Loans And Allowance For Loan Losses

6 Months Ended

Jun. 30, 2011

7. LOANS AND ALLOWANCE FOR LOAN LOSSES

Categories of loans, including loans held for sale within residential real estate of $5,148,000 and $7,513,000, at June 30, 2011 and December 31, 2010, respectively, include:

	June 30, 2011		December 31, 2010

Commercial and financial	$	136,632	$	146,463
Agricultural		9,593		11,708
Real estate - farmland		14,455		15,528
Real estate - construction		73,050		91,553
Real estate - commercial		132,276		153,767
Real estate - residential		183,483		189,479
Consumer		53,901		60,177

Total loans		603,390		668,675

Less
Allowance for loan losses		20,435		28,199

Net loans	$	582,955	$	640,476

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company's obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures, which focus lending efforts on the types, locations, and duration of loans most appropriate for the Company's business model and markets. The Company's principal lending activity is the origination of commercial loans and commercial real estate ("CRE") loans, 1-4 family residential mortgage loans and consumer loans, but also includes multi-family residential mortgage loans, and home equity lines of credit. The Company will also consider construction loans, but generally only in relation to 1-4 family homes in core markets, and commercial construction loans the subsidiary banks are willing to put into their regular CRE portfolios. The primary lending market includes the areas surrounding each of the subsidiary banks. This includes the Quincy, Illinois, Saint Joseph and Savannah, Missouri and Carmel, Indiana markets for Mercantile Bank, the Kansas City area for Heartland Bank, and the Southwest Florida communities of Naples, Marco Island and Fort Myers for Royal Palm Bank. Generally, assets of the borrowers collateralize loans, while individuals also guarantee loans to business entities. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

Management reviews and approves the Company's lending policies and procedures on a routine basis. Management routinely (at least quarterly) evaluates the adequacy of the allowance for loan losses and reviews reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. The Company's underwriting standards are designed to encourage relationship banking. Relationship banking implies a primary banking relationship with the borrower that includes, at minimum, an active deposit banking relationship in addition to the lending relationship. The integrity and character of the borrower are significant factors in the Company's loan underwriting. As a part of underwriting, tangible positive or negative evidence of the borrower's integrity and character are sought out. Additional significant underwriting factors beyond location, duration, the sound and profitable cash flow basis underlying the loan and the borrower's character are the quality of the borrower's financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral. In limited circumstances, the Company's subsidiary banks will consider transactional lending if it is profitable and in a line of business in which the bank has experience. This includes indirect automobile lending in the Quincy, Illinois market and conservatively underwritten commercial real estate in all markets.

The board of directors at each subsidiary bank establishes the Company's policies and loan approval limits. The Company's lending activities reflect an underwriting strategy that emphasizes asset quality and fiscal prudence in order to keep capital resources available for the most attractive lending opportunities in the Company's markets. Lending officers are assigned various levels of loan approval authority based upon their respective levels of experience and expertise. When the amount of loans to a borrower exceeds an officer's lending limit, the loan request goes to either an officer with a higher limit or the Board of Directors loan committee for approval. The Company's strategy for approving or disapproving loans is to follow conservative loan policies and underwriting practices, which include:

granting loans on a sound and collectible basis;

investing funds properly for the benefit of the Company's shareholders and the protection of its depositors;

serving the legitimate needs of the communities in the Company's markets while obtaining a balance between maximum yield and minimum risk;

ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan; and

developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each category

The Company's lending policies prohibit a customer's total borrowing relationship exceeding the subsidiary bank's regulatory lending limit. Loans to related parties, including executive officers, the Company's directors, and the subsidiary banks' directors are reviewed for compliance with regulatory guidelines at least annually.

The Company employs an external consulting firm to conduct quarterly loan reviews that validate loans on a sample basis against the Company's loan policies. In addition to compliance with the policies, the loan review process evaluates the risk assessments for specific loans made by the Company's credit department, lenders and loan committees. Results of these reviews are presented to management and the boards of directors.

The Company's objective is to offer the commercial, agricultural, residential and consumer customers in its markets a variety of products and services, including a full array of loan products. The Company's bank subsidiaries make real estate loans (including farmland, construction and mortgage loans); commercial, financial and agricultural loans; and consumer loans. Total loans include loans held for sale. The Company strives to do business in the areas served by its banks and their branches, and all of the Company's marketing efforts and the vast majority of its loan customers are located within its existing market areas. The following is a discussion of each major type of lending.

