| News Release Mercantile Bancorp, Inc. Announces 2007 Results
Quincy Illinois, February 28, 2008 – Mercantile Bancorp, Inc. (AMEX: MBR) today reported unaudited financial results for the year ended December 31, 2007. The company reported preliminary 2007 fourth quarter and full year results on January 28, 2007. Net income was $10.0 million, or $1.15 per share, on 8.7 million weighted average shares outstanding, compared with net income of $10.3 million, or $1.18 per share in 2006 on 8.8 million shares (adjusted for a 3-for-2 split in December 2007). In both years, the company realized gains from the sale of equity investments in startup banks. The pre-tax gains in 2006 were $4.3 million, compared with $2.7 million in 2007. Interest income in 2007 rose to $96.0 million from $76.2 million in 2006, driven partially by a 40 percent interest income growth from real estate lending and 14 percent growth in interest from consumer loans. “Our increased interest income was encouraging in a year of flat to declining interest rates and tight margins,” explained Awerkamp. “Commercial and real estate lending generated excellent returns. Agricultural and commercial land values in many of our served markets have increased, leading to borrowings from strong credits and reasonably healthy real estate markets.” The chief executive noted Mercantile didn’t experience meaningful losses with defaulted real estate or commercial loans, though he acknowledged the economy has caused an increase in non-performing loans. The company has never made sub-prime loans, and was unaffected directly by issues related to those products, he added. Non-interest income for 2007 was approximately $13.9 million – on-par with non-interest income in 2006. However, excluding the gains from the sale of equity investments, non-interest income rose significantly as customer service fees and income from the company’s growing equity brokerage and trust businesses grew year-over-year. Based on this success, the company is expanding asset management and brokerage capabilities throughout its banking network, Awerkamp said. This brokerage business established at one of Mercantile’s operating subsidiaries has flourished in the past two years. “Individuals and businesses in the type of mid-sized communities we serve need asset and financial management services, but don’t always have a wide selection of skilled, professional advisors from which to choose,” he noted. “We can provide the highest quality service through a known and trusted brand. There are also many cross-selling opportunities between our banking and asset management businesses.” Total interest expense was up 39 percent, with interest expense on deposits rising 35 percent. These increases were consistent with the growth in liabilities during the year. Non-interest bearing deposits, a low-cost source of funds for the bank, increased 20 percent. Awerkamp said the company throughout the year managed funds to minimize the impact of a changing interest rate environment on margins, but that the continuing inverted yield curve put pressure on margins. 2007 Highlights: Growth, Asset Quality, Managing Costs Mercantile enhanced its visibility and competitive position when it closed the acquisition of HNB Financial Services, Inc. in September. That acquisition gave Mercantile five additional full-service bank locations in eastern Missouri, adding approximately $178 million in assets, plus $119 million in loans and $130 million in deposits, and a dedicated group of managers and employees. Management believes the acquisition should facilitate operating efficiencies, generate economies of scale and create higher loan limits that could lead to increased lending opportunities. By adding HNB Financial to Mercantile Bancorp’s group of core holdings, the company now has a continuous 100-mile presence from Quincy, Ill. in the north to St. Louis in the south. Subject to final regulatory approval, the company plans to open a loan production office in Carmel, Ind., adjacent to the north side of Indianapolis. The company said its intent over time is to develop this office into a full service banking facility. This loan production office will be an adjunct of Mercantile Bank, the company’s flagship bank. The office will focus on business lending. Carmel mirrors other communities Mercantile serves. The city has grown rapidly in the past 10 years. Since 1996, its population has doubled to 69,000 and it has tripled in physical size. Carmel has become a major business hub for central Indiana – its Meridian Corridor hosts the second largest concentration of office workers in Indiana and is home to numerous large corporate offices and small businesses. The company recently announced plans to merge the operations of one of its core bank holdings, Farmers State Bank of Northern Missouri, into Mercantile Bank. The change is subject to regulatory approval and the plan is to complete the merger in second quarter 2008. “The strategy is consistent with our actions in 2006, when Mercantile consolidated the operations of five Illinois-chartered banks into two entities,” explained Awerkamp. “We made the moves to maintain a high level of customer service while reducing administrative, regulatory and compliance costs. We anticipate similar benefits for Farmers’ operations.” Throughout 2007, the company continued to integrate back-office operations of all its banks for greater efficiency and lower costs. The company ended 2007 with an efficiency ratio of 69.8 percent. Awerkamp said the company’s goal in time is to achieve an efficiency ratio closer to 60 percent, but with the current growth strategies in play, that will take time. “The service required in community banking results in higher costs, and we won’t sacrifice service,” noted Awerkamp. “We will always seek cost efficiencies, though it will take some time to fully integrate HNB operations into Mercantile’s.” Organic growth and the acquisition of HNB contributed to a $200 million gain in total assets, to $1.6 billion at December 31, 2007 from $1.4 billion at year-end 2006. The company’s loan portfolio grew to $1.2 billion at the close of 2007 compared with $1.0 billion at the end of 2006. Due to the asset growth and the continuing soft economy, the company increased its loan loss provision toward the end of 2007, but at $3 million was still less than the 2006 loan loss provision of $3.9 million. Non-performing loans 90 days or more outstanding were $23.0 million at December 31, 2007 compared with $6.4 million the year before. In addressing the increase in non-performing loans, Awerkamp added, “We are continually monitoring our loan portfolio and are in close touch with customers. If the weakness continues, we stand well positioned to withstand the downturn.” The company added three startup banks serving fast-growing markets and communities to its portfolio of equity investments. These present opportunities for Mercantile to generate noninterest income when these banks are acquired, or when and if Mercantile sells the investments. The company can also increase its stake or even consider an acquisition. 2008 Outlook “We remain disciplined in our loan review processes, balancing prudence and care with a willingness to continue to make loans to qualifying individuals and businesses,” said Awerkamp. “Our excellent customer relationships enable us to more effectively qualify new loans and to monitor existing loans. Our liquidity and strong capital position enabled us to continue lending to good credits when others were pulling back. We plan to continue this practice in 2008 while keeping a careful eye on the economies in our markets. “We anticipate ongoing margin compression in 2008, although we manage funds to minimize being caught with a significant imbalance between long-term and short-term interest rates. Entering 2008, economic predictions uniformly projected a rather flat economy with continuing loan issues. Mercantile is not immune to potential isolated problems, although we feel confident in the high quality of our loan portfolios and assets. We definitely see opportunities for organic growth in 2008, but we want to maximize the value of what we have before considering any more acquisitions.” About Mercantile Bancorp Forward-Looking Statements
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