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Mercantile Bancorp Inc. (NYSEMKT:MBR)

The Wall Street Analyst Forum

August 16, 2007 10:30 am ET

Executives

Ted Awerkamp - President and CEO

Mike McGrath - CFO

Dan Cook - CIO

Presentation

Moderator

Okay. Good morning, ladies and gentlemen. In our ongoing attempt to adhere to the public schedule as much for the webcast attendees as the physical attendees, as much for the physical attendees as the webcast attendees, I would like to introduce the next company in this morning's program.

The next company in this morning's programs is Mercantile Bancorp. It’s a Quincy, Illinois-based community bank holding company. From its headquarters in Western Illinois, the company also has a significant East Central Missouri quarter, with ownership presence stretching into the St. Louis metro area. It consists of wholly-owned subsidiaries of three banks in Illinois, two banks in Missouri, and one bank in Florida, a majority-owned subsidiary in suburban Kansas City.

I can live with Kansas I guess, where the company conducts a full-service commercial and consumer banking business, providing a full trust and asset management operation. To complement operating earnings, the company has made minority investments and de novo community banks, serving fast-growing markets in Missouri, Georgia, Florida, North Carolina, and Tennessee.

For further introductions, I'd like to introduce Ted Awerkamp, President and Chief Executive Officer.

Ted Awerkamp

Thank you and I’ll get right into our program. And I am joined also for those in physical attendance by our CFO, Mike McGrath, and our Chief Investment Officer, Dan Cook, who will be available for questions as well.

So, we consider ourselves as a company of community banks. To reflect our Safe Harbor statement here and we’ll get right into it. This is a snapshot of the company. We trade on the AMEX and it shows a range of our stock prices over the last year. The price as of 08/03, I believe we’re just a few pennies below $23 today and there are various other multiples, and we are in excess of $130 million of market cap today.

The investment appeals of Mercantile Bancorp are the stable returns that we get out of our core banks. We feel like the community bank structure is very well positioned and in demand within markets big and small in this country. We find that entering new markets with the community bank model and good bankers can bode well as well, and the equity appreciation from those investments we make in startup banks.

We’ll talk about our growth strategy in our company, which is to utilize capital to grow our existing subsidiaries and our core franchises, acquire banks which we consider the second tier portion of our strategy, and thirdly expanding into new markets.

We generate those results with the asset growth and the stable returns from those core banks that we operate by making acquisitions, obliviously in markets that we'll talk about a little more in detail as we go forward, and investment gains through majority positions in start-up banks and fast-growth markets.

To give a schematic of our strategy, again there are the core operating banks that we derive our steady income streams from, the asset and earnings per share growth we can generate by making acquisitions outright of banks, and then the equity gains we can pick up through the investments we will make in startup banks anywhere in the country.

Talking about the first strategy in terms of operating our core banks. Obviously, it is a community bank focus in a high-touch, high-service culture, and finding bankers that are seeking that type of environment versus the mega bank philosophy and how they operate. We serve in very stable markets.

We continually seek operating efficiencies and that’s a must as the bigger we get. We have no choice but to do that and finding local bankers in those markets and good teams of bankers. Obviously our core base is our home base in West Central Illinois. We've also established a line in Northeast Missouri, which is just literally across the river from us that stretches about 100 miles south, down into metro St. Louis as well.

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In addition, we obviously try to minimize our non-interest expense with the operating efficiencies we pick up, maintain that community bank service added to out approach. Technology allows us to bring the big bank offerings to the table from a product perspective, and obviously maximizing margins but paying very close attention to interest rate risk on our balance sheets in very difficult interest rate environments that all of us are seeing and are going to continue to see.

The earnings drivers in our core bank operations are, again, we talked about interest rate stability and paying very close attention to our balance sheets, but yet allowing our bankers in those individual markets in which we operate to have a strong say in their market and their competitive status, expanding market shares in our core markets, focusing on maintaining the customers, and we have very high percentage of market shares in our core markets.

