<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 333-33081
MERCANTILE BANK CORPORATION
(Exact name of small business issuer as specified in its charter)
Michigan 38-3360865
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503
(Address of principal executive offices)
(616) 242-9000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
At June 30, 1998, there were 1,495,000 shares of Common Stock outstanding
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE> 2
MERCANTILE BANK CORPORATION
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART 1. Financial Information Page No.
<S> <C>
Item I. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1998 (Unaudited) and December 31, 1997...................................... 3
Condensed Consolidated Statement of Income -
Three and Six Months Ended June 30, 1998 (Unaudited)................................. 4
Condensed Consolidated Statement of Comprehensive Income -
Three and Six Months Ended June 30, 1998 (Unaudited)................................. 5
Condensed Consolidated Statement of Changes in Shareholders Equity -
June 30, 1998 (Unaudited) and December 31, 1997...................................... 6
Condensed Consolidated Statement of Cash Flows -
Three and Six Months Ended June 30, 1998 (Unaudited)................................. 7
Notes to Condensed Consolidated Financial Statements (Unaudited)....................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 14
PART II. Other Information
Item 1. Legal Proceedings............................................................. 19
Item 2. Changes in Securities and Use of Proceeds..................................... 19
Item 3. Defaults upon Senior Securities............................................... 19
Item 4. Submission of Matters to a Vote of Security Stockholders...................... 19
Item 5. Other Information............................................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................................. 19
Signatures............................................................................. 21
</TABLE>
2
<PAGE> 3
MERCANTILE BANK CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,313,412 $ 153,300
Short-term investments 500,000 3,250,000
Federal funds sold 5,900,000 3,700,000
--------------- ---------------
Total cash and cash equivalents 10,713,412 7,103,300
Securities available for sale 14,494,951 2,997,500
Total loans 113,406,408 12,886,763
Allowance for loan losses (1,665,100) (193,300)
--------------- ---------------
Total loans, net 111,741,308 12,693,463
Premises and equipment - net 1,388,805 953,982
Organizational costs - net 72,406 74,871
Accrued interest receivable 721,050 52,811
Other assets 460,645 233,258
--------------- ---------------
Total assets $ 139,592,577 $ 24,109,185
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 15,037,312 $ 7,207,482
Interest-bearing 101,653,874 2,480,782
--------------- ---------------
Total 116,691,186 9,688,264
Securities sold under agreements to repurchase 10,555,295 655,447
Accrued expenses and other liabilities 307,768 292,204
--------------- ---------------
Total liabilities 127,554,249 10,635,915
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares
authorized, none issued
Common stock, no par value: 9,000,000 shares,
authorized; 1,495,000 shares outstanding
at June 30, 1998 and December 31, 1997 13,880,972 13,880,972
Retained earnings (deficit) (1,840,272) (404,071)
Net unrealized loss on securities available for sale (2,372) (3,631)
--------------- ---------------
Total shareholders' equity 12,038,328 13,473,270
--------------- ---------------
Total liabilities and shareholders' equity $ 139,592,577 $ 24,109,185
=============== ===============
</TABLE>
3
<PAGE> 4
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Interest income
Loans, including fees $ 1,952,640 $ 3,000,610
Investment securities 163,441 256,363
Federal funds sold 83,446 116,791
Interest-bearing deposits 5,476 9,914
-------------- --------------
Total interest income 2,204,973 3,383,678
Interest expense
Deposits 1,195,917 1,746,196
Other 103,597 132,259
-------------- --------------
Total interest expense 1,299,514 1,878,455
-------------- --------------
NET INTEREST INCOME 905,459 1,505,223
Provision for loan losses 473,000 1,471,800
