| News Release
Quincy, IL, October 18, 2006 – Citing the effect of a $1.5 million gain on the sale of an investment, Mercantile Bancorp, Inc. (AMEX: MBR) today reported net income for the third quarter ended September 30, 2006 of $2.9 million, or 50 cents per share, compared with net income of $2.6 million, or 45 cents per share, in the same period a year ago. Weighted average shares outstanding were 5,847,827 and 5,884,371 in the third quarter of 2006 and 2005, respectively. The Company noted that results for the prior year period have been adjusted to reflect the Company’s three-for-one stock split in June 2006. For the nine months ended September 30, 2006, Mercantile posted net income of $7.1 million, or $1.21 per share, on 5,848,104 weighted average shares outstanding, compared with net income of $7.0 million or $1.20 per share on 5,888,793 weighted average shares outstanding in the first nine months last year. Prior year numbers have been adjusted to reflect the June 2006 three-for-one stock split. The Company noted that nine-month results for the current year include the impact of a $279,000 after-tax charge related to the settlement of litigation. “The third quarter was marked by a continuation of the abnormally small differential between long-term and short-term interest rates,” said Dan S. Dugan, chairman, president and chief executive officer. “Short-term rates have risen over the past 12 months while long-term rates have not kept pace. As a result, we are paying higher rates for deposits but are not able to command correspondingly higher rates for loans. “However, within the context of the adverse interest rate environment, we performed well. Net loans grew by almost six percent despite the well-publicized softening in the housing market nationally. Similarly, deposits grew by 5.3 percent. This steady growth, I believe, reflects the nature of our primary Illinois and Missouri markets. Although they seldom experience explosive growth, they grow steadily and moderately, even as other areas of the nation experience volatility. This provides us with a solid base from which we can pursue other initiatives to increase value for shareholders.” Net interest income in the third quarter was $9.4 million, an increase of 5.2 percent over net interest income of $8.9 million reported in the third quarter a year ago, the Company reported. This increase was the result of growth in the loan portfolio, partially offset by a decline in net interest margin to 3.30 percent from 3.53 percent in the third quarter a year earlier. A major factor in the decline in third quarter net interest margin was a significant increase in interest expense as a result of trust preferred securities issued to fund the acquisition of Royal Palm Bancorp, which is expected to close in the fourth quarter of 2006. The securities were issued early in the third quarter to lock in the most advantageous rate possible, the Company said. Net interest income for the nine months amounted to $27.7 million, compared with $26.1 million in the nine months of the previous year, an increase of six percent. Net interest margin for the first nine months of 2006 was 3.41 percent vs. 3.52 percent for the same period last year. This reflects the increase in interest rates paid on deposits combined with the effect of interest on the trust preferred securities issued to fund the Royal Palm acquisition. “We expected the relationship between long-term and short-term rates to begin returning to their historical norm during the third quarter. However, continued anxiety over both the direction of the economy and geopolitical events has delayed normalization. As a result, we continued to experience pressure on our net interest margin,” Dugan said. Noninterest income in the third quarter rose to $3.8 million from $2.1 million in the same period last year. The large increase is due principally to a gain of $1.5 million from the sale of Mercantile’s interest in NorthStar Bancshares, Inc., which was acquired by a third party, according to the Company. Additionally, securities brokerage fees in the quarter rose to $249,000 from $77,000 in the same period a year earlier as that operation began to more fully realize its potential. For the nine months, noninterest income grew by 41.1 percent to $8.5 million from $6.0 million in the comparable period last year. The increase is the combined result of the gain on sale of the Company’s NorthStar investment, growth in securities brokerage fees and increases in most other noninterest categories. “An integral part of our strategy is to make strategic investments in other banks with the intent of generating returns above those we could achieve through our core operations alone,” Dugan said. “Monetization of our NorthStar investment clearly is an example of how we can, through prudent deployment of a small percentage of our capital, deliver value to our shareholders. “It is important to note that the gain recorded in the third quarter of this year is only a portion of the total gain we expect to record on the NorthStar transaction. Once certain issues between NorthStar and the acquiring company are fully resolved, we expect to record as much as an additional $1.3 million of the gain in the coming year,” Dugan added. The Company said it took steps to further strengthen its capital structure during the third quarter. In July, it issued $30 million in trust preferred securities and renewed and extended a $15 million line of credit. Funds generated from the financing activity will be used to complete the acquisition of Royal Palm Bancorp and for general corporate purposes. Mercantile’s balance sheet at the end of the third quarter reflected the Company’s continued growth. Cash and equivalents stood at $43.2 million. Net loans were $899 million, up 5.8 percent from $850 million at the end of 2005. Total assets rose 7.4 percent to $1.22 billion at September 30 from $1.14 billion at the end of the previous year. Deposits at third quarter-end were $996 million, an increase of 5.3 percent from their level of $946 million as of December 31, 2005. Stockholders’ equity climbed to $97.8 million up 6.9 percent from $91.5 million at the end of last year. “Our performance this year has validated our three pronged strategy,” said Dugan. “Our core banking business has been steady and we have been successful in growing both loans and deposits despite the difficult interest rate environment that has persisted throughout the year. “We have also actively pursued the second prong – acquisitions – by reaching an agreement to acquire Royal Palm Bancorp. That transaction is expected to close in November. It gives us tremendous potential to grow both loans and deposits. In addition, it gives us a strong presence in one of the most affluent and fastest-growing metropolitan areas in the nation,” Dugan noted. Dugan also said the third prong of Mercantile’s strategic plan has begun to yield tangible results. “We anticipate an annualized return of up to16 percent on the sale of our investment in NorthStar Bancshares. We also have the opportunity to realize a gain on another of our strategic investments when GBC Bancorp, Inc., in which we have a 5 percent equity stake, agreed to be acquired by another bank. That previously announced transaction is expected to close in the fourth quarter of 2006 and we expect to realize an annualized return of approximately 28 percent on our investment of $1.2 million. “Notably, we also executed three new equity investments. At the end of July we made a $1.7 million investment in Paragon National Bank (PGNN) in Memphis. This followed our announcement in June that we took a 2.5% equity position in Premier Community Bank of The Emerald Coast, a newly organized banking institution based in Crestview, Florida, and an acquisition of a small position in Integrity Bancshares, Inc. (ITYC) of Alpharetta, Georgia in late August. We anticipate these investments will yield an excellent return over time,” Dugan concluded. About Mercantile Bancorp Mercantile Bancorp, Inc. is a Quincy, Illinois-based bank holding company with majority-owned subsidiaries consisting of 5 banks in Illinois, 2 banks in Missouri and 1 bank in Kansas, where the Company conducts full-service commercial and consumer banking business, engages in mortgage banking, trust services and asset management, and provides other financial services and products. In addition, the Company has minority investments in 7 community banks in Missouri, Georgia, Florida and Tennessee. Further information is available on the Company's website at www.mercbanx.com. This release contains information and “forward-looking statements” that relate to matters that are not historical facts and which are usually preceded by the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties. Because of these and other uncertainties, our actual results may be materially different from those described in these forward-looking statements. The forward-looking statements in this release speak only as of the date of the release, and we do not assume any obligation to update the forward-looking statements or to update the reasons why actual results could differ from those contained in the forward-looking statements.
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