Gerald Johnson - Chairman & CEO, Mercantile Bank Corporation Charles E. Christmas, Senior Vice President, Chief Financial Officer & Treasurer Michael Price, President & COO Robert B. Kaminski, Jr., COO, Executive Vice President, Mercantile Bank of Michigan; Cashier & Secretary to the Board

Terry J. McEvoy – Oppenheimer & Co., Inc. John Rowand – Fidelity & Co. Bradley S. Vander Ploeg – Raymond James Financial, Inc. Eric Grubelich – Keefe, Bruyette & Woods., Inc. Steve Covington - Steven Capital Steven Gayain – Stifel, Nicolaus and Company, Inc. Jon G. Arfstrom – RBC Capital Markets

Welcome to the Mercantile Bank Corporation fourth quarter and full year earnings conference call. There will be a question-and-answer period at the end of the presentations. If you have any questions at that time, please press *1 on your touch tone telephone. Before we begin today’s call, I would like to remind everyone that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company or its management, statements on economic performance and statements regarding the underlying assumptions of the company’s business. The company’s actual results could differ materially from any forward-looking statements made today due to the several important factors described in the company’s latest Securities and Exchange Commission filing. The company assumes no obligation to update any forward-looking statements made during this call. If anyone does not already have a copy of the Press Release issued by Mercantile today, you can access it at the company’s web site at www.mercbank.com. On the conference today, from Mercantile Bank Corporation we have Jerry Jonson, Chairman and Chief Executive Officer; Mike Price, President and Chief Operating Officer; Chuck Christmas, Senior Vice President and Chief Financial Official; and Bob Kaminski, Executive Vice President. We will begin the call with management’s prepared remarks and then open the call up to questions. At this point, I would like to turn the call over to Mr. Jonson. Sir, you may begin.

