Mercantile Bancorp, Inc. - FORM 10-Q/A

Attached files

file	filename
EX-31.1 - EX-31.1 - Mercantile Bancorp, Inc.	c62831exv31w1.htm
EX-31.2 - EX-31.2 - Mercantile Bancorp, Inc.	c62831exv31w2.htm
EX-32.2 - EX-32.2 - Mercantile Bancorp, Inc.	c62831exv32w2.htm
EX-32.1 - EX-32.1 - Mercantile Bancorp, Inc.	c62831exv32w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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		37-1149138
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File requested to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

o Large Accelerated Filer

o Accelerated Filer

þ Non-Accelerated Filer
(Do not check if a smaller reporting company)

o Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act) Yes o No þ.

As of November 12, 2010 the number of outstanding shares of Common Stock, par value $0.4167 per share was 8,703,330.


MERCANTILE BANCORP, INC.

FORM 10-Q/A

TABLE OF CONTENTS

EXPLANATORY NOTE		3-4

PART I	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets	5

	Condensed Consolidated Statements of Operations	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Condensed Consolidated Financial Statements	8-22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22-47

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

Item 4.	Controls and Procedures	48

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	49-50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 5.	Other Information	51
Item 6.	Exhibits	51

	Signatures	51

Exhibits

	Section 302 Certifications
	Section 906 Certifications
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Mercantile Bancorp, Inc.
Quarterly Report on Form 10-Q/A for the period ended September 30, 2010

EXPLANATORY NOTE

Mercantile Bancorp, Inc. (the “Company”), is filing this Amendment to its quarterly report on Form 10-Q for the period ended September 30, 2010, originally filed on November 15, 2010, in order to restate previously reported results for this period. The Amendment reflects an increase in net loss of approximately $15.0 million for the three and nine months ended September 30, 2010. The Company previously announced its intentions to file this Form 10-Q/A on Form 8-K filed on December 28, 2010. This restatement of the Company’s results for the three and nine months ended September 30, 2010 is necessary to reflect an additional provision for loan losses of approximately $6.2 million and to increase the valuation allowance related to its deferred tax assets by approximately $10.3 million. These increases in the Company’s net loss were partially offset by an increase in the net loss attributable to the noncontrolling interest of approximately $1.5 million.

The increase in the provision for loan losses for the quarter ended September 30, 2010, reflected in this restatement, is the result of a determination made by the Company to increase its provision for loan losses after Mercantile Bank, the Company’s largest subsidiary bank, received the results of a recent, regularly scheduled safety and soundness examination conducted jointly by the Federal Deposit Insurance Corporation (the “FDIC”) and the Illinois Division of Financial Institutions (the “IDFI”) and completed in December 2010. Subsequent to the receipt of the results of its examination, Mercantile Bank amended its September 30, 2010 call report on December 17, 2010, to reflect an additional approximately $6.2 million in loan loss provision. The additional loan loss provision was required to increase the allowance for loan losses to a level deemed appropriate by Company management following the additional write-down of two commercial real estate loans by Mercantile Bank. As a result of the examination, Mercantile Bank reviewed Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events”; reassessed it evaluation of potential impairment losses as required by ASC Topic 310, “Receivables”; and reviewed information about the valuation of the underlying loan collateral and the financial condition of the borrowers that became known to Mercantile Bank following September 30, 2010, and determined that it was appropriate to record the write-down of the two impaired commercial real estate loans and make the additional adjustments retroactive to the third quarter of 2010.

As a result of the additional loan write-downs and provisions for loan losses made retroactive to the third quarter of 2010, the Company re-evaluated its allowance for loan loss (“ALLL”) calculation as of September 30, 2010, including both the general and specific reserves and incorporated into its re-evaluation the revised historical loss experience factor created by the additional write-downs. Each of the Company’s subsidiary banks performs a quarterly ALLL calculation which the Company utilizes to evaluate the adequacy of the total ALLL on a consolidated basis. Each of these calculations is designed to quantify an acceptable range rather than a specific amount. The Company’s re-evaluation of the consolidated ALLL as of September 30, 2010, based on the additional approximately $6.2 million of loan write-downs at Mercantile Bank, resulted in a determination by the Company that the difference between the calculated amount and the balance reflected in the restated financial statements as of September 30, 2010 was within the acceptable range.

Due to the determination to record additional loan loss provisions in the third quarter of 2010, the Company’s capital ratios were reduced and the Company re-evaluated the adequacy of the valuation allowance established for its deferred tax assets. Based on its analysis, the Company determined that it was no longer more likely than not that it could generate sufficient taxable income to realize the deferred tax assets in future near-term periods as defined by generally accepted accounting principles, and accordingly recognized an additional valuation allowance in the third quarter of 2010 in the amount of approximately $10.3 million, representing the full remaining balance of the Company’s and each of its subsidiary banks’ deferred tax assets prior to the adjustment.

Included in the Company’s additional approximately $10.3 million deferred tax asset valuation allowance was approximately $3.4 million related to Mid-America Bancorp, Inc. (“Mid-America”). This adjustment increased Mid-America’s net loss for the three and nine months ended September 30, 2010 by approximately $3.4 million, thereby increasing the Company’s net loss attributable to the noncontrolling interest for those same periods by approximately $1.5 million.

As a result of the changes noted above and as reflected in this Form 10-Q/A, the Company recognized a net loss of approximately $22.5 million (or $2.62 loss per share) for the three months ended September 30, 2010, compared to the previously reported net loss of $7.5 million (or $0.89 loss per share). For the nine months ended September 30, 2010, the Company recognized a net loss of approximately $26.0 million (or $3.38 loss per share), compared to the previously reported net loss of $11.0 million (or $1.66 loss per share).

Based on the need to revise the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2010, the Company’s management and the Audit Committee of the Board of Directors have

taken steps recently to re-evaluate the Company’s internal control over financial reporting, subsequent to September 30, 2010, and have concluded there is a material weakness in their design of such internal controls. The material weakness relates to the identification and communication of subsequent events. The Company’s Board of Directors has implemented several steps to improve the process for timely identification and communication of subsequent events to the Audit Committee and thus will remediate this material weakness. Included in these steps are the following:

•

Appointment of a Chief Lending Officer at Mercantile Bank, whose responsibilities will include: oversight of lending policies and procedures to ensure adequate risk management and compliance with banking regulations at each of the Company’s subsidiary banks; management of loan portfolio credit quality, underwriting standards and problem resolution; evaluation of the adequacy of the ALLL; review and interpretation of banking laws and accounting guidance, along with communication of pertinent information to lending management; and, reporting and recommendations to the Audit Committee and Board of Directors of problem asset management and related processes.

•

Revision of the loan policy at each of the Company’s subsidiary banks to clearly define what constitutes a subsequent event and more clearly identify the procedures to follow to ensure proper accounting and reporting of the impact of such subsequent events.

•

Revision of the loan policy at each of the Company’s subsidiary banks to address the banks’ participation in SNC loans, including procedures to follow upon receipt of a SNC exam report, execution of directives indicated in the report and appeal procedures with the lead bank and the FDIC in the event management disagrees with the findings in the report.

Further discussion regarding the Company’s assessment of the adequacy of its allowance for loan losses and its valuation allowance for deferred tax assets can be found in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations. While the Company is amending only certain portions of the Quarterly Report on Form 10-Q for the period ended September 30, 2010, for convenience and ease of future reference, the entire Quarterly Report for the period ended September 30, 2010 is reflected in this Form 10-Q/A.

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)


	September 30,
	2010
	(Unaudited)			December 31,
	Restated (1)			2009


Assets
Cash and due from banks	$	9,239		$	8,606
Interest-bearing demand deposits		75,936			94,623
Federal funds sold		9,919			18,038

Cash and cash equivalents		95,094			121,267
Available-for-sale securities		117,434			128,150
Held-to-maturity securities (fair values of $1,535 and $2,411)		1,481			2,334
Loans held for sale		2,871			681
Loans, net of allowance for loan losses of $25,866 and $18,851		675,442			757,138
Interest receivable		3,881			3,962
Foreclosed assets held for sale, net		26,126			16,409
Federal Home Loan Bank stock		2,884			2,900
Cost method investments in common stock		1,392			1,392
Deferred income taxes		—			10,212
Mortgage servicing rights		880			885
Cash surrender value of life insurance		15,430			15,011
Premises and equipment, net		24,330			25,670
Core deposit and other intangibles		946			1,066
Other assets		13,860			17,413
Discontinued operations, assets held for sale		—			285,992

Total assets	$	982,051		$	1,390,482


Liabilities
Deposits
Demand	$	102,595		$	108,318
Savings, NOW and money market		225,920			251,030
Time		444,908			421,412
Brokered time		95,486			173,764

Total deposits		868,909			954,524
Short-term borrowings		10,906			30,740
Long-term debt		15,000			25,172
Junior subordinated debentures		61,858			61,858
Interest payable		6,258			4,114
Other liabilities		4,742			4,827
Discontinued operations, liabilities held for sale		—			264,044

Total liabilities		967,673			1,345,279

Commitments and Contingent Liabilities (Note 10)

Equity
Mercantile Bancorp, Inc. stockholders’ equity
Common stock, $0.42 par value; authorized 30,000,000 shares;
Issued — 8,887,113 shares at September 30, 2010 and December 31, 2009
Outstanding — 8,703,330 shares at September 30, 2010 and December 31, 2009		3,629			3,629
Additional paid-in capital		11,919			11,919
Retained earnings (deficit)		(928	)		25,095
Accumulated other comprehensive income		2,815			2,954

		17,435			43,597
Treasury stock, at cost
Common; 183,783 shares at September 30, 2010 and December 31, 2009		(2,295	)		(2,295	)


Total Mercantile Bancorp, Inc. stockholders’ equity		15,140			41,302

Noncontrolling interest		(762	)		3,901


Total equity		14,378			45,203


Total liabilities and equity	$	982,051		$	1,390,482

See accompanying notes to condensed consolidated financial statements


(1)		Refer to Explanatory Note on page 3 and note 13 of this document

MERCANTILE BANCORP, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)


	Three months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

	Restated (1)						Restated (1)
Interest and Dividend Income
Loans
Taxable	$	9,990		$	11,033		$	29,751		$	33,414
Tax exempt		235			158			707			504
Securities
Taxable		847			1,032			2,743			3,334
Tax exempt		231			234			737			714
Federal funds sold		6			3			21			11
Dividends on Federal Home Loan Bank Stock		2			2			9			11
Deposits with financial institutions and other		43			8			161			160

Total interest and dividend income		11,354			12,470			34,129			38,148


Interest Expense
Deposits		3,911			4,986			11,970			17,000
Short-term borrowings		45			614			282			1,783
Long-term debt and junior subordinated debentures		1,033			1,166			3,091			3,608

Total interest expense		4,989			6,766			15,343			22,391


Net Interest Income		6,365			5,704			18,786			15,757

Provision for Loan Losses		11,560			5,341			22,700			17,644


Net Interest Income (Expense) After Provision For Loan Losses		(5,195	)		363			(3,914	)		(1,887	)


Noninterest Income
Fiduciary activities		581			569			1,744			1,705
Brokerage fees		243			302			899			742
Customer service fees		400			439			1,183			1,221
Other service charges and fees		195			142			564			382
Gains (losses) on sales of assets, net		(3	)		(6	)		5			(17	)
Net gains on investments in common stock		39			—			39			—
Net gains on loan sales		248			157			466			1,046
Loan servicing fees		126			122			373			349
Net increase in cash surrender value of life insurance		143			176			420			434
Other		158			14			569			121

Total noninterest income		2,130			1,915			6,262			5,983


Noninterest Expense
Salaries and employee benefits		4,310			4,432			13,004			13,234
Net occupancy expense		675			467			1,899			1,658
Equipment expense		552			712			1,721			1,928
Deposit insurance premium		645			561			1,717			2,259
Professional fees		610			665			1,566			2,210
Postage and supplies		131			164			406			465
Losses on foreclosed assets, net		508			512			890			2,067
Other than temporary losses on available-for-sale securities and cost method investments		—			692			566			3,238
Goodwill impairment losses		—			—			—			30,417
Amortization of mortgage servicing rights		117			38			196			379
Other		1,577			1,175			4,422			3,785

Total noninterest expense		9,125			9,418			26,387			61,640


Loss from Continuing Operations Before Income Taxes		(12,190	)		(7,140	)		(24,039	)		(57,544	)
Income Tax Expense (Benefit)		13,114			(2,971	)		10,077			(10,321	)

Loss from Continuing Operations		(25,304	)		(4,169	)		(34,116	)		(47,223	)

Discontinued Operations
Income (loss) from discontinued operations (including gain on sale in 2010 of $4,496), net of income tax expense of $1,733 and $355, respectively		219			2,321			3,429			(8,474	)


Net Loss		(25,085	)		(1,848	)		(30,687	)		(55,697	)

Less: Net loss attributable to the Noncontrolling interest		(2,551	)		(488	)		(4,662	)		(1,415	)


Net Loss attributable to Mercantile Bancorp, Inc.	$	(22,534	)	$	(1,360	)	$	(26,025	)	$	(54,282	)


Weighted Average Shares Outstanding		8,703,330			8,703,330			8,703,330			8,703,330

Basic Earnings (Loss) Per Share
Continuing operations	$	(2.62	)	$	(0.42	)	$	(3.38	)	$	(5.27	)

Discontinued operations	$	0.03		$	0.27		$	0.39		$	(0.97	)

See accompanying notes to condensed consolidated financial statements


(1)		Refer to Explanatory Note on page 3 and note 13 of this document

MERCANTILE BANCORP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)



Nine Months Ended September 30	2010			2009

	Restated (1)
Operating Activities
Net loss before attribution of noncontrolling interest	$	(30,687	)	$	(55,697	)
Net loss attributable to noncontrolling interest		(4,662	)		(1,415	)

Net income (loss) attributable to Mercantile Bancorp, Inc.		(26,025	)		(54,282	)
Items not requiring (providing) cash
Depreciation		1,358			2,065
Provision for loan losses		22,748			18,736
Amortization (accretion) of premiums and discounts on securities		482			256
Amortization (depreciation) of core deposit intangibles and other purchase accounting adjustments		120			(13	)
Deferred income taxes		10,762			(3,886	)
Other-than-temporary losses on available-for-sale and cost method investments		566			3,238
Losses on foreclosed assets		890			2,158
Gains on loan sales		(474	)		(1,740	)
Recovery of mortgage servicing rights		—			(244	)
Amortization of mortgage servicing rights		196			399
(Gain) on sale of Marine Bank & Trust and Brown County State Bank		(4,496	)		—
Net (gains) losses on sale of premises and equipment		(5	)		23
Net (gains) on investments of common stock		(39	)		—
Federal Home Loan Bank stock dividends		(6	)		(9	)
Net increase in cash surrender value of life insurance		(458	)		(825	)
Goodwill impairment		—			44,650

Changes in
Loans originated for sale		(38,828	)		(93,806	)
Proceeds from sales of loans		36,914			97,240
Interest receivable		102			472
Other assets		3,272			635
Interest payable		2,140			712
Other liabilities		(113	)		2,624
Noncontrolling interest in subsidiary		(4,662	)		(1,415	)

Net cash provided by operating activities		4,444			16,988


Investing Activities
Cash paid in acquisition of HNB Financial, net of cash received		—			3
Cash received from sales of Marine Bank & Trust and Brown County State Bank		14,823			—
Purchases of available-for-sale securities		(19,821	)		(49,508	)
Proceeds from maturities of available-for-sale securities		31,116			41,082
Proceeds from the sales of available-for-sale securities		373			—
Proceeds from maturities of held-to-maturity securities		947			2,325
Net change in loans		43,183			39,667
Purchases of premises and equipment		(55	)		(592	)
Purchase of Federal Home Loan Bank stock		—			(80	)
Proceeds from sales of Federal Home Loan Bank stock		22			718
Proceeds from sales of foreclosed assets		8,422			1,070
Purchase of bank-owned life insurance		—			(1,000	)

Net cash provided by investing activities		79,010			33,685


Financing Activities
Net increase (decrease) in demand deposits, money market, NOW and savings accounts		(38,123	)		20,816
Net (decrease) in time and brokered time deposits		(54,406	)		(57,301	)
Net increase (decrease) in short-term borrowings		(9,050	)		8,398
Net increase in long-term debt		—			500
Repayments of long-term debt		(10,172	)		(11,500	)

Net cash used in financing activities		(111,751	)		(39,087	)


Increase (Decrease) In Cash and Cash Equivalents		(28,297	)		11,586
Cash and Cash Equivalents, Beginning of Period		123,391			89,821


Cash and Cash Equivalents, End of Period	$	95,094		$	101,407


Supplemental Cash Flows Information
Interest paid	$	14,335		$	29,750
Income taxes paid (received)	$	(530	)	$	(3,811	)
Real estate acquired in settlement of loans	$	19,029		$	7,475

See accompanying notes to condensed consolidated financial statements


(1)		Refer to Explanatory Note on page 3 and note 13 of this document

MERCANTILE BANCORP, INC.

