This is the latest in the Seeking Alpha series of interviews with leading companies of interest to our readers. These are interviews with a twist: the executive has agreed to answer questions and respond to comments not from a single interviewer, but rather from our community of readers and contributors.
- Ted briefly introduces himself and the issues he's focused on below.
- Readers and contributors can immediately start to post questions and remarks using the comment box below (Note: you need to sign up for free registration and be logged in to do so).
- Seeking Alpha editors will not filter or edit the questions and comments from readers, except to delete profane or hostile language.
- Ted will respond to the questions and remarks beginning Tuesday, November 6th. Readers can track his answers and respond to them during that period, with the resulting dialogue remaining on the site.
Readers from external sites may join the Q&A by following this link.
Over to Ted:
Welcome to the Mercantile Q&A session on Seeking Alpha. I would like to thank Seeking Alpha for providing an excellent platform for the discussion of our unique banking business, the general banking environment, Mercantile’s 2007 performance, and our strategy going forward.
I would like to highlight a few of our recent accomplishments:
- 2007 Third Quarter EPS Increased 14% to 57 Cents
- Deposits Up 30%
- Total Assets Exceed $1.6 Billion, Up 32%
- Bank Acquisition Completed
- Recorded $2.1 Million Gain on Investment
We have a dynamic strategy for earnings and asset growth, and we believe that our company is well positioned to generate continued earnings growth and enhanced shareholder value. In addition to building earnings through share-price growth, our company policy is to pay shareholders a meaningful cash dividend.
Mercantile employs a three-pronged growth and operational strategy designed to fuel long-term earnings growth. Our de novo bank (start up) investment strategy is very different than the growth methods used by most community banks.
The three prongs are:
1. Maximizing returns and earnings by efficiently managing a core group of community banks
2. Sparking earnings growth by acquiring well-run community banking operations in rapidly expanding markets that have promising long-term demographic and income profiles
3. Generating returns that exceed those available from core banking operations by making investments in startup banks located in fast-growing communities underserved by existing community banks. This is unique when comparing Mercantile to other community banks.
MBR maintains a community bank focus and service culture.
With that approach, our company can:
• Serve stable, quality markets
• Deliver a high level of customized personal service
• Build a high quality loan portfolio by attracting customers not comfortable with the impersonal service provided by larger banks
• Leverage operating efficiencies
• Offer fee-based services, including asset management and brokerage services
• Utilize local management expertise
Mercantile’s bank portfolio includes six banks that serve established communities that are expected to grow at the same rate as the overall economy. However, two additional banks serve areas with fast growing populations. The core banks in more mature areas provide sound returns and modest growth, but the growth rates of their served markets limit upside opportunities. To maximize returns from established banks in mature markets, MBR focuses on efficient operations, increasing noninterest income and modest market share growth.
We believe the keys to maximizing returns and building market share in modest growth markets are:
• Minimizing non-interest expenses with back-office operating efficiencies that a larger bank can incorporate
• Providing personal “community bank” style service to retain customers
• Keeping in step with “big bank” product offerings and providing efficient Web-based banking services
• Closely monitoring loan quality with the goal of zero bad debt
• Judiciously managing investment portfolios to maximize interest margin
• Minimizing interest rate risk exposure to both asset and liability portfolios, particularly in changing rate environments, like we have recently
That said, to drive a higher rate of earnings expansion, our management team is continually looking to acquire banks with significant growth opportunities. Mercantile identifies banks that will be an optimal fit with MBR’s corporate culture and operating philosophies. We look only at banks in markets that we understand, primarily institutions in communities which serve as near by hubs for an extended small quasi-metro area. MBR will not divert management energy or attention by trying to understand or analyze markets, such as large cities, with unfamiliar banking and economic dynamics.
To growing community banks, Mercantile is an attractive acquirer by providing access to lower-cost capital, “bigger bank” technology, operations and marketing, and skilled asset management services. Another reason MBR is an acquirer of choice is our philosophy that the management team and employees are an integral part of the value of an acquisition. We seek out institutions with compatible operating and service philosophies. Our goal is to retain the character, the management and the employees of the banks we acquire. Mercantile seeks out well-managed, growing banks that can benefit from access to its operational capabilities (cost savings) and that need more capital to reach their expansion potential.
This strategy is not constrained by geography: by focusing on banks with compatible operations, MBR has the freedom to acquire banks in any market. MBR doesn’t buy banks that need to be “fixed,” nor does it consider banks because management wants to make radical changes.
Lastly, I would like to touch on our de novo bank investment strategy. From 2000 through 2006, Mercantile invested approximately $15 million in eight de novo banks. We anticipate that de novo bank investments will comprise no more than 10% of our total capital. In two instances in 2006, banks in which MBR has invested were acquired by other institutions. These transactions resulted in aggregate pre-tax gains of $4.3 million from cash distributions and tax-exempt exchanges of shares from the acquiring institutions. In 2007, we had similar results from other bank investments. Because Mercantile’s investments in de novo banks usually take several years to mature, Mercantile’s return on equity is lower than it would otherwise be.
Now I would like to turn the session over to our readers. I will do my best to respond to all questions as quickly and appropriately as possible.
Thanks again for joining us.