The Impact of Standardized Basel II on Mercantile Bancorp, Inc.

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1 The Impact of Standardized Basel II on Mercantile Bancorp, Inc. Sample Bank Analysis: Contact Second Pillar Consulting for analysis of your institution

2 Executive Summary Basel II bank capital regulations are in the news Starting in 2009, banks can choose to calculate their capital requirements using new Basel II risk-weights We estimate that implementation of Standardized Basel II at Mercantile Bancorp, Inc. can generate $6.17M in capital savings 80.3% of Illinois banks would be eligible for regulatory capital savings with the median bank saving $1M or 3.92% Page 2

3 The incremental capital associated with Basel II compliance can be stockpiled or deployed in a variety of ways Mercantile Bancorp, Inc., Quincy, IL Asset Size ($millions): $1,655 Capital Savings: $6.17M, or 4.57% Mercantile Bancorp, Inc. Highlights Thousands $105,000 $100,000 State National $95,000 $90,000 $85,000 $80,000 Current 1st Lien Jr. Lien FHA/ VA/ SBA Retail CRE<$1M C&I<$1M Delinq. Unused<1yr Other Ops Risk Basel II $103,061 $3,946 $258 $- $3,335 $5,116 $5,426 $1,186 $2,046 $1,129 $9,811 $96,893 0% 25% 50% 75% 100% Other 36% C&I 10% Asset Mix Retail 8% CRE 27% Mortgage 19% Percentile Capital Metrics and Management Metrics Gross Income Margin 3.4% Tangible Common Equity 3.7% Leverage Ratio 6.4% Changes in Capital Current Basel II Tier 1 RBC 7.6% 7.9% Total RBC 10.3% 10.8% Potential Use of Basel II Capital Savings* One time Dividend $ 0.71 Share Repurchase Number of Shares Change in EPS Organic Growth 364, % $ 70,669 *Based on Closing Price as of 7/29/2008 Stockpile: total RBC increases from 10.33% to 10.80%, an amount equal to $6.17M or 4.57% of the existing capital base Deploy: a variety of balance sheet actions that preserve the current 10.33% total RBC ratio: Issue a special dividend of $0.71 per share Repurchase 364,963 shares and increase EPS $5.02 or 4.36% Organically grow assets by $71M Page 3

4 Illinois Banks can save up to $1,204.2M in required capital under Standardized Basel II while improving risk management Capital savings estimate 1 $17,000,000 Current 1st Lien Jr. Lien FHA/ VA/ SBA Retail CRE<$1M C&I<$1M Delinq. Unused<1yr Other Ops Risk Basel II $16,500,000 Regulatory Capital Requirement Thousands $16,000,000 $15,500,000 $15,000,000 $14,500,000 $14,000,000 $13,500,000 $13,000,000 $16,668,754 $551,734 $107,453 $18,983 $292,837 $1,104,557 $699,696 $124,733 $150,122 $248,141 $1,544,361 $15,464,568 $12,500,000 $12,000,000 Note: Q1 Call Report; SPC estimates Page 4

5 Illinois banks with the highest percentage change in regulatory capital under Standardized Basel II Table 1. Top 20 Banks with the highest percentage changes in regulatory capital Name City Asset Size ($000's) Dollar Change ($000) Percent Change Hartsburg State Bank Hartsburg $ 18,437 $ % Evergreen Private Bank Oak Brook $ 230,022 $ 3, % Bank of Montgomery Montgomery $ 34,140 $ % Providence Bank, LLC South Holland $ 192,991 $ 3, % Metropolitan Capital Bank Chicago $ 92,090 $ 1, % Burling Bank Chicago $ 117,323 $ 1, % First Community Bank of Joliet Joliet $ 397,926 $ 6, % Millennium Bank Des Plaines $ 28,833 $ 1, % SouthernTrust Bank Goreville $ 32,932 $ % Hickory Point Bank and Trust, FSB Decatur $ 764,121 $ 8, % LincolnWay Community Bank New Lenox $ 105,714 $ 2, % First Clover Leaf Bank, FSB Edwardsville $ 401,767 $ 9, % State Farm Bank, FSB Bloomington $ 15,754,418 $ 190, % Cummins-American Corp. Glenview $ 936,614 $ 14, % Allied First Bank, SB Oswego $ 164,523 $ 1, % Farmers State Bank of Alto Pass, Ill. Alto Pass $ 246,786 $ 2, % Town Community Bank and Trust Antioch $ 62,604 $ 1, % Bankers' Bancorp, Inc. Springfield $ 590,799 $ 7, % Signature Bank Chicago $ 92,091 $ 2, % Arcola Homestead Savings Bank Arcola $ 9,933 $ % Averages $ 1,013, $ 13, % Source: Based Upon Second Pillar Estimates and Call report or TFR data Page 5