Notes to Condensed Consolidated Financial Statements
(table dollar amounts in thousands)

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of Mercantile Bancorp, Inc. (the “Company”) and its wholly and majority owned subsidiaries, Mercantile Bank, Royal Palm Bancorp, Inc. (the sole shareholder of Royal Palm Bank) and Mid-America Bancorp, Inc. (the sole shareholder of Heartland Bank), (“Banks”). All material inter-company accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements of the Company. These financial statements also include the accounts of HNB National Bank prior to its exchange in November 2009, and the accounts of Marine Bank & Trust and Brown County State Bank prior to their sales in February 2010.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the Company’s unaudited condensed consolidated financial statements for the nine months ended September 30, 2010 and 2009. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The 2009 year-end condensed consolidated balance sheet data was derived from the audited financial statements, but certain information and disclosures required by accounting principles generally accepted in the United States of America have been condensed or omitted.

These unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2009, appearing in the Company’s Annual Report on Form 10-K filed in 2010.

2. EARNINGS (LOSS) PER COMMON SHARE

Basic and diluted earnings (loss) per share have been computed by the weighted-average number of common shares outstanding during the period.

3. RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASC Topic 310, “Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” On July 21, 2010, new authoritative accounting guidance (Accounting Standards Update No. 2010-20) under ASC Topic 310 was issued which requires an entity to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. This statement addresses only disclosures and does not change recognition or measurement. The new authoritative accounting guidance under ASC Topic 310 will be effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required beginning on or after January 1, 2011.

FSAB ASC Topic 815, “Derivatives and Hedging.” New authoritative accounting guidance (Accounting Standards Update no. 2010-11) under ASC Topic 815 clarifies that the only form of an embedded credit derivative that relate to the subordination of one financial instrument to another. Entities that have contract containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The provisions of Topic 815 were effective for the Company on July 1, 2010 and did not have an impact on the Company’s financial statements.

FASB ASC Topic 820, “Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements.” New authoritative accounting guidance (Accounting Standards Update 2010-06) in this update requires new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements. The amendments also require a reporting entity to provide information about activity for purchases, sales, issuances, and settlements in Level 3 fair value measurements and clarify disclosures about the level of disaggregation and disclosures about inputs and valuation techniques. This update became effective for the Company for interim and annual reporting periods beginning after December 15, 2009 and did not have a significant impact on the Company’s financial statements

FASB ASC Topic 860, “Transfers and Servicing — Accounting for Transfers of Financial Assets”. New authoritative accounting guidance (Accounting Standards Update No. 2009-16) under ASC Topic 860 amends prior guidance to

enhance reporting about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. ASC Topic 860 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The provision became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

4. FEDERAL HOME LOAN BANK STOCK

Federal Home Loan Bank stock is stated at cost and is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. The Company owned approximately $1.9 million of Federal Home Loan Bank of Chicago (“FHLB”) stock as of September 30, 2010 and December 31, 2009. During the third quarter of 2007, FHLB received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances and purchase loans through the Mortgage Partnership Facility program. With regard to dividends, the FHLB will continue to assess its dividend capacity each quarter and may make appropriate request for approval from its regulator. The FHLB did not pay a dividend during the calendar year of 2009 or the first three quarters of 2010. Management performed an analysis and, based on currently available information, determined the investment in this FHLB stock was not impaired as of September 30, 2010 and December 31, 2009.

5. SECURITIES

The amortized cost and fair values of securities are as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value

Available-for-sale Securities:
September 30, 2010:
U.S. Government agencies	$	3,914	$	100	$	—		$	4,014
Mortgage-backed securities:
GSE residential		75,070		2,214		(2	)		77,282
State and political subdivisions		32,625		956		(239	)		33,342
Equity securities		2,674		122		—			2,796


	$	114,283	$	3,392	$	(241	)	$	117,434


December 31, 2009:
Mortgage-backed securities:
GSE residential	$	92,710	$	2,789	$	(145	)	$	95,354
State and political subdivisions		28,525		1,019		(5	)		29,539
Equity securities		3,603		162		(508	)		3,257


	$	124,838	$	3,970	$	(658	)	$	128,150


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value

Held-to-maturity Securities:
September 30, 2010:
Mortgage-backed securities:
GSE residential	$	1,481	$	54	$	—	$	1,535


December 31, 2009:
Mortgage-backed securities:
GSE residential	$	2,334	$	77	$	—	$	2,411

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at September 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value


Within one year	$	3,605	$	3,605	$	—	$	—
One to five years		20,227		21,109		—		—
Five to ten years		10,656		10,704		—		—
After ten years		2,051		1,938		—		—

		36,539		37,356		—		—
Mortgage-backed securities:
GSE residential		75,070		77,282		1,481		1,535
Equity securities		2,674		2,796		—		—


Totals	$	114,283	$	117,434	$	1,481	$	1,535

The carrying value of securities pledged as collateral, to secure public deposits, Federal Home Loan Bank advances, repurchase agreements and for other purposes, amounted to $32.9 million at September 30, 2010 and $47.4 million at December 31, 2009.

During the nine months ended September 30, 2010, the Company recognized other-than-temporary impairment charges of $566 thousand on two of its investments in stock of other financial institutions, which are carried as available-for-sale securities. Impairments are determined based on the difference between the Company’s carrying value and quoted market prices for the stocks as of September 30, 2010. In making the determination of impairment for each of its investments, the Company considered the duration of the loss, prospects for recovery in a reasonable period of time and the significance of the loss compared to carrying value.

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2010 and December 31, 2009:


	Less Than 12 Months					12 Months or More				Total
Description of			Unrealized					Unrealized				Unrealized
Securities	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses


September 30, 2010
Mortgage-backed securities: GSE residential	$	368	$	(2	)	$	—	$	—	$	368	$	(2	)
State and political subdivisions		5,081		(239	)		—		—		5,081		(239	)
Equity securities		—		—			—		—		—		—


Total temporarily impaired securities	$	5,449	$	(241	)	$	—	$	—	$	5,449	$	(241	)


December 31, 2009
Mortgage-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	)

At September 30, 2010, securities in an unrealized loss position in the investment portfolio are minimal. The Company’s mortgage-backed securities and state and political subdivision securities are in a loss position due to interest rate changes, not credit events. Those unrealized losses are considered temporary and management has the ability and intent to hold them for the foreseeable future. Their fair value is expected to recover as the investments approach their maturity date or there is a downward shift in interest rates. The Company has one equity security with an unrealized loss due to the downturn in the market of the financial services industry. The unrealized loss was not due to credit losses at the specific financial institution itself and is expected to recover in the future.

6. COST METHOD INVESTMENTS IN COMMON STOCK

The Company has minority investments in the common stock of other community banks, which are not publicly traded, that are recorded under the cost method of accounting. The Company had investments in three community banks at September 30, 2010 and December 31, 2009 with a carrying value of $1.4 million.

The Company’s cost method investments are reviewed for impairment based on each investee’s earnings performance, asset quality, changes in the economic environment, and current and projected future cash flows. Based on these reviews, the Company determined none of its investments to be other-than-temporarily impaired as of September 30, 2010.

7. FAIR VALUE MEASUREMENT

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In accordance with ASC 820, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

	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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet.

Available-for-sale securities — The fair values of available-for-sale securities are determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. Level 1 securities include exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. For these investments, the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bench mark securities, bids, offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include local state and political subdivisions, debentures, and other illiquid equity securities.

The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the ASC 820 hierarchy in which their fair value measurements fall as of September 30, 2010 and December 31, 2009 (in thousands):


			Fair Value Measurements Using
			Quotes Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
September 30, 2010	Fair Value		(Level 1)		(Level 2)		(Level 3)

U.S. Government agencies	$	4,014	$	—	$	4,014	$	—
Mortgage-backed securities:
GSE residential		77,282		—		77,282		—
State and political subdivisions		33,342		—		33,342		—
Equity securities		2,796		2,699		—		97


	$	117,434	$	2,699	$	114,638	$	97


			Fair Value Measurements Using
			Quotes Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2009	Fair Value		(Level 1)		(Level 2)		(Level 3)

Mortgage-backed securities:
GSE residential	$	95,354	$	—	$	95,354	$	—
State and political subdivisions		29,539		—		29,500		39
Equity securities		3,257		3,161		—		96


	$	128,150	$	3,161	$	124,854	$	135

Management values Level 3 securities based on exit prices for which management believes it could receive if they were to sell these securities. This value approximates costs for a majority of these investments. There were no changes in valuation techniques for the Level 3 securities during the period. The change in fair value of assets measured using significant unobservable (Level 3) inputs on a recurring basis for the three and nine months ended September 30, 2010 and 2009 is summarized as follows (in thousands):


	For the Three Months Ended					For the Nine Months Ended
	September 30					September 30
	2010		2009			2010			2009


Beginning balance	$	97	$	1,447		$	135		$	2,006
Total realized and unrealized gains and losses:
Included in net income		—		—			—			—
Included in other comprehensive income		—		—			—			—
Purchases, issuances and settlements		—		(58	)		(38	)		(617	)
Transfers in and/or out of Level 3		—		—			—			—


Balance, September 30	$	97	$	1,389		$	97		$	1,389


Total 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

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Impaired loans (Collateral Dependent) — Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy.

Foreclosed Assets Held for Sale — Other real estate consists of properties obtained through foreclosure or in satisfaction of loans. These properties are reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is recorded as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of the income statement.

Mortgage Servicing Rights — Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Cost Method Investments — Cost method investments do not trade in an active, open market with readily observable prices. The cost method investments are periodically reviewed for impairment based on each investee’s earnings performance, asset quality, changes in the economic environment, and current and projected future cash flows. Due to the nature of the valuation inputs, cost method investments are classified within Level 3 of the hierarchy.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis during the period and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at September 30, 2010 and December 31, 2009:


			Fair Value Measurements Using
			Quotes Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Carrying value at September 30, 2010	Fair Value		(Level 1)		(Level 2)		(Level 3)


Impaired loans	$	43,226	$	—	$	—	$	43,226
Foreclosed assets held for sale		830		—		—		830
Mortgage servicing rights		880		—		—		880


			Fair Value Measurements Using
			Quotes Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Carrying value at December 31, 2009	Fair Value		(Level 1)		(Level 2)		(Level 3)


Impaired loans	$	44,142	$	—	$	—	$	44,142
Foreclosed assets held for sale		885		—		—		885
Mortgage servicing rights		1,331		—		—		1,331
Cost method investments		5,409		—		—		5,409

ASC 825, formerly Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments”, and FSP FAS 107-1, requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in ASC 825. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities except for loans held-for-sale and available-for-sale securities. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances.

The estimation methodologies used, the estimated fair values, and the recorded book balances at September 30, 2010 and December 31, 2009, were as follows:


	September 30, 2010				December 31, 2009
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(Restated)
Financial assets
Cash and cash equivalents	$	95,094	$	95,094	$	121,267	$	121,267
Available-for-sale securities		117,434		117,434		128,150		128,150
Held-to-maturity securities		1,481		1,535		2,334		2,441
Loans held for sale		2,871		2,871		681		681
Loans, net		675,442		673,401		757,138		757,721
Federal Home Loan Bank stock		2,884		2,884		2,900		2,900
Cost method investments in common stock		1,392		1,392		1,392		1,392
Interest receivable		3,881		3,881		3,962		3,962

Financial liabilities
Deposits		868,909		864,682		954,524		952,611
Short-term borrowings		10,906		10,906		30,740		30,740
Long-term debt and junior subordinated debentures		76,858		46,492		87,030		56,368
Interest payable		6,258		6,258		4,114		4,114

Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents, Federal Home Loan Bank Stock, Interest Receivable, and Cost Method Investments in Common Stock — The carrying amount approximates fair value.

Held-to-Maturity Securities — Fair values equal quoted market prices if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities.

Loans Held for Sale — For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

Loans — The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Deposits — For demand deposits, savings accounts, NOW accounts, and money market deposits, the carrying amount approximates fair value. The fair value of fixed-maturity time and brokered time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings and Interest Payable — The carrying amount approximates fair value.

Long-Term Debt and Junior Subordinated Debentures — Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Commitments to Originate Loans, Letters of Credit, and Lines of Credit — The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting.

Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the Company’s fiduciary services department, brokerage operations, deferred taxes, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates that must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

8. INCOME TAXES

A reconciliation of income tax expense (benefit) on continuing operations at the statutory rate to the Company’s actual income tax expense (benefit) is shown below:


	September 30,			December 31,
	2010			2009
	(Restated)

Computed at the statutory rate (35%)	$	(8,413	)	$	(1,580	)
Increase (decrease) resulting from
Graduated tax rates		240			45
Tax exempt income		(470	)		(136	)
State income taxes		(1,192	)		(2	)
Increase in cash surrender value of life insurance		(142	)		(42	)
Changes in the deferred tax asset valuation allowance		20,067			—
Other		(13	)		30


Actual tax expense (benefit)	$	10,077		$	(1,685	)

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:


	September 30,			December 31,
	2010			2009
Deferred tax assets
Allowance for loan losses	$	9,542		$	6,885
Accrued compensated absences		122			115
Deferred compensation		796			759
Accrued postretirement benefits		136			125
Deferred loss on investments		2,301			2,050
Capital loss carryforward on disposal of HNB		3,810			5,773
Net operating loss carryforward		10,074			2,395
Stock options		111			111
Deferred loan fees		55			80
Alternative minimum tax credits		1,059			149
Other		1,421			1,029


		29,427			19,471


Deferred tax liabilities
Federal Home Loan Bank stock dividends		249			277
Depreciation		519			522
State taxes		765			452
Mortgage servicing rights		341			334
Deferred gain on sale of BOLI policies		—			770
Unrealized gains on available-for-sale securities		1,623			1,161
Purchase accounting adjustments		76			35
Other		197			118


		3,770			3,669


Net deferred tax asset before valuation allowance		25,657			15,802

Valuation allowance
Beginning balance	$	(5,590	)	$	—
(Increase) decrease during the period		(20,067	)		(5,590	)


Ending balance		(25,657	)		(5,590	)


Net deferred tax asset	$	—		$	10,212

As of September 30, 2010, the Company had $29,629,000 of net operating loss carryforwards which will expire in 15-20 years.

As of September 30, 2010, the Company had $1,059,000 of alternative minimum tax credits available to offset future federal income taxes. The credits have no expiration date.

9. DISCONTINUED OPERATIONS

The Company completed the sale of Marine Bank & Trust (“Marine Bank”) and Brown County State Bank (“Brown County”) to United Community Bancorp, Inc. (“United”), of Chatham, Illinois for approximately $25.8 million on February 26, 2010 resulting in a pre-tax gain of approximately $4.5 million. Approximately $531 thousand of the recognized gain was due to principal payments received by the Company in accordance with a letter agreement entered into with United at the time of the sale regarding two specified loan participations to both Marine Bank and Brown County. The proceeds of the sale were used to strengthen the Company’s capital position and reduce its outstanding debt obligations. This sale, announced in November 2009, was a stage in the Company’s multi-tiered recapitalization plan.

The following table summarizes the estimated fair values of the assets and liabilities at the date the Company sold Marine Bank and Brown County:


Cash and cash equivalents	$	4,343
Available-for-sale securities		39,306
Held-to-maturity securities		1,027
Loans, net of allowance for loan losses of $1,183		206,872
Interest receivable		2,300
Federal Home Loan Bank stock		1,574
Premises and equipment		3,698
Other assets		19,465


Total assets disposed		278,585


Deposits		232,330
Long-term debt		13,500
Interest payable		559
Other liabilities		10,469


Total liabilities released		256,858


Net assets disposed	$	21,727

Operations for 2009 have been reclassified to include all income and expense into discontinued operations. On November 21, 2009, the Company entered into an Exchange Agreement, which provided for the sale of HNB National Bank (“HNB”), one of the Company’s subsidiary banks, in exchange for the repayment of $28 million of debt. The Company realized a loss of approximately $2.4 million on the debt exchange transaction.

The following table summarizes the income and expenses of the discontinued operations for the periods ended September 30, 2010, including Marine Bank and Brown County, and 2009 including HNB, Marine Bank, and Brown County:


	Three Months Ended				Nine Months Ended
	2010		2009		2010		2009

Interest and dividend income	$	—	$	8,261	$	2,206	$	24,898
Interest expense		—		2,384		572		7,973

Net interest margin				5,877		1,634		16,925

Provision for loan loss		—		250		48		1,092
Noninterest income		238		1,309		4,754		4,179
Noninterest expense		—		4,006		866		26,612


Net income (loss) before taxes		238		2,930		5,474		(6,600	)

Income tax expense		19		609		2,045		1,874


Net income	$	219	$	2,321	$	3,429	$	(8,474	)

10. OFF BALANCE SHEET CREDIT COMMITMENTS

In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States of America, are not included in its consolidated balance sheets. These transactions are referred to as “off balance-sheet commitments.” The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheet. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company’s commitments to extend credit are contingent

upon customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Commitments to originate loans totaled $22.8 million at September 30, 2010 and $2.3 million at December 31, 2009. The commitments extend over varying periods of time with the majority being disbursed within a one-year period. At September 30, 2010 and December 31, 2009, the Company had granted unused lines of credit to borrowers totaling $102.6 million and $143.2 million, respectively, for commercial lines and open-end consumer lines.

Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that standby letters of credit arrangements contain collateral and debt covenants similar to those contained in loan agreements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. Standby letters of credit totaled $9 million at September 30, 2010 and $12.8 million at December 31, 2009. At September 30, 2010, the outstanding standby letters of credit had a weighted average term of approximately one year. As of September 30, 2010 and December 31, 2009, no liability for the fair value of the Company’s potential obligations under these guarantees has been recorded since the amount is deemed immaterial.

11. COMPREHENSIVE LOSS

Comprehensive loss components and related taxes were as follows:


	For the Three Months
	Ended September 30,
	2010			2009

Net loss	$	(25,085	)	$	(1,848	)


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 $(184) for 2010 and $(294) for 2009		(307	)		538
Less reclassification adjustment for realized gains (losses) included in income net of tax expense (benefit) of $14 for 2010 and $0 for 2009		25			—
Less reclassification adjustment for other than temporary losses included in income net of tax expense (benefit) of $(0) for 2010 and $(263) for 2009		—			(428	)

Total unrealized appreciation (depreciation) on available-for-sale securities, net of tax expense (benefit) of $(198) for 2010 and $557 for 2009		(332	)		966


Adjustment of ASC 715 (formerly SFAS 158) liability, net of tax expense (benefit) of $(0) for 2010 and $0 for 2009		(1	)		—


Total other comprehensive income (loss), net of tax		(333	)		966


Comprehensive loss		(25,418	)		(882	)

Comprehensive loss attributable to the noncontrolling interest		(2,551	)		(488	)


Comprehensive loss attributable to Mercantile Bancorp, Inc.	$	(22,867	)	$	(394	)


	For the Nine Months
	Ended September 30,
	2010			2009

Net loss	$	(30,687	)	$	(55,697	)


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 $(256) for 2010 and $(169) for 2009		(482	)		(116	)
Less reclassification adjustment for realized gains (losses) included in income net of tax expense (benefit) of $14 for 2010 and $0 for 2009		25			—
Less reclassification adjustment for other than temporary losses included in income net of tax benefit of $(215) for 2010 and $(1,230) for 2009		(351	)		(2,007	)

Total unrealized appreciation (depreciation) on available-for-sale securities, net of tax expense (benefit) of $(55) for 2010 and $1,061 for 2009		(156	)		1,891


Adjustment of SFAS 158 liability, net of tax expense of $(10) for 2010 and $(12) for 2009		17			20


Total other comprehensive income, net of tax		(139	)		1,911


Comprehensive loss		(30,826	)		(53,876	)

Comprehensive loss attributable to the noncontrolling interest		(4,662	)		(1,415	)


Comprehensive loss attributable to Mercantile Bancorp, Inc.	$	(26,164	)	$	(52,371	)

12. OPERATING AND LIQUIDITY MATTERS

The Company generated a net loss of $26.0 million in the first nine months of 2010, as well as net losses in each of the last two years, with $58.5 million in 2009 and $8.8 million in 2008. The 2008 and 2009 losses were largely due to the operating losses at two of its subsidiary banks, Royal Palm Bank in Naples, Florida, and Heartland Bank in Leawood, Kansas. Both of those banks continued to generate losses in the first nine months of 2010, as did Mercantile Bank, the Company’s largest subsidiary. Each bank has experienced significant increases in non-performing assets, impaired loans and loan loss provisions, resulting in bank regulators imposing cease and desist orders at Royal Palm Bank and Heartland Bank and a memorandum of understanding at Mercantile Bank. As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, the net loss in the first nine months of 2010 was increased by additional loan loss provisions of approximately $6.2 million at Mercantile Bank, along with an approximate $10.3 million increase in the valuation allowance related to the Company’s deferred tax assets.

Mercantile Bank’s net loss in 2010 is primarily due to charge-offs of purchased participations in large commercial real estate developments in various parts of the United States. Royal Palm Bank’s operating losses over the past three years (excluding goodwill impairment) were primarily attributable to the severe decline in real estate values in its southwest Florida market, creating both loan losses and write-downs of foreclosed assets. Heartland Bank’s losses were largely due to purchased participations from a bank in Georgia that was closed by the FDIC. Although the subsidiary banks are confident that they have identified the bulk of their asset quality issues and expect to see improved operating performance beginning in 2011, there can be no assurance that they won’t experience results similar to the past two-plus years. The Company has projected 2011 and 2012 operating results for each bank assuming an improving economy and reduced loan losses compared to 2008 through 2010. Those projections indicate Mercantile Bank returning to profitability in 2011. Royal Palm Bank and Heartland Bank are projected to be profitable in 2012, although not attaining compliance with all regulatory mandates set forth in their respective cease and desist orders. Due to the net losses incurred by the Company in 2008, 2009 and the first nine months of 2010, including the effect of restatement of its results for the three and nine months ended September 30, 2010, equity capital has been reduced to a level that leaves the Company with very little capacity to absorb further losses. Mercantile Bank is the Company’s largest subsidiary bank, representing approximately 71% of total consolidated assets at September 30, 2010, and although operating under a regulatory memorandum of understanding due to elevated levels of impaired loans, its actual loan losses over the past two-plus years have been lower than the other two subsidiary banks and it retains significant earnings capacity. However, it is unlikely that Mercantile Bank could generate sufficient earnings to offset continued losses at Royal Palm Bank and Heartland Bank.

In June 2009, the Company’s Board of Directors initiated a process to identify and evaluate a broad range of strategic alternatives to further strengthen the Company’s capital base and enhance shareholder value. These strategic alternatives have included and may include asset sales, rationalization of non-business operations, consolidation of operations, closing of branches, mergers of subsidiaries, capital raising and other recapitalization transactions. As part of this process, the Board created a special committee (the “Special Committee”) of independent directors to develop, evaluate and oversee any strategic alternatives that the Company may pursue. The Special Committee has retained outside financial and legal advisors to assist it with its evaluation and oversight.

In November 2009, as a part of a capital-raising plan developed by the Special Committee and its advisors, the Company reached agreements to sell three of its subsidiary banks for cash or in exchange for the cancellation of indebtedness owed by the Company. The first of these transactions closed in December 2009, and the other two in February 2010, serving to reduce debt and provide liquidity to support the capital requirements of its remaining subsidiaries.

The Special Committee also developed and executed a plan to raise additional equity through a shareholder rights offering. On April 27, 2010, the Company’s Board of Directors, upon the recommendation of the Special Committee, approved an amendment to its Certificate of Incorporation to increase the number of authorized shares of common stock of the Company from 14,000,000 to 30,000,000 (“the Amendment”). On May 24, 2010, at the Company’s annual meeting, stockholders voted to approve the Amendment. On July 12, 2010, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (“SEC”), to register Units comprised of shares of the Company’s common stock and warrants to acquire the Company’s common stock. Holders of the Company’s common stock would receive one subscription right for each share of Company common stock held as of September 23, 2010, the record date. The offering period expired on October 29, 2010. On November 3, 2010, the Company terminated the offering without acceptance of any of the subscriptions exercised thereunder. The Company’s Board of Directors determined that in light of the Company’s stock price trading substantially below the subscription price, it was not appropriate to accept the subscriptions that were exercised.

If the Company is unsuccessful in assessing and implementing other strategic and capital-raising options, and if a liquidity crisis would develop, the Company has various alternatives, which could include selling or closing certain branches or subsidiary banks, packaging and selling high-quality commercial loans, executing sale/leaseback agreements on its banking facilities, and other options. If executed, these transactions would decrease the various banks’ assets and liabilities, generate taxable income, improve capital ratios, and reduce general, administrative and other expense. In addition, the affected subsidiary banks would dividend the funds to the Company to provide liquidity, assuming such dividends receive the requisite regulatory approval. The Company is continuing to explore and evaluate all strategic and capital-raising options with its financial and legal advisors.

13. RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Certain adjustments have been made to restate previously reported results for the three and nine months ended September 30, 2010. The Company previously announced its intentions to file this Form 10-Q/A on Form 8-K filed on December 28, 2010. This restatement is necessary to reflect an additional provision for loan losses of approximately $6.2 million and to increase the valuation allowance related to its deferred tax assets by approximately $10.3 million. These increases in the Company’s net loss were partially offset by an increase in the net loss attributable to the noncontrolling interest of approximately $1.5 million.

The increase in the provision for loan losses for the quarter ended September 30, 2010, reflected in this restatement, is the result of a determination made by the Company to increase its provision for loan losses after Mercantile Bank, the Company’s largest subsidiary bank, received the results of a recent, regularly scheduled safety and soundness examination conducted jointly by the Federal Deposit Insurance Corporation (the “FDIC”) and the Illinois Division of Financial Institutions (the “IDFI”) and completed in December 2010. Subsequent to the receipt of the results of its examination, Mercantile Bank amended its September 30, 2010 call report on December 17, 2010, to reflect an additional approximately $6.2 million in loan loss provision. The additional loan loss provision was required to increase the allowance for loan losses to a level deemed appropriate by Company management following the additional write-down of two commercial real estate loans by Mercantile Bank. As a result of the examination, Mercantile Bank reviewed Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events”; reassessed its evaluation of potential impairment losses as required by ASC Topic 310, “Receivables”; and reviewed information about the valuation of the underlying loan collateral and the financial condition of the borrowers that became known to Mercantile Bank following September 30, 2010, and determined that it was appropriate to record the write-down of the two impaired commercial real estate loans and make the additional adjustments retroactive to the third quarter of 2010.

could generate sufficient taxable income to realize the deferred tax assets in future near-term periods as defined by generally accepted accounting principles, and accordingly recognized an additional valuation allowance in the third quarter of 2010 in the amount of approximately $10.3 million, representing the full remaining balance of the Company’s and each of its subsidiary banks’ deferred tax assets prior to the adjustment.

See the Explanatory Note on page 3 of this Form 10-Q/A for more information related to the adjustments retroactive to the third quarter of 2010.

The effects of the restatement on the Company’s condensed consolidated balance sheet, statement of operations, and statement of cash flows are summarized as follows:


	As of and for the Three Months Ended,									As of and for the Nine Months Ended,
	September 30, 2010									September 30, 2010
Condensed Consolidated	As Previously									As Previously
Statement of Operations	Reported			Adjustment			Restated			Reported			Adjustment			Restated


Provision for loan losses	$	5,386		$	6,174		$	11,560		$	16,526		$	6,174		$	22,700
Net interest income (expense) after provision for loan losses		979			(6,174	)		(5,195	)		2,260			(6,174	)		(3,914	)
Loss from continuing operations before income taxes		(6,016	)		(6,174	)		(12,190	)		(17,865	)		(6,174	)		(24,039	)
Income tax expense (benefit)		2,765			10,349			13,114			(272	)		10,349			10,077
Loss from continuing operations		(8,781	)		(16,523	)		(25,304	)		(17,593	)		(16,523	)		(34,116	)
Net Loss		(8,562	)		(16,523	)		(25,085	)		(14,164	)		(16,523	)		(30,687	)
Net loss attributable to the noncontrolling interest		(1,035	)		(1,516	)		(2,551	)		(3,146	)		(1,516	)		(4,662	)
Net loss attributable to Mercantile Bancorp, Inc.		(7,527	)		(15,007	)		(22,534	)		(11,018	)		(15,007	)		(26,025	)

Per share data
Basic earnings (loss) per share from continuing operations		(0.89	)		(1.73	)		(2.62	)		(1.66	)		(1.72	)		(3.38	)


	As of and for the Nine Months Ended,
	September 30, 2010
	As Previously
Condensed Consolidated Statement of Cash Flows	Reported			Adjustment			Restated


Net loss before attribution of noncontrolling interest	$	(14,164	)	$	(16,523	)	$	(30,687	)
Net loss attributable to noncontrolling interest		(3,146	)		(1,516	)		(4,662	)
Net income (loss) attributable to Mercantile Bancorp, Inc.		(11,018	)		(15,007	)		(26,025	)
Provision for loan losses		16,574			6,174			22,748
Deferred income taxes		638			10,124			10,762
Other assets		3,047			225			3,272
Noncontrolling interest in subsidiary		(3,146	)		(1,516	)		(4,662	)


	As of September 30, 2010
	As Previously
Condensed Consolidated Balance Sheet	Reported		Adjustment			Restated


Loans, net of allowance for loan losses	$	681,615	$	(6,173	)	$	675,442
Deferred income taxes		10,125		(10,125	)		—
Other assets		14,085		(225	)		13,860
Total assets		998,573		(16,522	)		982,051
Retained earnings (deficit)		14,077		(15,005	)		(928	)
Total Mercantile Bancorp, Inc. stockholders’ equity		30,145		(15,005	)		15,140
Noncontrolling interest		755		(1,517	)		(762	)
Total equity		30,900		(16,522	)		14,378
Total liabilities and equity		998,573		(16,522	)		982,051

14. SUBSEQUENT EVENTS

On November 3, 2010, the Company announced it would terminate the shareholder rights offering it implemented on September 23, 2010 without acceptance of any of the subscriptions exercised thereunder. The Company’s Board of Directors determined that in light of the Company’s stock price trading substantially below the subscription price, it was not appropriate to accept the subscriptions that were exercised. The Company continues to work with its financial advisors and legal counsel in assessing its strategic and capital-raising options.


Item 2.		*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Special Cautionary Notice Regarding Forward-looking Statements

Statements and financial discussion and analysis contained in the Form 10-Q/A that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Company’s operations or performance. Use of the words “believe,” “expect”, “anticipate”, “estimate”, “continue”, “intend”, “may”, “will”, “should”, or similar expressions, identifies these forward-looking statements. Examples of forward-looking statements include, but are not limited to, estimates or projections with respect to our future financial condition, results of operations or business, such as:

	•		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

Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:

	•		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, financial condition and results of operations;

	•		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 Company’s deferred tax valuation assumptions;

	•		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;

	•		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.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen the assumptions or bases in good faith and that they are reasonable. However, the Company cautions you that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. Any forward-looking statements made or incorporated by reference in this report are made as of the date of this report, and, except as required by applicable law, the Company assumes no obligation to update such statements or to update the reasons why actual results could differ from those projected in such statements. You should consider these risks and uncertainties in evaluating forward-looking statements and you should not place undue reliance on these statements.

General

Mercantile Bancorp, Inc. is a three-bank holding company headquartered in Quincy, Illinois with 12 banking facilities (11 full service offices and 1 stand-alone drive-up facility) serving 9 communities located throughout west-central Illinois, central Indiana, western Missouri, eastern Kansas and southwestern Florida. The Company is focused on meeting the financial needs of its markets by offering competitive financial products, services and technologies. It is engaged in retail, commercial and agricultural banking, and its core products include loans, deposits, trust and investment management. The Company derives substantially all of its net income from its subsidiary banks.

Wholly Owned Subsidiaries. As of September 30, 2010, the Company was the sole shareholder of the following banking 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. As of September 30, 2010, the Company was the majority, but not sole, shareholder of Mid-America Bancorp, Inc. (“Mid-America”), the sole shareholder of Heartland Bank (“Heartland”), located in Leawood, Kansas, in which the Company owns 55.5% of the outstanding voting stock. During the first three quarters of 2010, there were no transactions affecting Mid-America’s outstanding shares of common stock or the Company’s ownership percentage in Mid-America.

Other Investments in Financial Institutions. As of September 30, 2010, the Company had less than majority ownership interests in several additional banking organizations located throughout the United States. Specifically, the Company owned the following percentages of the outstanding voting stock of these banking entities:

	•		2.5% of Premier Community Bank of the Emerald Coast (“Premier Community”), located in Crestview, Florida;

	•		3.7% of Paragon National Bank (“Paragon”), located in Memphis, Tennessee;

	•		0.9% 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.

On February 27, 2009, the FDIC adopted an interim rule to impose a 20 basis point emergency special assessment on June 30, 2009, which would be collected on September 30, 2009. The 20 basis point assessment was originally based on the institution’s assessment base of total deposits. In the second quarter of 2009, the FDIC announced it had revised the original interim rule to impose a 20 basis point special assessment based on deposits to a 5 basis point special assessment based on the institution’s total assets minus Tier 1 Capital. The new rule provided that additional assessments of up to 5 basis points could be imposed on September 30, 2009 and December 31, 2009 if the reserve ratio of the Deposit Insurance Fund was not at an acceptable level. The 5 basis point additional assessment for each quarter could not exceed an institution’s calculation of 10 basis points on the original assessment base of total deposits. On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based deposit insurance assessment for the third quarter of 2009. The FDIC is also scheduled to increase the normal assessment rates with the intent being to replenish the Deposit Insurance Fund to the statutory limit of 1.15% of insured deposits by December 31, 2013. The December 30, 2009 prepayment is being amortized based on the actual quarterly assessment invoices received from the FDIC. As of September 30, 2010, the prepaid FDIC assessment balance is approximately $2.6 million.