Commercial, Financial and Agricultural Loans. These loans are primarily made within the Company's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. As a general practice, the Company's banks take as collateral a lien on any available equipment, accounts receivables or other assets owned by the borrower and often obtain the personal guaranty of the borrower. In general, these loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial, financial and agricultural loans is due to the type of collateral securing these loans. The increased risk also derives from the expectation that commercial, financial and agricultural loans generally will be serviced principally from the operations of the business, and those operations may not be successful. As a result of these additional complexities, variables and risks, commercial, financial and agricultural loans require more thorough underwriting and servicing than other types of loans.

Real Estate Loans. The Company's banks make real estate loans for farmland, construction and mortgage purposes as more thoroughly described below. Collectively, these loans, which include loans held for sale, comprise the largest category of the Company's loans.

Farmland Real Estate Loans. Farmland real estate loans are collateralized by owner-occupied and investment properties located in the Company's market areas. The Company's banks offer a variety of mortgage loan products that generally are amortized over five to twenty years. The loans generally have rates fixed for up to a five year period, with the loans either having an adjustable rate feature or a balloon at the maturity of the term. Loans secured by farmland real estate are generally originated in amounts of no more than 80% of the lower of cost or appraised value. The bank underwrites and seeks Farm Service Agency guarantees to enhance the credit structure of some farmland real estate loans.

The banks secure a valid lien on farmland real estate loans and obtain a mortgage title insurance policy that insures that the property is free of encumbrances prior to the banks' lien. The banks require hazard insurance if the farm property has improvements, and if the property is in a flood plain as designated by FEMA or HUD, the banks require flood insurance.

Construction Real Estate Loans. The Company's banks also make loans to finance the construction of residential and non-residential properties. Construction loans generally are secured by first liens on real estate. The Company's banks conduct periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If a bank is forced to foreclose on a project prior to completion, there is no assurance that the bank will be able to recover all of the unpaid portion of the loan. In addition, the bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While the Company's banks have underwriting procedures designed to identify what management believes to be acceptable levels of risk in construction lending, these procedures may not prevent losses from the risks described above.

The banks secure a valid lien on construction real estate loans and obtain a mortgage title insurance policy that insures that the property is free of encumbrances prior to the banks lien. The banks require hazard insurance if the construction property has improvements, insurance bonding on a contractor, and if the property is in a flood plain as designated by FEMA or HUD, the banks require flood insurance.

Residential Real Estate Loans. A significant portion of the Company's lending activity consists of the origination of mortgage loans collateralized by properties located in the Company's market areas. The Company's banks offer a variety of residential mortgage loan products that generally are amortized over five to twenty-five years. Residential loans collateralized by mortgage real estate generally have been originated in amounts of no more than 90% of the lower of cost or appraised value or the bank requires private mortgage insurance. Of the residential mortgage real estate loans originated, the Company generally retains on its books shorter-term loans with fixed or variable rates, and sells into the secondary mortgage market longer-term, fixed-rate loans to either Fannie Mae or a regional Federal Home Loan Bank, and retains the loan servicing rights.

Commercial Real Estate Loans. The Company's banks offer a variety of commercial real estate mortgage loan products that generally are amortized up to twenty years. The rates on these loans usually range from a daily variable rate to a fixed rate for no more than five years. The commercial real estate mortgage loans are collateralized by owner/operator real estate mortgages, as well as investment real estate mortgages. Loans collateralized by commercial real estate mortgages are generally originated in amounts of no more than 80% of the lower of cost or appraised value.

The banks secure a valid lien on mortgage real estate loans and obtain a mortgage title insurance policy that insures that the property is free of encumbrances prior to the bank's lien. The banks require hazard insurance in the amount of the loan and, if the property is in a flood plain as designated by FEMA or HUD, the banks require flood insurance.

Consumer Loans. The Company provides a wide variety of consumer loans (also referred to in this report as installment loans to individuals) including motor vehicle, watercraft, education, personal (collateralized and non-collateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 72 months and vary based upon the nature of collateral and size of loan. Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount that can be recovered on such loans.

