##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 001-32434
 
 MERCANTILE BANCORP, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware
(State or other jurisdiction of 
Incorporation or organization)
    
    37-1149138
(I.R.S. Employer
Identification No.)
 200 North 33rd Street
Quincy, ILLINOIS 62301
(Address of principal executive offices including zip code)
 (217) 223-7300
(Registrants telephone number, including area code)
 
  þ o
 o o
  o Large Accelerated Filer
o Accelerated Filer
þ Non-Accelerated Filer(Do not check if a smaller reporting company)
o Smaller Reporting Company
 o þ




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##### 



MERCANTILE BANCORP, INC.
 FORM 10-Q
 TABLE OF CONTENTS
 PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-18Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18-44Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    44PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 1A.
    
    Risk Factors
    
    
    45-46Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46-47Item 3.
    
    Defaults Upon Senior Securities
    
    
    47Item 5.
    
    Other Information
    
    
    47Item 6.
    
    Exhibits
    
    
    47Signatures
    
    
    48ExhibitsSection 302 CertificationsSection 906 Certifications
  2




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements .
 
 MERCANTILE BANCORP, INC.
Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)AssetsCash and due from banks
    
    $
    9,054
    
    
    $
    8,606Interest-bearing demand deposits
    
    
    60,092
    
    
    
    94,623Federal funds sold
    
    
    10,058
    
    
    
    18,038Cash and cash equivalents
    
    
    79,204
    
    
    
    121,267Available-for-sale securities
    
    
    122,694
    
    
    
    128,150Held-to-maturity securities (fair values of $1,829 and $2,411)
    
    
    1,749
    
    
    
    2,334Loans held for sale
    
    
    2,199
    
    
    
    681Loans, net of allowance for loan losses of $22,608 and $18,851
    
    
    701,204
    
    
    
    757,138Interest receivable
    
    
    3,720
    
    
    
    3,962Foreclosed assets held for sale, net
    
    
    24,700
    
    
    
    16,409Federal Home Loan Bank stock
    
    
    2,905
    
    
    
    2,900Cost method investments in common stock
    
    
    1,392
    
    
    
    1,392Deferred income taxes
    
    
    11,425
    
    
    
    10,212Mortgage servicing rights
    
    
    889
    
    
    
    885Cash surrender value of life insurance
    
    
    15,288
    
    
    
    15,011Premises and equipment, net
    
    
    24,767
    
    
    
    25,670Core deposit and other intangibles
    
    
    986
    
    
    
    1,066Other assets
    
    
    15,670
    
    
    
    17,413Discontinued operations, assets held for sale
    
    
    
    
    
    
    285,992Total assets
    
    $
    1,008,792
    
    
    $
    1,390,482LiabilitiesDepositsDemand
    
    $
    58,650
    
    
    $
    108,318Savings, NOW and money market
    
    
    253,464
    
    
    
    251,030Time
    
    
    443,986
    
    
    
    421,412Brokered time
    
    
    112,073
    
    
    
    173,764Total deposits
    
    
    868,173
    
    
    
    954,524Short-term borrowings
    
    
    13,823
    
    
    
    30,740Long-term debt
    
    
    15,000
    
    
    
    25,172Junior subordinated debentures
    
    
    61,858
    
    
    
    61,858Interest payable
    
    
    5,461
    
    
    
    4,114Other liabilities
    
    
    4,682
    
    
    
    4,827Discontinued operations, liabilities held for sale
    
    
    
    
    
    
    264,044Total liabilities
    
    
    968,997
    
    
    
    1,345,279Commitments and Contingent Liabilities (Note 10)EquityMercantile Bancorp, Inc. stockholders equityCommon stock, $0.42 par value; authorized 14,000,000 shares;Issued  8,887,113 shares at June 30, 2010 and December 31, 2009Outstanding  8,703,330 shares at June 30, 2010 and December 31, 2009
    
    
    3,629
    
    
    
    3,629Additional paid-in capital
    
    
    11,919
    
    
    
    11,919Retained earnings
    
    
    21,604
    
    
    
    25,095Accumulated other comprehensive income
    
    
    3,148
    
    
    
    2,95440,300
    
    
    
    43,597Treasury stock, at costCommon; 183,783 shares at June 30, 2010 and December 31, 2009
    
    
    (2,295
    )
    
    
    (2,295
    )Total
 Mercantile Bancorp, Inc. stockholders equity
    
    
    38,005
    
    
    
    41,302Noncontrolling interest
    
    
    1,790
    
    
    
    3,901Total equity
    
    
    39,795
    
    
    
    45,203Total liabilities and equity
    
    $
    1,008,792
    
    
    $
    1,390,482
  3




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##### Table of Contents



MERCANTILE BANCORP, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 Three months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Interest and Dividend IncomeLoansTaxable
    
    $
    9,759
    
    
    $
    11,150
    
    
    $
    19,761
    
    
    $
    22,381Tax exempt
    
    
    236
    
    
    
    173
    
    
    
    472
    
    
    
    346SecuritiesTaxable
    
    
    926
    
    
    
    1,119
    
    
    
    1,896
    
    
    
    2,302Tax exempt
    
    
    296
    
    
    
    236
    
    
    
    506
    
    
    
    480Federal funds sold
    
    
    7
    
    
    
    3
    
    
    
    15
    
    
    
    8Dividends on Federal Home Loan Bank Stock
    
    
    3
    
    
    
    4
    
    
    
    7
    
    
    
    9Deposits with financial institutions and other
    
    
    40
    
    
    
    80
    
    
    
    118
    
    
    
    152Total interest and dividend income
    
    
    11,267
    
    
    
    12,765
    
    
    
    22,775
    
    
    
    25,678Interest ExpenseDeposits
    
    
    3,888
    
    
    
    5,683
    
    
    
    8,059
    
    
    
    12,014Short-term borrowings
    
    
    50
    
    
    
    619
    
    
    
    237
    
    
    
    1,169Long-term debt and junior subordinated debentures
    
    
    1,045
    
    
    
    1,236
    
    
    
    2,058
    
    
    
    2,442Total interest expense
    
    
    4,983
    
    
    
    7,538
    
    
    
    10,354
    
    
    
    15,625Net Interest Income
    
    
    6,284
    
    
    
    5,227
    
    
    
    12,421
    
    
    
    10,053Provision for Loan Losses
    
    
    7,150
    
    
    
    9,518
    
    
    
    11,140
    
    
    
    12,303Net Interest Income After Provision For Loan Losses
    
    
    (866
    )
    
    
    (4,291
    )
    
    
    1,281
    
    
    
    (2,250
    )Noninterest IncomeFiduciary activities
    
    
    582
    
    
    
    568
    
    
    
    1,163
    
    
    
    1,136Brokerage fees
    
    
    357
    
    
    
    247
    
    
    
    656
    
    
    
    440Customer service fees
    
    
    418
    
    
    
    417
    
    
    
    783
    
    
    
    782Other service charges and fees
    
    
    230
    
    
    
    133
    
    
    
    369
    
    
    
    240Net gains on loan sales
    
    
    126
    
    
    
    372
    
    
    
    218
    
    
    
    889Loan servicing fees
    
    
    123
    
    
    
    114
    
    
    
    247
    
    
    
    227Net increase in cash surrender value of life insurance
    
    
    139
    
    
    
    135
    
    
    
    277
    
    
    
    258Other
    
    
    225
    
    
    
    101
    
    
    
    412
    
    
    
    107Total noninterest income
    
    
    2,200
    
    
    
    2,087
    
    
    
    4,125
    
    
    
    4,079Noninterest ExpenseSalaries and employee benefits
    
    
    4,289
    
    
    
    4,338
    
    
    
    8,694
    
    
    
    8,802Net occupancy expense
    
    
    626
    
    
    
    591
    
    
    
    1,224
    
    
    
    1,191Equipment expense
    
    
    606
    
    
    
    631
    
    
    
    1,169
    
    
    
    1,216Deposit insurance premium
    
    
    601
    
    
    
    1,088
    
    
    
    1,072
    
    
    
    1,698Professional fees
    
    
    465
    
    
    
    986
    
    
    
    956
    
    
    
    1,545Postage and supplies
    
    
    127
    
    
    
    125
    
    
    
    275
    
    
    
    301Losses (gains) on sales of assets, net
    
    
    
    
    
    
    1
    
    
    
    (8
    )
    
    
    11Losses on foreclosed assets, net
    
    
    170
    
    
    
    1,453
    
    
    
    382
    
    
    
    1,555Other than temporary losses on available-for-sale
securities and cost method investments
    