On January 12, 2010, the FDIC’s board of directors approved an Advance Notice of Proposed Rulemaking, or ANPR, entitled “Incorporating Executive Compensation Criteria into the Risk Assessment System.” The ANPR requests comment on ways in which the FDIC can amend its risk-based deposit insurance assessment system to account for risks posed by certain employee compensation programs. The FDIC’s goal is to provide an incentive for insured depository institutions to adopt compensation programs that align employee interest with the long-term interests of the institution and its stakeholders, including the FDIC. In order to accomplish this goal, the FDIC would adjust a assessment rates in a manner commensurate with the risks presented by an institution’s compensation program. Examples of compensation program features that meet the FDIC’s goals include: (i) providing significant portions of performance-based compensation in the form of restricted, non-discounted company stock to those employees whose activities present a significant risk to the institution; (ii) vesting significant awards of company stock over multiple years and subject to some form of claw-back mechanism to account for the outcome of risks assumed in earlier periods; and (iii) administering the program through a board committee composed of independent directors with input from independent compensation professionals. The Company believes its compensation programs currently meet the FDIC’s goals.

In June 2009, the Company elected to defer regularly scheduled interest payments on its outstanding junior subordinated debentures relating to its trust preferred securities. The terms of the junior subordinated debentures and the trust documents allow the Company to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. During the deferral period, the respective trusts will likewise suspend the declaration and payment of dividends on the trust preferred securities. Also during the deferral period, the Company may not, among other things and with limited exceptions, pay cash dividends on or repurchase its common stock nor make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated debentures. As of September 30, 2010, the accumulated deferred interest payments totaled $4.8 million.

On July 12, 2010, the Company announced that it had implemented an early retirement option and a limited reduction in force at the Company, Mercantile Bank, Royal Palm Bank and Heartland Bank. The Company’s Board of Directors authorized these actions on June 22, 2010, upon recommendation of the Board’s Compensation Committee, as additional steps in the Company’s efforts to reduce overhead costs in light of the sale of three of the Company’s subsidiary banks in the fourth quarter of 2009 and first quarter of 2010. The early retirements and reductions in force were completed by October 31, 2010. Total expenses related to these actions (principally one- time termination payments) were approximately $191,000. A total of 22 full-time positions were eliminated, representing approximately 7.7% of the Company’s workforce prior to implementation of these actions.

Also on July 12, 2010, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (SEC), to register units comprised of shares of the Company’s common stock and warrants to acquire the Company’s common stock. Holders of the Company’s common stock would receive one subscription right for each share of Company common stock held as of September 23, 2010, the record date. The offering period expired on October 29, 2010. On November 3, 2010, the Company terminated the offering without acceptance of any of the subscriptions exercised thereunder. The Company’s Board of Directors determined that in light of the Company’s stock price trading substantially below the subscription price, it was not appropriate to accept the subscriptions that were exercised.

Results of Operations

Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009

Overview. Unless otherwise indicated, discussions below regarding income and expense for the three months ended September 30, 2010 and 2009 refer to the Company’s continuing operations. Net loss for the three months ended September 30, 2010 from both continuing and discontinued operations was $22.5 million compared with a net loss of $1.4 million for the same period in 2009. The primary factors contributing to the increase in net loss were an increase in provision for loan losses to $11.6 million for the three months ended September 30, 2010 compared to $5.3 million for the same period in 2009; income tax expense of $13.1 million for the three months ended September 30, 2010, largely related to an increase in the valuation allowance on deferred tax assets, compared to income tax benefit of $3.0 million for the same period in 2009; and a decrease in income from discontinued operations of $2.1 million. These increases in net loss were partially offset by an increase in net interest income of $661 thousand, an increase in noninterest income of $215 thousand, a decrease in noninterest expense of $293 thousand, and an increase in net loss attributable to noncontrolling interest of $2.1 million. Basic earnings (loss) per share (EPS) from continuing operations for the three months ended September 30, 2010 was $(2.62) compared with ($0.42) for the same period in 2009.

Total assets at September 30, 2010 were $982.1 million compared with $1.4 billion at December 31, 2009, a decrease of $408.4 million or 29.4%, primarily attributable to decreases in cash and cash equivalents, securities, loans, and discontinued operations assets held for sale, partially offset by an increase in foreclosed assets held for sale. Total loans, including loans held for sale, at September 30, 2010 were $704.2 million compared with $776.7 million at December 31, 2009, a decrease of $72.5 million or 9.3%. Total deposits at September 30, 2010 were $868.9 million compared with $954.5 million at December 31, 2009, a decrease of $85.6 million or 9.0%. Total Mercantile Bancorp, Inc. stockholders’ equity at September 30, 2010 was $15.1 million compared with $41.3 million at December 31, 2009, a decrease of $26.2 million or 63.3%.

Discontinued Operations. As a result of the sale of two of the Company’s wholly-owned subsidiaries, Marine Bank and Trust and Brown County State Bank, to United Community Bancshares, Inc. on February 26, 2010, the assets and liabilities of those two banks are included in the Company’s consolidated balance sheet as of December 31, 2009, but are reflected as “Discontinued operations, assets held for sale” and “Discontinued operations, liabilities held for sale”. The income and expenses of those two banks for the period January 1 through February 26, 2010 and the three months ended September 30, 2009 are included in “Income (loss) from discontinued operations” in the Company’s consolidated statements of operations. As a result of the exchange for debt of another of the Company’s wholly-owned subsidiaries, HNB National Bank, on December 16, 2009, that bank’s income and expenses for the three months ended September 30, 2009 are included in “Income (loss) from discontinued operations” in the Company’s consolidated statements of operations.

Net Interest Income. For the three months ended September 30, 2010, net interest income increased $661 thousand, or 11.6%, to $6.4 million compared with $5.7 million for the same period in 2009. The increase was primarily due to decreased volumes of savings, money market and time and brokered time deposits, short-term borrowings and long-term debt, increased rates on loans, and decreased rates on all deposits. For the three months ended September 30, 2010 and 2009, the net interest margin increased by 56 basis points to 2.73% from 2.17% while the net interest spread increased by 50 basis points to 2.60% from 2.10%, respectively.

Interest and dividend income for the three months ended September 30, 2010 decreased $1.1 million, or 8.9%, to $11.4 million compared with $12.5 million for the same period in 2009. This decrease was due primarily to a decrease in loan interest income of $966 thousand. Average total loans from continuing operations for the three months ended September 30, 2010 decreased $107.7 million, or 13.0%, to $717.6 million compared with $825.3 million for the same period in 2009, while the average yield on total loans increased 27 basis points to 5.65% for the same period. Average total investments for the three months ended September 30, 2010 increased $1.8 million, or 1.46%, to $122.6 million compared with $120.8 million for the same period in 2009, while the average yield on investments decreased 77 basis points to 3.49% for the same period. For the three months ended September 30, 2010, compared to the same period in 2009, the yield on total average earning assets decreased by 13 basis points to 4.87%.

Interest expense for the three months ended September 30, 2010 decreased $1.8 million, or 26.3%, to $5.0 million compared with $6.8 million for the same period in 2009. This decrease was due primarily to decreases in interest expense on deposits of $1.1 million and interest expense on short-term borrowings of $569 thousand. Average total interest-bearing deposits for the three months ended September 30, 2010 decreased $76.6 million, or 9.0%, to $778.6 million compared with $855.2 million for the same period in 2009, while the average cost of funds on total interest-bearing deposits decreased 37 basis points to 1.99% for the same period. The average cost of funds on all categories of deposits decreased in the three months ended September 30, 2010, compared to the same period in 2009, primarily due to the Company reducing deposit rates to align with competitors in an inelastic rate environment. Average total long-term debt for the three months ended September 30, 2010 decreased $20.1 million, or 20.7%, to $76.9 million compared with $96.9 million for the same period in 2009, while the average cost of funds on long-term debt increased 56 basis points to 5.33% for the same period. For the three months ended September 30, 2010, compared to the same period in 2009, the cost of funds on total average interest-bearing liabilities decreased by 37 basis points to 2.27%.

The following table sets forth for the periods indicated an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities and the net interest margin on average total interest-earning assets for the same periods. All average balances are daily average balances and nonaccruing loans have been included in the table as loans carrying a zero yield.


	For the three months ended September 30
				2010								2009
				Income/								Income/
	Average Balance			Expense		Yield/Rate			Average Balance			Expense		Yield/Rate
						(dollars in thousands)
Assets
Interest-bearing demand deposits	$	71,794		$	43		0.24	%	$	86,706		$	8		0.04	%
Federal funds sold		10,679			6		0.22	%		8,504			3		0.14	%
Securities:
Taxable
U.S. treasuries and government agencies		4,079			24		2.33	%		—			3		0.00	%
Mortgage-backed securities: GSE residential		33,052			244		2.93	%		24,012			241		3.98	%
Other securities		58,283			579		3.94	%		69,193			788		4.52	%

Total taxable		95,414			847		3.52	%		93,205			1,032		4.39	%
Non-taxable — State and political subdivision (3)		27,164			231		3.37	%		27,612			234		3.36	%
Loans (net of unearned discount ) (1)(2)		717,608			10,225		5.65	%		825,305			11,191		5.38	%
Federal Home Loan Bank stock		2,949			2		0.27	%		2,947			2		0.27	%

Total interest-earning assets		925,608		$	11,354		4.87	%		1,044,279		$	12,470		4.74	%


Cash and due from banks		10,350								12,359
Interest receivable		3,847								4,288
Foreclosed assets held for sale, net		25,876								10,401
Cost method investments in common stock		1,392								2,210
Cash surrender value of life insurance		15,337								14,783
Premises and equipment		24,618								26,254
Other		26,855								20,290
Intangible assets		1,861								1,992
Allowance for loan loss		(22,184	)							(23,271	)
Discontinued operations, Assets held for sale		—								595,767


Total assets	$	1,013,560							$	1,709,352


Liabilities and Stockholders’ Equity
Interest-bearing transaction deposits	$	66,345		$	44		0.26	%	$	63,078		$	48		0.30	%
Savings deposits		45,604			38		0.33	%		46,873			64		0.54	%
Money-market deposits		112,432			163		0.58	%		160,918			315		0.78	%
Time and brokered time deposits		554,268			3,666		2.62	%		584,364			4,559		3.10	%
Short-term borrowings		14,907			45		1.20	%		65,039			614		3.75	%
Long term debt		15,001			159		4.21	%		35,052			347		3.93	%
Junior subordinated debentures		61,858			874		5.61	%		61,858			819		5.25	%


Total interest-bearing liabilities		870,415		$	4,989		2.27	%		1,017,182		$	6,766		2.64	%


Demand deposits		93,773								85,234
Interest payable		6,063								3,796
Other liabilities		4,594								4,650
Discontinued operations, Liabilities held for sale		—								544,499
Noncontrolling interest		1,723								4,682
Stockholders’ equity		36,992								49,309


Total liabilities and stockholders’ equity	$	1,013,560							$	1,709,352


Interest spread							2.60	%							2.10	%
Net interest income				$	6,365							$	5,704

Net interest margin							2.73	%							2.17	%
Interest-earning assets to interest-bearing liabilities		106.34	%							102.66	%


(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.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both volume and rate have been allocated proportionately to the change due to volume and rate.


	For the three months ended September 30,
	2010 vs. 2009
	Increase (Decrease) Due to
	Change in
	Volume			Rate			Total

Increase (decrease) in interest income:
Interest-bearing bank deposits	$	(2	)	$	37		$	35
Federal funds sold		1			2			3
Investment securities:
U.S. Treasuries and Agencies		—			21			21
Mortgage-backed securities: GSE residential		77			(74	)		3
States and political subdivision (1)		(4	)		1			(3	)
Other securities		(115	)		(94	)		(209	)
Loans (net of unearned discounts)		(1,514	)		548			(966	)
Federal Home Loan Bank stock		—			—			—

Change in interest income		(1,557	)		441			(1,116	)

Increase (decrease) in interest expense:
Interest-bearing transaction deposits		2			(6	)		(4	)
Savings deposits		(2	)		(24	)		(26	)
Money-market deposits		(82	)		(70	)		(152	)
Time and brokered time deposits		(226	)		(667	)		(893	)
Short-term borrowings		(302	)		(267	)		(569	)
Long-term debt and junior subordinated debentures		(259	)		126			(133	)

Change in interest expense		(869	)		(908	)		(1,777	)


Increase (decrease) in net interest income	$	(688	)	$	1,349		$	661


(1)		The tax exempt income for state and political subdivisions is not recorded on a tax equivalent basis.

Provision for Loan Losses. As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the three and nine months ended September 30, 2010. These adjustments included an additional $6.2 million of provision for loan loss, compared to the amount originally reported.

Provisions for loan losses are charged against income to bring the Company’s allowance for loan losses (“ALLL”) to a level deemed appropriate by management. For the three months ended September 30, 2010, the provision increased by approximately $6.2 million to $11.6 million, compared with $5.3 million for the same period in 2009, due to Mercantile Bank’s write-down of two commercial real estate loans. As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, Mercantile Bank originally recorded these write-downs in the fourth quarter of 2010, but after receiving the results of a recent, regularly scheduled safety and soundness examination, Mercantile Bank reassessed the circumstances impacting the two loans as subsequent events, and determined the write-downs should have been recognized as of September 30, 2010. On one of the loans, the borrower unexpectedly filed for bankruptcy in October 2010, whereas the other loan involved a lawsuit filed against the guarantors that was continued by the court in November 2010 until February 2011. In both cases, prior to the third quarter of 2010, Mercantile Bank had relied on the financial strength of the guarantors to service the debt. However, considering the uncertainties associated with the bankruptcy process and the delays in the lawsuit, Mercantile Bank concluded that both write-downs should be retroactively applied to the third quarter of 2010.

The Company continues to be negatively impacted by further declines in real estate values that collateralize loans, both in its Florida market and in some of its purchased participations in commercial real estate developments in other areas of the country.

The ALLL at September 30, 2010 was $25.9 million, or 3.67% of total loans, an increase of $7.0 million from $18.9 million or 2.43% of total loans at December 31, 2009. Nonperforming loans were $49.8 million, or 7.07% of total

loans as of September 30, 2010, compared with $50.8 million, or 6.54% of total loans as of December 31, 2009. Impaired loans decreased from $111.2 million at December 31, 2009 to $105.7 million at September 30, 2010. Approximately $12.1 million of this decrease is attributable to foreclosures on two loans to commercial real estate developers by Mercantile Bank and the subsequent transfer of the properties to foreclosed assets held for sale. The remainder of the decrease was due to the charge-offs at Mercantile Bank and Heartland, as well as payments received on impaired loans. This decrease was partially offset by an increase in impaired loans at Mercantile Bank, Royal Palm Bank, and Heartland throughout 2010. The Company anticipates a portion of the impaired loans will eventually be charged off, but believes it has adequately reserved for these losses based on circumstances existing as of September 30, 2010.

As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, due to the additional loan write-downs and provisions for loan losses retroactive to the third quarter of 2010, the Company re-evaluated its ALLL calculation as of September 30, 2010, including both the general and specific reserves and incorporated into its re-evaluation the revised historical loss experience factor created by the additional write-downs. Each of the Company’s subsidiary banks performs a quarterly ALLL calculation which the Company utilizes to evaluate the adequacy of the total ALLL on a consolidated basis. Each of these calculations is designed to quantify an acceptable range rather than a specific amount. The Company’s re-evaluation of the consolidated ALLL as of September 30, 2010, based on the additional $6.2 million of loan write-downs at Mercantile Bank, resulted in a determination by the Company that the difference between the calculated amount and the balance reflected in the restated financial statements as of September 30, 2010 was within the acceptable range.

Management has a process in place to review each subsidiary bank’s loan portfolio on a quarterly basis by an independent consulting firm that reports directly to the Audit Committee of the Board of Directors. The purpose of these quarterly reviews is to assist management in evaluating the adequacy of the allowance for loan losses. In light of the elevated levels of nonperforming and impaired loans over historical averages, management has increased the frequency and scope of the reviews in areas deemed to have the greatest risk of potential losses. Management’s goal is to identify problems loans as soon as possible, with the hope that early detection and attention to these loans will minimize the amount of the loss.

Noninterest Income. Noninterest income for the three months ended September 30, 2010 increased $215 thousand to $2.1 million compared with $1.9 million for the same period in 2009. The increase in noninterest income was primarily due to increases in other service charges and fees, net gains on loan sales, and other income, partially offset by decreases in brokerage fees.

The following table presents, for the periods indicated, the major categories of noninterest income:


	For the Three Months Ended
	September 30
	2010			2009

Fiduciary activities	$	581		$	569
Brokerage fees		243			302
Customer service fees		400			439
Other service charges and fees		195			142
Net gains (losses) on sales of assets		(3	)		(6	)
Net gains on investments in common stock		39			—
Net gains on loan sales		248			157
Loan servicing fees		126			122
Net increase in cash surrender value of life insurance		143			176
Other		158			14

Total noninterest income	$	2,130		$	1,915

Other service charges and fees for the three months ended September 30, 2010 increased $53 thousand to $195 thousand compared with $142 thousand for the same period in 2009, primarily due to an expansion of the number of accounts that generate transaction and maintenance fees.

Net gains on loan sales for the three months ended September 30, 2010 increased $91 thousand to $248 thousand compared with $157 thousand for the same period in 2009, primarily due to an increase in residential mortgage refinancing activity.

Other noninterest income for the three months ended September 30, 2010 increased $144 thousand to $158 thousand compared with $14 thousand for the same period in 2009, primarily due to fees for providing data processing services to the three former subsidiaries that were sold in December 2009 and February 2010.