Asset growth in those core markets is difficult and that’s why we’ve taken on that third leg of our strategy-defined growth, but we want to maintain very high asset quality in those modest growth markets.

It would begin capitalizing on non-interest income opportunities to begin leveraging our trust and asset management expertise in the community bank format across the banks that we now have.

Talking about one of our core banks, we own about 54% of this bank in the metro Kansas City market. It’s actually based in Leawood, Kansas, which is Johnson County, Kansas, and Jackson County, Missouri, and that gives you a little bit of flavor of the size of the market like that, which is a very substantial growth market for us in one of our core operating banks.

In addition, the second phase of our strategic approach is entering the markets through new acquisitions in which we executed two in the last year. And in that strategy, we focus on the operating characteristics of those banks. The culture of those banks is very important to us, and the growth potential of the markets that we’re going to enter into. And by focusing on those things, we feel like we can be somewhat geographically diverse to expand the growth of the company.

In late 2006, we stepped outside of our box a little bit and acquired a community bank in Naples, Florida, and this was an opportunity that came about. For those of you familiar with that southwest coast of Florida, it has got a very strong Midwestern appeal to it in the sense that the majority of folks that gravitate to that southwest coast are generally from Ohio, Indiana, Illinois and Missouri.

And that bank, we just acquired and closed in November of 2006, and you can see some of the bullets there as to how that’s been an important acquisition to us, and we think it sets the table for getting over the hump of distance limiting our core growth.

Here are some bullets on the various growth opportunities in that market, and we feel like going forward that, that southwest portion of Florida has tremendous growth potential over the next 20 years with the statistics of baby boomers going forward as well.

The second acquisition, we have been in the middle of this for the majority of this year, and we actually close on it three weeks from tomorrow, I believe. It is the market share leader in Hannibal, Missouri, which is a footprint, very much involved with what our home base is, and Hannibal, Missouri is just about 50 miles down the river, but this entity layers with an existing franchise that we all refer to as Perry State Bank, and we are going to merge those two banks immediately and end up with about a $350 million bank in our franchise.

And this HNB franchise actually trails down into St. Louis and St. Charles County, Missouri, which we'll talk about. Both of those, the Florida acquisition and this current acquisition were cash transactions, and this one particularly is anticipated to be accretive within 12 months to us.

The St. Charles County, Missouri market in this acquisition we talked about, this has been a very, very fast-growing market, which is technically due west and moving north out of St. Louis, of which this HNB franchise is in.

And there it shows a map of our home base in West Central Illinois, and this is actually an outline of the State of Missouri and shows the franchises, how they has moved with this HNB acquisition, moved us straight down into the west counties of St. Louis, and St. Charles and Clayton, Missouri.

We've established within a de novo investment we had down there -- we've established a trust office in that market as well, which we are doing quite well with. So, we are excited about moving our banking franchise down that way as well.

The acquisition profile we look for when we make an acquisition is obviously the bankers. We've talked about complementary operating philosophies going back to that community bank attitude and the synergy is that we can create growth opportunities when they become part of our organization.

And the third leg of our strategy is the de novo investments or startup bank investments that we have made around the country. We feel like these are strategic investments in banks that have a real potential to take off with growth. And again, we feel like we can do these, and we've proven we can do these anywhere in the country if we are confident in the banking team and the potential growth of that market.

The benefits to that startup we feel are obviously the capital infusions we make within them to help them get up and going. And then really importantly, and what we've really begun the last six months to focus on with these startups, is to position ourselves with them as loan participants within their growth mode. Our collective legal lending limit of our entity is about $35 million, and that uniquely positions us within a community bank structure to truly get involved in credits that could make a difference, and our sweet spot in those are between about $5 million and $15 million, and most startup banks are limited to individuals loans of up to about two, possibly $3 million, depending on their startup size. That severely limits their initial growth due to small businesses that require credits in the area of $5 million to $15 million. With our support and involvement, we can immediately make them players within their markets.