-------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 432,459 33,423
Noninterest income
Other income 72,823 87,263
-------------- --------------
Total noninterest income 72,823 87,263
Noninterest expense
Salaries and benefits 416,587 818,267
Occupancy 70,551 138,925
Furniture and equipment 32,565 71,741
Other expense 280,103 527,954
-------------- --------------
Total noninterest expenses 799,906 1,556,887
-------------- --------------
LOSS BEFORE FEDERAL INCOME TAX (294,624) (1,436,201)
Federal income tax expense 0 0
-------------- --------------
NET LOSS $ (294,624) $ (1,436,201)
============== ==============
Basic and diluted loss per share $ (0.20) $ (0.96)
========= =========
Average shares outstanding 1,495,000 1,495,000
============== ==============
</TABLE>
4
<PAGE> 5
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
NET LOSS $ (294,624) $ (1,436,201)
Other comprehensive income (loss), net of tax
Change in unrealized gains (losses) on securities (1,525) 1,259
-------------- --------------
COMPREHENSIVE LOSS $ (296,149) $ (1,434,942)
============== ==============
</TABLE>
5
<PAGE> 6
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Securities Total
Common Retained Available Shareholders'
Stock Earnings for Sale Equity
------ -------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ 13,880,972 $ (404,071) $ (3,631) $ 13,473,270
Net loss for the period from
January 1, 1998 through
June 30, 1998 (1,436,201) (1,436,201)
Change in unrealized loss on
securities available for sale,
net of tax 1,259 1,259
-------------- ------------- ----------- -------------
BALANCE, JUNE 30, 1998 $ 13,880,972 $ (1,840,272) $ (2,372) $ 12,038,328
============== ============= =========== =============
</TABLE>
6
<PAGE> 7
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (294,624) $ (1,436,201)
Adjustments to reconcile net loss
to net cash from operating activities
Depreciation and amortization 68,299 111,105
Provision for loan losses 473,000 1,471,800
Net change in:
Accrued interest receivable (239,284) (668,239)
Other assets (29,582) (224,922)
Accrued expenses and other liabilities 39,335 15,564
-------------- ---------------
Net cash from operating activities 17,144 (730,893)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans (37,265,739) (100,519,645)
Purchase of:
Securities available for sale (10,032,245) (13,528,853)
Premises and equipment, net (108,641) (513,267)
Matured securities available for sale 2,000,000 2,000,000
-------------- ---------------
Net cash used in investing activities (45,406,625) (112,561,765)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 41,306,855 107,002,922
Net increase in securities sold under agreements
to repurchase 5,467,097 9,899,848
-------------- ---------------
Net cash from financing activities 46,773,952 116,902,770
-------------- ---------------
Net change in cash and cash equivalents 1,384,471 3,610,112
Cash and cash equivalents at beginning of period 9,328,941 7,103,300
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,713,412 $ 10,713,412
============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 1,177,115 $ 1,616,566
</TABLE>
7
<PAGE> 8
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
The unaudited financial statements for the three and six months ended June
30, 1998 include the consolidated results of operations of Mercantile Bank
Corporation ("Corporation") and its wholly-owned subsidiary, Mercantile
Bank of West Michigan ("Bank"). These consolidated financial statements
have been prepared in accordance with the Instructions for Form 10-QSB and
Item 310(b) of Regulation S-B and do not include all disclosures required
by generally accepted accounting principles for a complete presentation of
the Corporation's financial condition and results of operations. In the
opinion of management, the information reflects all adjustments (consisting
only of normal recurring adjustments) which are necessary in order to make
the financial statements not misleading and for a fair presentation of the
results of operations for such periods. The results for the period ended
June 30, 1998 should not be considered as indicative of results for a full
year. For further information, refer to the consolidated financial
statements and footnotes included in the Corporation's annual report on
Form 10-KSB for the year ended December 31, 1997.
2. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses
account for the six months ended June 30, 1998:
Balance at January 1, 1998 $ 193,300
Provision for loan losses charged
to operating expense 1,471,800
--------------
Balance at June 30, 1998 $ 1,665,100
==============
3. LOANS
Total loans at June 30, 1998 were $113.4 million compared to $12.9 million
at December 31, 1997, an increase of $100.5 million or 780%. The components
of the outstanding balances and percentage increase in loans from the end
of 1997 to the end of the second quarter 1998 are as follows:
<TABLE>
<CAPTION>
Percent
June 30, 1998 December 31, 1997 Increase/
Balance % Balance % (Decrease)
------- --- ------- --- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consumer loans $ 960 0.8% $ 15 0.1% 6,300.0%
Commercial, financial
and other 35,598 31.4 7,433 57.7 378.9
Commercial real estate
construction 4,328 3.8 --- --- NA
Commercial real estate
mortgages 65,787 58.1 5,421 42.1 1,113.5
Residential real estate
mortgages 6,733 5.9 18 0.1 37,311.1
-------- ----- -------- ----- --------
$113,406 100.0% $ 12,887 100.0% 780.0%
======== ===== ======== ===== ========
</TABLE>
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8
<PAGE> 9
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
4. PREMISES AND EQUIPMENT - NET
Premises and equipment are comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -----------
<S> <C> <C>
Leasehold improvements $ 750,588 $ 545,401
Furniture and equipment 716,661 408,581
-------------- ---------------
1,467,249 953,982
Less accumulated depreciation (78,444) ---
-------------- ---------------
$ 1,388,805 $ 953,982
============== ===============
</TABLE>
Depreciation expense for the second quarter 1998 amounted to $36,547.
5. DEPOSITS
Total deposits at June 30, 1998 were $116.7 million compared to $9.7
million at December 31, 1997, an increase of $107.0 million or 1,104%. The
components of the outstanding balances and percentage increase in deposits
from the end of 1997 to the end of the second quarter 1998 are as follows:
<TABLE>
<CAPTION>
Percent
June 30, 1998 December 31, 1997 Increase/
Balance % Balance % (Decrease)
------- --- ------- --- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
Demand $ 15,037 12.9% $ 7,208 74.4% 108.6%
Interest-bearing
Checking 4,273 3.7 213 2.2 1,906.1
Money market 1,372 1.2 --- --- NA
Savings 20,552 17.6 2,089 21.6 883.8
Time, under
$100,000 47,436 40.6 178 1.8 26,549.4
Time, $100,000
and over 28,021 24.0 --- --- NA
----------- -------- ----------- ------- ----------
$ 116,691 100.0% $ 9,688 100.0% 1,104.5%
=========== ======== =========== ======= ==========
</TABLE>
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9
<PAGE> 10
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
6. BORROWINGS
Information relating to securities sold under agreements to repurchase
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -----------
<S> <C> <C>
Outstanding balance $ 10,555,295 $ 655,447
Average interest rate 4.70% 4.70%
Average balance $ 5,233,576 $ 3,853
Average interest rate 4.70% 4.70%
Maximum outstanding at any month end $ 10,555,295 $ 655,447
</TABLE>
Securities sold under agreements to repurchase (repurchase agreements)
generally have original maturities of less than one year. Repurchase
agreements are treated as financings and the obligations to repurchase
securities sold are reflected as liabilities. Securities involved with the
agreements are recorded as assets of the Bank and are primarily held in
safekeeping by correspondent banks. Repurchase agreements are offered
principally to certain large deposit customers as deposit equivalent
investments.
7. EMPLOYEE BENEFIT PLANS
The Corporation established a 401(k) plan effective January 1, 1998,
covering substantially all its employees. The Corporation's second quarter
1998 matching 401(k) contribution charged to expense was $11,396. The
percent of the Corporation's matching contributions to the 401(k) is
determined annually by the Board of Directors.
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10
<PAGE> 11
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND OFF-BALANCE-SHEET RISK
Some financial instruments are used to meet financing needs and to reduce
exposure to interest rate changes. These financial instruments include
commitments to extend credit and standby letters of credit. These involve,
to varying degrees, credit and interest-rate risk in excess of the amount
reported in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the commitment,
and generally have fixed expiration dates. Standby letters of credit are
conditional commitments to guarantee a customer's performance to a third
party. Exposure to credit loss if the other party does not perform is
represented by the contractual amount for commitments to extend credit and
standby letters of credit. Collateral or other security is normally not
obtained for these financial instruments prior to their use, and many of
the commitments are expected to expire without being used.