    
    566
    
    
    
    2,546
    
    
    
    566
    
    
    
    2,546Goodwill impairment losses
    
    
    
    
    
    
    30,417
    
    
    
    
    
    
    
    30,417Amortization of mortgage servicing rights
    
    
    40
    
    
    
    138
    
    
    
    79
    
    
    
    341Other
    
    
    1,357
    
    
    
    1,372
    
    
    
    2,846
    
    
    
    2,610Total noninterest expense
    
    
    8,847
    
    
    
    43,686
    
    
    
    17,255
    
    
    
    52,233Loss from Continuing Operations Before Income Taxes
    
    
    (7,513
    )
    
    
    (45,890
    )
    
    
    (11,849
    )
    
    
    (50,404
    )Income Tax Benefit
    
    
    (1,847
    )
    
    
    (5,666
    )
    
    
    (3,037
    )
    
    
    (7,350
    )Loss from Continuing Operations
    
    
    (5,666
    )
    
    
    (40,224
    )
    
    
    (8,812
    )
    
    
    (43,054
    )Discontinued OperationsIncome (loss) from discontinued operations (including
gain on sale in 2010 of $4,257), net of income tax
expense of $1,047 and $1,507, respectively
    
    
    13
    
    
    
    (12,460
    )
    
    
    3,210
    
    
    
    (10,795
    )Net Loss
    
    
    (5,653
    )
    
    
    (52,684
    )
    
    
    (5,602
    )
    
    
    (53,849
    )Less: Net loss attributable to the
Noncontrolling interest
    
    
    (1,178
    )
    
    
    (638
    )
    
    
    (2,111
    )
    
    
    (927
    )Net Loss attributable to Mercantile Bancorp, Inc.
    
    $
    (4,475
    )
    
    $
    (52,046
    )
    
    $
    (3,491
    )
    
    $
    (52,922
    )Weighted Average Shares Outstanding
    
    
    8,703,330
    
    
    
    8,703,330
    
    
    
    8,703,330
    
    
    
    8,703,330Basic Earnings (Loss) Per ShareContinuing operations
    
    $
    (0.51
    )
    
    $
    (4.55
    )
    
    $
    (0.77
    )
    
    $
    (4.84
    )Discontinued operations
    
    $
    
    
    
    $
    (1.43
    )
    
    $
    0.37
    
    
    $
    (1.24
    )
  4




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##### Table of Contents



MERCANTILE BANCORP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
 (Unaudited)
 Six Months Ended June 30
    
    2010
    
    
    2009Operating ActivitiesNet loss before attribution of noncontrolling interest
    
    $
    (5,602
    )
    
    $
    (53,849
    )Net loss attributable to noncontrolling interest
    
    
    (2,111
    )
    
    
    (927
    )Net income (loss) attributable to Mercantile Bancorp, Inc.
    
    
    (3,491
    )
    
    
    (52,922
    )Items not requiring (providing) cashDepreciation
    
    
    906
    
    
    
    1,380Provision for loan losses
    
    
    11,140
    
    
    
    13,145Amortization (accretion) of premiums and discounts on securities
    
    
    319
    
    
    
    96Amortization (depreciation) of core deposit intangibles and other purchase
accounting adjustments
    
    
    79
    
    
    
    (9
    )Deferred income taxes
    
    
    (860
    )
    
    
    (3,699
    )Other-than-temporary losses on available-for-sale and cost method investments
    
    
    566
    
    
    
    2,546Losses on foreclosed assets
    
    
    382
    
    
    
    1,613Gains on loan sales
    
    
    (226
    )
    
    
    (1,441
    )Recovery of mortgage servicing rights
    
    
    
    
    
    
    (244
    )Amortization of mortgage servicing rights
    
    
    79
    
    
    
    354(Gain) on sale of Marine Bank & Trust and Brown County State Bank
    
    
    (4,257
    )
    
    
    (Gains) Losses on sale of premises and equipment
    
    
    (8
    )
    
    
    14Federal Home Loan Bank stock dividends
    
    
    (5
    )
    
    
    (6
    )Net increase in cash surrender value of life insurance
    
    
    (316
    )
    
    
    (511
    )Goodwill impairment
    
    
    
    
    
    
    44,650Changes inLoans originated for sale
    
    
    (18,855
    )
    
    
    (100,033
    )Proceeds from sales of loans
    
    
    17,473
    
    
    
    101,535Interest receivable
    
    
    262
    
    
    
    1,486Other assets
    
    
    1,463
    
    
    
    3,342Interest payable
    
    
    1,342
    
    
    
    363Other liabilities
    
    
    (174
    )
    
    
    2,541Noncontrolling interest in subsidiary
    
    
    (2,111
    )
    
    
    (927
    )Net cash provided by operating activities
    
    
    3,708
    
    
    
    13,273Investing ActivitiesCash paid in acquisition of HNB Financial, net of cash received
    
    
    
    
    
    
    3Cash received from sales of Marine Bank & Trust and Brown County State Bank
    
    
    14,585
    
    
    
    Purchases of available-for-sale securities
    
    
    (14,152
    )
    
    
    (30,856
    )Proceeds from maturities of available-for-sale securities
    
    
    21,208
    
    
    
    29,301Proceeds from maturities of held-to-maturity securities
    
    
    678
    
    
    
    1,714Net change in loans
    
    
    31,364
    
    
    
    23,520Purchases of premises and equipment
    
    
    (30
    )
    
    
    (378
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (80
    )Proceeds from sales of Federal Home Loan Bank stock
    
    
    
    
    
    
    718Proceeds from sales of foreclosed assets
    
    
    8,022
    
    
    
    739Purchase of bank-owned life insurance
    
    
    
    
    
    
    (1,000
    )Net cash provided by investing activities
    
    
    61,675
    
    
    
    23,681Financing ActivitiesNet increase (decrease) in demand deposits, money market, NOW and savings accounts
    
    
    (54,524
    )
    
    
    34,808Net (decrease) in time and brokered time deposits
    
    
    (38,742
    )
    
    
    (70,274
    )Net increase (decrease) in short-term borrowings
    
    
    (6,132
    )
    
    
    20,684Net increase in long-term debt
    
    
    
    
    
    
    500Repayments of long-term debt
    
    
    (10,172
    )
    
    
    (11,500
    )Net cash used in financing activities
    
    
    (109,570
    )
    
    
    (25,782
    )Increase (Decrease) In Cash and Cash Equivalents
    
    
    (44,187
    )
    
    
    11,172Cash and Cash Equivalents, Beginning of Period
    
    
    123,391
    
    
    
    89,821Cash and Cash Equivalents, End of Period
    
    $
    79,204
    
    
    $
    100,993Supplemental Cash Flows InformationInterest paid
    
    $
    10,146
    
    
    $
    20,849Income taxes paid (received)
    
    $
    (530
    )
    
    $
    (3,761
    )Real estate acquired in settlement of loans
    
    $
    16,693
    
    
    $
    2,146
  5




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##### Table of Contents



MERCANTILE BANCORP, INC.
 
 Notes to Condensed Consolidated Financial Statements
(table dollar amounts in thousands)
 1. BASIS OF PRESENTATION
    2. EARNINGS (LOSS) PER COMMON SHARE
  3. RECENT ACCOUNTING PRONOUNCEMENTS
 FASB ASC Topic 310, Receivables: Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses.
 FSAB ASC Topic 815, Derivatives and Hedging.
 FASB ASC Topic 820, Fair Value Measurements and Disclosures  Improving Disclosures about Fair
Value Measurements.
 6




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##### Table of Contents



FASB ASC Topic 860, Transfers and Servicing  Accounting for Transfers of Financial Assets.
 4. FEDERAL HOME LOAN BANK STOCK
  5. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale Securities:June 30, 2010:U.S. Government agencies
    
    $
    4,095
    
    
    $
    59
    
    
    $
    
    
    
    $
    4,154Mortgage-backed
securities:GSE
residential
    
    
    84,454
    
    
    
    2,422
    
    
    
    (62
    )
    
    
    86,814State and political
subdivisions
    
    
    27,461
    
    
    
    966
    
    
    
    (34
    )
    
    
    28,393Equity securities
    
    
    3,007
    
    
    
    326
    
    
    
    
    
    
    
    3,333$
    119,017
    
    
    $
    3,773
    
    
    $
    (96
    )
    
    $
    122,694December 31, 2009:Mortgage-backed
securities:GSE
residential
    
    $
    92,710
    
    
    $
    2,789
    
    
    $
    (145
    )
    
