| News Release Mercantile Bancorp, Inc. Reports Third Quarter 2007 Results
Quincy Illinois, October 25, 2007 – Mercantile Bancorp, Inc. (AMEX: MBR) today reported net income for the third quarter ended September 30, 2007 of $3.3 million, or 57 cents per share, on approximately 5,807,000 weighted average shares outstanding, up from net income of $2.9 million, or 50 cents per share on approximately 5,848,000 weighted average shares outstanding in the third quarter a year ago. For the nine months, the Company posted net income of $7.5 million, or $1.29 per share, on approximately 5,822,000 weighted average shares outstanding, up from net income of $7.1 million, or $1.21 per share, on approximately 5,848,000 weighted average shares outstanding for the nine months of the previous year. Quarterly and nine months results included a gain of $2.1 million on the sale of Mercantile's investment in New Frontier Bancshares, Inc. in September 2007. For comparison, during third quarter 2006, the Company recorded a gain on the sale of assets of $1.5 million, also resulting from the sale of an investment position in a startup bank, which is part of Mercantile's income-generating strategy. Mercantile's acquisition of HNB Financial Services, Inc. closed on September 7, so third quarter 2007 operating results reflect less than a month of contribution from HNB. At the closing date, HNB had approximately $166.5 million in assets. As of September 30, 2007, Mercantile reported total assets of approximately $1.62 billion compared with $1.22 billion at the end of third quarter 2006. “We have continued to grow Mercantile through acquisitions and increases in core deposits and loans,” said Ted T. Awerkamp, President and Chief Executive Officer. “We will move to integrate HNB into our core banking operations at a reasonable pace for customers and the Company. We are setting priorities to maximize the acquisition's best opportunities.” Addressing business in the Company's core banking operations, Awerkamp explained: “As in the second quarter of 2007, softness in the economy and housing market continued to impact our results. Our loan portfolio remained stable and the quality high. We had very few issues related to loan quality, and these were mainly in the Florida market. We anticipated and reserved for these particular problem loans.” Awerkamp noted that toward the end of the quarter, loan activity picked up, possibly indicating a potential change in the highly cautious borrowing behavior of past months. He said a slight improvement in the interest rate curve as short-term rates fell slightly compared with long-term rates should ease pressure on the Company's net interest margin in the coming months. Net interest income for the third quarter rose to $10.5 million from $9.4 million in third quarter 2006. The increase is due primarily to the inclusion of results from Royal Palm Bank in Naples, Florida, acquired in November, 2006. Net interest income for the nine months rose to $31.3 million compared with $27.7 million in the nine months of 2006, an increase of about 13 percent. Noninterest income in the third quarter rose to $5.0 million from $3.8 million in the comparable period last year. For the nine months, noninterest income rose to $10.1 million from $8.5 million in the same period a year earlier. “In every major category, we have grown year-over-year noninterest income,” said Awerkamp. “This has been and remains a priority. We had particularly satisfying gains in fees from trust services and our growing brokerage business. These initiatives 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 third quarter was $9.9 million, versus $7.7 million in the same period last year. For the nine months, noninterest expense amounted to $28.6 million compared with $23.0 million in the comparable period a year earlier. The increases in both the three- and nine-month periods primarily reflect noninterest expenses attributable to the Royal Palm acquisition due mostly to additional employees and higher facility occupancy expenses. Mercantile's efficiency ratio was 64 percent in third quarter 2007 compared with 59 percent in third quarter 2006. The increase reflects the Royal Palm acquisition and its integration into the Company's operations, and costs associated with two branches opened in 2006 by Heartland Bank in the Kansas City area, which have not yet matured. Awerkamp explained: “While operating efficiency is certainly important to us, we expect higher costs as we continue to add high-quality assets through acquisitions. Increased revenue usually trails the costs related to these acquisitions, particularly people costs. We view the higher level of costs as a form of investment we will more than recover as our acquisitions and new branches reach their full earning potential.” Acquisitions Bolster Balance Sheet Total non-performing loans were $12.9 million at September 30, 2007 compared with $4.9 million at the end of third quarter 2006. The year-over-year increase was primarily due to several large commercial real estate loans that are in foreclosure proceedings and are being closely monitored. Management said it remains confident the subject property values provide adequate collateral and expects full recovery of the funds. “We have taken a close look at our entire portfolio, and we feel relatively confident most of the problem loans have been addressed,” said Awerkamp. “Most of our problem loans have been on the commercial side. We have been pleased with the stability and quality of consumer loans, and we generally sell our mortgages to the secondary market. Most of our residential mortgages fall below the jumbo loan category so we have had no problem finding buyers. But consumer lending activity has been unusually slow.” Deposits at September 30, 2007 stood at $ 1.30 billion, up from $1.17 billion at December 31, 2006. The increase in deposits primarily reflects the HNB acquisition, which contributed a significant amount of time deposits and savings, NOW and money market accounts. The Company continues to allow certain high-cost brokered certificates of deposit to expire and is not replacing them. There was a year-over year decline in these brokered time deposits. “We continue to have a high retention rate for core deposits, which helps lessen any impact of deposit re-pricing,” noted Awerkamp. He said he believes the interest rate curve is slowly beginning to shift back to a more normal balance, which would have a long-term positive impact on the Company's net interest margin. “Part of our strategy is to carefully monitor and manage interest rates to minimize the impact of long- and short-term interest rate differences.” During the quarter, Mercantile continued to make strategic investments in startup banks by taking equity positions in two newly created banking organizations in California and Georgia. The Company said the aggregate amount invested in the two opportunities was $2.6 million. Mercantile purchased a 4.99 percent equity interest in Los Angeles-based Manhattan Bancorp, Inc., a bank holding company that is the parent of Bank of Manhattan. Also during the quarter, Mercantile bought a 4.99 percent equity interest in Brookhaven Bank, a Georgia-chartered bank headquartered in Atlanta that intends to focus primarily on serving the needs of businesses and professional organizations. “We have generated attractive returns from several of our de novo bank investments, and the strategy has proven successful in enhancing shareholder value,” said Awerkamp. He noted that these startup banks may also turn to Mercantile for it to participate in attractive lending opportunities when a prospective loan exceeds a startup bank's lending limit. Awerkamp said he is cautiously optimistic about the Company's outlook for the remainder of 2007. “We have been moving through this difficult economic environment with relatively few problems,“ he said. “We don't expect a significant increase in either deposit or lending activity, because consumers and businesses are still cautious. We see several bright spots. If the trend toward a more normalized interest rate curve continues, we anticipate getting some relief from the pressure on our margins. We are managing our expenses and new technology is enabling our banks and the holding company to operate more efficiently and cost-effectively, which should also benefit margins. Finally, we believe the current environment will create new opportunities for growth from internal sources and possibly through strategic acquisitions.” About Mercantile Bancorp 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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