A summary of the notional or contractual amounts of financial instruments
with off-balance-sheet risk at June 30, 1998 and December 31, 1997 follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -----------
<S> <C> <C>
Commitments to make loans $ 1,100,237 $ 7,198,584
Commercial unused lines of credit 43,141,679 3,701,272
Standby letters of credit 2,690,233 ---
Consumer unused lines of credit 4,718,589 64,356
</TABLE>
Commitments to make loans generally have termination dates of one year or
less and may require a fee. Since many of the above commitments expire
without being used, the above amounts do not necessarily represent future
cash commitments. No losses are anticipated as a result of these
transactions.
9. REGULATORY MATTERS
The Corporation and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications
in certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
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11
<PAGE> 12
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration are required.
The minimum requirements are:
<TABLE>
<CAPTION>
Capital to Risk-
Weighted Assets
---------------- Tier 1 Capital
Total Tier 1 to Average Assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized <8 <4 <4
</TABLE>
Actual capital levels (in thousands) and minimum required levels for the
Corporation and the Bank were:
<TABLE>
<CAPTION>
Minimum Required
to be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998
Total capital (to risk
weighted assets)
Consolidated $ 13,551 11.2% $ 9,653 8.0% $ 12,066 10.0%
Bank 12,979 10.8 9,639 8.0 12,049 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 12,041 10.0 4,833 4.0 7,249 6.0
Bank 11,471 9.5 4,826 4.0 7,239 6.0
Tier 1 capital (to
average assets)
Consolidated 12,041 10.6 4,566 4.0 5,708 5.0
Bank 11,471 10.1 4,565 4.0 5,707 5.0
December 31, 1997
Total capital (to risk
weighted assets)
Consolidated $ 13,595 78.1% $ 1,392 8.0% $ 1,740 10.0%
Bank 13,056 75.6 1,382 8.0 1,728 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 13,402 77.0 696 4.0 1,044 6.0
Bank 12,863 74.5 691 4.0 1,037 6.0
Tier 1 capital (to
average assets)
Consolidated 13,402 69.7 769 4.0 961 5.0
Bank 12,863 69.3 743 4.0 928 5.0
</TABLE>
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12
<PAGE> 13
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
The Corporation and Bank were categorized as well capitalized at June 30,
1998 and year end 1997.
10. SUBSEQUENT EVENTS
The Corporation completed a secondary public offering subsequent to June
30, 1998. The Corporation issued 977,500 shares of common stock in the
public offering, resulting in net proceeds to the Corporation of
approximately $14.3 million, subject to further adjustments based upon
final actual expenses incurred. Management anticipates using these
proceeds to support further growth of the organization.
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13
<PAGE> 14
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion compares the financial condition of the Corporation and
its wholly owned subsidiary, the Bank; at June 30, 1998 to December 31, 1997,
and the results of operations for the three and six months ended June 30, 1998.
This discussion should be read in conjunction with the interim consolidated
condensed financial statements and footnotes included herein.
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and about the Corporation. Words such
as "anticipates", "believes", "estimates", "expects", "forecasts", "intends",
"is likely", "plans", "projects", variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to predict
with regard to timing, extent, likelihood and degree of occurrence. Therefore,
actual results and outcomes may materially differ from what may be expressed or
forecasted in such forward-looking statements. The Corporation undertakes no
obligation to update, amend, or clarify forward looking statements, whether as a
result of new information, future events (whether anticipated or unanticipated),
or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; and changes in the national and local economy. These are representative
of the Future Factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement.