    $
    95,354State and political
subdivisions
    
    
    28,525
    
    
    
    1,019
    
    
    
    (5
    )
    
    
    29,539Equity securities
    
    
    3,603
    
    
    
    162
    
    
    
    (508
    )
    
    
    3,257$
    124,838
    
    
    $
    3,970
    
    
    $
    (658
    )
    
    $
    128,150
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueHeld-to-maturity Securities:June 30, 2010:Mortgage-backed
securities:GSE
residential
    
    $
    1,749
    
    
    $
    80
    
    
    $
    
    
    
    $
    1,829December 31, 2009:Mortgage-backed
securities:GSE
residential
    
    $
    2,334
    
    
    $
    77
    
    
    $
    
    
    
    $
    2,411
 7




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##### Table of Contents



Available-for-sale
    
    
    Held-to-maturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueWithin one year
    
    $
    3,640
    
    
    $
    3,669
    
    
    $
    
    
    
    $
    One to five years
    
    
    17,770
    
    
    
    18,615
    
    
    
    
    
    
    
    Five to ten years
    
    
    10,146
    
    
    
    10,263
    
    
    
    
    
    
    
    After ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,556
    
    
    
    32,547
    
    
    
    
    
    
    
    Mortgage-backed
securities:GSE
residential
    
    
    84,454
    
    
    
    86,814
    
    
    
    1,749
    
    
    
    1,829Equity securities
    
    
    3,007
    
    
    
    3,333
    
    
    
    
    
    
    
    Totals
    
    $
    119,017
    
    
    $
    122,694
    
    
    $
    1,749
    
    
    $
    1,829
    Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalDescription of
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedSecurities
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesJune 30, 2010Mortgage-backed securities:GSE
residential
    
    $
    4,698
    
    
    $
    (62
    )
    
    $
    21
    
    
    $
    
    
    
    $
    4,719
    
    
    $
    (62
    )State and political subdivisions
    
    
    1,182
    
    
    
    (34
    )
    
    
    180
    
    
    
    
    
    
    
    1,362
    
    
    
    (34
    )Equity securities
    
    
    1,009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,009
    
    
    
    Total temporarily
impaired securities
    
    $
    6,889
    
    
    $
    (96
    )
    
    $
    201
    
    
    $
    
    
    
    $
    7,090
    
    
    $
    (96
    )December 31, 2009Mortgage-backed securities:GSE
residential
    
    $
    12,518
    
    
    $
    (145
    )
    
    $
    92
    
    
    $
    
    
    
    $
    12,610
    
    
    $
    (145
    )State and political subdivisions
    
    
    1,831
    
    
    
    (5
    )
    
    
    182
    
    
    
    
    
    
    
    2,013
    
    
    
    (5
    )Equity securities
    
    
    2,839
    
    
    
    (508
    )
    
    
    
    
    
    
    
    
    
    
    2,839
    
    
    
    (508
    )Total temporarily impaired
securities
    
    $
    17,188
    
    
    $
    (658
    )
    
    $
    274
    
    
    $
    
    
    
    $
    17,462
    
    
    $
    (658
    )
  8




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##### Table of Contents



6. COST METHOD INVESTMENTS IN COMMON STOCK
   7. FAIR VALUE MEASUREMENT
   Level 1
    
    Valuations for assets and liabilities traded in active exchange markets,
such as the New York Stock Exchange. Valuations are obtained from readily available
pricing sources for market transactions involving identical assets or liabilities.Level 2
    
    Valuations for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing services for identical or
comparable assets or liabilities which use observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.Level 3
    
    Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
 Recurring Basis
  Available-for-sale securities
 9




---



##### Table of Contents



Fair Value Measurements UsingQuotes Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsFair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)June 30, 2010U.S. Government agencies
    
    $
    4,154
    
    
    $
    
    
    
    $
    4,154
    
    
    $
    Mortgage-backed
securities:GSE
residential
    
    
    86,814
    
    
    
    
    
    
    
    86,814
    
    
    
    State and political
subdivisions
    
    
    28,393
    
    
    
    
    
    
    
    28,393
    
    
    
    Equity securities
    
    
    3,333
    
    
    
    3,236
    
    
    
    
    
    
    
    97$
    122,694
    
    
    $
    3,236
    
    
    $
    119,361
    
    
    $
    97
 Fair Value Measurements UsingQuotes Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsFair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)December 31, 2009Mortgage-backed
securities:GSE
residential
    
    $
    95,354
    
    
    $
    
    
    
    $
    95,354
    
    
    $
    State and political
subdivisions
    
    
    29,539
    
    
    
    
    
    
    
    29,500
    
    
    
    39Equity securities
    
    
    3,257
    
    
    
    3,161
    
    
    
    
    
    
    
    96$
    128,150
    
    
    $
    3,161
    
    
    $
    124,854
    
    
    $
    135
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30
    
    
    June 302010
    
    
    2009
    
    
    2010
    
    
    2009Beginning balance
    
    $
    
    
    
    $
    1,944
    
    
    $
    135
    
    
    $
    2,006Total realized and unrealized
gains and losses:Included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other
comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchases, issuances and settlements
    
    
    
    
    
    
    497
    
    
    
    (38
    )
    
    
    (559
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, June 30
    
    $
    
    
    
    $
    1,447
    
    
    $
    97
    
    
    $
    1,447Total gains or losses for the
period included in net income
attributable to the change in
unrealized gains or losses related
to assets and liabilities still
held at the reporting date
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Nonrecurring Basis
  10




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##### Table of Contents



Impaired loans
  Foreclosed Assets Held for Sale
 Mortgage Servicing Rights
 Cost Method Investments
  Fair Value Measurements UsingQuotes Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Carrying value at June 30, 2010Impaired loans
    
    $
    23,661
    
    
    $
    
    
    
    $
    
    
    
    $
    23,661Foreclosed assets held for sale
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    65Mortgage servicing rights
    
    
    889
    
    
    
    
    
    
    
    
    
    
    
    889
 Fair Value Measurements UsingQuotes Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Carrying value at December 31, 2009Impaired loans
    
    $
    44,142
    
    
    $
    
    
    
    $
    
    
    
    $
    44,142Foreclosed assets held for sale
    
    
    885
    
    
    
    
    
    
    
    
    
    
    
    885Mortgage servicing rights
    
    
    1,331
    
    
    
    
    
    
    
    
    
    
    
    1,331Cost method investments
    
    
    5,409
    
    
    
    
    
    
    
    
    
    
    
    5,409
  11




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##### Table of Contents



June 30, 2010
    
    December 31, 2009Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFinancial assetsCash and cash equivalents
    
    $
    79,204
    
    
    $
    79,204
    
    
    $
    121,267
    
    
    $
    121,267Available-for-sale securities
    
    
    122,694
    
    
    
    122,694
    
    
    
    128,150
    
    
    
    128,150Held-to-maturity securities
    
    
    1,749
    
    
    
    1,829
    
    
    
    2,334
    
    
    
    2,441Loans held for sale
    
    
    2,199
    
    
    
    2,199
    
    
    
    681
    
    
    
    681Loans, net of allowance for loan losses
    
    
    701,204
    
    
    
    717,944
    
    
    
    757,138
    
    
    
    757,721Federal Home Loan Bank stock
    
    
    2,905
    
    
    
    2,905
    
    
    
    2,900
    
    
    
    2,900Cost method investments in common stock
    
    
    1,392
    
    
    
    1,392
    
    
    
    1,392
    
    
    
    1,392Interest receivable
    
    
    3,720
    
    
    
    3,720
    
    
    
    3,962
    
    
    
    3,962Financial liabilitiesDeposits
    
    
    868,173
    
    
    
    864,441
    
    
    
    954,524
    
    
    
    952,611Short-term borrowings
    
    
    13,823
    
    
    
    13,823
    
    
    
    30,740
    
    
    
    30,740Long-term debt and junior subordinated
debentures
    
    
    76,858
    
    
    
    46,674
    
    
    
    87,030
    
    
    
    56,368Interest payable
    
    
    5,461
    
    
    
    5,461
    
    
    
    4,114
    
    
    
    4,114Unrecognized financial instruments (net
of contract amount)Commitments to originate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lines of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Cash and Cash Equivalents, Federal Home Loan Bank Stock, Interest Receivable, and Cost Method
Investments in Common Stock 
 Held-to-Maturity Securities 
 Loans Held for Sale 
 Loans 
 Deposits 
 Short-Term Borrowings and Interest Payable 
 Long-Term Debt and Junior Subordinated Debentures 
 Commitments to Originate Loans, Letters of Credit, and Lines of Credit 
 12