At June 30, 2011 and December 31, 2010, the Company held a concentration in commercial real estate loans amounting to $219,781,000 and $260,848,000, respectively.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method at June 30, 2011 and December 31, 2010:


	June 30, 2011
	Commercial & Financial		Agricultural		Real Estate- Farmland		Real Estate- Construction		Real Estate- Commercial		Real Estate- Residential		Installment Loans to Individuals		Total
	(dollars in thousands)
Allowance for loan losses:

For the three months ended June 30, 2011

Balance, beginning of year	$	3,156	$	34	$	66	$	11,031	$	4,645	$	4,023	$	1,187	$	24,142
Provision (Credit) charged to expense		410		3		(2)		758		(158)		232		(67)		1,176
Losses charged off		289		3		-		4,509		1		118		41		4,961
Recoveries		3		3		-		5		23		20		24		78
Balance, end of period	$	3,280	$	37	$	64	$	7,285	$	4,509	$	4,157	$	1,103	$	20,435

For the six months ended June 30, 2011

Balance, beginning of year	$	4,540	$	44	$	73	$	12,288	$	4,625	$	5,126	$	1,503	$	28,199
Provision (Credit) charged to expense		311		(7)		(9)		1,058		(126)		(698)		(316)		213
Losses charged off		1,587		7		-		6,068		90		336		135		8,223
Recoveries		16		7		-		7		100		65		51		246
Balance, end of period	$	3,280	$	37	$	64	$	7,285	$	4,509	$	4,157	$	1,103	$	20,435

Ending balance:
Individually evaluated for impairment	$	928	$	-	$	-	$	3,951	$	2,127	$	1,224	$	717	$	8,947
Ending balance:
Collectively evaluated for impairment	$	2,352	$	37	$	64	$	3,334	$	2,382	$	2,933	$	386	$	11,488

Loans:
Ending balance	$	136,632	$	9,593	$	14,455	$	73,050	$	132,276	$	183,483	$	53,901	$	603,390
Ending balance:
Individually evaluated for impairment	$	8,663	$	-	$	221	$	47,514	$	25,178	$	5,303	$	2,169	$	89,048
Ending balance:
Collectively evaluated for impairment	$	127,970	$	9,593	$	14,234	$	25,536	$	107,098	$	178,180	$	51,732	$	514,343


	December 31 2010
	Commercial & Financial		Agricultural			Real Estate- Farmland			Real Estate- Construction		Real Estate- Commercial		Real Estate- Residential		Installment Loans to Individuals		Total
	(dollars in thousands)
Allowance for loan losses:

Balance, beginning of year	$	3,023	$	200		$	300		$	5,840	$	2,974	$	4,956	$	1,558	$	18,851
Provision (Credit) charged to expense		8,845		(157	)		(188	)		19,452		3,003		3,359		653		34,967
Losses charged off		7,411		18			39			13,057		1,355		3,247		788		25,915
Recoveries		83		19			-			53		3		58		80		296
Balance, end of period	$	4,540	$	44		$	73		$	12,288	$	4,625	$	5,126	$	1,503	$	28,199

Ending balance:
Individually evaluated for impairment	$	2,497	$	-		$	-		$	8,509	$	2,207	$	1,346	$	804	$	15,363
Ending balance:
Collectively evaluated for impairment	$	2,043	$	44		$	73		$	3,779	$	2,418	$	3,780	$	699	$	12,836

Loans:
Ending balance	$	146,463	$	11,708		$	15,528		$	91,553	$	153,767	$	189,479	$	60,177	$	668,675
Ending balance:
Individually evaluated for impairment	$	4,726	$	-		$	-		$	52,375	$	24,279	$	6,004	$	2,348	$	89,732
Ending balance:
Collectively evaluated for impairment	$	141,737	$	11,708		$	15,528		$	39,178	$	129,488	$	183,475	$	57,829	$	578,943

Management's opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

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 ("ALL"), which it believes is adequate to cover probable losses inherent in the loan portfolio. Loans are charged off against the ALL when the loans are deemed to be uncollectible. Although the Company believes the ALL is adequate to cover probable losses inherent in the loan portfolio, the amount of the ALL 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 ALL could occur based on these examinations.

Based on an evaluation of the loan portfolio, management presents a quarterly review of the ALL to the board of directors, indicating any change in the ALL since the last review and any recommendations as to adjustments in the ALL. 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 ALL.

A model is utilized to determine the specific and general portions of the ALL. Through the loan review process, management assigns a risk weighting 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 ALL based on the amounts determined using the procedures set forth above.

