| News Release Mercantile Bancorp, Inc. Announces Solid Second Quarter Results
Quincy Illinois, July 18, 2007 – Mercantile Bancorp (AMEX: MBR) today reported net income for the second quarter ended June 30, 2007 of $2.4 million, or 41 cents per share, on 5,829,437 weighted average shares outstanding, compared with net income of $2.2 million, or 38 cents per share on 5,848,345 weighted average shares outstanding in the second quarter a year ago. For the six months ended June 30, the company posted net income of $4.2 million, or 72 cents per share, on 5,830,585 weighted average shares outstanding, compared with net income of $4.2 million, or 71 cents per share, on 5,848,245 weighted average shares outstanding for the first six months of the previous year. “Our second quarter performance was an improvement over the first quarter as the impact of our acquisition of Royal Palm Bank in late 2006 contributed to results. However, our performance was still impacted by the combination of factors we have been experiencing for the past year,” said Ted T. Awerkamp, President and Chief Executive Officer. “Intense competition among financial institutions for loans and deposits, a continuation of the well-documented softness in the housing market and a flat interest rate curve all had an impact on our results. This combination made it challenging to generate loans and to price them in a manner that provided reasonable margins.” Net interest income for the second quarter rose by 11.2 percent to $10.4 million from $9.4 million in the second quarter a year ago. The increase is due primarily to the inclusion of results from Royal Palm Bank, based in Naples, Florida, which was acquired in November, 2006. “The softness in the housing market clearly had an effect on the second quarter,” Awerkamp noted. “Both individuals and commercial customers took a cautious approach to making additional loan commitments. That ratcheted up the level of competition for loans of all types. Although our markets have been more stable in terms of lending activity than the nation as a whole, we nonetheless saw the level of lending grow more slowly than previously anticipated.” Net interest income for the first six months of 2007 was $20.8 million compared with $18.3 million in the first half of the prior year, an increase of 13.6 percent. The growth primarily reflects the inclusion of Royal Palm Bank's results for the entire six month period. Noninterest income in the second quarter rose to $2.8 million from $2.4 million in the comparable period last year. For the first six months of 2007, noninterest income rose to $5.1 million from $4.8 million in the same period a year earlier. “We have made it a priority to grow noninterest income,” Awerkamp stated. “Although the initiatives to accomplish this are still in their infancy, they are gaining traction. Over the long term we believe they can become a more significant part of our total income stream.” Noninterest expense in the second quarter rose to $9.4 million from $7.5 million in the same period last year. For the first six months of the current year, noninterest expense amounted to $18.6 million vs. $15.3 million in the comparable period a year earlier. The increases in both the three- and six-month periods primarily reflect noninterest expenses attributable to the Royal Palm acquisition. Due to the timing of the acquisition, no Royal Palm expenses were included in the prior-year periods. Additionally, noninterest expenses include costs related to the expansion of the company's subsidiary, Mid-America Bancorp, whose operating unit, Heartland Bank, opened two new locations late in 2006 in the Kansas City metro market. Mercantile said its efficiency ratio rose in the second quarter to 71 percent compared with 64 percent in the comparable period a year earlier. The increase reflects both the Royal Palm acquisition, the integration of which is still underway, and the costs associated the two new branches opened by Heartland Bank, which have not yet matured. Commenting on the lower efficiency level, Awerkamp said, “We are accepting a temporarily lower-than-normal level of operating efficiency in order to facilitate growth. It is an unfortunate fact that expenses do not rise in lock-step with revenue. We view the higher level of costs as a form of investment we will more than recover as they reach their full earning potential.” Average assets in the second quarter were $1.4 billion. This compares to average assets of $1.1 billion in the second quarter of last year. Although, as expected, the Royal Palm acquisition was a major contributor to the increase, particularly strong performance at Heartland Bank was also a factor in the growth. Net loans at the ends of the second quarter stood at $1.03 billion, approximately level compared with $1.02 billion at the end of 2006. “The steady level of loans compared with the end of last rear reflects active management of credit risk and the portfolio as a whole. We