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##### Table of Contents



8. INCOME TAXES
  June 30,
    
    
    December 31,2010
    
    
    2009Computed at the statutory rate (35%)
    
    $
    (4,147
    )
    
    $
    (1,580
    )Increase (decrease) resulting fromGraduated tax rates
    
    
    118
    
    
    
    45Tax exempt income
    
    
    (318
    )
    
    
    (136
    )State income taxes
    
    
    (576
    )
    
    
    (2
    )Increase in cash surrender value of life insurance
    
    
    (94
    )
    
    
    (42
    )Changes in the deferred tax asset valuation allowance
    
    
    1,965
    
    
    
    Other
    
    
    15
    
    
    
    30Actual tax expense (benefit)
    
    $
    (3,037
    )
    
    $
    (1,685
    )
 13




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##### Table of Contents



June 30,
    
    
    December 31,2010
    
    
    2009Deferred tax assetsAllowance for loan losses
    
    $
    8,315
    
    
    $
    6,885Accrued compensated absences
    
    
    121
    
    
    
    115Deferred compensation
    
    
    832
    
    
    
    759Accrued postretirement benefits
    
    
    141
    
    
    
    125Deferred loss on investments
    
    
    2,322
    
    
    
    2,050Capital loss carryforward on disposal of HNB
    
    
    4,057
    
    
    
    5,773Net operating loss carryforward
    
    
    5,272
    
    
    
    2,395Stock options
    
    
    111
    
    
    
    111Deferred loan fees
    
    
    65
    
    
    
    80Alternative minimum tax credits
    
    
    395
    
    
    
    149Other
    
    
    1,058
    
    
    
    1,02922,689
    
    
    
    19,471Deferred tax liabilitiesFederal Home Loan Bank stock dividends
    
    
    282
    
    
    
    277Depreciation
    
    
    507
    
    
    
    522State taxes
    
    
    574
    
    
    
    452Mortgage servicing rights
    
    
    343
    
    
    
    334Deferred gain on sale of BOLI policies
    
    
    
    
    
    
    770Unrealized gains on available-for-sale securities
    
    
    1,821
    
    
    
    1,161Purchase accounting adjustments
    
    
    62
    
    
    
    35Other
    
    
    120
    
    
    
    1183,709
    
    
    
    3,669Net deferred tax asset before valuation allowance
    
    
    18,980
    
    
    
    15,802Valuation allowanceBeginning balance
    
    $
    (5,590
    )
    
    $
    (Increase) decrease during the period
    
    
    (1,965
    )
    
    
    (5,590
    )Ending balance
    
    
    (7,555
    )
    
    
    (5,590
    )Net deferred tax asset
    
    $
    11,425
    
    
    $
    10,212
   9. DISCONTINUED OPERATIONS
  14




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##### Table of Contents



Cash and cash equivalents
    
    $
    4,343Available-for-sale securities
    
    
    39,306Held-to-maturity securities
    
    
    1,027Loans, net of allowance for loan losses of $1,183
    
    
    206,872Interest receivable
    
    
    2,300Federal Home Loan Bank stock
    
    
    1,574Premises and equipment
    
    
    3,698Other assets
    
    
    19,465Total assets disposed
    
    
    278,585Deposits
    
    
    232,330Long-term debt
    
    
    13,500Interest payable
    
    
    559Other liabilities
    
    
    10,469Total liabilities released
    
    
    256,858Net assets disposed
    
    $
    21,727
   Three Months Ended
    
    
    Six Months Ended2010
    
    
    2009
    
    
    2010
    
    
    2009Interest and dividend income
    
    $
    
    
    
    $
    8,343
    
    
    $
    2,206
    
    
    $
    16,637Interest expense
    
    
    
    
    
    
    2,696
    
    
    
    572
    
    
    
    5,589Net interest margin
    
    
    
    
    
    
    5,647
    
    
    
    1,634
    
    
    
    11,048Provision for loan loss
    
    
    
    
    
    
    447
    
    
    
    48
    
    
    
    842Noninterest income
    
    
    13
    
    
    
    1,623
    
    
    
    4,535
    
    
    
    2,870Noninterest expense
    
    
    
    
    
    
    18,709
    
    
    
    866
    
    
    
    22,606Net income (loss) before taxes
    
    
    13
    
    
    
    (11,886
    )
    
    
    5,255
    
    
    
    (9,530
    )Income tax expense
    
    
    
    
    
    
    574
    
    
    
    2,045
    
    
    
    1,265Net income
    
    $
    13
    
    
    $
    (12,460
    )
    
    $
    3,210
    
    
    $
    (10,795
    )
 10. OFF BALANCE SHEET CREDIT COMMITMENTS
   15




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11. COMPREHENSIVE LOSS
  For the Three MonthsEnded June 30,2010
    
    
    2009Net loss
    
    $
    (5,653
    )
    
    $
    (52,684
    )Other comprehensive income (loss):Unrealized appreciation (depreciation) on available-for-sale
securities:Unrealized appreciation (depreciation) on
available-for-sale securities, net of tax expense (benefit)
of $(279) for 2010 and $(282) for 2009
    
    
    (477
    )
    
    
    (536
    )Less reclassification adjustment for other than temporary
losses included in income net of tax expense (benefit) of
$(215) for 2010 and $(967) for 2009
    
    
    (351
    )
    
    
    (1,579
    )Total unrealized appreciation (depreciation) on
available-for-sale securities, net of tax expense (benefit)
of $(64) for 2010 and $(685) for 2009
    
    
    (126
    )
    
    
    1,043Adjustment of ASC 715 (formerly SFAS 158) liability, net of
tax expense (benefit) of $(10) for 2010 and $(12) for 2009
    
    
    17
    
    
    
    20Total other comprehensive income (loss), net of tax
    
    
    (109
    )
    
    
    1,063Comprehensive loss
    
    
    (5,762
    )
    
    
    (51,621
    )Comprehensive loss attributable to the noncontrolling interest
    
    
    (1,178
    )
    
    
    (638
    )Comprehensive loss attributable to Mercantile Bancorp, Inc.
    
    $
    (4,584
    )
    
    $
    (50,983
    )
 16




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##### Table of Contents



For the Six MonthsEnded June 30,2010
    
    
    2009Net loss
    
    $
    (5,602
    )
    
    $
    (53,849
    )Other comprehensive income (loss):Unrealized appreciation (depreciation) on available-for-sale
securities:Unrealized appreciation (depreciation) on
available-for-sale securities, net of tax expense of $(72)
for 2010 and $(464) for 2009
    
    
    (175
    )
    
    
    (654
    )Less reclassification adjustment for other than temporary
losses included in income net of tax benefit of $(215) for
2010 and $(967) for 2009
    
    
    (351
    )
    
    
    (1,579
    )Total unrealized appreciation (depreciation) on
available-for-sale securities, net of tax expense (benefit)
of $143 for 2010 and $503 for 2009
    
    
    176
    
    
    
    925Adjustment of SFAS 158 liability, net of tax expense of $(10)
for 2010 and $12 for 2009
    
    
    18
    
    
    
    20Total other comprehensive income, net of tax
    
    
    194
    
    
    
    945Comprehensive loss
    
    
    (5,409
    )
    
    
    (52,904
    )Comprehensive loss attributable to the noncontrolling interest
    
    
    (2,111
    )
    
    
    (927
    )Comprehensive loss attributable to Mercantile Bancorp, Inc.
    
