| News Release Mercantile Bancorp, Inc. Announces First Quarter 2008 Results
Quincy Illinois, May 5, 2008 – Mercantile Bancorp, Inc. (AMEX: MBR) today reported an unaudited net loss of $1.7 million or 19 cents per share for the quarter ended March 31, 2008 compared with net income of $1.8 million or 21 cents per share (adjusted for a 3-for-2 split in December 2007) for the same period in the prior year. First quarter 2008 earnings were negatively impacted by an increase in the company’s loan loss provision to $4.8 million from $755 thousand in the first quarter of 2007. Increasing the loan loss provision was done to provide for determined weakness in specific real estate loans on its books in various parts of the country, and the company deemed prudent to address aggressively. Additionally, a one-time $300,000 charge was taken in first quarter 2008 due to the company’s banks calling in certain Certificates of Deposit as allowed contractually, which it anticipates will result in long-term savings in its cost of funds. Net interest income for the first quarter, led by increased real estate lending but offset by a greater cost of funds, was $10.2 million compared with $10.4 million in the same quarter a year ago. Noninterest income increased to $3.8 million in the first quarter of 2008 from $2.4 million in the same period last year. It was driven primarily by increases in fees from trust and brokerage services as well as a $300,000 gain on the sale of a vacant lot acquired in the September 2007 purchase of HNB Financial Services, Inc. “Most facets of our business performed well and met expectations. While overall earnings were negatively impacted by soft economic conditions and our underperforming Royal Palm subsidiary, we have implemented dynamic new leadership in Florida and are keenly focused on improving its performance in a timely manner. We have also implemented important initiatives to position Mercantile for growth and increase efficiency. These include moving our Quincy bank into a new facility, merging two Farmers State Bank of Northern Missouri locations into Mercantile Bank, investing in new technology, and opening a loan production office in Carmel, Indiana. We invested in new lenders and sales associates at several of our affiliates to provide the high quality service our customers expect, and to drive growth. As difficult as the current environment is, we are in an excellent position to capitalize on opportunities now and in the future”, said Ted T. Awerkamp, President and CEO of Mercantile Bancorp. Total loans rose to $1.2 billion at March 31, 2008 compared with $1 billion a year ago. This reflects the addition of $119 million of loans from HNB and also organic growth. The chief executive said the company has closely monitored loan quality and worked with customers to avert potential payment problems and bring loan payments more than 90 days outstanding into line whenever possible. Lending secured by farmland continues to be a highlight for Mercantile, as an escalating agricultural market has driven farmland prices and demand upward, he noted. Home mortgage lending has slowed, but there are no material financial issues related to home loans, stated Awerkamp. “The company has never participated in a sub-prime lending program,” he added. Deposits rose to $1.4 billion from $1.1 billion, primarily reflecting the addition of $130 million from HNB with the remainder due to organic growth at the company’s other affiliates. The performance of the company’s asset management business continued to exceed expectations, said Awerkamp. Noninterest income from trust services was up 20% to $690,000 for the first quarter of 2008 from $573,000 in the same quarter last year, while income from brokerage fees rose 35% to $416,000 from $308,000 for the same periods. “We added established commissioned sales personnel to our equity brokerage business, and they are having an immediate positive impact on new business and service fees,” explained Awerkamp. “Interest and noninterest income increased, while deposits, loans and assets were up, reflecting organic growth and the acquisition of HNB in 2007. Our capital position is excellent and overall asset quality is strong. Soft economic conditions, net interest margin compression, and expenses related to revamping operations, personnel additions in expanding markets, and the growth initiatives put in place all impacted results,” he added. Mercantile recorded a $300,000 charge to interest expense related to calls on brokered certificates of deposit. The company had the option to call these CDs if interest rates declined, which it did. However, accounting rules required Mercantile to immediately expense the brokerage fees related to these certificates. Re-deploying the proceeds from these called certificates into other funding sources at lower rates will result in a long-term reduction in cost of funds that will more than offset the expense recognized in the quarter. Awerkamp said the overall quality of Mercantile’s loan portfolio has remained high, despite nonperforming loan totals at a level greater than the company’s historical average. A significant portion of the increased provision for loan losses, as well as total nonperforming loans, reflects several commercial real estate loans to developers in the Midwest and Florida who experienced cash flow problems due to a slowing economy and oversupply of commercial properties. The company has been working with these borrowers in re-valuing properties and adjusting prices to reflect market conditions. Although they are secured by real estate, the company anticipates a portion of these loans will eventually be charged off, but believes they have adequately reserved for this eventuality. No part of the loan loss provision involves sub-prime lending, and the company has few credit issues in its mortgage or consumer lending businesses, added Awerkamp. Net charge-offs in the first quarter of 2008 amounted to $436,000, compared with $196,000 a year ago and $1.9 million in fourth quarter 2007. Outlook Mercantile said it expects a pre-tax gain in the second quarter 2008 of approximately $1.1 million at closing of Fifth Third Bancorp’s acquisition of Charlotte-based First Charter Corporation (FCTR), of which Mercantile Bancorp owns 164,012 shares. Scheduled to close by June 30, Fifth Third will pay $31 a share for First Charter, a premium of more than 50 percent based on First Charter's stock price of $20.25 before the deal was disclosed. “In addition, concerning operations, we anticipate seeing the benefits of our focus on efficiency, new personnel, the addition of HNB, a new loan production office in the Indianapolis market, the consolidation of Farmers into Mercantile Bank, and changes in our Florida affiliate. These moves should have a positive impact in the coming quarters,” said Awerkamp. “Tempering the positives, of course, is the state of the economy and uncertainty about the full impact of real estate-related issues. However, we believe we are doing a very good job identifying potential problem loans and reserving for them. “This is a difficult period, but we continue to be 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. “We are seeking high quality lending opportunities, and are aggressively marketing our brand to win new customers. Until the economic picture clears, we are focused more on organic growth rather than acquisitions or equity investments, and on maximizing the value of our existing network of banks.” About Mercantile Bancorp Forward-Looking Statements
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