During the second quarter of 1998, the assets of Mercantile Bank Corporation
increased from $93.1 million on March 31, 1998, to $139.6 million on June 30,
1998. This represents a total increase in assets of $46.5 million. A $1.4
million increase in cash and cash equivalents; a $8.0 million increase in
investment securities; and a $36.8 million increase in net loans primarily
comprised this growth. The increase in assets was funded by $41.3 million growth
in deposits, and an increase of $5.5 million in repurchase agreements, partially
offset by a $0.3 million decrease in equity. The growth in deposits is the
result of both core deposits and reliance on out-of-area CD's. While management
expects continuing growth, it is anticipated to be at a slower rate.
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14
<PAGE> 15
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to the Corporation's
consolidated average interest earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
period indicated. Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the period presented. During the period presented, there were no nonaccrual
loans.
<TABLE>
<CAPTION>
Quarter ended June 30, 1998
Average Average
Balance Interest Rate
------- -------- -------
(in thousands)
<S> <C> <C> <C>
ASSETS
Federal funds sold and interest-bearing
deposits with banks $ 6,754 $ 89 5.29%
Investment securities - available for sale 12,055 163 5.42
Loans 88,696 1,953 8.83
----------- ----------- --------
Subtotal interest-bearing assets 107,505 2,205 8.23
Other assets 6,655
-----------
Total assets $ 114,160
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 83,540 $ 1,196 5.74%
Other borrowings 8,804 104 4.74
----------- ----------- --------
Subtotal interest-bearing liabilities 92,344 1,300 5.65
Noninterest-bearing deposits 9,303
Other liabilities 301
Shareholders' equity 12,212
-----------
Total liabilities and shareholders' equity $ 114,160
===========
Net interest income $ 905
===========
Net interest rate spread 2.58%
========
Net interest margin on earning assets 3.37%
========
</TABLE>
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15
<PAGE> 16
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998, which are expected to
mature or reprice in each of the time periods shown (in thousands):
<TABLE>
<CAPTION>
Interest Rate Sensitivity Period
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 5,900 $ --- $ --- $ --- $ 5,900
Interest-bearing deposits --- 500 --- --- 500
Securities available for sale 999 4,493 9,003 --- 14,495
Consumer loans 249 7 421 283 960
Commercial, financial and other 21,310 229 12,419 1,640 35,598
Commercial real estate construction 712 437 1,319 1,860 4,328
Commercial real estate mortgages 15,315 1,751 46,846 1,874 65,786
Residential real estate mortgages 1,979 949 3,390 416 6,734
---------- ---------- ---------- --------- ----------
46,464 8,366 73,398 6,073 134,301
Interest-bearing liabilities
Interest-bearing checking $ 4,273 $ --- $ --- $ --- $ 4,273
Savings 20,552 --- --- --- 20,552
Money market 1,372 --- --- --- 1,372
Time deposits < $100,000 1,776 20,676 24,984 --- 47,436
Time deposits $100,000 and over 8,487 15,064 4,470 --- 28,021
Other borrowings 10,555 --- --- --- 10,555
---------- ---------- ---------- --------- ----------
47,015 35,740 29,454 --- 112,209
---------- ---------- ---------- --------- ----------
Net asset (liability) gap $ (551) $ (27,374) $ 43,944 $ 6,073 $ 22,092
========== ========== ========== ========= ==========
Cumulative net asset (liability) gap $ (551) $ (27,925) $ 16,019 $ 22,092
========== ========== ========== =========
</TABLE>
At quarter-end, commercial loans approximated 93.2% of the total loan portfolio.
The significant concentration in commercial loans and the rapid growth of this
portion of our business is in keeping with our stated strategy of focusing a
substantial amount of our efforts on "wholesale" banking. Corporate and business
lending is an area of expertise for all of the Corporation's senior management
team. Commercial loans are also the assets most efficiently originated and
managed by the fewest number of staff, thus reducing overhead through
necessitating fewer full-time equivalents (FTE's)/$million in assets. It is also
the commercial sector of our business that generates the greatest amount of
deposits, and it is virtually the only source of significant demand deposits.