    $
    (3,298
    )
    
    $
    (51,977
    )
 12. OPERATING AND LIQUIDITY MATTERS
      17




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13. SUBSEQUENT EVENTS
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Cautionary Notice Regarding Forward-looking Statements
  18




---



##### Table of Contents




    
    projections of revenues, income, earnings per share, capital
expenditures, assets, liabilities, dividends, capital structure,
or other financial items;
    
    descriptions of plans or objectives of management for future
operations, products, or services, including pending acquisition
transactions;
    
    forecasts of future economic performance; and
    
    descriptions of assumptions underlying or relating to any of the foregoing
  
    
    the effects of current and future business and economic
conditions in the markets the Company serves change or
are less favorable than it expected;
    
    deposit attrition, operating costs, customer loss and business
disruption are greater than the Company expected;
    
    competitive factors including product and pricing pressures among
financial services organizations may increase;
    
    the effects of changes in interest rates on the level and
composition of deposits, loan demand, the values of loan
collateral, securities and interest sensitive assets and
liabilities may lead to a reduction in the Companys net interest
margins;
    
    changes in market rates and prices may adversely impact securities,
loans, deposits, mortgage servicing rights, and other financial
instruments;
    
    the legislative or regulatory developments, including changes in
laws concerning taxes, banking, securities, insurance and other
aspects of the financial securities industry, such as the recently
enacted Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Dodd-Frank Act), and the extensive rule making it requires
to be undertaken by various regulatory agencies may adversely
affect the Companys business;
    
    personal or commercial bankruptcies increase;
    
    the Companys ability to expand and grow its business and
operations, including the establishment of additional branches and
acquisition of additional banks or branches of banks may be more
difficult or costly than the Company expected;
    
    any future acquisitions may be more difficult to integrate than
expected and the Company may be unable to realize any cost savings
and revenue enhancements the Company may have projected in
connection with such acquisitions;
    
    changes in accounting principles, policies or guidelines;
    
    credit risks, including credit risks resulting from the devaluation of
collateral debt obligations and/or structured investment vehicles on
the capital markets to which the Company currently has no direct
exposure;
    
    the failure of assumptions underlying the establishment of the Companys allowance for loan losses;
    
    construction and development loans are based upon estimates of costs
and value associated with the complete project. These estimates may
be inaccurate, and cause the Company to be exposed to more losses on
these projects than on other loans;
    
    changes occur in the securities markets;
 19




---



##### Table of Contents




    
    technology-related changes may be harder to make or more expensive than the Company anticipated;
    
    worldwide political and social unrest, including acts of war and terrorism; and
    
    changes occur in monetary and fiscal policies of the U.S. government,
including policies of the U.S. Treasury and the Federal Reserve Board.
  General
  Wholly Owned Subsidiaries
 
    
    Mercantile Bank (Mercantile Bank), located in Quincy, Illinois; and
    
    Royal Palm Bancorp, Inc. (Royal Palm), the sole shareholder of Royal
Palm Bank of Florida (Royal Palm Bank), located in Naples, Florida.
 Majority-Owned Subsidiary.
 Other Investments in Financial Institutions.
 
    
    0.8% of Premier Bancshares, Inc. (Premier), the sole shareholder of
Premier Bank, located in Jefferson City, Missouri;
    
    2.5% of Premier Community Bank of the Emerald Coast (Premier Community),
located in Crestview, Florida;
    
    4.1% of Paragon National Bank (Paragon), located in Memphis, Tennessee;
    
    1.4% of Enterprise Financial Services Corp. (Enterprise), the sole
shareholder of Enterprise Bank & Trust, based in Clayton, Missouri;
    
    4.1% of Solera National Bancorp, Inc. (Solera), the sole shareholder of
Solera National Bank, located in Lakewood, Colorado;
    
    2.9% of Manhattan Bancorp, Inc. (Manhattan), the sole shareholder of
Bank of Manhattan, located in Los Angeles, California; and
    
    4.9% of Brookhaven Bank (Brookhaven), located in Atlanta, Georgia.
  20




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21




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##### Table of Contents



Results of Operations
Comparison of Operating Results for the Three Months Ended June 30, 2010 and 2009
 Overview
   Discontinued Operations
 Net Interest Income
   22




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##### Table of Contents



23




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##### Table of Contents



For the three months ended June 302010
    
    
    2009Income/
    
    
    
    
    
    
    
    
    
    
    Income/Average Balance
    
    
    Expense
    
    
    Yield/Rate
    
    
    Average Balance
    
    
    Expense
    
    
    Yield/Rate(dollars in thousands)AssetsInterest-bearing demand
deposits
    
    $
    61,104
    
    
    $
    40
    
    
    
    0.26
    %
    
    $
    78,596
    
    
    $
    13
    
    
    
    0.07
    %Federal funds sold
    
    
    12,279
    
    
    
    7
    
    
    
    0.23
    %
    
    
    11,395
    
    
    
    3
    
    
    
    0.11
    %Securities:TaxableU.S. treasuries
and government
agencies
    
    
    2,898
    
    
    
    25
    
    
    
    3.46
    %
    
    
    2,922
    
    
    
    9
    
    
    
    1.24
    %Mortgage-backed
securities:GSE
residential
    
    
    34,101
    
    
    
    266
    
    
    
    3.13
    %
    
    
    23,516
    
    
    
    260
    
    
    
    4.43
    %Other securities
    
    
    62,415
    
    
    
    635
    
    
    
    4.08
    %
    
    
    73,113
    
    
    
    917
    
    
    
    5.03
    %Total taxable
    
    
    99,414
    
    
    
    926
    
    
    
    3.74
    %
    
    
    99,551
    
    
    
    1,186
    
    
    
    4.78
    %Non-taxable  State and
political subdivision (3)
    
    
    27,286
    
    
    
    296
    
    
    
    4.35
    %
    
    
    27,995
    
    
    
    236
    
    
    
    3.38
    %Loans (net of unearned
discount) (1)(2)
    
    
    741,609
    
    
    
    9,995
    
    
    
    5.41
    %
    
    
    847,707
    
    
    
    11,323
    
    
    
    5.36
    %Federal Home Loan Bank
stock
    
    
    2,955
    
    
    
    3
    
    
    
    0.41
    %
    
    
    3,597
    
    
    
    4
    
    
    
    0.45
    %Total
interest-earning
assets
    
    
    944,647
    
    
    $
    11,267
    
    
    
    4.78
    %
    
    
    1,068,841
    
    
    $
    12,765
    
    
    
    4.79
    %Cash and due from banks
    
    
    10,543
    
    
    
    
    
    
    
    
    
    
    
    12,941Interest receivable
    
    
    3,761
    
    
    
    
    
    
    
    
    
    
    
    4,162Foreclosed assets held
for sale, net
    
    
    20,541
    
    
    
    
    
    
    
    
    
    
    
    7,214Cost method investments
in common stock
    
    
    1,392
    
    
    
    
    
    
    
    
    
    
    
    3,150Cash surrender value of
life insurance
    
    
    15,218
    
    
    
    
    
    
    
    
    
    
    
    14,289Premises and equipment
    
    
    24,995
    
    
    
    
    
    
    
    
    
    
    
    26,700Other
    
    
    26,966
    
    
    
    
    
    
    
    
    
    
    
    20,910Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,832Intangible assets
    
    
    1,893
    
    
    
    
    
    
    
    
    
    
    
    1,586Allowance for loan loss
    
    
    (18,684
    )
    
    
    
    
    
    
    
    
    
    
    (17,766
    )Discontinued operations,
Assets held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    639,982Total assets
    
    $
    1,031,272
    
    
    
    
    
    
    
    
    
    
    $
    1,812,841Liabilities and Stockholders EquityInterest-bearing
transaction deposits
    
    $
    67,147
    
    
    $
    47
    
    
    
    0.28
    %
    
    $
    69,201
    
    
    $
    54
    
    
    
    0.31
    %Savings deposits
    
    
    47,584
    
    
    
    40
    
    
    
    0.34
    %
    
    
    47,267
    
    
    
    65
    
    
    
    0.55
    %Money-market deposits
    
    
    115,121
    
    
    
    169
    
    
    
    0.59
    %
    
    
    151,313
    
    
    
    378
    
    
    
    1.00
    %Time and brokered time
deposits
    
    
    551,046
    
    
    
    3,632
    
    
    
    2.64
    %
    
    
    600,307
    
    
    
    5,186
    
    
    
    3.47
    %Short-term borrowings
    
    
    20,331
    
    
    
    50
    
    
    
    0.99
    %
    
    
    79,706
    
    
    
    619
    
    
    
    3.11
    %Long term debt
    
    
    15,000
    
    
    
    159
    
    
    
    4.25
    %
    
    
    35,052
    
    
    
    389
    
    
    
    4.45
    %Junior subordinated
debentures
    
    
    61,858
    
    
    
    886
    
    
    
    5.74
    %
    
    
    61,858
    
    
    
    847
    
    
    
    5.49
    %Total
interest-bearing
liabilities
    
    
    878,087
    
    
    $
    4,983
    
    
    
    2.28
    %
    
    
    1,044,704
    
    
    $
    7,538
    
    
    
    2.89
    %Demand deposits
    
    
    100,175
    
    
    
    
    
    
    
    
    
    
    
    84,412Interest payable
    
    
    5,181
    
    
    
    
    
    
    
    
    
    
    
    3,157Other liabilities
    
    
    4,059
    
    
    
    
    
    
    
    
    
    
    
    4,409Discontinued operations,
Liabilities held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    573,060Noncontrolling interest
    