Thank you Tina and thank all of you for dialing in this morning. Although 2006 was an extremely challenging year, the management and staff of Mercantile Bank Corporation have continued to demonstrate their ability to produce superior results in a difficult operating environment. Our challenges this year were primarily in three areas: First, ongoing margin pressures brought about highly competitive pricing of both loans and deposits, exacerbated by the flat-yield curve in an industry-wide trend in disintermediation savings and money market deposits, the higher costing CDs. Secondly, growing our balance sheet in an environment that is increasingly competitive, as we continue to gain market share as the expense of our competitors who have shown an ongoing and aggressive willingness to compromise on deal structure as well as undercut Mercantile’s pricing on potential new as well as existing credit relationships, oftentimes to absurd levels unreflective of the proposed transactions credit risk. And third, maintaining our historical and traditional asset quality numbers. However, our metrics have remained consistent with regard to asset quality for the entire year and the slight increase in non-performers since year-end 2005 continues, in our view, to be a short-term situation and not an indication of a longer-term trend. I believe we have dealt very effectively with these challenges during 2006. For the year, diluted earnings per share increased 11.4%, total loans increased $183.7 million or 11.8%, and asset growth is $229.1 million, an increase of 12.5%. During the year we surpassed $2 billion in assets. Helping us to fund this growth has been an excellent in increase in local deposits. And Chuck will have further comments regarding our loan and deposit growth. With regard to non-performing assets and charge-offs, although our ratios remain well within peer group parameters, we continue to work diligently to bring these numbers back to the historically low levels reflected in our prior years’ performance. Mike will further expand on the developments in our loan portfolio. Our new markets had a significant positive impact on our ability to continue to grow our earnings and assets at double-digit rates. Mike will have additional comments on Holland, Lansing and Ann Arbor. I believe, in summary, that we have dealt very efficiently and effectively with the numerous challenges that we faced in 2006, and have produced excellent results for our shareholders. I will now turn the conference call over to Chuck. Charles E. Christmas: Thanks Jerry and good morning everybody. What I’d like to this morning is give you an overview of Mercantile’s financial condition and operating results for the fourth-quarter of 2006 and all of 2006, highlighting the major financial conditions and performance balances and ratios. Our net income for the fourth quarter of 2006 was $4.6 million, an increase of $0.1 million, or 1%, over the $4.5 million recorded in the fourth quarter of 2005. For all of 2006, our net income came in at $19.8 million, that’s an increase of $1.9 million, or about 11%, over the $17.9 million recorded in 2005. On a diluted-earnings-per-share basis, our fourth quarter 2006 was 57 cents, compared to 56 cents in the fourth quarter of 2005, an increase of about 2%, and for all of 2006, our diluted earnings per share was $2.45, an increase of 11% over the $2.20 earned in 2005. Our increases in net income continue to be achieved due to growth in net interest income, resulting from earning asset growth, which more than offset a lower net interest margin and increased provision expense. Our overall profitability is driven by continued strong earning asset growth, which has translated it into increased net interest income. In the fourth quarter of 2006, our net interest income totaled $15.3 million, an increase of $300,000, or 2%, over 2005 fourth quarter. And for all of 2006, our net interest income totaled $61.6 million, that’s an increase of $6.3 million, or about 11%, over 2005. Our average earning assets from the fourth quarter of 2006 came in at $1.94 billion, that’s an increase of $229 million, or 13%, over average earning assets during the fourth quarter of 2005. Our average loans in the fourth quarter of 2006 averaged $1.73 billion, an increase of $210 million, or about 92% of the average earning asset growth from the fourth quarter of 2005. As fully expected, with the prime rate now holding steady, resulting in a relatively flat-yield on assets, but continued costs of fund increases, in our fixed-rate CD and Federal Home Loan Bank advance portfolios, our net interest margin continued to decline during the fourth quarter of 2006, after being relatively stable for many prior quarters up until the third quarter of 2006. Our net interest margin for the fourth quarter was 3.19%, compared to 3.34% in the third quarter of 2006, and 3.47% in the second quarter of 2006. With the market consensus and expectations that the Fed will hold the federal funds rate steady for the next 3-6 months, we expect a further decline in our net interest margin during the next couple of quarters before leveling off. As in the past, the main issue impacting our net interest margin will be the re-pricing of the wholesale funds portfolio, but also continued extreme competitive pressures on loan and deposit rates and the flat-to-inverted yield curve. Our costs of wholesale funds have increased and will continue for the next couple of quarters as maturing funds are replaced with funds at higher rates, although not to the degree as in the recent past quarters. For the first quarter of 2007, wholesale funds maturing total $260 million, with the average rate of 4.80%. In the second quarter of 2007, our wholesale funds maturing total $220 million, with an average rate of 5.10%. And for the last 6 months of 2007, wholesale fund maturities total $335 million, with an average rate of 5.25%. Currently, the 12-month CD rate, to put things in perspective for you, equals about 5.25%. Our loan-loss provision expense in the fourth quarter of 2006 totaled $1.7 million. That’s an increase of $400,000, or 34%, over the fourth quarter of ’05, and for all of 2006 our loan-loss provision expense totaled $5.8 million. That’s an increase of $2 million, or 52%, over the 2005 expense. A lower reserve coverage ratio and lower loan growth more than offset the higher level of net loan charge-offs. Our Fee Income from the fourth quarter of 2006 totaled $1.4 million, down 27% from the fourth quarter of 2005, and for all of 2006, totaled $5.3 million, down 7% from 2005. So if we exclude the $0.7 million one-time gain on the sale of tax credits in the fourth quarter of 2005, fee income during the fourth quarter of 2006 was up 15%, and for all of 2006 was up 6%. Our overhead costs for the fourth quarter of 2006 totaled $8.2 million, that’s a decrease of $0.6 million, or 7%, from what was experienced in the fourth quarter of 2005, and for all of 2006, totaled $32.3 million. That’s an increase of $1.2 million, or 4%, from all of 2005. Increased costs associated with significant increase in staff in facilities during mid-to-late 2005, and increased costs associated with troubled credit relationships during 2006, more than offset no employee bonus accrual in 2006. As of December 31, 2006, our assets totaled $2.07 billion. That’s an increase of $40 million during the fourth quarter of 2006, with loans being up $35 million. During the last 12 months, assets increased $229 million, or about 12%, with loans up $184 million, also up about 12%. There continues to be no major changes in our asset composition. Our funding strategy also has not changed significantly, as we continue to grow local deposits as best we can and bridge any funding gap of wholesale funds, namely brokerage CDs and Federal Bank advances. Our local deposit and repo growth during 2006 was very, very strong, up $190 million, or 36%. Our wholesale funds were up as well, but only up $51 million, or about 5%. Our average wholesale funds-to-total funds at the end of 2006 totaled 61%, compared to 65% as of September 30, 2006, and 68% at the beginning of 2006. The company continues to be in a well-capitalized position for bank reparatory definitions, with a total risk based capital ratio at year-end ’06 of 11.5%. With that, I will turn it over to Mike for his remarks.