Brokerage fees for the three months ended September 30, 2010 decreased $59 thousand to $243 thousand compared with $302 thousand for the same period in 2009, primarily due to the volatility of the economy and stock market, creating fluctuations in amounts and timing of performance-based fees generated on customer brokerage accounts .

Noninterest Expense. For the three months ended September 30, 2010, noninterest expense decreased $293 thousand to $9.1 million compared with $9.4 million for the same period in 2009, primarily due to a decrease in other than temporary losses on available-for-sale securities and cost method investments, partially offset by an increase in other noninterest expense.

The following table presents, for the periods indicated, the major categories of noninterest expense:


	For the Three Months Ended
	September 30
	2010		2009

Salaries and employee benefits	$	4,310	$	4,432
Net occupancy expense		675		467
Equipment expense		552		712
Deposit insurance premium		645		561
Professional fees		610		665
Postage and supplies		131		164
Losses on foreclosed assets, net		508		512
Other than temporary losses on available-for-sale securities and cost method investments		—		692
Amortization of mortgage servicing rights		117		38
Other		1,577		1,175

Total noninterest expense	$	9,125	$	9,418

Other than temporary losses on available-for-sale securities and cost method investments decreased $692 thousand for the three months ended September 30, 2010 compared to the same period in 2009, primarily due to the gradual stabilization of values associated with these securities and investments from 2009 to 2010.

Other noninterest expense for the three months ended September 30, 2010 increased $402 thousand to $1.6 million compared with $1.2 million for the same period in 2009, primarily due to increases in liability insurance expense and repossession and foreclosure expenses.

Income Tax Expense (Benefit). Income tax expense from continuing operations for the three months ended September 30, 2010 was $13.1 million compared to a benefit of $3.0 million for the same period in 2009, primarily due to an increase in the valuation allowance related to the Company’s deferred tax assets. As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the three and nine months ended September 30, 2010. These adjustments included an additional valuation allowance related to deferred tax assets in the amount of approximately $10.3 million, representing the full remaining balance of the Company’s and each of its subsidiary banks’ deferred tax assets prior to the adjustment. Due to the determination to record additional loan loss provisions in the third quarter of 2010, the Company’s capital ratios were reduced and the Company re-evaluated the adequacy of the valuation allowance established for its deferred tax assets. Based on its analysis, the Company determined that it was no longer more likely than not that it could generate sufficient taxable income to realize the deferred tax assets in future near-term periods as defined by generally accepted accounting principles.

The Company has recognized no increase in its liability for unrecognized tax benefits. The Company files income tax returns in the U.S. federal jurisdiction and the states of Illinois, Missouri, Kansas and Florida jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2005.

Results of Operations

Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009

Overview. Unless otherwise indicated, discussions below regarding income and expense for the nine months ended September 30, 2010 and 2009 refer to the Company’s continuing operations. Net loss for the nine months ended September 30, 2010 from both continuing and discontinued operations was $26.0 million compared with a net loss of $54.3 million for the same period in 2009. The primary factors contributing to the decrease in net loss were a goodwill impairment charge of $30.4 million recognized during the second quarter of 2009, compared to none in 2010; an increase in net interest income of $3.0 million; an increase in noninterest income of $279 thousand; a decrease in noninterest expense of $35.3 million (including the $30.4 million decrease in goodwill impairment

charge); an increase in income from discontinued operations of $11.9 million; and an increase in net loss attributable to noncontrolling interest of $3.2 million. These decreases in net loss were partially offset by an increase in provision for loan losses to $22.7 million for the nine months ended September 30, 2010, compared to $17.6 million for the same period in 2009, and income tax expense of $10.1 million for the nine months ended September 30, 2010, associated with an increase in the valuation allowance on deferred tax assets, compared to an income tax benefit of $10.3 million for the same period in 2009. . Basic earnings (loss) per share (EPS) for the nine months ended September 30, 2010 were $(3.38) compared with $(5.27) for the same period in 2009. The Company’s annualized return on average assets was (3.18)% for the nine months ended September 30, 2010, compared with (4.14)% for the same period in 2009. The annualized return on average stockholders’ equity was (85.97)% for the nine months ended September 30, 2010, compared to (88.72)% for the same period in 2009.

Discontinued Operations. As a result of the sale of two of the Company’s wholly owned subsidiaries, Marine Bank and Trust and Brown County State Bank, to United Community Bancshares, Inc. on February 26, 2010, the assets and liabilities of those two banks are included in the Company’s consolidated balance sheet as of December 31, 2009, but are reflected as “Discontinued operations, assets held for sale” and “Discontinued operations, liabilities held for sale”. The income and expenses of those two banks for the period January 1 through February 26, 2010 and the nine months ended September 30, 2009 are included in “Income (loss) from discontinued operations” in the Company’s consolidated statements of operations. As a result of the exchange for debt of another of the Company’s wholly owned subsidiaries, HNB National Bank, on December 16, 2009, that bank’s income and expenses for the nine months ended September 30, 2009 are included in “Income (loss) from discontinued operations” in the Company’s consolidated statements of operations.

Net Interest Income. For the nine months ended September 30, 2010, net interest income increased $3.0 million, or 19.2%, to $18.8 million compared with $15.8 million for the same period in 2009. The increase was primarily due to decreased volumes of money market and time and brokered time deposits, short-term borrowings and long-term debt, increased rates on loans, and decreased rates on all deposits. For the nine months ended September 30, 2010 and 2009, the net interest margin increased by 64 basis points to 2.63% from 1.99% while the net interest spread increased by 54 basis points to 2.47% from 1.93%, respectively.

Interest and dividend income for the nine months ended September 30, 2010 decreased $4.0 million, or 10.5%, to $34.1 million compared with $38.1 million for the same period in 2009. This decrease was due primarily to a decrease in loan interest income of $3.5 million. Average total loans for the nine months ended September 30, 2010 decreased $97.8 million, or 11.6%, to $743.0 million compared with $840.8 million for the same period in 2009, while the average yield on total loans increased 9 basis points to 5.48% for the same period. Average total investments for the nine months ended September 30, 2010 decreased $742 thousand, or 0.59%, to $125.4 million compared with $126.2 million for the same period in 2009, while the average yield on investments decreased 68 basis points to 3.71% for the same period. For the nine months ended September 30, 2010, compared to the same period in 2009, the yield on total average earning assets decreased by 5 basis points to 4.77%.

Interest expense for the nine months ended September 30, 2010 decreased $7.0 million, or 31.5%, to $15.3 million compared with $22.4 million for the same period in 2009. This decrease was due primarily to decreases in interest expense on deposits of $5.0 million and interest expense on short-term borrowings of $1.5 million. Average total interest-bearing deposits for the nine months ended September 30, 2010 decreased $77.4 million, or 8.7%, to $794.3 million compared with $871.7 million for the same period in 2009, while the average cost of funds on total interest-bearing deposits decreased 61 basis points to 2.01% for the same period. The average cost of funds on all categories of deposits decreased in the nine months ended September 30, 2010, compared to the same period in 2009, due to the Company reducing deposit rates to align with competitors in an inelastic rate environment. Average total long-term debt for the nine months ended September 30, 2010 decreased $19.4 million, or 20.0%, to $77.5 million compared with $96.9 million for the same period in 2009, primarily due to the payoff of a large note payable, while the average cost of funds on long-term debt increased 35 basis points to 5.33% for the same period. For the nine months ended September 30, 2010, compared to the same period in 2009, the cost of funds on total average interest-bearing liabilities decreased by 58 basis points to 2.30%.


	For the nine months ended September 30
				2010								2009
				Income/								Income/
	Average Balance			Expense		Yield/Rate			Average Balance			Expense		Yield/Rate
						(dollars in thousands)
Assets
Interest-bearing demand deposits	$	72,611		$	161		0.30	%	$	77,582		$	160		0.28	%
Federal funds sold		11,892			21		0.24	%		12,058			11		0.12	%
Securities:
Taxable
U.S. treasuries and government agencies		2,328			49		2.81	%		1,722			25		1.94	%
Mortgage-backed securities: GSE residential		33,632			800		3.18	%		23,834			784		4.40	%
Other securities		61,739			1,894		4.10	%		72,509			2,525		4.66	%

Total taxable		97,699			2,743		3.75	%		98,065			3,334		4.55	%
Non-taxable — State and political subdivision (3)		27,727			737		3.55	%		28,103			714		3.40	%
Loans (net of unearned discount ) (1)(2)		743,006			30,458		5.48	%		840,834			33,918		5.39	%
Federal Home Loan Bank stock		2,899			9		0.42	%		3,332			11		0.44	%

Total interest-earning assets		955,834		$	34,129		4.77	%		1,059,974		$	38,148		4.81	%


Cash and due from banks		9,334								12,432
Interest receivable		3,797								4,351
Foreclosed assets held for sale, net		20,507								10,177
Cost method investments in common stock		1,392								2,874
Cash surrender value of life insurance		15,221								14,194
Premises and equipment		24,993								26,664
Other		24,497								19,269
Goodwill		—								20,480
Intangible assets		1,890								1,545
Allowance for loan loss		(20,183	)							(19,798	)
Discontinued operations, Assets held for sale		58,130								602,904


Total assets	$	1,095,412							$	1,755,066


Liabilities and Stockholders’ Equity
Interest-bearing transaction deposits	$	67,476		$	137		0.27	%	$	65,152		$	158		0.32	%
Savings deposits		46,921			123		0.35	%		46,705			218		0.62	%
Money-market deposits		120,516			533		0.59	%		153,013			1,057		0.92	%
Time and brokered time deposits		559,397			11,177		2.67	%		606,800			15,567		3.43	%
Short-term borrowings		20,056			282		1.88	%		69,195			1,783		3.45	%
Long term debt		15,687			538		4.59	%		35,052			1,085		4.14	%
Junior subordinated debentures		61,858			2,553		5.52	%		61,858			2,523		5.45	%


Total interest-bearing liabilities		891,911		$	15,343		2.30	%		1,037,775		$	22,391		2.88	%


Demand deposits		97,320								81,043
Interest payable		5,239								3,341
Other liabilities		4,190								4,414
Discontinued operations, Liabilities held for sale		53,479								541,608
Noncontrolling interest		2,800								5,082
Stockholders’ equity		40,473								81,803


Total liabilities and stockholders’ equity	$	1,095,412							$	1,755,066


Interest spread							2.47	%							1.93	%
Net interest income				$	18,786							$	15,757

Net interest margin							2.63	%							1.99	%
Interest-earning assets to interest-bearing liabilities		107.17	%							102.14	%


(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.


	For the nine months ended September 30,
	2010 vs. 2009
	Increase (Decrease) Due to
	Change in
	Volume			Rate			Total


Increase (decrease) in interest income:
Interest-bearing bank deposits	$	(11	)	$	12		$	1
Federal funds sold		—			10			10
Investment securities:
U.S. Treasuries and Agencies		11			13			24
Mortgage-backed securities: GSE residential		269			(253	)		16
States and political subdivision (1)		(10	)		33			23
Other securities		(350	)		(281	)		(631	)
Loans (net of unearned discounts)		(4,002	)		542			(3,460	)
Federal Home Loan Bank stock		(1	)		(1	)		(2	)

Change in interest income		(4,094	)		75			(4,019	)

Increase (decrease) in interest expense:
Interest-bearing transaction deposits		5			(26	)		(21	)
Savings deposits		1			(96	)		(95	)
Money-market deposits		(195	)		(329	)		(524	)
Time and brokered time deposits		(1,146	)		(3,244	)		(4,390	)
Short-term borrowings		(915	)		(586	)		(1,501	)
Long-term debt and junior subordinated debentures		(759	)		242			(517	)

Change in interest expense		(3,009	)		(4,039	)		(7,048	)


Increase (decrease) in net interest income	$	(1,085	)	$	4,114		$	3,029


(1)		The tax exempt income for state and political subdivisions is not recorded on a tax equivalent basis.

Provision for Loan Losses. As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the three and nine months ended September 30, 2010. These adjustments included an additional approximately $6.2 million of provision for loan loss, compared to the amount originally reported.

Provisions for loan losses are charged against income to bring the Company’s allowance for loan losses to a level deemed appropriate by management. For the nine months ended September 30, 2010, the provision increased by $5.1 million to $22.7 million, compared with $17.6 million for the same period in 2009, primarily due to Mercantile Bank’s write-down of the two commercial real estate loans discussed in the Explanatory Note on page 3 of this Form 10-Q/A. The Company continues to be negatively impacted by further declines in real estate values that collateralize loans, both in its Florida market and in some of its purchased participations in commercial real estate developments in other areas of the country. Additionally, the provision for the nine months ended September 30, 2010 includes approximately $2.0 million related to a subordinated debenture at a troubled financial institution held by both Royal Palm Bank and Heartland.

The allowance for loan losses at September 30, 2010 was $25.9 million, or 3.67% of total loans, an increase of $7.0 million from $18.9 million or 2.43% of total loans at December 31, 2009. Nonperforming loans were $49.8 million, or 7.07% of total loans as of September 30, 2010, compared with $50.8 million, or 6.54% of total loans as of December 31, 2009. Impaired loans decreased from $111.2 million at December 31, 2009 to $105.7 million at September 30, 2010. Approximately $12.1 million of this decrease is attributable to foreclosures on two loans to commercial real estate developers by Mercantile Bank and the subsequent transfer of the properties to foreclosed assets held for sale. The remainder of the decrease was due to the charge-offs at Mercantile Bank and Heartland, as well as payments received on impaired loans. This decrease was partially offset by an increase in impaired loans at Mercantile Bank, Royal Palm Bank, and Heartland throughout 2010. The Company anticipates a portion of the

impaired loans will eventually be charged off, but believes it has adequately reserved for these losses based on circumstances existing as of September 30, 2010, including the Company’s re-evaluation of its ALLL calculation incorporating the revised historical loss experience factor created by the additional write-downs discussed in the Explanatory Note on page 3 of this Form 10-Q/A.

Noninterest Income. Noninterest income for the nine months ended September 30, 2010 increased $279 thousand to $6.3 million compared with $6.0 million for the same period in 2009. The increase in noninterest income was primarily due to increases in brokerage fees, other service charges and fees, and other income, partially offset by decreases in net gains on loan sales.

The following table presents, for the periods indicated, the major categories of noninterest income:


	For the Nine Months Ended
	September 30
	2010		2009

Fiduciary activities	$	1,744	$	1,705
Brokerage fees		899		742
Customer service fees		1,183		1,221
Other service charges and fees		564		382
Net gains (losses) on sales of assets		5		(17	)
Net gains on investments in common stock		39		—
Net gains on loan sales		466		1,046
Loan servicing fees		373		349
Net increase in cash surrender value of life insurance		420		434
Other		569		121

Total noninterest income	$	6,262	$	5,983

Brokerage fees for the nine months ended September 30, 2010 increased $157 thousand to $899 thousand compared with $742 thousand for the same period in 2009, primarily due to the volatility of the economy and stock market, creating fluctuations in amounts and timing of performance-based fees generated on customer brokerage accounts.

Other service charges and fees for the nine months ended September 30, 2010 increased $182 thousand to $564 thousand compared with $382 thousand for the same period in 2009, primarily due to an expansion of the number of accounts that generate transaction and maintenance fees.

Other noninterest income for the nine months ended September 30, 2010 increased $448 thousand to $569 thousand compared with $121 thousand for the same period in 2009, primarily due to fees for providing data processing services to the three former subsidiaries that were sold in December 2009 and February 2010.

Net gains on loan sales for the nine months ended September 30, 2010 decreased $580 thousand to $466 thousand compared with $1.0 million for the same period in 2009, primarily due to a slow-down in residential mortgage refinancing activity, ultimately leading to a reduction in the amount of loan sales from 2009 to 2010.

Noninterest Expense. For the nine months ended September 30, 2010, noninterest expense decreased $35.3 million to $26.4 million compared with $61.6 million for the same period in 2009, primarily due to a goodwill impairment charge of $30.4 million in 2009. The decrease was also attributable to decreases in net losses on foreclosed assets and other than temporary losses on available-for-sale securities and cost method investments.

The following table presents, for the periods indicated, the major categories of noninterest expense:


	For the Nine Months Ended
	September 30
	2010		2009

Salaries and employee benefits	$	13,004	$	13,234
Net occupancy expense		1,899		1,658
Equipment expense		1,721		1,928
Deposit insurance premium		1,717		2,259
Professional fees		1,566		2,210
Postage and supplies		406		465
Losses on foreclosed assets, net		890		2,067
Other than temporary losses on available-for-sale securities and cost method investments		566		3,238
Goodwill impairment losses		—		30,417
Amortization of mortgage servicing rights		196		379
Other		4,422		3,785

Total noninterest expense	$	26,387	$	61,640

Net losses on foreclosed assets decreased $1.2 million for the nine months ended September 30, 2010 to $890 thousand, from $2.1 million for the same period in 2009, primarily due to write-downs of the carrying values of several foreclosed properties held by Royal Palm, based on updated appraisals during the second quarter of 2009. The write-downs of carrying values have continued into 2010, but are occurring at a slower pace.