    
    2,907
    
    
    
    
    
    
    
    
    
    
    
    4,637Stockholders equity
    
    
    40,863
    
    
    
    
    
    
    
    
    
    
    
    98,462Total
liabilities and
stockholders
equity
    
    $
    1,031,272
    
    
    
    
    
    
    
    
    
    
    $
    1,812,841Interest spread
    
    
    
    
    
    
    
    
    
    
    2.50
    %
    
    
    
    
    
    
    
    
    
    
    1.90
    %Net interest income
    
    
    
    
    
    $
    6,284
    
    
    
    
    
    
    
    
    
    
    $
    5,227Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.67
    %
    
    
    
    
    
    
    
    
    
    
    1.96
    %Interest-earning assets
to interest-bearing
liabilities
    
    
    107.48
    %
    
    
    
    
    
    
    
    
    
    
    102.31
    %
 
 (1)
    
    Non-accrual loans have been included in average loans, net of unearned discount(2)
    
    Includes loans held for sale(3)
    
    The tax exempt income for state and political subdivisions in not recorded on a tax equivalent basis. 24




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For the three months ended June 30,2010 vs. 2009Increase (Decrease) Due toChange inVolume
    
    
    Rate
    
    
    TotalIncrease (decrease) in interest income:Interest-bearing bank deposits
    
    $
    (3
    )
    
    $
    30
    
    
    $
    27Federal funds sold
    
    
    
    
    
    
    4
    
    
    
    4Investment securities:U.S. Treasuries and Agencies
    
    
    
    
    
    
    16
    
    
    
    16Mortgage-backed securities:GSE
residential
    
    
    96
    
    
    
    (90
    )
    
    
    6States and political subdivision (1)
    
    
    (6
    )
    
    
    66
    
    
    
    60Other securities
    
    
    (123
    )
    
    
    (159
    )
    
    
    (282
    )Loans (net of unearned discounts)
    
    
    (1,429
    )
    
    
    101
    
    
    
    (1,328
    )Federal Home Loan Bank stock
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Change in interest income
    
    
    (1,466
    )
    
    
    (32
    )
    
    
    (1,498
    )Increase (decrease) in interest expense:Interest-bearing transaction deposits
    
    
    (2
    )
    
    
    (5
    )
    
    
    (7
    )Savings deposits
    
    
    
    
    
    
    (25
    )
    
    
    (25
    )Money-market deposits
    
    
    (77
    )
    
    
    (132
    )
    
    
    (209
    )Time and brokered time deposits
    
    
    (400
    )
    
    
    (1,154
    )
    
    
    (1,554
    )Short-term borrowings
    
    
    (297
    )
    
    
    (272
    )
    
    
    (569
    )Long-term debt and junior subordinated
debentures
    
    
    (269
    )
    
    
    78
    
    
    
    (191
    )Change in interest expense
    
    
    (1,045
    )
    
    
    (1,510
    )
    
    
    (2,555
    )Increase (decrease) in net interest income
    
    $
    (421
    )
    
    $
    1,478
    
    
    $
    1,057
 
 (1)
    
    The tax exempt income for state and political subdivisions is not recorded on a tax equivalent basis. Provision for Loan Losses
  25




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##### Table of Contents



Noninterest Income.
  For the Three Months EndedJune 302010
    
    
    2009Fiduciary activities
    
    $
    582
    
    
    $
    568Brokerage fees
    
    
    357
    
    
    
    247Customer service fees
    
    
    418
    
    
    
    417Other service charges and fees
    
    
    230
    
    
    
    133Net gains on loan sales
    
    
    126
    
    
    
    372Loan servicing fees
    
    
    123
    
    
    
    114Net increase in cash surrender value of life insurance
    
    
    139
    
    
    
    135Other
    
    
    225
    
    
    
    101Total noninterest income
    
    $
    2,200
    
    
    $
    2,087
     Noninterest Expense
  For the Three Months EndedJune 302010
    
    
    2009Salaries and employee benefits
    
    $
    4,289
    
    
    $
    4,338Net occupancy expense
    
    
    626
    
    
    
    591Equipment expense
    
    
    606
    
    
    
    631Deposit insurance premium
    
    
    601
    
    
    
    1,088Professional fees
    
    
    465
    
    
    
    986Postage and supplies
    
    
    127
    
    
    
    125Losses on sales of assets, net
    
    
    
    
    
    
    1Losses on foreclosed assets, net
    
    
    170
    
    
    
    1,453Other than temporary losses on
available-for-sale securities and cost
method investments
    
    
    566
    
    
    
    2,546Goodwill impairment losses
    
    
    
    
    
    
    30,417Amortization of mortgage servicing rights
    
    
    40
    
    
    
    138Other
    
    
    1,357
    
    
    
    1,372Total noninterest expense
    
    $
    8,847
    
    
    $
    43,686
 26




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##### Table of Contents



Income Taxes Expense (Benefit)
  Results of Operations  Comparison of Operating Results for the Six Months Ended June 30, 2010 and 2009
 Overview
  Discontinued Operations
 Net Interest Income
  27




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##### Table of Contents



28




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##### Table of Contents



For the six months ended June 302010
    
    
    2009Income/
    
    
    
    
    
    
    
    
    
    
    Income/Average Balance
    
    
    Expense
    
    
    Yield/Rate
    
    
    Average Balance
    
    
    Expense
    
    
    Yield/Rate(dollars in thousands)AssetsInterest-bearing demand
deposits
    
    $
    70,522
    
    
    $
    118
    
    
    
    0.34
    %
    
    $
    72,983
    
    
    $
    85
    
    
    
    0.23
    %Federal funds sold
    
    
    12,984
    
    
    
    15
    
    
    
    0.23
    %
    
    
    14,254
    
    
    
    8
    
    
    
    0.11
    %Securities:TaxableU.S. treasuries
and government
agencies
    
    
    1,458
    
    
    
    25
    
    
    
    3.46
    %
    
    
    2,597
    
    
    
    22
    
    
    
    1.71
    %Mortgage-backed
securities:GSE
residential
    
    
    34,136
    
    
    
    556
    
    
    
    3.28
    %
    
    
    23,722
    
    
    
    532
    
    
    
    4.52
    %Other securities
    
    
    64,033
    
    
    
    1,315
    
    
    
    4.14
    %
    
    
    74,176
    
    
    
    1,815
    
    
    
    4.93
    %Total taxable
    
    
    99,627
    
    
    
    1,896
    
    
    
    3.84
    %
    
    
    100,495
    
    
    
    2,369
    
    
    
    4.75
    %Non-taxable  State and
political subdivision (3)
    
    
    28,015
    
    
    
    506
    
    
    
    3.64
    %
    
    
    28,353
    
    
    
    480
    
    
    
    3.41
    %Loans (net of unearned
discount ) (1)(2)
    
    
    757,136
    
    
    
    20,233
    
    
    
    5.39
    %
    
    
    848,732
    
    
    
    22,727
    
    
    
    5.40
    %Federal Home Loan Bank
stock
    
    
    2,902
    
    
    
    7
    
    
    
    0.49
    %
    
    
    3,554
    
    
    
    9
    
    
    
    0.51
    %Total
interest-earning
assets
    
    
    971,186
    
    
    $
    22,775
    
    
    
    4.73
    %
    
    
    1,068,371
    
    
    $
    25,678
    
    
    
    4.85
    %Cash and due from banks
    
    
    9,415
    
    
    
    
    
    
    
    
    
    
    
    14,105Interest receivable
    
    
    3,777
    
    
    
    
    
    
    
    
    
    
    
    4,383Foreclosed assets held
for sale, net
    
    
    17,703
    
    
    
    
    
    
    
    
    
    
    
    7,498Cost method investments
in common stock
    
    
    1,392
    
    
    
    
    
    
    
    
    
    
    
    3,199Cash surrender value of
life insurance
    
    
    15,151
    
    
    
    
    
    
    
    
    
    
    
    13,894Premises and equipment
    
    
    25,218
    
    
    
    
    
    
    
    
    
    
    
    26,873Other
    
    
    24,974
    
    
    
    
    
    
    
    
    
    
    
    21,311Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,842Intangible assets
    
    
    1,907
    
    
    
    
    
    
    
    
    
    
    
    1,529Allowance for loan loss
    
    
    (18,849
    )
    
    
    
    
    
    
    
    
    
    
    (18,033
    )Discontinued operations,
Assets held for sale
    
    
    85,797
    
    
    
    
    
    
    
    
    
    
    