Thank you Chuck, and good morning everyone. Mercantile Bank of Michigan completed another strong year, especially considering the market dynamics facing commercial banks in general nationally, which are especially challenging in Michigan. Chuck and Jerry have already mentioned that asset growth was 13%, slightly less than the traditional growth rate of past years for Mercantile, but well ahead of the 9% growth rate reported by the FDIC for all banks through the first 9 months of 2006. The difficult economic times and competitive pressures have made asset growth more difficult, but the Mercantile team of bankers continues to develop strong numbers of new relationships across all of our markets. Non-performing assets held relatively steady during the year, at 0.46% of total assets. While this is higher than historical levels at Mercantile, it compares favorably with what is happening both nationally and within our Michigan peer group. FDIC statistics for all insured banks at 09/30/06 indicate a non-performing ratio of 0.49% of total assets. Additionally, at 09/30/06, a peer group of 40 publicly-traded Michigan banks reveals a non-performing asset rate of 0.66%. Our newer markets continue to be strong complements to our Kent County franchise, contributing 50% of our net new loan growth for the year and 41% of our net new local deposit growth. Both Holland and Lansing are profitable operations, with Grand Rapids nearing break-even. While certain current metrics in 2007 portend a challenging year for all banks, we are excited about the continued success of our sales efforts. Mercantile has become one of the premier banks in each market we compete in. This ends my prepared remarks. I certainly would be glad to answer any specific questions you have during the Q&A, but at this time, I would like to turn it over to Bob Kaminski. Robert B. Kaminski, Jr.: Thank you, Mike. I have just a couple of operational updates this morning. The structure remains on track at our new Lansing facility. We are currently anticipating opening this building in the month of May. Mercantile continues to prepare for first quarter customer roll up of our next generation Internet banking product. This product will give some features of functionality that will allow us to continue to grow this avenue of banking for Mercantile customers. Finally, 2006 was a big year for health savings account penetration at Mercantile Bank. Towards the end of the year, primarily through partnership with one of the areas largest employers, we opened over 700 HSA accounts, bringing in $0.5 million in new account relationship dollars. I will now turn it back over to Jerry.

Thank you, Bob. With that we will now take questions.

Thank you, sir. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press *1 on your telephone key pad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand set before pressing the * key. One moment please while we hold for questions. Our first question is from Terry McEvoy with Oppenheimer. Please proceed with your question. Terry McEvoy - Oppenheimer: Hi, good morning. I have a couple of questions. First off, this is the first quarter that I’ve seen at Mercantile where the provision did not match and exceed charge-offs. Was that due just to the long growth maybe being a little lighter in the fourth quarter maybe than what we’ve seen historically or was there something else that occurred to drive that event? Robert B. Kaminski, Jr.: Terry, this is Bob. We look through a calculation each month and each quarter to derive at what the provision should be for the bank for the period and through the dynamics of the portfolio and changes in long range and such, that’s how the calculation worked out for the quarter. It happens so that it did not match the charge off, but there were smaller shifts in the portfolio that made a successful provision. Terry McEvoy - Oppenheimer: You mention quite a bit in the press release call about the competitive landscape. Have you seen your comparing fourth quarter to third quarter? Was there an easing at all in the fourth quarter, did it remain constant, and how do you feel about your competitors looking at it for the first couple of quarters of this year in terms of their pricing?