Thirdly, there is the affiliation with the established community bank holding company that can bring things to the table for them to make them players in their market immediately. The benefits to us as a company -- we do not do anything other than make an equity investment position, and do not get involved in the active management whatsoever.

But then with that growth of that equity investment, generally most states require that those startup banks have to be in business at least five years before they can sell, but we have the option at that point, based on how that bank is doing, to invest even further and/or just maintain our position as a backup participant lender through that investment.

With these various options within a company of community banks, we are out attempting to get our story known, which we’ve only been doing for a year now, but we feel like that truly positions this company for further success.

And I circle back to the schematic of our strategic position. And on the far right side, we talk about our wholly-owned core banks, secondly, the acquisitions that we’ll make, and thirdly, the de novo bank investments. Again, we refer to this as our three-pronged growth strategy.

Who is Mercantile Bankcorp? Mercantile Bank Corp was established in 1983, off of our lead bank, which was established in 1906 in Quincy, Illinois. We began strategically investing in community banks about 25 years ago, obviously, within our home area and we’ve acquired, I believe, over 10 banking organizations now within our company, and we have collapsed some charters as well, as we find opportunities to gain some efficiencies, and we just became a public company in 2005, when we closed this HNB, Hannibal Missouri acquisition. In a few weeks, we will be a $1.6 billion community bank holding company.

This is a current listing on page 31, this slide of our existing charters that we own outright with the exception of Heartland Bank in Leawood, Kansas. That franchise, we only own about 54% I believe today. The rest of those franchises we own outright and the HNB Bank franchise, I indicated, we close in a few weeks. We have both regulatory approval and the Hannibal shareholder approval, so that’s clear to go, and we will close. And then I had mentioned also that third one down, Perry State Bank, we will merge into the HNB franchise in about a year's time or less.

The de novo bank investments on page 32, we are spread across, as you see, I believe, that’s eight different states across the country. And most recently the last three there; suburban Colorado, suburban Atlanta, and suburban Los Angeles, that Manhattan Bancorp actually just opened for business yesterday. That’s how new that bank is; Brookhaven in Atlanta, and I believe that just opened as well this week. And then Solera National Bank in suburban Colorado doesn’t open until September 10. But those franchises, we have high hopes for the opportunities there.

Enterprise and First Charter were entities that -- we actually picked up a position of, Enterprise in suburban St. Louis and First Charter in Charlotte, and were based off of sales of earlier investments that we made from tremendous gains and chose to take the stock positions in those companies. So, as you see, those are nice balances across the country that helps us in various ways as well.

This is a math schematic of the various investments we have. And the lower left corner shows what type of holding it would be for us, but gives a nice glimpse of how we've taken a community bank approach and structure, but yet not limited ourselves to geography per se, but in varied levels, obviously, our levels of involvement is in those farther flunged places with the exception of Florida.

Our performance to get into the metrics of where we are at, again, we've talked about the growth drivers of community banks' approach and structures. We think there is a real desire for that in markets with the right bankers.

Our lending limitability is due to our collective size -- I touched upon small business growth which is still the backbone of, we believe, this country and community banks, of course. And there is some good growth in some of these faster growing markets in places like St. Louis, Kansas City, Atlanta, Denver, there is some really quality growth in those markets.

And lastly, we are in the process of expanding the asset and land management services that we provide.

This is a snapshot of the last four years of our asset growth within our company and this would not include any of the de novo investments from a standpoint of bank assets in that regard. The loan growth of our company, as you see '06 over '05, and I'll touch upon year-to-date '07 a little later here.

The total deposit growth, and I touched upon our non-interest income, think about those equity investments in startup banks, we would not receive any income stream from those entities until we actually monetize or sell position. And in 2006, we actually had two of those entities come to sell and that is reflected in that bar in 2006.

I touched upon the trust services and the non-interest income. But first, it is a lot of information on one slide that you can review a little closer in your packets, but the upper left graphic reflects the trust assets under management in mid-2007, approaching $550 million, and then the bottom left slide would be the gross non-interest income. The last bar reflecting just a half a year, but again, we see that's been a real opportunity for us, both the trust under management, and again focused on trust in probably the $1 million to $5 million range that the large trust companies really just ignore.