decided to withdraw from involvement in certain commercial loans that we believe were no longer consistent with our lending practices. The current environment has meant it is taking longer to replace those loans. We believe the actions were prudent and eliminated risks with which we were no longer comfortable,” Awerkamp stated. Total non-performing loans increased from $4.2 million at June 30, 2006 to $11.1 million at June 30, 2007. The increase was primarily due to several large commercial real estate loans that are in foreclosure proceedings and being closely monitored by management. The Company is confident that the subject property values provide adequate collateral, and full recovery is expected. Deposits at mid-year stood at $1.12 billion, down modestly from their level of $1.17 billion at the end of 2006. Awerkamp said “The decline in deposits is due to a combination of normal variation and a decision we made to allow certain high-cost brokered CD's to run off. Our core deposit growth has been very strong and we believe the higher cost CD's can be replaced in a reasonable amount of time with lower-cost core deposits as funding needs increase with loan growth. Moreover, our high retention rate for core deposits helps reduce the extent to which we are affected by deposit repricing.” The executive said it is important to recognize that changes in loan and deposit totals are due to active management of the company's balance sheet. “The banking environment is in a state of flux. Under such conditions, we want to proceed with a certain amount of caution so we are well-positioned to take advantage of opportunities that may present themselves as we go forward.” Awerkamp also said Mercantile continued to pursue its three-pronged strategy for growth in the second quarter. “We have been active in a number of areas. Our previously announced acquisition of HNB Financial Services is winding its way through the regulatory approval process. We currently expect that transaction to close late in the third quarter of this year. When complete, HNB is expected to give us a stronger position in eastern Missouri and a presence in the fast-growing northern portion of metropolitan St. Louis. “We also continued our efforts to generate long-term growth through strategic investments in de novo banks. In the second quarter we announced two transactions. We agreed to acquire a 4.4 percent interest in a newly-formed community banking organization in the metropolitan Denver area that intends to focus on serving the large Hispanic segment of the population. We also monetized an investment by agreeing to sell our interest in New Frontier Bancshares, Inc. of St. Charles, Missouri for $6.8 million, which will generate a pre-tax gain of approximately $2.1 million. That transaction should close in the fourth quarter. Awerkamp pointed out that Mercantile has also made progress in the company's core bank operations. “The investments we've made in technology allow us to remain competitive by offering a range of services comparable to those available from larger banks. Further, our infrastructure makes possible the effective integration of locations that are geographically distant from our Quincy headquarters.” “Looking toward the second half, we remain cautiously optimistic,” Awerkamp stated. “In recent weeks, we have seen what appears to be the start of a return to a more normal relationship between long-term and short-term interest rates. Although it is premature to draw any definitive conclusions, movement toward an interest rate curve closer to historic norms should allow us to obtain more reasonable pricing on new loans and relieve some of the pressure on margins we have been experiencing.” “We believe the current environment will create a number of new opportunities for growth from internal sources and through strategic acquisitions. By marshalling our resources, we are well-positioned to take full advantage of those opportunities when they arise and deliver increased value to our shareholders,” Awerkamp concluded. Separately, Mercantile noted it recently amended and extended an existing line of credit through US Bank, N.A., which expired June 30, 2007. The new $8 million credit facility bears interest at a floating rate relative to changes in the national prime interest rate until maturity on June 30, 2008. The Company intends to continue to use this revolving credit line for various corporate purposes, including, but not limited to, pursuit of the Company's growth and operating strategy, stock repurchases, and/or other general corporate purposes. The amount of the new facility has been reduced form its previous level of $15 million. Mercantile noted it expects to incorporate the additional $7 million previously included in the credit facility in other borrowings being contemplated in relation to its previously announced acquisition of HNB Financial Services, Inc. About Mercantile Bancorp
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