Terry, this is Mike. I think it was pretty consistent all through 2006 and I would say as we roll into 2007 it’s pretty consistent out there right now that there’s not a lot of expansion organically going on in Michigan economy and there’s a lot things out there competing for the same business we have so we continue to have some very fierce competition from a pricing and as Jerry mentioned, from a structure standpoint that I would expect to see probably through at least the first half of the year. And what makes it more difficult of course is the flat yield curve we have out there which right now is a difficult time to find a place on a yield curve and we have some competitors out there quoting some rates which really don’t make any sense in our view so it makes it doubly tough to come up with the asset growth that we are used to having here at Mercantile. However we continue to do it. We continue to outperform our peers and the market in general as far as banks go throughout Michigan and the country because we continue to focus on what we’ve always done which is to try to win the business based on strong relationships rather than win them on deal structure or pricing but when the pricing gap that we’re seeing becomes so great, it just makes it tougher to overcome that. Terry McEvoy - Oppenheimer: Thank you. Operator: Thank you. Our next question is from John Rowand with Fidelity and Company. Please proceed with your question. John Rowand – Fidelity & Co.: Good morning. Chuck, first can you just go through the rates for the maturing CDs again, I didn’t get everything. Charles E. Christmas: Certainly John. For the first quarter of ’07 it totaled $216 million at 4.8 average rate. And the second quarter, it’s $220 million at an average rate of 5.1, and in the last six months of ’07 it’s $335 million at an average rate of 5.25, and the one year senior rate currently is about 5.25%. John Rowand – Fidelity & Co.: And just quickly on the tax rate, there was a jump in the quarter. Do you see it staying at around 32% or going back down to around 31%? Charles E. Christmas: Just between somewhere between 31% and 32%. There was an adjustment we put through the fourth quarter. John Rowand – Fidelity & Co.: Just a follow up on the previous question. Bob, can you kind of talk about what your expectations are for the provision expense going forward. Do you expect to at least match charge-offs? Robert B. Kaminski: As I mentioned in the previous question, we go through a growth calculation every month and then quarter end to make a determination of what the provision should be. Obviously charge-offs are factored into that equation but also looks at other things going on in the portfolio, long range, long growth, long range changes so it’s quite a complex computation. Certainly charge-offs is an important factor but it’s not the only factor. John Rowand – Fidelity & Co.: Thank you. Operator: Thank you. Our next question is from Bradley S. Vander Ploeg with Raymond James. Please state your question. Bradley S. Vander Ploeg - Raymond James: Thank you. Good morning. One quick housekeeping item. Just kind of comparing earnings apples to apples versus last years fourth quarter. Can you remind me, I did my own calculation but what was your options expense in the fourth quarter of ’05 if you have that handy? Charles E. Christmas: Brad, I’ll have to get back to you. I don’t have that. Bradley S. Vander Ploeg - Raymond James: O.K. I was just curious about that. Charles E. Christmas: I know it’s in our cue in the foot note, but I don’t have that with me. Bradley S. Vander Ploeg - Raymond James: O.K. And then, just to make sure I heard you right Chuck. On margin pressure for the next couple of quarters, we can do our calculations based on maturing wholesale CDs and so forth, but it sounded like you would expect the rate of decline to slow a little bit versus the past couple of quarters. Is that right? Charles E. Christmas: Yeah, you know, making the assumptions that rates don’t change from where they are today. I think the first quarter will show a similar type of decline as what we’ve seen in the last couple of quarters, but thereafter we’ll definitely see a smaller decline, if not just more of a straight line…obviously a few basis points here or there but… Bradley S. Vander Ploeg - Raymond James: And then it’s pretty clear, we can sense your frustration about some of the competition in the market, it sounds like it’s fairly irrational. Is it? And it sounds like its coming from everybody, or is it smaller banks scrambling to get market share, or the bigger banks maybe just trying to post balance sheet growth at any price? I mean it’s coming from one place or another. Charles E. Christmas: Yeah Brad, I would say we feel a little bit all the way across the board, but we run into it probably a little bit more with the larger banks that, the sense that we have is that they’re just trying to stem the bleeding as far as balance sheet run-off goes. You know we focus a lot on how to run this bank profitably and we are frustrated because we don’t see how they’re making money on some of these deals but I guess that’s up to them to decide whether or not they want to continue to do that but it certainly is frustrating when you see one bank offering a fixed rate for five years in the low 6% and at the same time turn around and offer the same customer a deposit rate for three years of 5.25. You don’t have to be a genius to figure out that balance and it’s a tough one to figure out how they’re making any money. And it’s happening, and happens out there quit a bit these days but we continue again to focus on building the relationship, adding the value through the consultative approach that Mercantile always has, but it clearly is an interesting time for sure out there. Bradley S. Vander Ploeg - Raymond James: Yeah. I know you can’t necessarily get inside their heads, but what does it take to change that? Does it take a credit quality surprise for them, or better organic growth in the market to change that dynamic?

Let Jerry, Bob, or Chuck add to this, but from my viewpoint, it clearly can’t I don’t think in my personal opinion continue forever just because it makes no sense from a pricing or profitability standpoint. I think it takes a combination of somebody probably taking a look at what is going on in that particular market of the bank that’s doing that. Credit surprises, I think you will see popping up with some of these banks because they’re doing deals without guarantees for example, or under-secured that we just walk away from saying we need those guarantees or we need that security. I think a combination of those things inevitably will pop up. When that will happen? Is it Valentines Day? Or is it next June? It’s hard to get a sense on as it depends on how diligently senior management at these banks at their headquarters sometimes many states away will take a look at it. But Jerry or Bob or Chuck, I don’t know….

Yeah Brad, this is Jerry. I read a lot of the research that you all send me. And the major culprits that are doing this all have significant earning challenges of their own and it is puzzling how they’re able to justify some of the rate structures they’ve put together. So, I think at some point, somebody in another city is going to say that’s enough! What these banks are trying to do is compete with rate against service that they can’t provide and we just have to ride it out basically. What we tell our investors is we remain very firm in our commitment to credit quality and spread income and if it slows the growth temporarily then so be it. Bradley S. Vander Ploeg - Raymond James: Right, right. And then one final thing…Bob, maybe you could elaborate a little bit for me on the credit trend in the quarter? Why do you not see the increased charge-offs as a ticket of a trend? What is a normalized level for charge-offs and also within the charge-offs at the end of the quarter did you see any industry breakdowns that were troublesome? Robert B. Kaminski: Well, I think you know, Mike prepared some statistics what our peer group is doing and you can see in those trends, charge-offs as well as non-performing loans have increased for banks in our general peer group specifically within this region. So, I think what you see is a trend toward higher probable loans. Our trends were pretty stable if you look at each of the quarters in 2006 in terms of our non-performing loans. In terms of any particular industries that have been challenged, obviously the automotive continues to be one that goes through some major struggles and challenges here in Mid-West and in the state of Michigan in particular. And you see some credit exhibiting some stress because of that. The economy as a whole is not extremely healthy here, and until that turns around, I think you’ll begin to still see some performers within those industry groups and other industry groups as well that exhibit some stress.