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16
<PAGE> 17
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Mortgage and consumer loans increased during the second quarter by $6.7 million
and $0.9 million, respectively. As the extremely rapid growth of our commercial
loan portfolio gradually slows, the retail portion of our loan assets is
expected to increase as a percentage of total loans. However, our strategy for
growth and profitability is expected to result in the commercial sector of our
lending efforts and resultant assets continuing to be the dominant portfolio
category.
Total deposits were $116.7 million at June 30, 1998, compared to $9.7 million at
prior year-end. Of this amount $15.0 million, or approximately 12.9%, were
demand deposits. In addition, Business Investment Checking, our combined sweep
account/repurchase agreement, increased from $0.7 million on December 31, 1997,
to $10.6 million on June 30, 1998. Out-of-area deposits, consisting primarily of
$99,000 certificates obtained from depositors located outside our market area
and placed by deposit brokers for a fee, totaled $59.6 million, or approximately
47% of combined deposits and Business Investment Checking at quarter-end. The
amount of new out-of-area deposits obtained during the second quarter totaled
$18.5 million, a level considerably lower than the $41.1 million obtained during
the first quarter. Our reliance on out-of-area deposits is expected to be
ongoing due to our planned significant future growth; however, the downward
trend in out-of-area deposit concentration levels reflected above should also
continue as new business and retail relationships continue to be established and
as existing customers fund deposit accounts/business investment checking
accounts which have already been opened or as these customers require additional
deposit products.
The net operating loss for the second quarter was $294,624 ($0.20/share), which
compares favorably to the first quarter net operating loss of $1,141,577
($0.76/share). Growth in net interest income and a decline in loan loss
provisions primarily contribute to the improved performance. Net interest income
during the second quarter totaled $905,459, or $305,695 higher than the first
quarter level. Provision for loan losses were $473,000 ($0.32/share) and
$998,800 ($0.66/share) during the second and first quarter, respectively. Loan
loss provisions are high due to the extremely rapid growth of the loan portfolio
combined with management's decision to manage the portfolio utilizing a 1.5%
allowance for loan and lease losses. Although the percentage loan loss reserve
to total loans is high relative to the quality of the overall portfolio, company
management feels it is prudent to operate with this level of reserves due to the
newness of the organization and the significant number of credits at the legal
lending limit of the Bank. Loan loss provisions are an immediate reduction to
earnings; moreover, these provisions will continue to reduce earnings, although
more moderately, as the anticipated rate of loan growth slows.
Payroll and other non-interest operating expenses are expected to decline as a
percentage of income as the Corporation grows. As a result, the efficiency
ratio, at 0.98% during the first six months of 1998, should decrease as the
Corporation more adequately absorbs current overhead costs and amortization of
prior period organization and start-up costs.
- --------------------------------------------------------------------------------
17
<PAGE> 18
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Immediate and future plans for the remainder of 1998 include the continued
growth of the recently implemented telephone banking product, as well as the
introduction of PC banking to both our retail and commercial customers. It is
management's opinion that the use of state-of-the-art technology will offset
some of the potential advantages that establishing branch banking locations
might provide. This is especially true if ATM kiosks are strategically located
throughout our market area and used in connection with and as an adjunct to our
technology.
- --------------------------------------------------------------------------------
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a depository of funds, the Bank may occasionally be named as a defendant in
lawsuits (such as garnishment proceedings) involving claims to the ownership of
funds in particular accounts. Such litigation is incidental to the Bank's
business.
The Corporation's management is not aware of any pending litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At its Annual Meeting held on April 21, 1998, the Corporation's stockholders
voted to elect four directors, C. John Gill, Gerald R. Johnson, Jr., Calvin D.
Murdock, and Donald Williams, Sr., each for a three year term expiring at the
Annual Meeting of the stockholders of the Corporation in 2001. The results of
the election were as follows:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
Nominee For Withheld Abstained Non-Votes
------- ----- -------- --------- ---------
<S> <C> <C> <C> <C>
C. John Gill 1,435,102 5,500 --- ---
Gerald R. Johnson, Jr. 1,434,702 5,900 --- ---
Calvin D. Murdock 1,435,102 5,500 --- ---
Donald Williams, Sr. 1,435,102 5,500 --- ---
</TABLE>
The terms of office of the following directors (who were not up for election)
continued after the Annual Meeting: Betty S. Burton, Peter A. Cordes, David M.
