Mercantile Bancorp. of St. Louis hopes to form a mortgage banking subsidiary and has hired an investment banking firm to help map its strategy.

The move follows Mercantile's July 1 acquisition of Roosevelt Financial Group, also of St. Louis, which created a $7.8 billion-asset residential mortgage portfolio, equal to 42% of Mercantile's total loans.

That's too big a percentage for a commercial bank, said John Q. Arnold, Mercantile's chief financial officer. With the acquisition of Roosevelt, a thrift, Mercantile became the No. 1 mortgage originator in Missouri and the biggest retail bank, holding more than 23% of the state's deposits.

But the acquisition also skewed Mercantile's balance sheet, giving it a higher proportion of single-family mortgages than it would like. "We don't want to be perceived as a thrift," Mr. Arnold said.

Mr. Arnold would not identify the investment bank that his company retained, but it is believed to be UBS Securities, which has enjoyed a long-standing relationship with Mercantile.

"We've engaged a Wall Street firm to help us," Mr. Arnold said. "We want to talk about alternative investments, identify assets to sell and what to do with them. We may move money out of one form and into another."

While specifics are being hashed out, three things are certain, Mr. Arnold said: Mercantile wants to be a regional player in the mortgage business; it wants to have enough scale to be cost-competitive; and it wants the mortgage operations to support its banking business.

Mr. Arnold said Mercantile is determining how big it wants to be in the highly volatile and competitive mortgage banking business. A portion of Roosevelt's portfolio includes loans from outside the Midwest. Those loans may be sold, as well as mortgage-backed securities.

The company has asked the investment banker to consider whether it should take proceeds from the sale of the loans and buy other mortgage portfolios in Mercantile's traditional banking markets.

"One of the decisions is, Do we want to expand the balance sheet, shrink it, or hold it to the same size?" Mr. Arnold said.

Stanley J. Bradshaw, who was Roosevelt's chairman and chief executive officer, is expected to head the new mortgage company.

Analysts said if Mercantile is in the market for mortgage companies, it should be able to find some for sale.

"There are smaller mortgage companies and portfolios out there if they want to add scale in servicing or originations," said Michael Ancell, an analyst with Edward Jones in St. Louis.

But Mr. Ancell warned that mortgage banking is a tough business for companies that don't have scale. Still, he believes Mercantile is correct to take the mortgages off its balance sheet.

Joseph Roberto, an analyst with Keefe, Bruyette & Woods Inc., said mortgages are "an oversized piece of the total pie" at Mercantile and putting them in a separate company makes sense.

In the end, Mercantile's overall strategy should not veer significantly.

The $30 billion-asset bank has been a sizable mortgage lender in the five states in which it does business: Missouri, Arkansas, Illinois, Iowa, and Kansas. The company does well in rural markets selling mortgages and cross-selling other banking products.

Mercantile is also a skilled acquirer. Acquisitions are a cornerstone of the company's strategy, but it has never bought so big a thrift as Roosevelt.

"Normally we wouldn't have done something like this, but Roosevelt is so unbank-like," Mr. Arnold said.

He also said the company would like to have its mortgage strategy straightened out by the third quarter. That would be followed by the Roosevelt computer system conversion and branch closings scheduled for November. Mercantile plans to close 45 to 50 of Roosevelt's 83 branches. It also plans to sell six offices.

The integration process is ahead of schedule, according to Mr. Arnold.

Originally, company officials thought the integration would not be completed until early 1998, but now they see completion by yearend.

Separately, the company shut 32 branches, mostly in St. Louis and Kansas City, Mo., in June and July in connection with its acquisition of Mark Twain Bancshares, another St. Louis competitor. This consolidation also was ahead of schedule, Mr. Arnold said.

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