Brad this is Mike and let me touch on what Bob says. Let me give you an example. We have one deal in ORE right now and the deal was a real estate development deal that we got an appraisal on. We have it filed for $3.2 million, we made about a $2 million loan on it. The deal went sour because right now, real estate is a challenge in some cases. We collected $850 thousand from the guarantor to reduce the debt down to slightly over a million dollars. Took the property to auction, got an offer of about $750 thousand, pulled it out of the auction and took a charge to indicate what we think the value is. You look at that and you say boy, where did the lender go wrong, where did the process go wrong and it’s really difficult to say that you did, and you end up with a piece of property that an appraised as-finished completed value, according to the appraisal should have been worth $3.2 million, and you end up with about a million dollars debt on it. And this is still a difficult market right now to dispose of that. So, that’s the type of thing we’re seeing in addition to there’s a lot of stuff that we talked about earlier in the year that was put on the books but Leonard whose no longer with us. That was all across the board as far as industry goes, and for lack of a better term, cleaning up a lot of that as we went to the end of the year. Bradley S. Vander Ploeg - Raymond James: OK, and I know you’re definitely seeing higher charge-offs in non-performers across the industry but I know you guys are not happy with numbers that are in line with the period. Michael Price: No, we definitely are. And we definitely are doing everything we possibly can to get back to more Mercantilesque numbers. Bradley S. Vander Ploeg - Raymond James: Alright, thanks very much.

Thank you, our next question is from Eric Grubelich with Keefe, Bruyette & Woods. Please state your question. Eric Grubelich – Keefe, Bruyette & Woods: Hi, good morning. A couple of things, actually just a follow-up on what Mike was just talking about. You did mention you had that one member who’s no longer with the bank. Is there much more to follow from what this guy has done or are you pretty much through the problems he’s created?

That’s a good question. But, the good news I think as far as this particular lender’s portfolio is that there really hasn’t been anything identified in addition. The lender’s been gone about three quarters of the year and we’ve combed through that portfolio pretty well and we don’t see anything that hasn’t been identified that’s popped up in the last four or five months so I think that’s pretty good news. Eric Grubelich – Keefe, Bruyette & Woods: OK, but what was the example, the ORE was that one of his or something?

No, actually that one was actually just made by a lender who has a very good track record here and was approved by senior management as well because all the metrics looked good and certainly everything, I think in a normal market three years ago the deal would have been just fine. But, right now there’s just…and I think everybody’s aware of there’s just a real shift in what’s going on out there and speaking about the lender that left, I’m not sure that we’ve ever been clear about the gender of the person and I’m not sure we want to focus any more on that, so we’ll just leave it at that. Eric Grubelich – Keefe, Bruyette & Woods: Oh, if I said he….

And if we’ve ever said that in the past, we were just being very generic. Eric Grubelich – Keefe, Bruyette & Woods: OK, I understand. So, on that ORE property though, was that a commercial or…?

It’s a commercial property being developed in some residential…they had use for that residential lot but certainly a commercial development project. Eric Grubelich – Keefe, Bruyette & Woods: OK, and was there anything else of significance to build the NTA pocket up after you took a couple million to charge-off?

No, I think there’s just a lot of stuff as we work it through the course of the year we look at, let’s try to be as conservative as we always are here at Mercantile and if we think that there’s a pretty good chance of a loss then let’s take it and then try to recover some of that in the future. Eric Grubelich – Keefe, Bruyette & Woods., Inc.: Mike do you think that … I know the intention is to get the charge off and credit numbers to a more Mercantilesque levels, do you think it will be a little bit of tough situation going into ‘07, before that happens?

Yes, when I say Mercantilesque I look back to a couple of years ago, for everybody following us quarter after quarter, I think when we had .03, .09 performers I always said that was a pretty amazing number that will not always be that way. So, are we going to get back to .03 or .09 like we were for many years in a quarter? No, but I think I really feel good about the fact that we are not identifying anymore as I mentioned last quarter watch-less totals have come down and that is always a good indicator of where the charts are as follows a couple of quarters down. But, are you going to see .46 NPA’s become .21 at the end of first quarter? I don’t think so. Are you going to see that number increase significantly? I don’t think so. Eric Grubelich – Keefe, Bruyette & Woods., Inc.: Ok I think that those of us that are on the phone are just looking at…it seems to me that you are characterizing the fourth quarter as a difficult environment, but also some clean-up and that we wouldn’t necessarily expect to see at a 50 bases point run rate on charge off going forward but on the other hand it is not going to be 10 basis points either.

Right, I would suggest that that’s a pretty good characterization of where we feel things are. Eric Grubelich – Keefe, Bruyette & Woods., Inc.: Right, OK, I think you had made a comment earlier off the S quality subject about a margin, I thought you said, you know again talking about a competitor’s environment, directional pricing, irrational terms… What your mind is making you think is that … you know…the pressure…not necessarily the margin of price competition for loans. What makes you think that it is going to turn the corner in a few quarters? Putting the yield curve aside for a minute, what do you think is going to change in a competitive landscape that may ease that burden of price competition in loans in the foreign lending?