Activity in the ALL for the periods ended June 30, 2010 were as follows:

		Three months Ended June 30, 2010		Six months Ended June 30, 2010

Balance, beginning of period	$	18,917	$	18,851
Provision charged to expense		7,150		11,140
Losses charged off, net of recoveries of $46 and $124, respectively		3,459		7,383
Balance, end of period	$	22,608	$	22,608

For the six months ended June 30, 2011, provision for loan loss expense was $213 thousand, compared with $11.1 million for the same period in 2010. The year-over-year decrease was partially due to a negative provision of $963 thousand in the first quarter of 2011 compared to $3.9 million for the same period in 2010. The Company's analysis of the adequacy of its ALL as of March 31, 2011 reflected, prior to recording the negative provision, an excess balance in the ALL, primarily due to the reduction in total loans, stabilization of non-performing loan balances and receipt of an updated appraisal in April 2011 to support a substantial reduction of a specific reserve on a commercial real estate loan that was added in the fourth quarter of 2010. For the three months ended June 30, 2011, provision for loan loss expense was $1.2 million, compared with $7.2 million for the same period in 2010.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination. In addition, lending relationships over $500,000, new commercial and commercial real estate loans, and watch list credits are reviewed at least annually by management in order to verify risk ratings. The Company uses the following definitions for risk ratings:

Pass – Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.

Special Mention – Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the bank's credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be charged-off.

The following tables present the credit risk profile of the Company's loan portfolio based on rating category and payment activity as of June 30, 2011 and December 31, 2010:


	Commercial & Agricultural		Commercial Real Estate		Residential Real Estate		Consumer
Rating:	June 30, 2011	December 31, 2010	June 30, 2011	December 31, 2010	June 30, 2011	December 31, 2010	June 30, 2011	December 31, 2010

Pass	$ 126,393	$ 133,363	$ 126,739	$ 167,302	$ 168,304	$ 171,904	$ 51,317	$ 57,760
Special Mention	8,027	15,076	20,128	17,523	4,728	3,988	415	70
Substandard	7,320	2,130	72,914	74,252	5,302	6,074	2,169	2,345
Doubtful	1,343	2,712	-	1,770	-	-	-	2
Total	$ 143,083	$ 153,281	$ 219,781	$ 260,847	$ 178,334	$ 181,966	$ 53,901	$ 60,177


	Loans Held for Sale		Floor Plan Loans		Total Loans
Rating:	June 30, 2011	December 31, 2010	June 30, 2011	December 31, 2010	June 30, 2011	December 31, 2010

Pass	$ 5,148	$ 7,513	$ 3,143	$ 4,891	$ 481,044	$ 542,733
Special Mention	-	-	-	-	33,298	36,657
Substandard	-	-	-	-	87,705	84,801
Doubtful	-	-	-	-	1,343	4,484
Total	$ 5,148	$ 7,513	$ 3,143	$ 4,891	$ 603,390	$ 668,675

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at the earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual or charged-off are reversed against interest income. After collection of the full principal balance on these loans, interest is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present the Company's loan portfolio aging analysis as of June 30, 2011 and December 31, 2010:


	June 30, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing

Commercial and financial	$	5,281	$	1,522	$	1,051	$	7,854	$	128,778	$	136,632	$	7
Agricultural		1		3		1		5		9,588		9,593		1
Real estate - farmland		187		—		—		187		14,268		14,455		—
Real estate - construction		236		—		20,329		20,565		52,485		73,050		—
Real estate - commercial		7,026		109		8,097		15,232		117,044		132,276		—
Real estate - residential		3,718		488		2,046		6,252		177,231		183,483		22
Installment loans to individuals		362		81		77		520		53,381		53,901		57
Total	$	16,811	$	2,203	$	31,601	$	50,615	$	552,776	$	603,390	$	87

	December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
Commercial and financial	$	112	$	243	$	2,284	$	2,639	$	143,824	$	146,463	$	—
Agricultural		—		—		2		2		11,706		11,708		2
Real estate - farmland		357		—		—		357		15,171		15,528		—
Real estate - construction		2,606		5,480		21,816		29,902		61,651		91,553		—
Real estate - commercial		1,878		1,779		9,133		12,790		140,977		153,767		—
Real estate - residential		1,632		2,496		3,347		7,475		182,004		189,479		262
Installment loans to individuals		220		150		43		413		59,764		60,177		27
Total	$	6,805	$	10,148	$	36,625	$	53,578	$	615,097	$	668,675	$	291

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when, based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. The Company defines impaired loans as all loans classified as "substandard", "doubtful" or "loss". Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan-by-loan basis by either the present value of the expected future cash flows, the loan's observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significant restructured loans are considered impaired in determining the adequacy of the ALL.