6 Illinois banks with the lowest or negative percentage changes in regulatory capital under Standardized Basel II Table 2. Bottom 20 Banks with the lowest or negative percentage changes in regulatory capital Name City Asset Size ($000's) Dollar Change ($000) Percent Change Kinderhook State Bank Kinderhook $ 16,262 $ (122) -4.9% First National Bank of Catlin Catlin $ 39,950 $ (193) -5.0% First National Bank of Grand Ridge Grand Ridge $ 30,617 $ (199) -5.0% Camp Grove State Bank Camp Grove $ 15,269 $ (181) -5.3% Lemont National Bank Lemont $ 56,275 $ (370) -6.0% Maroa Forsyth Community Bank Maroa $ 21,273 $ (166) -6.1% Charleston Federal Savings and Loan Association Charleston $ 33,289 $ (186) -6.3% State Bank of Colusa Colusa $ 17,727 $ (246) -6.5% SBC, Incorporated Countryside $ 960,136 $ (8,760) -6.9% Builders Financial Corporation Chicago $ 529,262 $ (4,472) -7.0% Illinois-Service Federal Savings and Loan AssociatChicago $ 120,270 $ (1,167) -7.4% Elkville State Bank Elkville $ 19,079 $ (293) -7.6% Texico State Bank Texico $ 8,832 $ (71) -7.8% First State Bank of West Salem West Salem $ 14,871 $ (295) -8.1% Corus Bankshares, Inc. Chicago $ 9,072,057 $ (112,104) -8.2% American Home Bank Chicago $ 269,674 $ (5,874) -9.7% Heritage Community Bank Glenwood $ 296,625 $ (3,191) -9.9% Reynolds State Bank Reynolds $ 63,889 $ (2,014) -12.5% American Union Savings and Loan Association, S. Chicago $ 7,541 $ (120) -12.6% Peoples National Bank of Kewanee Kewanee $ 189,477 $ (13,426) -24.7% Averages $ 589,119 $ (7,673) -8.4% Source: Based Upon Second Pillar Estimates and Call report or TFR data Page 6

7 But not all banks are ready to answer the tough risk management questions posed by Basel II compliance Do you have a well-functioning risk oversight structure? Do you have clear risk management policies and procedures? Have you identified the important risks faced by your institution? Have you articulated an institutional appetite for risk-taking? Do you have accessible data on the risk characteristics of your existing portfolio? Do you have accessible data on the past performance of your portfolio? Do you have personnel that can fill critical risk assessment? Do you actively manage and plan your capital position? Are you committed to enhancing your overall risk and capital management? Page 7

8 Second Pillar Consulting can help banks prepare for Basel II compliance Our principals have over thirty years of experience in enterprise risk management, regulatory capital compliance, and regulatory relations Supported International Basel II compliance at a top-ten bank Developed analytical and reporting capabilities Created governance structure and supporting policies Led regulatory exams for approval Managed risk in retail banking, commercial banking, and insurance Focused on building strong regulatory relationships Active participants in several Basel II industry and regulatory forums that facilitated drafting the new rules Frequent speakers at industry and regulatory conferences on Basel Several Basel II academic papers written jointly with regulators Page 8

9 Contact Information Bill Nayda (804) Geoffrey Rubin (703)