Yes, I think, you know, we’re not saying that saying that we absolutely know that it is going to change in the prime quarters, but intuitively as entrepreneurial businesspeople, we just see a difficult road ahead for this particular type of pricing and this particular type of method of operation to continue. One of the things that we do have hope is that that the yield curve will change somewhat, because that does cause a bigger part of the problem as a lot of our competitors are clearly guessing and hoping that as they quote a 5 year fixed rate term loan at 5.75 or 6.25 when prime is over 8 they clearly are betting that that yield curve is going to change and that rates odds is going to come down. I think that, you know, what are the odds that the yield curve is going to be flat a year from now? I guess if we all knew the answer to that we would probably all be happy, but it is probably going to change somewhat, but I don’t think that these other banks are positioned to continue to make these bets over and over again. But they could and we are planning for that. The way we plan for that is to continue to stick to our heading and say we’re still able to grow, we’re still able to get into business because the service levels and the relationship building that we are building our bank on, we still lead the pack in that and we always will. You know that’s what we’re all about, it just makes it a more difficult environment for us to operate in. Eric Grubelich – Keefe, Bruyette & Woods., Inc.: OK. And then a question for Chuck related to the margin. Chuck, generally speaking, if you could weight it a little bit, or weight the answer a little bit that I’m going to ask you in this question. When you look back at the margin this past year, in your mind giving your unique funding structure that is more wholesale oriented than a typical bank, when you look at where the margin compression is then, roughly how much of it would you say is due to some competition on the pricing of the loans versus the general impact of the yield curve, in your relationship with your client based loans and your funding? Charles E. Christmas: Yeah I think that you know certainly a vast majority is just timing. It is just our cost of funds catching up as we place down the fixed rate liabilities that we have. I don’t know how to venture a guess to that answer…10 or 20% would just be my guess on that. I mean we certainly never tried to put a pencil and a calculator to it. Eric Grubelich – Keefe, Bruyette & Woods., Inc.: But typically you have a … being more of a prime based lender and again, given the structure of your liabilities, you’ve got a natural spread between prime and wholesale borrowing. I guess it sounds to me what you are describing on those roll-rates in the next couple of quarters and the second half, if the market really doesn’t move, you shouldn’t be getting a lot more pressure after the first, maybe the second quarter, from the funding side of the equation. Charles E. Christmas: Correct. Eric Grubelich – Keefe, Bruyette & Woods., Inc.: OK, so the competition on price is more the big question, whether that persists or not as Mike was talking about.