Other than temporary losses on available-for-sale securities and cost method investments decreased $2.7 million for the nine months ended September 30, 2010 to $566 thousand, from $3.2 million for the same period in 2009, primarily due to the gradual stabilization of values associated with these securities and investments from 2009 to 2010.

Income Tax Expense (Benefit). Income tax expense from continuing operations for the nine months ended September 30, 2010 was $10.1 million, compared to a benefit of approximately $10.3 million for the same period in 2009, primarily due to an increase in the valuation allowance related to the Company’s deferred tax assets. As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the three and nine months ended September 30, 2010. These adjustments included an additional valuation allowance related to deferred tax assets in the amount of $10.3 million, representing the full remaining balance of the Company’s and each of its subsidiary banks’ deferred tax assets prior to the adjustment. Due to the determination to record additional loan loss provisions in the third quarter of 2010, the Company’s capital ratios were reduced and the Company re-evaluated the adequacy of the valuation allowance established for its deferred tax assets. Based on its analysis, the Company determined that it was no longer more likely than not that it could generate sufficient taxable income to realize the deferred tax assets in future near-term periods as defined by generally accepted accounting principles.

Financial Condition

September 30, 2010 Compared to December 31, 2009

Loan Related Data. As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the three and nine months ended September 30, 2010. These adjustments included additional loan charge-offs as of September 30, 2010. Further discussion of the loan portfolio reflects these adjustments to September 30, 2010 balances, as restated.

Loan Portfolio. Total loans from continuing operations, including loans held for sale, decreased $72.5 million or 9.3% to $704.2 million as of September 30, 2010 from $776.7 million as of December 31, 2009. The Company’s subsidiary banks experienced decreased loan balances in the first nine months of 2010 due to charge offs, seasonal fluctuations, debt paydowns, stricter underwriting standards, and the uncertain economy and the fear of continued recession causing potential borrowers to reduce their spending. At September 30, 2010 and December 31, 2009, the ratio of total loans to total deposits was 81.0% and 81.4%, respectively. For the same periods, total loans represented 71.7% and 55.9% of total assets, respectively.

The following table summarizes the loan portfolio of the Company by type of loan at the dates indicated, with 2009 restated to exclude discontinued operations:


	September 30, 2010					December 31, 2009
	Amount		Percent			Amount		Percent
	Restated		(dollars in thousands)

Commercial and financial	$	152,586		21.67	%	$	161,702		20.82	%
Agricultural		11,820		1.68	%		9,832		1.27	%
Real estate — farmland		17,201		2.44	%		19,655		2.53	%
Real estate — construction		106,781		15.16	%		153,578		19.77	%
Real estate — commercial		161,200		22.89	%		163,292		21.02	%
Real estate — residential (1)		190,338		27.04	%		193,818		24.96	%
Installment loans to individuals		64,253		9.12	%		74,793		9.63	%


Total loans		704,179		100.00	%		776,670		100.00	%


Allowance for loan losses		25,866					18,851

Total loans, including loans held for sale, net of allowance for loan losses	$	678,313				$	757,819


(1)		Includes loans held for sale

Nonperforming Assets. Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due, restructured loans, repossessed assets and other assets acquired in satisfaction of debts previously contracted. It is management’s policy to place loans on nonaccrual status when interest or principal is 90 days or more past due. Such loans may continue on accrual status only if they are both well-secured and in the process of collection.

Total nonperforming loans decreased to $49.8 million as of September 30, 2010 from $50.8 million as of December 31, 2009, while total nonperforming loans and nonperforming other assets increased to $75.9 million as of September 30, 2010 from $67.2 million as of December 31, 2009. The Company continues to be negatively impacted by further declines in real estate values that collateralize loans, both in its Florida market and in some of its purchased participations in commercial real estate developments in other areas of the country.

Impaired loans decreased from $111.2 million at December 31, 2009 to $105.7 million at September 30, 2010. Approximately $12.1 million of this decrease is attributable to foreclosures on two loans to commercial real estate developers by Mercantile Bank and the subsequent transfer of the properties to foreclosed assets held for sale. The remainder of the decrease was due to the charge-offs at Mercantile Bank and Heartland, as well as payments received on impaired loans. This decrease was partially offset by an increase in impaired loans at Mercantile Bank, Royal Palm Bank, and Heartland throughout 2010. The Company anticipates a portion of the impaired loans will eventually be charged off, but believes it has adequately reserved for these losses based on circumstances existing as of September 30, 2010.

Nonperforming other assets is comprised primarily of the carrying value of several foreclosed commercial real estate properties in the Midwest and Florida that the Company intends to sell, with the carrying value representing management’s assessment of the net realizable value in the current market. The ratio of nonperforming loans to total loans increased to 7.07% as of September 30, 2010, from 6.54% as of December 31, 2009. The ratio of nonperforming loans and nonperforming other assets to total loans increased to 10.78% as of September 30, 2010 from 8.66% as of December 31, 2009.

The following table presents information regarding nonperforming assets at the dates indicated, with 2009 restated to exclude discontinued operations:


	September 30,			December 31,
	2010			2009

	(Restated)

Nonaccrual loans
Commercial and financial	$	2,882		$	1,439
Agricultural		—			248
Real estate — farmland		715			62
Real estate — construction		24,483			33,946
Real estate — commercial		7,316			7,378
Real estate — residential		6,797			6,803
Installment loans to individuals		164			154


Total nonaccrual loans		42,357			50,030

Loans 90 days past due and still accruing		3,773			393
Restructured loans		3,622			397


Total nonperforming loans		49,752			50,820


Repossessed assets		26,178			16,409
Other assets acquired in satisfaction of debt previously contracted		—			—


Total nonperforming other assets		26,178			16,409


Total nonperforming loans and nonperforming other assets	$	75,930		$	67,229

Nonperforming loans to loans, before allowance for loan losses		7.07	%		6.54	%

Nonperforming loans and nonperforming other assets to loans, before allowance for loan losses		10.78	%		8.66	%

Allowance for Loan Losses. In originating loans, the Company recognizes that loan losses will be experienced and the risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for such loan. Management has established an allowance for loan losses (“ALLL”), which it believes is adequate to cover probable losses inherent in the loan portfolio. Loans are charged off against the ALLL when the loans are deemed to be uncollectible. Although the Company believes the ALLL is adequate to cover probable losses inherent in the loan portfolio, the amount of the allowance is based upon the judgment of management, and future adjustments may be necessary if economic or other conditions differ from the assumptions used by management in making the determinations. In addition, the Company’s subsidiary banks periodically undergo regulatory examinations, and future adjustments to the ALLL could occur based on these examinations.

Based on an evaluation of the loan portfolio, management presents a quarterly review of the ALLL to the Audit Committee of the Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. In making its evaluation, management considers the diversification by industry of the commercial loan portfolio, the effect of changes in the local real estate market on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans and related collateral security, and the present level of the ALLL.

A model is utilized to determine the specific and general portions of the ALLL. Through the loan review process, management assigns one of six loan grades to each loan, according to payment history, collateral values and financial condition of the borrower. The loan grades aid management in monitoring the overall quality of the loan portfolio. Specific reserves are allocated for loans in which management has determined that deterioration has occurred. In addition, a general allocation is made for each loan category in an amount determined based on general economic conditions, historical loan loss experience, and amount of past due loans. Management maintains the ALLL based on the amounts determined using the procedures set forth above.

The allowance for loan losses increased $7.0 million to $25.9 million as of September 30, 2010 from $18.9 million as of December 31, 2009. Provision for loan losses was $22.7 million and net charge-offs were $15.7 million for the nine months ended September 30, 2010. The allowance for loan losses as a percent of total loans increased to 3.67%

as of September 30, 2010 from 2.43% as of December 31, 2009. The increase was due to further deterioration of the commercial real estate markets in several of the Company’s locations, particularly in southwest Florida, resulting in nonperforming and impaired loan totals at historic elevated levels, as well as additional provisions at Heartland and Royal Palm Bank in regards to a subordinated debenture at a troubled financial institution, and at Mercantile Bank in regards to purchased participations in out-of-territory commercial real estate developments. The increase in allowance for loan losses was partially offset by increases in net charge-offs at Mercantile Bank and Heartland. As a percent of nonperforming loans, the allowance for loan losses increased to 51.99% as of September 30, 2010 from 37.09% as of December 31, 2009. The Company believes it has adequately reserved for potential losses based on circumstances existing as of September 30, 2010.

As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, due to the additional loan write-downs and provisions for loan losses retroactive to the third quarter of 2010, the Company re-evaluated its allowance for loan loss (“ALLL”) calculation as of September 30, 2010, including both the general and specific reserves and incorporated into its re-evaluation the revised historical loss experience factor created by the additional write-downs. Each of the Company’s subsidiary banks performs a quarterly ALLL calculation which the Company utilizes to evaluate the adequacy of the total ALLL on a consolidated basis. Each of these calculations is designed to quantify an acceptable range rather than a specific amount. The Company’s re-evaluation of the consolidated ALLL as of September 30, 2010, based on the additional approximately $6.2 million of loan write-downs at Mercantile Bank, determined that the difference between the calculated amount and the balance reflected in the restated financial statements as of September 30, 2010 was within the acceptable range.

The following table presents for the periods indicated an analysis of the allowance for loan losses and other related data, with 2009 restated to exclude discontinued operations:


	As of and for the			As of and for
	Nine Months Ended			the Year Ended
	September 30,			December 31,
	2010			2009

	(Restated)
Average loans outstanding during year	$	743,006		$	840,834

Allowance for loan losses:
Balance at beginning of year	$	18,851		$	19,038


Loans charged-off:
Commercial and financial		2,777			927
Agricultural		13			438
Real estate — farmland		39			—
Real estate — construction		10,211			10,938
Real estate — commercial		1,019			2,055
Real estate — residential		1,220			7,218
Installment loans to individuals		627			899

Total charge-offs		15,906			22,475


Recoveries:
Commercial and financial		72			—
Agricultural		15			13
Real estate — farmland		—			—
Real estate — construction		52			34
Real estate — commercial		1			7
Real estate — residential		20			8
Installment loans to individuals		61			143

Total recoveries		221			205


Net charge-offs		15,685			22,270
Provision for loan losses		22,700			22,083


Balance at end of year	$	25,866		$	18,851


Allowance for loan losses as a percent of total loans outstanding at year end		3.67	%		2.43	%

Allowance for loan losses as a percent of total nonperforming loans		51.99	%		37.09	%


Ratio of net charge-offs to average total loans		2.11	%		2.65	%

Concentration of Credit Risk. Included in the Company’s loan portfolio at September 30, 2010 are approximately $21.5 million of purchased participation loans to borrowers located in areas outside the Company’s normal markets. Although the Company applies the same underwriting standards to these loans, there may be additional risk associated with those out of the Company’s normal territory.

At September 30, 2010, Heartland had approximately $3.2 million in loans with various customers collateralized by stock in a financial institution closed by regulators in October, 2010. The Company is currently working with these customers to increase collateral to acceptable levels and believes there are adequate reserves placed against the loans.

Included in the loan portfolios of Heartland and Royal Palm Bank at September 30, 2010 are $3.5 million and $1.0 million, respectively, of subordinated debentures issued by a troubled financial institution. Based on the Company’s risk analysis, despite the issuer being current on all interest payments, it was determined that additional specific allowance for loan loss should be in place to cover potential future losses. Accordingly, the Company recorded $2.0 million of loan loss provision in the second quarter of 2010, increasing the specific allowance for loan loss related to these debentures to $2.25 million. No additional loan loss provision related to the debentures was recorded in the third quarter of 2010. The Company will continue to monitor the financial condition of the issuer, which is attempting to raise additional capital and exploring opportunities to be acquired by or merge with another financial institution. If these efforts are unsuccessful and the issuer is closed by regulators, the Company would be subject to additional losses on these debentures of up to $2.25 million.

Heartland also held, in addition to the $3.5 million of subordinated debentures issued by a troubled financial institution, a total of $2.0 million in subordinated debentures issued by two other financial institutions as of September 30, 2010. The Company monitors the financial condition of these two issuers, which are current on all interest payments related to the debentures, and has determined, based on information available as of September 30, 2010, that no specific allowance for loan losses is required. In October 2010, Heartland received a payoff in the amount of $1.5 million on one of these subordinated debentures. At September 30, 2010, Royal Palm Bank holds no other debentures other than the $1.0 million issued by a troubled financial institution.

Securities. The Company uses its securities portfolio to ensure liquidity for cash requirements, to manage interest rate risk, to provide a source of income, to ensure collateral is available for municipal pledging requirements and to manage asset quality. Where the Company has less than majority ownership interests in banking organizations that are publicly traded, it continuously adjusts its common stock investments to their current market value through the securities portfolio as an unrealized gain or loss on available-for-sale securities.

The Company has classified securities as both available-for-sale and held-to-maturity as of September 30, 2010. Available-for-sale securities are held with the option of their disposal in the foreseeable future to meet investment objectives, liquidity needs or other operational needs. Securities available-for-sale are carried at fair value. Held-to-maturity securities are those securities for which the Company has the positive intent and ability to hold until maturity, and are carried at historical cost adjusted for amortization of premiums and accretion of discounts.

As of September 30, 2010, the fair value of the available for-sale securities was $117.4 million and the amortized cost was $114.3 million for an unrealized gain of $3.1 million. The after-tax effect of this unrealized gain was $2.2 million and has been included in stockholders’ equity. As of December 31, 2009, the fair value of the available-for-sale securities was $128.1 million and the amortized cost was $124.8 million for an unrealized gain of $3.3 million. Fluctuations in net unrealized gains and losses on available-for-sale securities are due primarily to increases or decreases in prevailing interest rates for the types of securities held in the portfolio.

As of September 30, 2010, the amortized cost of held-to-maturity securities was $1.5 million, a decrease of $800 thousand from the December 31, 2009 amortized cost of $2.3 million.

The Company owns approximately $1.9 million of Federal Home Loan Bank of Chicago stock included in other assets. During the third quarter of 2007, the Federal Home Loan Bank of Chicago received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The Federal Home Loan Bank will continue to provide liquidity and funding through advances, however the draft order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board. With regard to dividends, the Federal Home Loan Bank continues to assess its dividend capacity each quarter and make appropriate request for approval. There were no dividends paid by the Federal Home Loan Bank of Chicago during the first three quarters of 2010.

Foreclosed Assets Held for Sale. At September 30, 2010, foreclosed assets increased $9.7 million or 59.2% to $26.1 million from $16.4 million as of December 31, 2009, primarily attributable to the foreclosure on two loans to commercial real estate developers by Mercantile Bank, partially offset by the sale of one property by Heartland and

additional write-downs at each subsidiary based on updated appraisals of the carrying values of previously foreclosed properties. Included in total foreclosed assets held for sale at September 30, 2010 were properties resulting from foreclosure on several of Royal Palm’s loans in the Florida market, several of Heartland’s purchased participation loans in the Georgia and Arkansas markets, and a Mercantile purchased participation in the Iowa market.

Deposits. Total deposits decreased $85.6 million or 9.0% to $868.9 million as of September 30, 2010 from $954.5 million as of December 31, 2009. Noninterest-bearing deposits decreased $5.7 million or 5.3% to $102.6 million as of September 30, 2010 from $108.3 million as of December 31, 2009, while interest-bearing deposits decreased $79.9 million or 9.4% to $766.3 million as of September 30, 2010 from $846.2 million as of December 31, 2009. The decrease in noninterest-bearing deposits was partially related to one commercial depositor at Mercantile Bank with a large balance at December 31, 2009 that was transferred out in the second quarter of 2010. The majority of the overall decrease in deposits during the first nine months of 2010 was attributable to reduced funding required in the loan portfolio as well as reduced liquidity required by Mercantile Bank to provide correspondent banking services to the three subsidiary banks that were sold in December 2009 and February 2010.

Borrowings. The Company utilizes borrowings to supplement deposits in funding its lending and investing activities. Short-term borrowings consist of federal funds purchased, securities sold under agreements to repurchase, US Treasury demand notes, short-term advances from the Federal Home Loan Bank (“FHLB”), short term advances from the Federal Discount Borrower in Custody line (“Federal BIC line”), and demand notes and a note payable with Great River Bancshares, Inc. (“Great River”), owned by R. Dean Phillips, a significant shareholder of the Company. Long-term debt consists of long-term advances from the FHLB, notes payable with Great River and junior subordinated debentures.

Short-term borrowings were $10.9 million as of September 30, 2010, a decrease of $19.8 million from $30.7 million as of December 31, 2009, primarily attributable to repayment of the remaining short-term debt due to Great River following the sale of two of the Company’s subsidiaries in February 2010, partially offset by an increase in federal funds purchased.

Long-term borrowings were $15.0 million as of September 30, 2010, a decrease of $10.2 million from $25.2 million as of December 31, 2009, primarily attributable to repayment of the remaining long-term debt due to Great River following the sale of two of the Company’s subsidiaries in February 2010, as well as a reduction in advances from the FHLB. Included in long-term borrowings as of September 30, 2010 were FHLB borrowings totaling $13.0 million, with maturities ranging from the years 2011 to 2013 and interest rates ranging from 3.15% to 5.30%.