In addition, land management services, and in the bottom right reflect the fact that we are approaching 27,000 acres under management where we can let folks maintain their family farms and/or people who in fact are buying farms as an investment and will manage those processes for them; generally that's agriculture production and/or recreational use, which is becoming very popular in the Midwest.

Brokerage services; retail brokerage services is another area that we've just within the last two years began focusing on platforming and utilizing. We’ve reorganized that process in our banks, and then began expanding it into all of our banks, but are beginning that. We are through Raymond James to get under one broker dealer, and they have got a very solid community bank system that we locate the brokers locally, and that's brought a nice piece of business.

So, the assets under management, as you can see, were in excess of $350 million through mid-year '07, and the non-interest income that's bringing to the company. And we think there is real upside with that in the retail brokerage side by finding the right brokers in our markets.

This slide, going back to the metrics in that income of the company through year-end '06, we have been on a nice climb over the last few years and the return-on-average equity, understanding again that, as we are unable to reflect a real earnings stream through those de novo investments, and the fact that we are ramping up as we have the last few years, this is a mark that we would intend to push up in the 12% to 15% range; that would be our goal, and we are working on it diligently.

The first half of 2007 through June 30, the same slide, so just to give you a comparison to mid-year '06, starting on slide 45. We have assets and we show that growth there. Obviously, the acquisition of Royal Palm Bank of Florida would be the bulk of this growth, total loans. And this is a snapshot on slide 47 that most folks like to see.

In terms of the composition of our loan portfolio within our company, we’ve got a real nice balance from commercial through real estate through consumer loans to individuals. We don’t have a real focus on any one area. Again, as a community bank structure we seek sound, small businesses generally. And the only place we are seeing the question of loan portfolio is mostly by the Florida regulators, and they are really putting the hammer on in Southwest Florida on watching the commercial real estate portfolios down there. But, again, that bank is not big enough yet to cause any real problems in that regard as well.

Overall performance, and this is a slide that is a little difficult to understand, but the top graphic is the total loans and loan growth of the company, and it is tied to the right side axis, and is just over $1 billion at this point in that portfolio.

The bottom two graphics, the middle graphic is the non-performing loans and the bottom graphic is charge-offs, and the middle graphic, even though it reflects some upward movement from 2006 to 2007, that’s three loans and as the gentleman before me actually talked about, but we’re not real concerned about non-performing loans as per se because even though they are technically non-performing, if they are in fact properly collateralized and our booking, tracks them. We are well-collateralized and will get substantial fees and penalty fees fully paid out on these three loans that we should be fined, and its just a one-time blip hopefully.

And now that's charge-off side, again, we had a little increase from '05 to '06 that was one loan, but we feel really confident going forward that we're in good shape there as well and our peer comparisons show very, very, very strong asset quality compared to our peers.

Moving on to total deposit growth, again, some positive growth signs from mid '06 to mid '07, the non-interest income though slight, I believe, that’s in fact about a 7.3% increase from '07 versus '06. And then the net income, relatively flat, it’s been a very difficult year on interest margin on the last 12 months, but we are actually starting to see some signs that in fact perhaps we’ve seen the bottom of the decline in margins and we are going to see those increase and we are very optimistic about that as well.

Return on average equity, again, through mid-year with our growth and the building out of Royal Palm, we are going to be pushing on, it's going to be difficult to get that back up into the double-digits this year, but we are very optimistic about where we go forward within that return.

The stock price activity on our company since we went public in mid '05, we've seen a nice increase by showing the growth in our franchise, and getting out and visiting folks, and we've increased our shareholders from about 600 when we started to about 1,000 shareholders today, and we are very optimistic about that as well going forward.

From a value perspective, we feel like community banks on average if you follow the industry are about 1.8 times booked. Obviously, we are trading below that today at just under 1.4, near 1.3 times booked, and the environment over the last few weeks made us feel even better about that situation that possibly the real world is backing up to where we are.