Certainly you and I can do the number crunching to figure out just the re-pricing and how that impacts the margins, but certainly the wild card is going to be not only the competitiveness but we talk about certainty the shape of the yield curve as well. Things are pretty much the same regardless of the term we take, certainly right now. So, there is not really a lot you can do from a managing standpoint of trying to help the curve margin, but certainly what we do and as we do in any rate environment at any time is look at our balance sheet for the next 12, 18, and 24 months and try to position the balance sheet to take into account any changes in the interest rate environment itself. We are certainly looking out into the future and trying to position the balance sheet appropriately. Eric Grubelich – Keefe, Bruyette & Woods., Inc.: And one last question for Jerry. Jerry, have you, or has the board looked at what the non-lender bonus bogey is for next year yet? Gerald Johnson: Yes, we are looking right now … actually in the process of looking at our total bonus plan both for non-lenders and lenders and I am going out for purpose to discuss not with any fervor, but we certainly are sensitive to not paying a bonus we also are sensitive to paying a bonus if we are not producing for out investors so we are trying to balance both of those and come up with a plan that we feel is fair to our shareholders at the same time recognizes outstanding performance of our employees. Eric Grubelich – Keefe, Bruyette & Woods., Inc.: Sure, thanks and thanks for all of the candid answers to the questions, we appreciate it. Operator: Thank you. Ladies and gentlemen a reminder if you would like to ask a question at this time please press *1 on your telephone keypad. Our next question is from Steve Covington with Steven Capital. Please state your question. Steve Covington - Steven Capital: Good morning guys. All of my questions have been answered I just have one question out of curiosity. Bob you mentioned the HSA product that you have begun to get some traction in, I was wondering if you could maybe give a little bit of color to the opportunities you see there and I wasn’t sure if I heard exactly the number of accounts of balances and what that could end becoming for you guys. Robert B. Kaminski: Yes, Steve this is something that we really took great initiative on in 2006. The new product, as people in the community are just becoming aware of what this product can do for them and as well as employers, so we’ve really established a great relationship with one of the large employers in this area for the latter half of 2006. A lot have put a big push on it. We opened the last couple months of the year about 700 new HSA accounts. These accounts are still in the process of funding as we speak. But, within those 700 accounts are 700 new customers that present some pristine opportunities some other chances to get them to know Mercantile bank, many of whom, you know bank with us, so they are brand new customers, especially most of the employers as well as all of the individuals with retaining accounts. So, there are numerous opportunities then with this product and we see this as something that we will continue to really emphasize to our staff and look for opportunities throughout their talking to businesses and seeing what types of plans they have for health insurance for their employees. So, this has been a real nice pride for us and we will continue to stress as we go into ‘07. Steve Covington - Steven Capital: And isn’t the opening cycle for these accounts typically in January? And would you expect that number to get bigger just even from those couple of relationships you have? Robert B. Kaminski: Yeah, absolutely. Obviously the timing on these things is typically around year end, but as you go throughout the years establishing new relationships with other employers…look to start to fund these accounts as we go through the year and as I mentioned I think we are able to double our HSA accounts through the latter half of the year with this other relationships. So, there are great possibilities there and it is one that I think that people continue to gain awareness on and the more they do the more opportunities will be out there. Steve Covington - Steven Capital: OK, thanks. Robert B. Kaminski: Thanks, Steve. Operator: Our next question is from Steven Gayain with Stifel Nicolaus. Please state your question. Steven Gayain – Stifel Nicolaus: Good morning. Just a couple of questions, I apologize if these have been answered already, I was a little bit late to the call, but as far as asset sensitivity are you still asset sensitive and as rates would go down 25 say basis points over the next few months what impact would that have on the margin? Charles E. Christmas: Hey Steven, this is Chuck. We are pretty well matched kind of regardless of what the interest rate environment does. We do expect as we talk about our margin to go down a little bit just from some of the re-pricing. As far as the GAAP terminology of asset sensitive, liability sensitive, in the short haul we are asset…we remain asset sensitive. We still have excluding caps right now, about 70% of our loans, almost 70% of our loans are still tied to prime. If you factor in the caps, you look at a potential increase in the interest rate environment, our floating rate loans are probably in the low 50%, so that would certainly have an impact. So in the short term we are definitely still asset sensitive, but if you start lengthening that out over a 12 month period say, then we have a lot of the fixed rate CD products and other things that come into play and then we are probably a little more liability sensitive out for a whole year. Steven Gayain – Stifel Nicolaus: OK, and also with loan growth, you said the pipeline, it looks pretty good. Can you kind of break that down by geography, where you’re seeing the positive growth?

Yeah, this is Mike. I think we are seeing it all across the board. Lansing was particularly strong for us last year and may continue to indicate that they’ve got a lot of really good stuff in the pipeline, if you will. Grand Rapids, of course is always very strong for us, even Holland and Ann Arbor were a little softer than they would have liked last year are showing some good activity levels. So, I don’t really look at any one area to take a disproportionate lead into it, but we’ve got some good stuff going on in all the markets. Steven Gayain – Stifel Nicolaus: Ok and last question. As far as expenses for 2007, where do you see that going?

As far as the overhead? OK, we didn’t do a lot of hiring and facility expansion in 2006 certainly not to the degree we did in 2005 we certainly have budgeted for some additional staff members in 2007, probably along similar lines to what we did throughout 2006. As Bob mentioned we are scheduled to open up our new Lansing facility in the springtime. That will add in a little bit of overhead costs. Those facility costs will be more expensive than the current lease of completing what we are in now, but I would say overall we are not looking for some significant increases in overhead costs for 2007 over 2006 Steven Gayain – Stifel Nicolaus: OK, thank you.

Thank you. Our next question is from Terry McEvoy with Oppenheimer. Please proceed with your question Terry J. McEvoy – Oppenheimer: Just curious on the statement on the press release about the margin challenges three folds. One being the uncertainty associated with the direction of rates. Is that being driven being by your customer base, maybe unwillingness to put on the new load, or is it just internally trying to hedge your interest rate position given the uncertainty that you’re seeing?

