Mercantile Bancorp. said it may report a first-quarter loss of as much as $57 million.
The bulk of the loss would come from charges for the acquisition of $1.8 billion-asset Hawkeye Bancorp. of Des Moines and for writing off half the $22 million in loans to St. Louis-based Edison Brothers Stores Inc., the bank said.
However, Mercantile also lost $9.5 million, or about 12 cents per share, on its cobranded credit card with Southwestern Bell Co.
The loss on the credit card operation was the most surprising to analysts because that business was expected to be a major revenue generator.
Mercantile said last week that the card is too generous in its fee structure. As a result, the bank said it is trying to renegotiate its partnership agreement with Southwestern Bell.
The two St. Louis-based companies rolled out their new Visa card a year ago amid much fanfare. As other Baby Bell companies had demonstrated, telephone companies provide a huge potential customer base, offering attractive incentives such as rebates on telephone bills.
Indeed, Mercantile's card exceeded expectations as 500,000 accounts were opened in Arkansas, Kansas, Missouri, Oklahoma, and Texas - 120,000 more than the bank projected. The trouble, however, was the incentives - no fee, a 1% cash rebate, a 5% rebate on Southwestern Bell telephone bills and a teaser introductory rate of 7.9%.
Analysts say Mercantile is now trying to renegotiate its deal to make Southwestern Bell share more of the risk for the cash rebates. Mercantile also wants to either charge a fee for the card or increase the interest rate, which is currently between 6 and 9.4 percentage points above prime.
Denis LaPlante, an analyst with Fox-Pitt Kelton, said he was initially encouraged by Mercantile's new card. He said the bank's management told him the card was priced strategically and was expected to be a significant source of revenue. Now, he said, management admits the card was "mispriced" and "there was a disproportionate amount of incentive costs."
Mr. LaPlante said Mercantile officials believe they can iron out their problems with Southwestern Bell in the next couple of months, but he believes repricing the card will be disruptive, and could lead to further revenue decline.
Other analysts say Mercantile, which has $18 billion in assets, is dependent on the card's success because it's a significant source of future revenue.
"It's the only business Mercantile is currently in that has real revenue growth potential," said Michael Durante, an analyst with McDonald & Company Securities Inc. "(Earnings) estimates are going to need to be reduced significantly as a result of the Southwestern portfolio."
Mr. Durante said that problems with the card began when too many customers kept low balances and the bulk of the cash rebates was borne by Mercantile. The company had hoped the credit card operation could grow to 2% of assets quickly, he added.
"We are reviewing repricing options and making other adjustments which will assure that the card's ongoing performance will be consistent with our initial expectations," said W. Randolph Adams, chairman and chief executive of Mercantile's lead banking subsidiary in St. Louis.
Southwestern Bell officials declined comment other than to say the card is a success from their point of view and they intend to continue it.
Analysts said the difficulties with the card could have serious consequences for Mercantile's ability to stay independent.
Mr. Durante said revenue growth has depended upon cost cutting over the past few years, and if Mercantile doesn't get the growth it needs from the credit card business it may be forced to cut more from operations.
He also said the charge to earnings could slow down the company's aggressive acquisition strategy. "It's going to be tough for them to do any deals when their stock is low," he noted.
Analysts agreed that Mercantile, which itself is considered a prime takeover target, can't afford to stumble.
"The Southwestern Bell card is expected to be a key revenue generator for Mercantile," said James Weber, an A.G. Edwards analyst in St. Louis. "If they have difficulty getting it to be a revenue contributor, it could make them more vulnerable to takeover."
