To Survive, Mercantile of Illinois Is Halving Its Lineup

Mercantile Bancorp Inc. is shedding half its banks in a series of deals that illustrates the financial contortions some companies need to survive the recession.

The Quincy, Ill., company announced Monday that it had agreed to sell Brown County State Bank in Mount Sterling, Ill., and Marine Bank and Trust in Carthage, Ill., for $25.6 million, or 1.1 times their tangible book value. The buyer is the $850 million-asset United Community Bancorp Inc. in Chatham, Ill., which has been eyeing acquisition candidates in new markets.

In a separate transaction, Mercantile would transfer HNB National Bank in Hannibal, Mo., to R. Dean Phillips, the sole shareholder of Great River Bancshares Inc. in Quincy, Ill. In return, Phillips would forgo $28 million of Mercantile's debt to him.

"You deal with what is in front of you. These were quality assets that weren't real growth stories for us, but selling them keeps us in the game," Ted T. Awerkamp, Mercantile's president and chief executive, said in an interview Tuesday. "We are getting a premium for what we sold, we are able to eliminate our debt, and now we get to roll up our sleeves and get back to fixing our problems. It is all about surviving this environment."

Experts said that although several strugglers have taken to selling assets to stay afloat, Mercantile's approach, of shrinking by three banks at once combined with the debt restructuring, stands out.

"Unfortunately, they are selling off some of their better-performing banks to shrink the balance sheet and raise capital," said Jacob Eisen, president of Capital Insight Partners, a Chicago investment banking firm that serves as investor relations counsel to the $1.7 billion-asset Mercantile. "But fortunately for them, they had something to leverage in such a sour time."

The company's problems are concentrated in its Royal Palm Bank of Florida unit in Naples and Heartland Bank unit in Leawood, Kan., which made big bets on residential development and construction loans. Both banks are under regulatory orders to boost capital ratios. Without giving specific numbers, Awerkamp said that the deals would put both banks "well in excess" of the requirements in the orders.

Royal Palm has been operating under a cease-and-desist agreement with regulators since May, when they gave it until July to boost its leverage ratio to 8% and its total risk-based capital ratio to 12%. According to data from the Federal Deposit Insurance Corp., those ratios were 1.51% and 3.6%, respectively, at the end of the third quarter.

In March, Heartland was given a similar order to boost its ratios within 30 days. At Sept. 30 the bank was in compliance with ratios of 8.04% and 12.8%.

Coupled with the exchange, the sale of the two banks, which will net Mercantile roughly $4 million in fresh capital, would reduce its assets by 36%, to $1.08 billion. The deals are expected to close next quarter.

The debt reduction is a key part of the HNB deal, Awerkamp said. By giving Phillips HNB, Mercantile would slash its debt from $33 million to $5 million. No timetable was given for the debt exchange.

A call to Phillips was not returned.

Terry Keating, managing director in the Chicago office of Amherst Partners LLC, an investment bank, said Mercantile has a smart approach to solving its capital troubles and trimming its debt.

"I see this as them finding a really creative way to reduce the leveraging and debt on the balance sheet," Keating said. "It doesn't carry any dilution, and it is a more efficient and quicker means of raising capital."

Keating said that given Mercantile's strong-performing Mercantile Bank — its flagship bank, with assets of $750 million — the company likely could have joined other ailing companies that have been able to tap the capital markets. But he still called this a better method.

"They probably could have, but it would have been a question of cost," Keating said. "This is pretty quick and easy. You trade one bank, sell two others, and you're back in business."

That doesn't mean Mercantile still might not hit the public markets, Awerkamp said. Nothing is planned, but the option hasn't been ruled out, he said. "Our capital restoration plan is multitiered," Awerkamp said. "We have not indicated that we would not raise capital."

The sales, however, do obviate a plan announced last month in which the company would merge its Royal Palm unit into Mercantile Bank in an attempt to cure its capital problems. Now the Florida bank will remain independent in part because it could be easier to sell down the road, Awerkamp said. "We feel that we have a good, sound management team in place there, and we think there is upside for that unit when that region turns," he said. "We want the ability to keep it independent. Who knows what the future brings in that part of the world?"

Along with the news of its deals, the company reported a third-quarter loss of $1.4 million, narrowing its loss by 23% from a year earlier. The loss was driven by a $5.6 million provision for loan losses, which was up a quarter from the provision a year earlier.

Nonperforming loans totaled $59.2 million, up 84% from a year earlier, but Awerkamp said the company is starting to see a slowdown in the pipeline of new problem loans. "We think we've identified all of our problem assets," he said.

Mercantile said Phillips would lend it an additional $11 million that would go toward immediately recapitalizing the banks and would be repaid at the close of the debt exchange, as well as a $7 million line of credit that will remain in place through next year. However, the company said that at this point, it doesn’t anticipate tapping the line.