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring.

The Company will restructure loans when the borrower is unable to comply with the terms of the loan, but can demonstrate the ability to meet acceptable restructured terms. Restructurings generally include one or more of the following restructuring options; reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Restructured loans in compliance with modified terms are classified as impaired.

At June 30, 2011 the Company had approximately $5.7 million in troubled debt restructurings that were classified as impaired including $2.3 million in construction real estate loans, $428 thousand in residential real estate loans, $2.8 million in commercial real estate loans, and $171 thousand in commercial loans. In addition to these amounts, the Company had troubled debt restructurings totaling approximately $6.4 million, also classified as impaired, that were performing in accordance with their modified terms including $3.4 million in construction real estate loans, $107 thousand in residential real estate loans, and $2.9 million in commercial real estate loans.

The following tables present impaired loans as of June 30, 2011 and December 31, 2010:

	Six Months Ending June 30, 2011										Three Months Ending June 30, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized			Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance:

Commercial and agriculture	$	6,457	$	6,457	$	—	$	4,271	$	234		$	3,292	$	220
Commercial real estate		24,400		24,400		—		32,745		469			28,733		282
Residential real estate		1,570		1,570		—		2,158		23			1,648		12
Consumer		—		—		—		2		—			—		—

Loans with a specific valuation allowance:

Commercial and agriculture		2,206		2,206		928		2,424		63			2,421		22
Commercial real estate		48,513		48,513		6,078		42,000		578			42,056		372
Residential real estate		3,733		3,733		1,224		3,533		99			3,521		69
Consumer		2,169		2,169		717		2,257		27			2,216		13

Total:

Commercial	$	81,576	$	81,576	$	7,006	$	81,440	$	1,344		$	76,502	$	896
Residential	$	5,303	$	5,303	$	1,224	$	5,691	$	122		$	5,169	$	81
Consumer	$	2,169	$	2,169	$	717	$	2,259	$	27		$	2,216	$	13

	December 31, 2010
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance:

Commercial and agriculture	$	987	$	987	$	—	$	2,283	$	177
Commercial real estate		25,984		25,984		—		46,808		1,489
Residential real estate		1,626		1,626		—		4,784		41
Consumer		—		—		—		—		—

Loans with a specific valuation allowance:

Commercial and agriculture		3,739		3,739		2,497		2,927		171
Commercial real estate		50,670		50,670		10,716		37,726		1,402
Residential real estate		4,378		4,378		1,346		4,293		63
Consumer		2,348		2,348		804		1,930		104

Total:

Commercial	$	81,380	$	81,380	$	13,213	$	89,744	$	3,239
Residential	$	6,004	$	6,004	$	1,346	$	9,077	$	104
Consumer	$	2,348	$	2,348	$	804	$	1,930	$	104

Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on non-accruing impaired loans for which the ultimate collectability of principal is not uncertain.

The following table presents the Company's nonaccrual loans at June 30, 2011 and December 31, 2010:

	June 30,		December 31,
	2011		2010

Commercial and financial	$	1,274	$	2,579
Agricultural		—		—
Real estate - farmland		—		134
Real estate - construction		20,329		29,892
Real estate - commercial		11,712		9,134
Real estate - residential		2,331		4,041
Installment loans to individuals		154		216
Total	$	35,800	$	45,996

For the six month period ended June 30, 2011 and year ended December 31, 2010, the Company recognized interest income on impaired loans of $1,493,000 and $3,447,000, respectively. On a cash basis, the Company recognized interest income on impaired loans of $1,399,000 and $4,475,000 for the six month period ended June 30, 2011 and year ended December 31, 2010, respectively.

- Definition

The entire disclosure for claims held for amounts due a company. Examples include trade accounts receivables, notes receivables, loans receivables.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 310
-SubTopic 10
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Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 03
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-Article 9

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher AICPA
-Name Statement of Position (SOP)
-Number 01-6
-Paragraph 13
-Subparagraph d
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 310
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Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
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Reference 6: http://www.xbrl.org/2003/role/presentationRef
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Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 210
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Reference 8: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
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Reference 9: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 310
-SubTopic 10
-Section 50
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-URI http://asc.fasb.org/extlink&oid=6965416&loc=d3e5074-111524

+ Details

June 30, 2011

December 31 2010

Mercantile Bancorp, Inc. 10-Q