Hecht, Susan K. Jones, Lawrence W. Larsen, Michael H. Price, Dale J, Visser, and
Robert M. Wynalda.
ITEM 5. OTHER INFORMATION.
Not applicable.
- --------------------------------------------------------------------------------
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
EXHIBIT NO. EXHIBIT DESCRIPTION
---------- -------------------
3.1 Articles of Incorporation are incorporated by reference
to exhibit 3.1 of the Corporation's Registration
Statement on Form SB-2 (Commission File no. 333-33081)
that became effective on October 23, 1997
3.2 Bylaws of the Corporation are incorporated by reference
to exhibit 3.2 of the Corporation's Registration
Statement on Form SB-2 (Commission File No. 333-33081)
that became effective on October 23, 1997
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
- --------------------------------------------------------------------------------
20
<PAGE> 21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on August 12, 1998.
MERCANTILE BANK CORPORATION
By: /s/ Gerald R. Johnson, Jr.
---------------------------------------
Gerald R. Johnson, Jr.
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael H. Price
---------------------------------------
Michael H. Price
President and Chief Operating Officer
By: /s/ Charles E. Christmas
---------------------------------------
Charles E. Christmas
Vice President of Finance, Treasurer and
Compliance Officer
(Principal Financial and Accounting Officer)
- --------------------------------------------------------------------------------
21
<PAGE> 22
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- ---------- -------------------
3.1 Articles of Incorporation are incorporated by reference
to exhibit 3.1 of the Corporation's Registration
Statement on Form SB-2 (Commission File no. 333-33081)
that became effective on October 23, 1997
3.2 Bylaws of the Corporation are incorporated by reference
to exhibit 3.2 of the Corporation's Registration
Statement on Form SB-2 (Commission File No. 333-33081)
that became effective on October 23, 1997
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
- --------------------------------------------------------------------------------
22
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
12/31/97
TO
ANNUALIZED 6/30/98
---------- -------
<S> <C> <C>
Return on average total assets -3.30% -1.65%
Return on average equity -22.91% -11.45%
Dividend Payout Ratio NA NA
Average Equity to Average Assets 14.42%
</TABLE>
STATEMENT OF COMPUTER PER SHARE EARNINGS
<TABLE>
<S> <C>
Net Loss $(1,436,201)
Average Shares Outstanding 1,495,000
Basic and Diluted Loss Per Share $(0.96)
</TABLE>
- --------------------------------------------------------------------------------
23
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,313,412
<INT-BEARING-DEPOSITS> 500,000
<FED-FUNDS-SOLD> 5,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 14,494,951
<INVESTMENTS-MARKET> 14,494,951
<LOANS> 113,406,408
<ALLOWANCE> (1,665,100)
<TOTAL-ASSETS> 139,592,577
<DEPOSITS> 116,691,186
<SHORT-TERM> 10,555,295
<LIABILITIES-OTHER> 307,768
<LONG-TERM> 0
0
0
<COMMON> 13,880,972
<OTHER-SE> (1,840,272)
<TOTAL-LIABILITIES-AND-EQUITY> 139,592,577
<INTEREST-LOAN> 3,000,610
<INTEREST-INVEST> 256,363
<INTEREST-OTHER> 126,705
<INTEREST-TOTAL> 3,383,678
<INTEREST-DEPOSIT> 1,746,196
<INTEREST-EXPENSE> 132,259
<INTEREST-INCOME-NET> 1,505,223
<LOAN-LOSSES> 1,471,800
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,556,887
<INCOME-PRETAX> (1,436,201)
<INCOME-PRE-EXTRAORDINARY> (1,436,201)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,436,201)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (193,300)
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (1,665,100)
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (1,665,100)
</TABLE>
