| News Release Mercantile Bancorp, Inc. Announces Second Quarter 2008 Results
Quincy Illinois, July 23, 2008 – Mercantile Bancorp, Inc. (AMEX: MBR) today reported unaudited net income of $1.3 million or $0.15 per share for the quarter ended June 30, 2008 compared with net income of $2.4 million or $0.27 per share (adjusted for a 3-for-2 split in December 2007) in second quarter 2007. The Company had $1.7 billion in assets compared with $1.4 billion a year ago, half of the increase reflecting the contribution from HNB Financial Services, Inc., acquired late last year, and the remainder being organic growth. Total loans at June 30, 2008 were $1.2 billion, up 19 percent from $1 billion a year ago and deposits rose 25 percent to $1.4 billion versus $1.1 billion a year ago. Net interest income in second quarter was $10.9 million compared with $10.4 million in second quarter 2007. The Company noted in the past few months, net interest margins have started to stabilize after several quarters of margin compression. Stable and low interest rates have enabled subsidiary banks to re-price variable rate certificates of deposit, reducing interest expense and offsetting the decrease in loan yields due to the lower rate environment. Noninterest income, partially reflecting strong loan servicing activity, loan sales and growth in the Company’s trust services and brokerage business, rose 43 percent to $4.0 million in second quarter 2008 compared with $2.8 million in second quarter 2007. Also in second quarter 2008, the Company recorded a $943,000 pre-tax gain from the sale of its equity investment in First Charter Corporation. As previously announced, management elected to sell these shares in the open market rather than take shares of Fifth Third Bancorp, which acquired First Charter. The investment in First Charter was part of Mercantile’s strategy to invest in startup financial institutions. “We had encouraging results in a number of areas, including residential and commercial loan growth, with continued strong performance from our trust and brokerage businesses,” said Ted T. Awerkamp, President and CEO. “Our Carmel, Indiana loan production office, opened in first quarter 2008, is off to a fast start and is already building a meaningful pipeline. In the second quarter we had a great deal of mortgage refinancing activity, which generated service fees and also gains from the sale of these loans to the secondary market. We have had no difficulty finding secondary market buyers for our initiated loans. “Our subsidiary banks all carry the highest rating of capitalization structures as defined for the industry. In general, the markets we serve, with the exception of southwest Florida, have shown relative stability compared with many sectors of the country. It’s a very tough economic environment, and it has affected our business in some loan sectors, but we are pleased to have so many bright spots in our operations.” The Company’s first half 2008 net loss, primarily reflecting a loan loss provision taken in first quarter, was $414,000 or ($0.05) per share compared with net income of $4.2 million or $0.48 cents per share for the same period last year. For the six months of 2008, net interest income increased to $21.1 million compared with $20.8 million in first half 2007, while provision for loan losses increased to $6.6 million in the first half of 2008 compared with $1.2 million a year ago. Six months 2008 noninterest income was $7.7 million at June 30, 2008 versus $5.1 million for the same period in 2007. First half 2008 noninterest expense was $24.1 million compared with $18.6 million a year ago. Managing, Monitoring Loan Quality Mercantile recorded a loan loss provision in second quarter 2008 of $1.8 million, compared with $4.8 million in first quarter 2008 and $1.2 million a year ago. As of June 30, 2008 total nonperforming loans (nonaccrual loans plus loans 90 or more days in arrears) were $30.5 million compared with $23.9 million last quarter. Management noted that of the total amount, approximately $22 million is concentrated in 12 commercial loan relationships. “Although problem loans of any kind are disappointing, the relatively small number of troubled borrowers illustrates our primary loan loss issues are not systemic, but specific to a limited number of loans and relationships,” explained Awerkamp. “Across all our banks, the quality of loans and the financial health of borrowers is generally quite good. The total of nonperforming loans is a fraction of our $1.2 billion loan portfolio. “We believe the majority of the potential losses have been identified based on current conditions. Our biggest challenge has come from specific loans made by our Royal Palm Bank subsidiary, and also a participation loan with the developer of a property in Arkansas. Although many parts of Florida are extremely troubled, we see relative strength in the growing, affluent southwest Florida markets served by Royal Palm. We have taken steps to improve loan and credit management and we are closely monitoring the underlying value of the real estate securing these loans.” In first quarter 2008, Mercantile installed new management at Royal Palm. Awerkamp noted “many positive changes in the bank’s performance even at this early stage.” In light of the measured deterioration of credit quality at Royal Palm, he said Mercantile and Royal Palm management teams have worked closely over the past few months to aggressively review the bank’s portfolios and identify problem loans. Management believes the largest portion of Royal Palm’s problem loans have been identified and reserved for. Awerkamp added: “We have been aggressive in addressing the issues Royal Palm faces. Though that market has challenges, putting the bank on track to meet our expectations quarter to quarter is well underway.” Second Quarter Highlights and Second Half Outlook “Even taking into account the increase in total loans and deposits resulting from our acquisition of HNB Financial last year, we have experienced organic growth in both areas,” explained Awerkamp. “We’re encouraged by the activity we’ve seen in consumer lending, particularly in mortgage refinancing. We have been very selective in the commercial lending leads we’re pursuing, which has resulted in a smaller commercial loan portfolio. However, we are pursuing a number of high quality opportunities, primarily small business lending. We believe our strong capital position creates a competitive advantage for us with some financial institutions pulling back from lending because of capital issues.” Awerkamp continued: “Our Midwest markets have not experienced the peaks and valleys that have characterized many markets. Agricultural-related lending has been strong and weather has been favorable for corn and soybeans. There continues to be a flow of small business lending opportunities in many of our markets.” The lead bank’s new headquarters building in Quincy, Illinois, which also houses the holding company’s executive offices, has helped attract new commercial and consumer business, noted Awerkamp. With this new facility, the Company has been able to accelerate its work to integrate back-office operations and technology among several of its banks, he added. Noninterest expenses rose year-over year, primarily reflecting the new facility, the addition of HNB Financial personnel and facilities and some cost overlaps related to hiring new executives at Royal Palm and expenses in managing through the Royal Palm challenges. “We have invested heavily in key, quality personnel in Florida, Indiana and our home region this year. In the long term, we believe this will prove to be a timely investment. Quality business is built and managed by quality people. Though 2008 is shaping up to be a year of endurance for our industry and company, I am quite optimistic about our future. Excellent personnel and growth will be central to coming out of the difficulties caused by current market conditions.” Awerkamp said a focus in the second half will be continued cost management initiatives and operational expense reduction throughout the Mercantile Bancorp network. The company announced in July it had filed all necessary regulatory applications to combine one of its Missouri-chartered institutions, Perry State Bank, with Hannibal, Missouri based HNB National Bank. Subject to regulatory approval, the execution of the merger is expected in September and will be the second internal merger for the Company in 2008, the first being the merger of Farmer’s State Bank of Northern Missouri into Mercantile Bank in April. Awerkamp said the consolidation will reduce regulatory and compliance costs, expand marketing opportunities and generate operating efficiencies. “The outlook for the remainder of 2008 remains cautious, particularly if consumer confidence further erodes,” noted Awerkamp. He said the holding company is working closely with its subsidiary banks to monitor credit quality. “Our first order of business is to maintain asset quality, but we also have the capital strength to continue pursuing new business opportunities, which we believe gives us a competitive advantage.” About Mercantile Bancorp Forward-Looking Statements
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