So, we've held on well in the last couple of weeks actually. And again, our focus is not getting hung up on the stock price, but focusing on solid growth, solid earnings, and getting out and telling folks our story, and we think we see a position in our company as a real strong value position.

Going back and touching upon the appeals of the investment in MBR, again, it's a community bank model that’s not very sexy, but it's going to be solid and if it's well-run in markets with good bankers, there is always going to be a demand for solid community banks, with both the fact that our asset earnings growth will be enhanced by entering new markets from both an acquisition standpoint and franchises that make sense to our group, as well as investing in the startup banks in quality growth markets in this country; we think that's a very solid model going forward.

And that is moving through that quickly, but I am welcome to take any questions, if anybody has any this morning.

Question-and-Answer Session

Ted Awerkamp

Yes, ma'am.

Unidentified Audience Member

(Question Inaudible)

Ted Awerkamp

What type of loans in those types of situations?

Unidentified Audience Member

(Question Inaudible)

Ted Awerkamp

That's exactly right. And the question was, how do we, and what type of loans I assume, do we syndicate and push through the banks within our system? I'll give you an example right now. There are two loans that we are working on, each $20 million pieces, one in the Naples market, and because of that opportunity through our Florida Bank, they invited us then to take a look as part of a syndicate on a real estate development, and because of that opportunity, which is going to close within about a month. We were invited to a second opportunity in Colorado Springs, and that too is a, if I understand it correctly, about a 24,000-acre former ranch in the area would be just east of Colorado Springs near those air force bases out there.

That is a planned community, if you will, building out that 24,000 acres over the next twenty years. And so, again, in that case, it’s a long-term real estate development plan. And so we are able to utilize our Colorado investment and get invited to that deal. And so, we will take those and then when we take that piece down, generally, we’ll keep probably 5 to 7 million in our lead bank, which has an internal limit of 15 million, but that’s a little large for one of our banks to have in house. And then we will push out, surely 1 to 2 million across our other banks, and just within the entire $20 million position. So, we will spread that across our banks in that manner.

Unidentified Audience Member

(Question Inaudible)

Ted Awerkamp

Well, in terms of the…

Unidentified Audience Member

(Question Inaudible)

Ted Awerkamp

Right.

Unidentified Audience Member

(Question Inaudible)

Ted Awerkamp

And the question is, I guess, what are the strength of these type of developers within these types of loans?

Unidentified Audience Member

Right.

Ted Awerkamp

Well, then these two examples and these are probably extreme examples as to their size, I mean, those are pretty substantial developments. And in those two cases, they are very strong developers. And in the case of both, they are both very strong, very seasoned developers, I mean these aren’t, neither of these types of credits would we have gotten involved in any of these works, very strong developers and in both cases these are long-term investments, these are and obviously I am not going to disclose the name of the two developers, but those are extreme examples.

As I said earlier, our network within these de novo investments and potential for loan participations would focus back on small businesses, probably more in the $5 million to $8 million range, those types of loans, and again if you saw our breakdown on our portfolio, we were not heavily dependent on any one area, be it commercial lending or real estate or consumer, and now we are going to focus, we are going to be more inclined to gear toward real estate and commercial because of the strength of collateral to back those things up. And I don't know if that subsequently -- or if that’s what you are looking for?

Unidentified Audience Member

Okay.

Ted Awerkamp

If there are no other questions, I will be glad to meet outside if you would like, and I appreciate your attending today. Thank you.

TRANSCRIPT SPONSOR

The Wall Street Analyst Forum, a leading conference host for public corporations to address analysts/portfolio managers and professional investors, sponsors four annual conferences in NYC for large, mid and small-cap companies. Seeking Alpha readers may attend Wall Street Analyst Forum conferences free of charge if you pre-register. See the full conference schedule and attendance information.

Read all Wall Street Analyst Forum conference presentation transcripts here.

To learn more about sponsoring investor conference presentation transcripts see here.

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