    637,717Total assets
    
    $
    1,137,671
    
    
    
    
    
    
    
    
    
    
    $
    1,811,689Liabilities and Stockholders EquityInterest-bearing
transaction deposits
    
    $
    67,942
    
    
    $
    93
    
    
    
    0.28
    %
    
    $
    66,207
    
    
    $
    110
    
    
    
    0.34
    %Savings deposits
    
    
    47,843
    
    
    
    85
    
    
    
    0.36
    %
    
    
    46,619
    
    
    
    154
    
    
    
    0.67
    %Money-market deposits
    
    
    124,253
    
    
    
    370
    
    
    
    0.60
    %
    
    
    149,029
    
    
    
    742
    
    
    
    1.00
    %Time and brokered time
deposits
    
    
    561,950
    
    
    
    7,511
    
    
    
    2.70
    %
    
    
    618,204
    
    
    
    11,008
    
    
    
    3.59
    %Short-term borrowings
    
    
    22,884
    
    
    
    237
    
    
    
    2.09
    %
    
    
    71,847
    
    
    
    1,169
    
    
    
    3.28
    %Long term debt
    
    
    16,031
    
    
    
    379
    
    
    
    4.77
    %
    
    
    35,052
    
    
    
    738
    
    
    
    4.25
    %Junior subordinated
debentures
    
    
    61,858
    
    
    
    1,679
    
    
    
    5.47
    %
    
    
    61,858
    
    
    
    1,704
    
    
    
    5.56
    %Total
interest-bearing
liabilities
    
    
    902,761
    
    
    $
    10,354
    
    
    
    2.31
    %
    
    
    1,048,816
    
    
    $
    15,625
    
    
    
    3.00
    %Demand deposits
    
    
    99,874
    
    
    
    
    
    
    
    
    
    
    
    80,501Interest payable
    
    
    4,827
    
    
    
    
    
    
    
    
    
    
    
    3,110Other liabilities
    
    
    4,394
    
    
    
    
    
    
    
    
    
    
    
    4,324Discontinued operations,
Liabilities held for sale
    
    
    80,660
    
    
    
    
    
    
    
    
    
    
    
    571,245Noncontrolling interest
    
    
    3,353
    
    
    
    
    
    
    
    
    
    
    
    5,143Stockholders equity
    
    
    41,802
    
    
    
    
    
    
    
    
    
    
    
    98,550Total
liabilities and
stockholders
equity
    
    $
    1,137,671
    
    
    
    
    
    
    
    
    
    
    $
    1,811,689Interest spread
    
    
    
    
    
    
    
    
    
    
    2.42
    %
    
    
    
    
    
    
    
    
    
    
    1.84
    %Net interest income
    
    
    
    
    
    $
    12,421
    
    
    
    
    
    
    
    
    
    
    $
    10,053Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.58
    %
    
    
    
    
    
    
    
    
    
    
    1.90
    %Interest-earning assets
to interest-bearing
liabilities
    
    
    107.58
    %
    
    
    
    
    
    
    
    
    
    
    101.86
    %
 
 (1)
    
    Non-accrual loans have been included in average loans, net of unearned discount(2)
    
    Includes loans held for sale(3)
    
    The tax exempt income for state and political subdivisions in not recorded on a tax equivalent basis. 29




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##### Table of Contents



For the six months ended June 30,2010 vs. 2009Increase (Decrease) Due toChange inVolume
    
    
    Rate
    
    
    TotalIncrease (decrease) in interest income:Interest-bearing bank deposits
    
    $
    (3
    )
    
    $
    36
    
    
    $
    33Federal funds sold
    
    
    (1
    )
    
    
    8
    
    
    
    7Investment securities:U.S. Treasuries and Agencies
    
    
    (13
    )
    
    
    16
    
    
    
    3Mortgage-backed securities:GSE residential
    
    
    194
    
    
    
    (170
    )
    
    
    24States and political subdivision (1)
    
    
    (6
    )
    
    
    32
    
    
    
    26Other securities
    
    
    (230
    )
    
    
    (270
    )
    
    
    (500
    )Loans (net of unearned discounts)
    
    
    (2,448
    )
    
    
    (46
    )
    
    
    (2,494
    )Federal Home Loan Bank stock
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Change in interest income
    
    
    (2,509
    )
    
    
    (394
    )
    
    
    (2,903
    )Increase (decrease) in interest expense:Interest-bearing transaction deposits
    
    
    3
    
    
    
    (20
    )
    
    
    (17
    )Savings deposits
    
    
    4
    
    
    
    (73
    )
    
    
    (69
    )Money-market deposits
    
    
    (109
    )
    
    
    (263
    )
    
    
    (372
    )Time and brokered time deposits
    
    
    (935
    )
    
    
    (2,562
    )
    
    
    (3,497
    )Short-term borrowings
    
    
    (608
    )
    
    
    (324
    )
    
    
    (932
    )Long-term debt and junior subordinated
debentures
    
    
    (498
    )
    
    
    114
    
    
    
    (384
    )Change in interest expense
    
    
    (2,143
    )
    
    
    (3,128
    )
    
    
    (5,271
    )Increase (decrease) in net interest income
    
    $
    (366
    )
    
    $
    2,734
    
    
    $
    2,368
 
 (1)
    
    The tax exempt income for state and political subdivisions is not recorded on a tax equivalent basis. Provision for Loan Losses
  30




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##### Table of Contents



Noninterest Income.
  For the Six Months EndedJune 302010
    
    
    2009Fiduciary activities
    
    $
    1,163
    
    
    $
    1,136Brokerage fees
    
    
    656
    
    
    
    440Customer service fees
    
    
    783
    
    
    
    782Other service charges and fees
    
    
    369
    
    
    
    240Net gains on loan sales
    
    
    218
    
    
    
    889Loan servicing fees
    
    
    247
    
    
    
    227Net increase in cash surrender value of life insurance
    
    
    277
    
    
    
    258Other
    
    
    412
    
    
    
    107Total noninterest income
    
    $
    4,125
    
    
    $
    4,079
     Noninterest Expense
  For the Six Months EndedJune 302010
    
    
    2009Salaries and employee benefits
    
    $
    8,694
    
    
    $
    8,802Net occupancy expense
    
    
    1,224
    
    
    
    1,191Equipment expense
    
    
    1,169
    
    
    
    1,216Deposit insurance premium
    
    
    1,072
    
    
    
    1,698Professional fees
    
    
    956
    
    
    
    1,545Postage and supplies
    
    
    275
    
    
    
    301Net gains (losses) on sales of assets
    
    
    (8
    )
    
    
    11Losses on foreclosed assets, net
    
    
    382
    
    
    
    1,555Other than temporary losses on
available-for-sale securities and cost
method investments
    
    
    566
    
    
    
    2,546Goodwill impairment losses
    
    
    
    
    
    
    30,417Amortization of mortgage servicing rights
    
    
    79
    
    
    
    341Other
    
    
    2,846
    
    
    
    2,610Total noninterest expense
    
    $
    17,255
    
    
    $
    52,233
 31




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##### Table of Contents



Income Taxes Expense (Benefit)
  Financial Condition
June 30, 2010 Compared to December 31, 2009
 Loan Portfolio
  June 30, 2010
    
    
    December 31, 2009Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(dollars in thousands)Commercial and financial
    
    $
    149,763
    
    
    
    20.63
    %
    
    $
    161,702
    
    
    
    20.82
    %Agricultural
    
    
    10,601
    
    
    
    1.46
    %
    
    
    9,832
    
    
    
    1.27
    %Real estate  farmland
    
    
    17,601
    
    
    
    2.42
    %
    
    
    19,655
    
    
    
    2.53
    %Real estate  construction
    
    
    123,409
    
    
    
    17.00
    %
    
    
    153,578
    
    
    
    19.77
    %Real estate  commercial
    
    
    164,286
    
    
    
    22.63
    %
    
    
    163,292
    
    
    
    21.02
    %Real estate  residential (1)
    
    
    194,933
    
    
    
    26.85
    %
    
    
    193,818
    
    
    
    24.96
    %Installment loans to individuals
    
    
    65,418
    
    
    
    9.01
    %
    
    
    74,793
    
    
    
    9.63
    %Total loans
    
    
    726,011
    
    
    
    100.00
    %
    
    
    776,670
    
    
    
    100.00
    %Allowance for loan losses
    
    
    22,608
    
    
    
    
    
    
    
    18,851Total loans, including loans
held for sale, net of allowance
for loan losses
    
    $
    703,403
    
    
    
    
    
    
    $
    757,819
 
 (1)
    
