Michigan Split Dollar Agreement
that has been entered into between our bank and each of Gerald
R. Johnson, Jr., Michael H. Price, Robert B. Kaminski, Jr.,
Charles E. Christmas, and certain other officers of our bank
is incorporated by reference to exhibit 10.33 of our Form 10-K
for the year ended December 31, 2005 *10.33
    
    Director Fee Summary *10.34
    
    Lease Agreement between our bank and Joe D. Pentecost Trust
dated April 29, 2005 for our East Lansing, Michigan office is
incorporated by reference to exhibit 10.35 of our Form 10-K
for the year ended December 31, 200510.35
    
    Lease Agreement between our bank and The Conlin Company dated
July 12, 2005 for our Ann Arbor, Michigan office is
incorporated by reference to exhibit 10.36 of our Form 10-K
for the year ended December 31, 200510.36
    
    Stock Incentive Plan of 2006 is incorporated by reference to
Appendix A of our proxy statement for our April 27, 2006
annual meeting of shareholders that was filed with the
Securities and Exchange Commission *10.37
    
    Form of Notice of Grant of Incentive Stock Option and Stock
Option Agreement for incentive stock options granted under our
Stock Incentive Plan of 2006 is incorporated by reference to
exhibit 10.1 of our Form 8-K dated November 22, 2006 *




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##### Table of Contents



EXHIBIT NO.
    
    EXHIBIT DESCRIPTION10.38
    
    Form of Restricted Stock Award Agreement Notification of Award
and Terms and Conditions of Award for restricted stock under
our Stock Incentive Plan of 2006 is incorporated by reference
to exhibit 10.2 of our Form 8-K dated November 22, 2006 *10.39
    
    Executive Officer Bonus Plan for 2007 is incorporated by
reference to exhibit 10.1 of our Form 8-K dated January 29,
2007 *21
    
    Subsidiaries of the company23
    
    Consent of Independent Registered Public Accounting Firm31
    
    Rule 13a-14(a) Certifications32.1
    
    Section 1350 Chief Executive Officer Certification32.2
    
    Section 1350 Chief Financial Officer Certification
 
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    Management contract or compensatory plan