Terry I think that it is probably all of the above. I think as we imagine in the press releases. You know there is a lot of uncertainty just in the whole market place with what the rate environment is going to be in sixth months from now or twelve months from now. Certainly with the flat inverted yield curve, the buy margin, meaning the long term rates, the environment is certainly is looking at the fact to start cutting rates. You know, you read the press release from the Fed, you look at the comments they make in their regular speeches and it doesn’t look like, at least to us, that the Fed is going to start cutting short term rates anytime soon. And that just causes a lot of confusion and questioning, not only on our part but for our customers, deposits, and borrowers alike. Who knows what is going to happen and in trying to manage that whether the bank or whether that is our customers, just provides some difficulty in the expectations and what to do with them. Terry J. McEvoy – Oppenheimer: Ok and just a question for Jerry. I think it was in November you mentioned in a conference, willingness from acquisitions and do you see the bank maybe putting that growth strategy on hold until some of the challenges that you’ve been very up front today discussing until those challenges possibly ease, or do you think an acquisition is completely separate from the margin challenges etc.? Charles E. Christmas: I think they’re very much tied together Terry, and you know certainly if we had an opportunity in another market either through acquisition or takeover. I think the four of us would have to take a look at it, but we do not have any plans at this time but do anything except continue to grow the markets that we’re in and make sure we have our asset quality numbers where we want them and work with the pressures were going to have on spreading margin. So, it would take a very unique situation, I believe, for us to go into any other markets this coming year. Now, that being said, certainly going forward in 2008-2009, whatever, we want to be able to take a look. But, I think you’re very accurate in this question because I think for this year we are really going to concentrate on the markets that we’re in. Terry J. McEvoy – Oppenheimer: Appreciate it, thank you.

Thank you. Our next question is from Jon G. Arfstrom from RBC Capital Markets. Jon G. Arfstrom – RBC Capital Markets: Good morning guys. Sorry to be late for the call here but I’ve got a couple of questions. Chuck, do you know what the bonus expense would have been had you hit the 15% growth? Charles E. Christmas: It’s about $2.9 million. Jon G. Arfstrom – RBC Capital Markets: Is that something that you would typically accrue in the first quarter? Charles E. Christmas: Yeah, what we do is, formally on a quarterly basis where we certainly look at a monthly basis, is we look at our historical performance within that given year, we project internally what we think is going to happen for the rest of the year and make an appropriate accrual based on the historical numbers as well as our expectation. You know, the bonus is not all or nothing, it does provide us with a pro-rata payment so our accrual could be adjusted for that. Jon G. Arfstrom – RBC Capital Markets: OK, but the $2.9 million, you’re saying was the full bonus number. Charles E. Christmas: If we had our full bonus for 2006, yes that is the expense that would extend flowed through. Jon G. Arfstrom – RBC Capital Markets: OK, so what was the number that actually flowed through for the full year. Charles E. Christmas: The full year for the non-linear bonds program was zero. Jon G. Arfstrom – RBC Capital Markets: Zero, OK, great. Charles E. Christmas: Easy for you to say. Jon G. Arfstrom – RBC Capital Markets: Well, I was going to make a comment offline that having a bonus accrual at lower than 15% is definitely acceptable in this type of environment, we can talk about that offline. The long growth outlook, I know we’ve talked about this quite a bit, but do you feel is it stable? Is it decelerating? Can you get, you know we have a 2.1% sequential growth number and that’s down two quarters in a row. Can that move back up early in ’07?

Yeah, I think it can Jon, it’s Mike. I think you know we’ve got some good stuff out there, that delightful wildcard is that we’ve had some unusual success with some large payoffs in the fourth quarter because, in many cases we had some large real estate deals that were, our customers did really well on and they sold them and that got paid off. But that’s pretty unusual for us, I think it’s very very possible that we get back to the normal number for us anyways which is pretty robust long growth. Jon G. Arfstrom – RBC Capital Markets: OK, so if you really, if you strip all this to its core, you really have, potentially a couple of quarters in margin pressure, and maybe long growth is not quite at your historical level but still relatively strong. But it seems like when you strip it to its core, the margin is really the issue in early ’07, is that fair?

Yeah definitely, you’re right on Jon, especially with making comparisons to 2006. Jon G. Arfstrom – RBC Capital Markets: OK, OK, and then Jerry, just one question for you. I hope you don’t take it the wrong way because there’s no hidden agenda here, but are you satisfied with the results for the year given the environment. I know we touched on the phone this issue and its somewhat of a sensitive topic for everyone. But given the environment, are you satisfied with the year and are you generally optimistic for ’07?

I don’t think any of us are what you would say satisfied when you compare our performance this year which is by your standards is still very good. Am I satisfied by the way our employees perform and the way our management team performed? Absolutely, we faced a lot of challenges this year. Yield curves, some loans made by some people that the loans shouldn’t have been made. And this isn’t making excuses, but you know would I have liked to have seen earnings per share increase of 15% and a full bonus payout, absolutely. Would I have liked to have seen, and that’s just for the four of us sitting here. I’m talking about bonuses for the people who work so hard everyday to make such a great organization. But, am I satisfied with the way that our people responded and the way we met the challenges, absolutely, I’d match this group against anybody I’ve ever worked with. So, I’d like to see better numbers, but I’m very pleased with the way our team performed. And that’s kind of the answer Jon. You’d have to divide it up into two parts I guess. Jon G. Arfstrom – RBC Capital Markets: OK, alright, thank you.

Thank you, gentleman we have no further questions.

Alright, if that’s the case thank you all very much for dialing in. That concludes the conference.

Thank you, sir. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time, thank you all for your participation and have a wonderful day.