    Includes loans held for sale Nonperforming Assets
  32




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##### Table of Contents



June 30,
    
    
    December 31,2010
    
    
    2009Nonaccrual loansCommercial and financial
    
    $
    1,650
    
    
    $
    1,439Agricultural
    
    
    
    
    
    
    248Real estate  farmland
    
    
    62
    
    
    
    62Real estate  construction
    
    
    17,277
    
    
    
    33,946Real estate  commercial
    
    
    6,566
    
    
    
    7,378Real estate  residential
    
    
    9,673
    
    
    
    6,803Installment loans to individuals
    
    
    138
    
    
    
    154Total nonaccrual loans
    
    
    35,366
    
    
    
    50,030Loans 90 days past due and still accruing
    
    
    3,007
    
    
    
    393Restructured loans
    
    
    
    
    
    
    397Total nonperforming loans
    
    
    38,373
    
    
    
    50,820Repossessed assets
    
    
    24,766
    
    
    
    16,409Other assets acquired in satisfaction of debt previously
contracted
    
    
    
    
    
    
    Total nonperforming other assets
    
    
    24,766
    
    
    
    16,409Total nonperforming loans and nonperforming other assets
    
    $
    63,139
    
    
    $
    67,229Nonperforming loans to loans, before allowance for loan losses
    
    
    5.29
    %
    
    
    6.54
    %Nonperforming loans and nonperforming other assets to loans,
before allowance for loan losses
    
    
    8.70
    %
    
    
    8.66
    %
 Allowance for Loan Losses
  33




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34




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##### Table of Contents



As of and for the Six
    
    
    As of and forMonths Ended
    
    
    the Year EndedJune 30,
    
    
    December 31,2010
    
    
    2009Average loans outstanding during year
    
    $
    757,136
    
    
    $
    830,740Allowance for loan losses:Balance at beginning of year
    
    $
    18,851
    
    
    $
    19,038Loans charged-off:Commercial and financial
    
    
    3,748
    
    
    
    927Agricultural
    
    
    
    
    
    
    438Real estate  farmland
    
    
    
    
    
    
    Real estate  construction
    
    
    1,920
    
    
    
    10,938Real estate  commercial
    
    
    822
    
    
    
    2,055Real estate  residential
    
    
    594
    
    
    
    7,218Installment loans to individuals
    
    
    423
    
    
    
    899Total charge-offs
    
    
    7,507
    
    
    
    22,475Recoveries:Commercial and financial
    
    
    42
    
    
    
    Agricultural
    
    
    
    
    
    
    13Real estate  farmland
    
    
    
    
    
    
    Real estate  construction
    
    
    22
    
    
    
    34Real estate  commercial
    
    
    
    
    
    
    7Real estate  residential
    
    
    11
    
    
    
    8Installment loans to individuals
    
    
    49
    
    
    
    143Total recoveries
    
    
    124
    
    
    
    205Net charge-offs
    
    
    7,383
    
    
    
    22,270Provision for loan losses
    
    
    11,140
    
    
    
    22,083Balance at end of year
    
    $
    22,608
    
    
    $
    18,851Allowance for loan losses as a percent of
total loans outstanding at year end
    
    
    3.11
    %
    
    
    2.43
    %Allowance for loan losses as a percent of
total nonperforming loans
    
    
    58.92
    %
    
    
    37.09
    %Ratio of net charge-offs to average total loans
    
    
    0.98
    %
    
    
    2.68
    %
 Concentration of Credit Risk
   35




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##### Table of Contents



ecurities
     Foreclosed Assets Held for Sale.
 Deposits
 Borrowings
 36




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##### Table of Contents



Liquidity
     Capital Resources
  37




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38




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##### Table of Contents



Regulatory Matters
   1.
    
    A cease and desist order (CDO) is a formal action by the FDIC requiring a
bank to take corrective measures to address deficiencies identified by the FDIC. The
bank can continue to serve its customers in all areas including making loans,
establishing lines of credit, accepting deposits and processing banking transactions.
All customer deposits remain fully insured to the maximum limits set by the FDIC.2.
    
    A Memorandum of Understanding (MOU) agreement is characterized by regulatory
authorities as an informal action that is neither published nor made publicly available
by the agencies and is used when circumstances warrant a milder form of action than a
formal supervisory action, such as a cease and desist order.3.
    
    A Written Agreement (WA) is a formal enforcement action by the FRB, similar
in nature to an MOU, but is legally binding and will be published and made public.
 The Company.
  39




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##### Table of Contents



Mercantile Bank.
  Royal Palm Bank.
      40




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##### Table of Contents



Royal Palm Bancorp.
 Heartland Bank.
  Mid-America Bancorp.
   Effect of Inflation and Changing Prices.
  Critical Accounting Estimates
   41




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##### Table of Contents



Allowance for Loan Losses.
   Deferred Taxes.
 Regulatory Developments.
  Deposit Insurance
 42




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##### Table of Contents



Trust Preferred Securities
 The Consumer Financial Protection Bureau
 Increased Capital Standards and Enhanced Supervision
 Transactions with Affiliates
 Transactions with Insiders
 Enhanced Lending Limits
 Corporate Governance
 43




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk .
  
 Item 4. Controls and Procedures .
 Evaluation of disclosure controls and procedures.
 Changes in internal controls over financial reporting
 44




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##### Table of Contents



PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Recently enacted legislative reforms and future regulatory reforms required by such legislation
could have a significant impact on the Companys business, financial condition and results of
operations.
  
    
    a reduction in the ability to generate or originate
revenue-producing assets as a result of compliance with heightened capital
standards;
    
    increased cost of operations due to greater regulatory oversight,
supervision and examination of banks and bank holding companies, and higher
deposit insurance premiums;
    
    the limitation on the ability to raise capital through the use of
trust preferred securities as these securities may no longer be included as Tier 1
capital going forward; and
    
    the limitation on the ability to expand consumer product and service
offerings due to anticipated stricter consumer protection laws and regulations.
  The Company and its subsidiaries are subject to regulatory agreements and orders that restrict the
Company and its subsidiaries from taking certain actions.
 General.
 The Company.
 45




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##### Table of Contents



Banking Subsidiaries
  Capital Injections and Ongoing Compliance
 We may not be able to operate profitably without the revenue stream from our discontinued
operations.
    
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  46




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##### Table of Contents



Total Number of Shares
    
    Maximum ApproximateSecond Quarter
    
    
    
    
    
    
    
    
    
    Purchased as Part of
    
    Dollar Value of Shares that2010 Calendar
    
    Total Number of
    
    Average Price
    
    Publicly Announced
    
    May Yet Be Purchased UnderMonth
    
    Shares Purchased (1)
    
    Paid per Share (1)
    
    Plans or Programs (2)
    
    the Plans or Programs (3)April
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    $
    8,128,000May
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    $
    8,128,000June
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    $
    8,128,000Total
    
    
    0
    
    
    
    N/A
    
    
    
    0
 
 (1)
    
    The total number of shares purchased and the average price paid per share include, in addition
to other purchases, shares purchased in the open market and through privately negotiated
transactions by the Companys 401(k) Profit Sharing Plan. For the months indicated, there were no
shares purchased by the Plan.(2)
    
    Includes only shares subject to publicly announced stock repurchase program, i.e. the $10
million stock repurchase program approved by the Board on August 15, 2005 and announced on August
17, 2005 (the 2005 Repurchase Program). Does not include shares purchased by the Companys
401(k) Profit Sharing Plan.(3)
    
    Dollar amount of repurchase authority remaining at month-end under the 2005 Repurchase
Program, the Companys only publicly announced repurchase program in effect at such dates. The
2005 Repurchase Program is limited to 883,656 shares (10% of the number of outstanding shares on
the date the Board approved the program, adjusted for the three-for-one stock split in June of 2006
and the three-for-two split in December of 2007) but not to exceed $10 million in repurchases. 
 Item 3. Defaults Upon Senior Securities
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    Identification of Exhibit31.1
    
    Certification of the Chief Executive
Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.31.2
    
    Certification of the Chief Financial
Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.32.1
    
    Certification of the Chief Executive
Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial
Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 47




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SIGNATURES
  Date: August 16, 2010
    By:
    /s/ Ted T. AwerkampTed T. AwerkampPresident and Chief Executive Officer
(principal executive officer)Date: August 16, 2010
    By:
    /s/ Michael P. McGrathMichael P. McGrathExecutive Vice President, Treasurer, Secretary and
Chief Financial Officer
(principal financial officer/
principal accounting officer) 48