Junior subordinated debentures were $61.9 million at September 30, 2010 and December 31, 2009. Maturities ranged from the years 2035 to 2037 (callable at the Company’s option in 2011, 2015 and 2017), and interest rates ranged from 1.94% to 7.17%. In June 2009, the Company decided to defer regularly scheduled interest payments on its outstanding $61.9 million of junior subordinated notes relating to its trust preferred securities. The terms of the junior subordinated notes and the trust documents allow the Company to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. During the deferral period, the respective trusts will likewise suspend the declaration and payment of dividends on the trust preferred securities. Also during the deferral period, the Company may not, among other things and with limited exceptions, pay cash dividends on or repurchase its common stock or make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated notes. As previously disclosed, the Company had suspended the payment of cash dividends on its outstanding common stock. The Company believes that the deferral of interest payments on the junior subordinated notes and the suspension of cash dividend payments on its common stock will generate approximately $5.6 million per year in additional cash flow (compared with the prior levels of interest and dividend payments) and serve to strengthen its capital ratios and those of its subsidiary banks until those banks return to a sufficient level of profitability. As of September 30, 2010, the accumulated deferred interest payments totaled $4.8 million.

Liquidity

Liquidity management is the process by which the Company and its subsidiary banks ensure that adequate liquid funds are available to meet the present and future cash flow obligations arising in the daily operations of the business in a timely and efficient manner. These financial obligations consist of needs for funds to meet commitments to borrowers for extensions of credit, funding capital expenditures, withdrawals by customers, maintaining deposit reserve requirements, servicing debt, paying dividends to shareholders, and paying operating expenses. Management believes that adequate liquidity exists to meet all projected cash flow obligations.

The Company achieves a satisfactory degree of liquidity through actively managing both assets and liabilities. Asset management guides the proportion of liquid assets to total assets, while liability management monitors future funding requirements and prices liabilities accordingly.

The Company’s most liquid assets are cash and due from banks, interest-bearing demand deposits, and federal funds sold. The balances of these assets are dependent on the Company’s operating, investing, lending, and financing activities during any given period. As of September 30, 2010, cash and cash equivalents totaled $95.1 million, a decrease of $26.2 million from $121.3 million as of December 31, 2009. This decrease was primarily attributable to reduced liquidity required by Mercantile Bank to provide correspondent banking services to the three subsidiary banks that were sold in December 2009 and February 2010.

The Company’s primary sources of funds consist of deposits, investment maturities and sales, loan principal repayment, sales of loans, and capital funds. Additional liquidity is provided by bank lines of credit and term debt, repurchase agreements, junior subordinated debentures and the ability to borrow from the Federal Reserve Bank and Federal Home Loan Bank.

Capital Resources

Other than the option of issuing common stock, the Company’s primary source of capital is net income retained by the Company. During the nine months ended September 30, 2010, the Company had a net loss of $26.0 million and paid no dividends to stockholders. During the year ended December 31, 2009, the Company incurred a net loss of $58.5 million and paid no dividends to stockholders. As of September 30, 2010, total Mercantile Bancorp, Inc. stockholders’ equity was $15.1 million, a decrease of $26.2 million from $41.3 million as of December 31, 2009.

In recent regulatory guidance, the Board of Governors of the Federal Reserve System has emphasized that voting common stockholders’ equity generally should be the dominant element within Tier One capital for bank holding companies and that it is the most desirable element of capital from a supervisory standpoint. The Board of Governors has reiterated that bank holding companies should place primary reliance on common equity and has cautioned bank holding companies against over-reliance on non-common-equity capital elements.

The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies and their subsidiary banks. Risk-based capital ratios are established by allocating assets and certain off-balance sheet commitments into four risk-weighted categories. These balances are then multiplied by the factor appropriate for that risk-weighted category. The guidelines require bank holding companies and their subsidiary banks to maintain a total capital to total risk-weighted asset ratio of not less than 8.00%, of which at least one half must be Tier 1 capital, and a Tier 1 leverage ratio of not less than 4.00%. As of September 30, 2010, the Company’s total risk-based capital ratio was 3.86%, Tier 1 risk-based capital ratio was 1.93%, and its Tier 1 leverage ratio was 1.42%. The capital ratios fell below the adequately capitalized levels primarily due to continued loan losses as well as additional valuation allowance related to the Company’s and each of its subsidiary banks’ deferred tax. The Company is working with its legal and other professional advisors on various capital-raising options in an effort to restore its capital ratios to adequately capitalized levels. See the “Regulatory Matters” section of this filing for more information on the capital adequacy of the Company and its subsidiary banks. Without prior approval, the subsidiary banks are restricted as to the amount of dividends that they may declare to the balance of the retained earnings account, adjusted for defined bad debts. In addition, the FDIC has authority to prohibit or to limit the payment of dividends by a bank if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. The Company, Mercantile Bank, Royal Palm Bank and Heartland Bank are each prohibited from paying any dividends without regulatory consent, pursuant to various regulatory enforcement actions taken with respect to each entity. See further discussion in the “Regulatory Matters” section of this filing.

The Company generated a net loss of $26.0 million in the first nine months of 2010, as well as net losses in each of the last two years, with $58.5 million in 2009 and $8.8 million in 2008. The 2008 and 2009 losses were largely due to the operating losses at Royal Palm Bank and Heartland Bank. Both of those banks continued to generate losses in the first nine months of 2010, as did Mercantile Bank, the Company’s largest subsidiary. Each bank has experienced significant increases in non-performing assets, impaired loans and loan loss provisions, resulting in bank regulators imposing cease and desist orders at Royal Palm Bank and Heartland Bank and a memorandum of understanding at Mercantile Bank. For further discussion of these regulatory enforcement actions, see the “Regulatory Matters” section of this filing.

As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, the net loss in the first nine months of 2010 was increased by additional loan loss provision of approximately $6.2 million at Mercantile Bank, along with an approximately $10.3 million increase in the valuation allowance related to the Company’s deferred tax assets. Mercantile Bank’s net loss in 2010 is primarily due to charge-offs of purchased participations in large commercial real estate developments in various parts of the country. Royal Palm Bank’s operating losses over the past three years (excluding goodwill impairment) were primarily attributable to the severe decline in real estate values in its southwest Florida market, creating both loan losses and write-downs of foreclosed assets. Heartland’s losses were largely due to purchased participations from a bank in Georgia that was closed by the FDIC. Although the subsidiary banks are confident that they have identified the bulk of their asset quality issues and expect to see

improved operating performance beginning in 2011, there can be no assurance that they will not experience additional losses. The Company has projected 2011 and 2012 operating results for each bank assuming an improving economy and reduced loan losses compared to 2008 through 2010. Those projections indicate Mercantile Bank returning to profitability in 2011. Royal Palm Bank and Heartland Bank are projected to be profitable in 2012, although not attaining compliance with all regulatory mandates set forth in their respective cease and desist orders.

Due to the net losses incurred by the Company in 2008, 2009 and the first nine months of 2010, including the effect of the re-statement of its results for the three and nine months ended September 30, 2010, equity capital has been reduced to a level that leaves the Company with very little capacity to absorb further losses. Mercantile Bank is the Company’s largest subsidiary bank, representing approximately 71% of total consolidated assets at September 30, 2010, and although operating under a regulatory memorandum of understanding due to elevated levels of impaired loans, its actual loan losses over the past two-plus years have been lower than the other two subsidiaries and it retains significant earnings capacity. However, it is unlikely that Mercantile Bank could generate sufficient earnings to offset continued losses at Royal Palm Bank and Heartland Bank.

In June 2009, the Company’s Board of Directors initiated a process to identify and evaluate a broad range of strategic alternatives to further strengthen the Company’s capital base and enhance shareholder value. These strategic alternatives have included and may include asset sales, rationalization of non-business operations, consolidation of operations, closing of branches, mergers of subsidiaries, capital raising and other recapitalization transactions. As part of this process, the Board created a special committee (the “Special Committee”) of independent directors to develop, evaluate and oversee any strategic alternatives that the Company may pursue. The Special Committee retained outside financial and legal advisors to assist it with its evaluation and oversight.

The Special Committee also developed and executed a plan to raise additional equity through a shareholder rights offering. On April 27, 2010, the Company’s Board of Directors, upon the recommendation of the Special Committee, approved an amendment to its Certificate of Incorporation to increase the number of authorized shares of common stock of the Company from 14,000,000 to 30,000,000 (“the Amendment”). On May 24, 2010, at the Company’s annual meeting, stockholders voted to approve the Amendment. On July 12, 2010, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (“SEC”), to register units comprised of shares of the Company’s common stock and warrants to acquire the Company’s common stock. Holders of the Company’s common stock would receive one subscription right for each share of Company common stock held as of September 23, 2010, the record date. The offering period expired on October 29, 2010. On November 3, 2010, the Company terminated the offering without acceptance of any of the subscriptions exercised thereunder. The Company’s Board of Directors determined that in light of the Company’s stock price trading substantially below the subscription price, it was appropriate not to accept the subscriptions that were exercised.

Regulatory Matters

In connection with regular examinations of the Company, Mercantile Bank, Royal Palm Bank, Royal Palm Bancorp, Heartland Bank and Mid-America Bancorp by the Federal Reserve Bank of St. Louis (“FRB”), the FDIC, the Illinois Department of Financial and Professional Regulation (“IDFPR”) and Florida Office of Financial Regulation (“FOFR”), various actions were taken by the regulatory agencies.

These regulatory actions fall under three categories:

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. On March 10, 2009, the Company received a notice from the FRB of its intent to issue an MOU, which was signed by the Company’s Board of Directors on March 17, 2009. Under the terms of the MOU, the Company was expected to, among other things, provide its subsidiary banks with financial and managerial resources as needed, submit capital and cash flow plans to the FRB and provide periodic performance updates to the FRB. In addition, the Company was prohibited from paying any special salaries or bonuses to insiders, paying dividends, paying interest related to trust preferred securities, or incur any additional debt, without the prior written approval of the FRB. On July 31, 2009, the Company submitted to the FRB a three-year strategic and capital plan designed to strengthen the Company’s and its subsidiaries’ operations and capital position going forward. The plan reflected the challenges with respect to capital and the difficulties in projecting the impact of the economic weakness in the Company’s markets on its loan portfolio, as well as strategies to maintain the financial strength of the Company and its subsidiaries. A significant part of the plan was the initiative by the Company to sell one or more subsidiary banks in order to generate liquidity to reduce debt, improve capital ratios and provide necessary capital contributions to its remaining subsidiary banks. The result of this initiative was the exchange for debt of HNB in December 2009 and the sale of Marine Bank and Brown County in February 2010.

On February 16, 2010, the Company executed a WA with the FRB, replacing the previously-issued MOU. The terms of the WA are generally consistent with the MOU, with a requirement that an updated capital and cash flow plan be submitted to the FRB. On May 19, 2010, the Company submitted to the FRB a revised three-year strategic and capital plan that outlines the proposed strategies to maintain its regulatory capital status of at least “adequately capitalized”, maintain positive cash balances at the parent company level, ensure that each of its subsidiaries meets the capital requirements directed by their respective regulatory orders, and meet its debt service requirements, including distributions on its trust preferred securities. On December 15, 2010, the Company submitted to the FRB an updated three-year strategic and capital plan that outlines the revised proposed strategies to maintain its regulatory capital status of at least “adequately capitalized”, maintain positive cash balances at the parent company level, ensure that each of its subsidiaries meets the capital requirements directed by their respective regulatory orders, and meet its debt service requirements, including distributions on its trust preferred securities. See the “Capital Resources” section of this filing for discussion of the Company’s efforts to raise capital through a shareholder rights offering and other strategies.

Mercantile Bank. On March 8, 2010, Mercantile Bank entered into a MOU with the FDIC and the IDFPR. Under the terms of the MOU, Mercantile Bank agreed, among other things, to provide certain information to each supervisory authority including, but not limited to, financial performance updates, loan performance updates, written plan for reducing classified assets and concentrations of credit, written plan to improve liquidity and reduce dependency on volatile liabilities, written capital plan, and written reports of progress. In addition, the bank agreed not to declare any dividends or make any distributions of capital without the prior approval of the supervisory authorities, and within 30 days of the date of the MOU, to maintain its Tier 1 leverage capital ratio at no less than 8.0% and total risk based capital ratio at no less than 12.0%.

As of September 30, 2010, Mercantile Bank had a Tier 1 leverage capital ratio of 7.44% and a total risk based capital ratio of 11.14%. These ratios fell below the level required by the MOU primarily due to additional provisions for loan losses, and the Company elected not to inject any capital into Mercantile Bank until it determines a course of action to raise capital at the Company level. The FDIC has been notified of the non-compliance, and has requested the bank to provide a plan to restore the ratios to the required levels. The Company and Mercantile Bank are working with their legal and other professional advisors to develop a plan, which is expected to be implemented by March 31, 2011.

Royal Palm Bank. On October 3, 2008, Royal Palm Bank entered into a MOU with the FDIC and FOFR. Under the terms of the MOU, Royal Palm Bank agreed, among other things, to provide certain information to each supervisory authority including, but not limited to, financial performance updates, loan performance updates, written plan for improved earnings, written capital plan, review and assessment of all officers who head departments of the bank, and written reports of progress. In addition, Royal Palm Bank agreed not to declare any dividends or make any distributions of capital without the prior approval of the supervisory authorities, and to maintain its Tier 1 leverage capital ratio at no less than 8.0%, the Tier 1 risk based capital ratio at no less than 10.0%, and total risk based capital ratio at no less than 12.0%.

In May 2009, Royal Palm Bank entered into a stipulation and consent to the issuance of a CDO with the FDIC and FOFR. The CDO was issued and became effective May 30, 2009. Under the CDO, Royal Palm agreed, among

other things, to provide certain information to each supervisory authority including, but not limited to, notification of plans to add any individual to the board of directors or employ any individual as a senior executive officer, financial performance updates, loan performance updates, written plan for improved earnings, written capital plan, written contingency funding plan, written strategic plan, and written reports of progress. In addition, Royal Palm agreed not to declare any dividends or make any distributions of capital without the prior approval of the supervisory authorities, and to maintain its Tier 1 leverage capital ratio at no less than 8.0%, the Tier 1 risk based capital ratio at no less than 10.0%, and total risk based capital ratio at no less than 12.0%.

At September 30, 2009, Royal Palm Bank’s Tier 1 leverage ratio was 1.51% and total risk based capital ratio was 3.61%. As specified in the CDO, Royal Palm Bank notified the supervisory authorities within 10 days of the determination of the ratios. As a result of these capital ratios, Royal Palm Bank was not in compliance with the CDO requirements for capital ratios on September 30, 2009. On October 7, 2009, Royal Palm Bank received a letter from the FDIC informing it that the FDIC has preliminarily determined that Royal Palm Bank was critically undercapitalized and was subject to certain mandatory requirements under the Federal Deposit Insurance Act (“FDIA”). The letter also required Royal Palm Bank to submit a capital restoration plan to the FDIC by October 30, 2009, along with certain other disclosures related to the mandatory requirements under FDIA for critically undercapitalized banks. On October 9, 2009, the Company injected $2 million of additional capital into Royal Palm Bank and as a result, as of that date, Royal Palm Bank had a Tier 1 leverage capital ratio of 2.69%, a Tier 1 risk based capital ratio of 4.24% and a total risk based capital ratio of 5.58%.

On October 23, 2009, Royal Palm Bank received a letter from the FOFR demanding that Royal Palm Bank inject sufficient capital into Royal Palm Bank by November 30, 2009, such that as of November 30, 2009, Royal Palm Bank has a Tier 1 leverage capital ratio of at least 6%. In addition, Royal Palm Bank was required by this FOFR letter to submit a plan to the FOFR demonstrating how Royal Palm Bank will have a Tier 1 leverage capital ratio of at least 8% and a total risk based capital ratio of at least 12% as of December 31, 2009.

The Company injected $11.0 million of capital into Royal Palm Bank on December 1, 2009, with the proceeds from a short-term debt from Great River Bancshares, Inc. The Company injected an additional $1.25 million of capital into Royal Palm Bank on March 31, 2010, with proceeds from the sale of Marine Bank and Trust and Brown County State Bank.

As of September 30, 2010, Royal Palm Bank had a Tier 1 leverage capital ratio of 6.79%, Tier 1 risk based capital ratio of 9.93% and a total risk based capital ratio of 11.30%. These ratios fell below the level required by the CDO primarily due to additional provisions for loan losses, and the Company elected not to inject any capital into Royal Palm Bank until it determines a course of action to raise capital at the Company level. The FDIC has been notified of the non-compliance, and has requested the bank to provide a plan to restore the ratios to the required levels. The Company and Royal Palm Bank are working with their legal and other professional advisors to develop a plan, which is expected to be implemented by March 31, 2011.

Royal Palm Bancorp. In September 2009, Royal Palm Bancorp entered into a MOU with the FRB. As a one-bank holding company, this MOU primarily reflected regulatory concerns related to Royal Palm Bancorp’s subsidiary (Royal Palm Bank). Under the terms of the MOU, Royal Palm Bancorp agreed, among other things, to provide certain information to the FRB including, but not limited to, financial performance updates and written reports of progress. In addition, Royal Palm Bancorp agreed to assist Royal Palm Bank in addressing weaknesses identified in the bank examination, and not to pay any salaries or bonuses to insiders, incur any debt, declare any dividends or make any distributions of capital without the prior approval of the supervisory authorities. As of September 30, 2010, Royal Palm Bancorp was in compliance with all requirements of the MOU.

Heartland Bank. On March 9, 2009, Heartland signed a CDO with the FDIC. Under the terms of the CDO, Heartland agreed to, among other things, prepare and submit plans and reports to the FDIC regarding certain matters including, but not limited to, progress reports detailing actions taken to secure compliance with all provisions of the order, loan performance updates as well as a written plan for the reduction of adversely classified assets, a revised comprehensive strategic plan, and a written profit plan and comprehensive budget. In addition, Heartland agreed not to declare any dividends without the prior consent of the FDIC and to maintain its Tier 1 leverage capital ratio at no less than 8.0% and maintain its total risk based capital at no less than 12.0%.

As of September 30, 2010, Heartland had a Tier 1 leverage capital ratio of 5.55%, Tier 1 capital ratio of 7.70%, and total risk based capital ratio of 9.71%. These ratios fell below the level required by the CDO primarily due to additional provisions for loan losses, and the Company elected not to inject any capital into Heartland until it determines a course of action to raise capital at the Company level. The FDIC has been notified of the non-compliance, and has requested the bank to provide a plan to restore the ratios to the required levels. The Company and Heartland are working with their legal and other professional advisors to develop a plan, which is expected to be implemented by March 31, 2011.

Mid-America Bancorp. In September 2009, Mid-America Bancorp entered into a MOU with the FRB. As a one-bank holding company, this MOU primarily reflected regulatory concerns related to Mid-America’s subsidiary (Heartland Bank). Under the terms of the MOU, Mid-America Bancorp agreed, among other things, to provide certain information to the FRB including, but not limited to, financial performance updates and written reports of progress. In addition, Mid-America Bancorp agreed to assist Heartland Bank in addressing weaknesses identified in the bank examination, and not to pay any salaries or bonuses to insiders, incur any debt, declare any dividends or make any distributions of capital without the prior approval of the supervisory authorities. As of September 30, 2010, Mid-America Bancorp was in compliance with all requirements of the MOU.

No fines or penalties were imposed as a result of any of the regulatory enforcement actions.

The Company, Mercantile Bank, Royal Palm Bank, Royal Palm Bancorp, Heartland Bank and Mid-America Bancorp are committed to ensuring that future requirements of the regulatory agreements are met in a timely manner.

Effect of Inflation and Changing Prices.

The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting procedures generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Critical Accounting Estimates

Critical accounting estimates are those that are critical to the portrayal and understanding of the Company’s financial condition and results of operations, and require management to make assumptions that are difficult, subjective, or complex. These estimates involve judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions of conditions were to prevail, and depending on the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

The Company’s significant accounting policies are integral to understanding the results reported. The Company’s significant accounting policies are described in detail in Note 1 to its consolidated financial statements included in its Annual Report on Form 10-K filed with the SEC on April 7, 2010. The majority of these accounting policies do not require management to make difficult, subjective, or complex judgments or estimates, or the variability of the estimates is not material. However, management has identified the following critical policies.

Allowance for Loan Losses. The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for loan losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogeneous groups of loans are among other factors. The Company estimates a range

of inherent losses related to the existence of the exposures. The estimates are based upon the Company’s evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

Deferred Taxes. Prior to September 30, 2010, the Company maintained significant net deferred tax assets for deductible temporary differences, the largest of which related to the net operating loss carryforward and the allowance for loan losses. For income tax return purposes, only net charge-offs are deductible, not the provision for loan losses. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the recoverability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. Management considered both positive and negative evidence regarding the ultimate recoverability of the deferred tax assets. Positive evidence includes the existence of taxes paid in available carryback years, available tax planning strategies and the probability that taxable income will be generated in future periods, while negative evidence includes a cumulative loss in the current year and prior year and general business and economic trends.

As discussed in the Explanatory Note on page 3 of this Form 10-Q/A, due to the determination to record additional loan loss provisions in the third quarter of 2010, the Company’s capital ratios were reduced and the Company re-evaluated the adequacy of the valuation allowance established for its deferred tax assets. Based on its analysis, the Company determined that it was no longer more likely than not that it could generate sufficient taxable income to realize the deferred tax assets in future near-term periods as defined by generally accepted accounting principles, and accordingly recognized an additional valuation allowance in the third quarter of 2010 in the amount of approximately $10.3 million, representing the full remaining balance of the Company’s and each of its subsidiary banks’ deferred tax assets prior to the adjustment. Management’s assumptions could change based on unanticipated changes in the current economic environment and cause management to decrease its valuation allowance.

Regulatory Developments. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), into law. The Dodd-Frank Act will have a broad impact on the financial services industry, including significant regulatory and compliance changes such as, among other things, (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) increased capital and liquidity requirements; (3) increased regulatory examination fees; (4) changes to assessments to be paid to the FDIC for federal deposit insurance; and (5) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Board of Governors of the Federal Reserve System, (the “Federal Reserve”), the Office of the Comptroller of the Currency, (the “OCC”), and the Federal Deposit Insurance Corporation, (the “ FDIC”).

The following items provide a brief description of the impact of the Dodd-Frank Act on the operations and activities, both currently and prospectively, of the Company and its subsidiaries.

Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the FDIC’s Deposit Insurance Fund, (the “DIF”), will be calculated. Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average equity. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. Several of these provisions could increase the FDIC deposit insurance premiums paid by the Company’s subsidiaries. The Dodd-Frank Act also provides that, effective one year after the date of enactment, depository institutions may pay interest on demand deposits.

Trust Preferred Securities. Under the Dodd-Frank Act, bank holding companies are prohibited from including in their regulatory Tier 1 capital hybrid debt and equity securities issued on or after May 19, 2010. Among the hybrid debt and equity securities included in this prohibition are trust preferred securities, which the Company has used in the past as a tool for raising additional Tier 1 capital and otherwise improving its regulatory capital ratios. Although the Company is permitted to continue to include its existing trust preferred securities as Tier 1 capital, the prohibition on the use of these securities as Tier 1 capital going forward may limit the Company’s ability to raise capital in the future.

The Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent Consumer Financial Protection Bureau, (the “Bureau”), within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with

respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against certain state-chartered institutions. Although the Company’s subsidiaries do not currently offer many of these consumer products or services, compliance with any such new regulations would increase the cost of operations and, as a result, could limit the Company’s ability to expand into these products and services.

Increased Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than existing regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. Compliance with heightened capital standards may reduce the Company’s ability to generate or originate revenue-producing assets and thereby restrict revenue generation from banking and non-banking operations. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. Compliance with new regulatory requirements and expanded examination processes could increase the Company’s cost of operations.

Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

Transactions with Insiders. Insider transaction limitations are expanded through the strengthening on loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. Federal banking law currently limits a national bank’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. It also eventually will prohibit state-chartered banks (such as the Company’s banking subsidiaries) from engaging in derivative transactions unless the state lending limit laws take into account credit exposure to such transactions.

Corporate Governance. The Dodd-Frank Act addresses many corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for compensation committee members; (3) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC with authority to adopt proxy access rules that would allow shareholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials.

Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. While the Company’s current assessment is that the Dodd-Frank Act will not have a material effect on the Company’s operations, given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on the Company’s operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain of business practices, impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect the Company’s business. These changes may also require the Company to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact the Company’s results of operations and financial condition. While the Company cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have, these changes could be materially adverse to the Company’s investors.


Item 3.		*Quantitative and Qualitative Disclosures About Market Risk*.

There have been no material changes since December 31, 2009. For more information regarding quantitative and qualitative disclosures about market risk, please refer to the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2009, and in particular, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Rate Sensitive Assets and Liabilities” and Item 7A “Quantitative and Qualitative Disclosures About Market Risk.”


Item 4.		*Controls and Procedures*.

Evaluation of disclosure controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer originally concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Company’s management within the time periods specified in the Securities and Exchange Commission’s rules and forms.

However, as discussed in the Explanatory Note on page 3 of this Form 10-Q/A, based on the need to revise the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2010, the Company’s management and the Audit Committee of the Board of Directors have taken steps recently to re-evaluate the Company’s internal control over financial reporting, subsequent to September 30, 2010, and have concluded there is a material weakness in their design of such internal controls. The material weakness relates to the identification and communication of subsequent events. The Company’s Board of Directors has implemented several steps to improve the process for timely identification and communication of subsequent events to the Audit Committee and thus will remediate the material weakness. Included in these steps are the following:

	•		Appointment of a Chief Lending Officer at Mercantile Bank, whose responsibilities will include: oversight of lending policies and procedures to ensure adequate risk management and compliance with banking regulations at each of the Company’s subsidiary banks; management of loan portfolio credit quality, underwriting standards and problem resolution; evaluation of the adequacy of the ALLL; review and interpretation of banking laws and accounting guidance, along with communication of pertinent information to lending management; and, reporting and recommendations to the Audit Committee and Board of Directors of problem asset management and related processes.

	•		Revision of the loan policy at each of the Company’s subsidiary banks to clearly define what constitutes a subsequent event and to more clearly identify the procedures to follow to ensure proper accounting and reporting of the impact of such subsequent events.

	•		Revision of the loan policy at each of the Company’s subsidiary banks to address the banks’ participation in Shared National Credit loans, including procedures to follow upon receipt of a Shared National Credit exam report, execution of directives indicated in the report and appeal procedures with the lead bank and the FDIC in the event management disagrees with the findings in the report.

Changes in internal controls over financial reporting. Aside from the changes implemented by the Board of Directors, as discussed above, there were no other changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION


Item 1.		*Legal Proceedings*

None


Item 1A.		*Risk Factors*

In addition to the risk factors previously discussed in Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, the Company also faces the risks set forth below:

The Company and its subsidiaries are subject to regulatory agreements and orders that restrict the Company and its subsidiaries from taking certain actions.

General. As is more fully discussed in the “Regulatory Matters” section in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009, and Part I, Item 2 of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010, as well as this filing, the Company, Mercantile Bank, Royal Palm, Royal Palm Bank, Mid-America and Heartland Bank are subject to various bank regulatory enforcement actions. As of September 30, 2010, all regulatory requirements were met, except as discussed in the “Regulatory Matters” section of this filing. The Company will continue to work diligently to maintain compliance or become compliant with the enforcement actions. If the Company is unable to comply with such requirements, the regulatory agencies could force a sale, liquidation or federal conservatorship or receivership of subsidiaries.

The Company. The Company executed a Written Agreement (“WA”) with the Federal Reserve Bank (“FRB”) in February 2010. Under the terms of the WA, the Company must, among other requirements, provide subsidiary banks with financial and managerial resources as needed, update capital and cash flow plans for the FRB, and provide periodic performance updates to the FRB. In addition, the Company is prohibited from paying any special salaries or bonuses to insiders, paying dividends, paying interest related to trust preferred securities, or incur any additional debt, without the prior written approval of the FRB.

On May 19, 2010, the Company submitted to the FRB, and the FRB accepted, a revised three-year strategic and capital plan that outlines the proposed strategies to maintain the regulatory capital status of at least “adequately capitalized”, maintain positive cash balances at the parent company level, ensure that each of the subsidiaries meets the capital requirements directed by their respective regulatory orders, and meet the Company’s debt service requirements, including distributions on the trust preferred securities.

Banking Subsidiaries. Generally, the enforcement actions pertaining to the Company’s subsidiaries require that the banking subsidiaries provide certain information to each supervisory authority including, but not limited to, financial performance updates, loan performance updates, written plan for reducing classified assets and concentrations of credit, written plan to improve liquidity and reduce dependency on volatile liabilities, written capital plan, and written reports of progress. In addition, there are restrictions on the subsidiaries’ ability to declare any dividends or make any distributions of capital without the prior approval of the supervisory authorities and, with respect to the bank subsidiaries, to maintain certain Tier 1 leverage capital and total risk based capital ratios at prescribed levels.

As of September 30, 2010, Mercantile Bank, Royal Palm, Royal Palm Bank, Mid-America and Heartland Bank were in compliance with substantially all of the requirements of the enforcement actions pertaining to them, with the exception of the regulatory capital ratios at Mercantile Bank, Royal Palm Bank and Heartland Bank. The Company elected not to inject any additional capital into the subsidiary banks until it determines a course of action to raise capital at the Company level.

The regulatory agencies have been notified of the non-compliance and have requested the banks to provide plans to restore the ratios to required levels. The Company and its subsidiary banks are working with their legal and other professional advisors to develop plans, which are expected to be implemented by March 31, 2011.

Capital Injections and Ongoing Compliance. The Company and its subsidiaries’ ability to remain in compliance with the enforcement actions depends on various factors, including, but not limited to, the maintenance of adequate capital levels. A significant part of the plan presented to the FRB was the initiative to sell one or more subsidiary banks in order to generate liquidity to reduce debt, improve capital ratios and provide necessary capital contributions to the remaining subsidiary banks. The result of this initiative was the exchange for debt of HNB National Bank in December 2009 and the sale of Marine Bank & Trust and Brown County State Bank in February 2010. The Special Committee of the Board of Directors developed and pursued a plan to raise additional equity through a shareholder rights offering. On April 27, 2010, the Company’s Board of Directors, upon the recommendation of the Special Committee, approved an amendment to its Certificate of Incorporation to increase the number of authorized shares of common stock of the Company from 14,000,000 to 30,000,000 (“the Amendment”). On May 24, 2010, at the Company’s annual meeting, stockholders voted to approve the Amendment. On July 12, 2010, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (“SEC”), to register units comprised of shares of the Company’s common stock and warrants to acquire the Company’s common stock. On November 3, 2010, the Company announced it would terminate the offering without acceptance of any of the subscriptions exercised there under. The Company’s Board of Directors determined that in light of the Company’s stock price trading substantially below the subscription price, it was appropriate not to accept the subscriptions that

were exercised. The Company continues to work with its financial advisors and legal counsel in assessing its strategic and capital-raising options.

If the Company is not successful in developing and implementing other strategic and capital-raising options and the plans requested by the regulatory agencies (as described above), the ability to become and remain compliant with the enhanced capital levels required under the enforcement actions will be reduced. The Company could be compelled by banking regulators under those circumstances to sell, liquidate or place in federal conservatorship or receivership one or more of its remaining subsidiaries. Also, while these enforcement actions remain in place, the Company’s ability to address opportunities and challenges in our business, our markets and the banking industry generally will be curtailed.

The Company may have a concentration of credit risk related to its purchased participation loans.

Included in the Company’s loan portfolio at September 30, 2010 are approximately $21.5 million of purchased participation loans to borrowers located in areas outside the Company’s normal markets. Although the Company applies the same underwriting standards to these loans, there may be additional risk associated with those out of the Company’s normal territory.

The Company may not be able to develop and implement successfully its capital plan.

The Company has developed and is continuing to develop and implement a capital-raising plan to address its future needs for capital. The Company successfully consummated the sale of three subsidiary banks in late 2009 and early 2010 as part of the plan. However, the Company terminated its pending shareholder rights offering on November 3, 2010, and thus was unsuccessful in completing that part of the plan. The Company is now assessing and developing other strategic and capital-raising options to augment its plan. While the Company is committed to the completion and execution of the augmented plan and is devoting necessary resources to achieve that result, the Company may not be able to identify additional, viable options or, if identified, successfully execute those options and the plan generally under current market conditions.


Item 2.		*Unregistered Sales of Equity Securities and Use of Proceeds*

There were no unregistered sales of equity securities.

There were the following issuer purchases of equity securities (i.e., the Company’s common stock) during the three months ended September 30, 2010:

Total Number of Shares

Maximum Approximate

Third Quarter

Total Number of

Purchased as Part of

Dollar Value of Shares that

2010 Calendar

Shares Purchased

Average Price

Publicly Announced

May Yet Be Purchased Under

Month

(1)

Paid per Share (1)

Plans or Programs (2)

the Plans or Programs (3)

July

N/A

8,128,000

August

N/A

8,128,000

September

N/A

8,128,000

Total

N/A


(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*

None


Item 5.		*Other Information*

On November 15, 2010, the Company received notice that Alexander J. House has resigned, effective immediately, as a director of Mercantile Bancorp, Inc. and Mercantile Bank in order to devote more time to his business interests.


Item 6.		*Exhibits*


Exhibit
Number		Identification of Exhibit

10.1		Dealer-Manager Agreement dated September 23, 2010, between Mercantile Bancorp, Inc. and McClendon, Morrison & Partners, Inc. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated September 23, 2010).

31.1		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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Date: February 7, 2011	By:	/s/ Ted T. Awerkamp
		Ted T. Awerkamp
		President and Chief Executive Officer (principal executive officer)


Date: February 7, 2011	By:	/s/ Michael P. McGrath
		Michael P. McGrath
		Executive Vice President, Treasurer, Secretary and Chief Financial Officer (principal financial officer/ principal accounting officer)

Mercantile Bancorp, Inc. - FORM 10-Q/A - February 7, 2011

Attached files

Mercantile Bancorp, Inc. Reports

Also read