<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 March 31, 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 April 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> <C>
Item I. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 .............................. 3
Condensed Consolidated Statement of Income -
Three Months Ended March 31, 1998 (Unaudited) ................................. 4
Condensed Consolidated Statement of Comprehensive Income -
Three Months Ended March 31, 1998 (Unaudited) ................................. 5
Condensed Consolidated Statement of Changes in Shareholders Equity -
March 31, 1998 (Unaudited) and December 31, 1997............................ .. 6
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 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 ..................................................................... 20
----------
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------- ---------------
<S> <C> <C>
(Unaudited)
ASSETS
Cash and due from banks $ 6,175,366 $ 153,300
Short-term investments 2,753,575 3,250,000
Federal funds sold 400,000 3,700,000
------------- -------------
Total cash and cash equivalents 9,328,941 7,103,300
Securities available for sale 6,495,983 2,997,500
Total loans 76,140,669 12,886,763
Allowance for loan losses (1,192,100) (193,300)
------------- -------------
Total loans, net 74,948,569 12,693,463
Premises and equipment - net 1,316,711 953,982
Organizational costs - net 76,496 74,871
Accrued interest receivable 481,766 52,811
Other assets 426,973 233,258
------------- -------------
Total assets $ 93,075,439 $ 24,109,185
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 10,598,157 $ 7,207,482
Interest-bearing 64,786,174 2,480,782
------------- -------------
Total 75,384,331 9,688,264
Securities sold under agreements to repurchase 5,088,198 655,447
Accrued expenses and other liabilities 268,433 292,204
------------- -------------
Total liabilities 80,740,962 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 March 31, 1998 and December 31, 1997 13,880,972 13,880,972
Retained earnings (deficit) (1,545,648) (404,071)
Net unrealized loss on securities available for sale (847) (3,631)
------------- -------------
Total shareholders' equity 12,334,477 13,473,270
------------- -------------
Total liabilities and shareholders' equity $ 93,075,439 $ 24,109,185
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
March 31, 1998
--------------
<TABLE>
<S> <C>
Interest income
Loans, including fees $ 1,047,970
Federal funds sold 33,345
Investment securities 97,390
-------------
Total interest income 1,178,705
Interest expense
Deposits 550,279
Other 28,662
-------------
Total interest expense 578,941
-------------
Net interest income 599,764
Provision for loan losses 998,800
-------------
Net interest income after provision for loan losses (399,036)
Noninterest income
Other income 13,592
-------------
Total noninterest income 13,592
Noninterest expense
Salaries and benefits 401,580
Occupancy 68,374
Furniture and equipment 39,176
Other expense 247,003
-------------
Total noninterest expenses 756,133
-------------
Loss before federal income tax (1,141,577)
Federal income tax expense
-------------
Net loss $ (1,141,577)
=============
Basic and diluted loss per share $ (.76)
=============
Average shares outstanding $ 1,495,000
=============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31, 1998
--------------
<TABLE>
<S> <C>
NET LOSS $ (1,141,577)
Other comprehensive income, net of tax
Change in unrealized gains on securities 2,784
------------
COMPREHENSIVE LOSS $ (1,138,793)
============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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
March 31, 1998 (1,141,577) (1,141,577)
Unrealized gain on securities
available for sale, net of tax 2,784 2,784
----------- ------------ ------------- -------------
BALANCE, MARCH 31, 1998 $13,880,972 $ (1,545,648) $ (847) $ 12,334,477
=========== ============ ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,141,577)
Adjustments to reconcile net loss
to net cash from operating activities
Depreciation and amortization 42,806
Provision for loan losses 998,800
Gain on loans sold (14,137)
Loans originated for sale (1,209,620)
Proceeds from loans sold 1,223,757
Net change in:
Accrued interest receivable (428,955)
Other assets (195,340)
Accrued expenses and other liabilities (23,772)
-------------
Net cash from operating activities (748,038)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans (63,253,906)
Purchase of:
Securities available for sale (3,496,607)
Premises and equipment, net (404,626)
-------------
Net cash used in investing activities (67,155,139)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 65,696,067
Net increase in securities sold under agreements to repurchase 4,432,751
-------------
Net cash from financing activities 70,128,818
-------------
Net change in cash and cash equivalents 2,225,641
Cash and cash equivalents at beginning of year 7,103,300
-------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,328,941
=============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 445,820
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The unaudited financial statements for the three months ended March 31, 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
March 31, 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 three months ended March 31, 1998:
<TABLE>
<S> <C>
Balance at January 1, 1998 $ 193,300
Provision for loan losses charged
to operating expense 998,800
----------
Balance at March 31, 1998 $1,192,100
==========
</TABLE>
3. LOANS
Total loans at March 31, 1998 were $76.1 million compared to $12.9 million
at December 31, 1997, an increase of $63.2 million or 490.8%. The
components of the outstanding balances and percentage increase in loans from
the end of 1997 to the end of the first quarter 1998 are as follows:
<TABLE>
<CAPTION>
Percent
March 31, 1998 December 31, 1997 Increase/
Balance % Balance % (Decrease)
------- ------- -------------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consumer loans $ 1,877 2.5% $ 15 .1% 12,413.3%
Commercial, financial
and other 23,497 30.8 7,433 57.7 216.1
Commercial real estate
construction 1,888 2.5 N/A
Commercial real estate
mortgages 47,956 63.0 5,421 42.1 784.6
Residential real estate
mortgages 923 1.2 18 .1 5,027.8
-------- ------- ---------- ----- ---------
$ 76,141 100.0% $ 12,887 100.0% 490.8%
======== ======= ========== ===== =========
</TABLE>
8
<PAGE> 9
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. PREMISES AND EQUIPMENT - NET
<TABLE>
<S> <C> <C>
Premises and equipment are comprised of the following:
March 31, December 31,
1998 1997
---- ----
Leasehold improvements $ 714,383 $ 545,401
Furniture and equipment 644,225 408,581
---------- ------------
1,358,608 953,982
Less accumulated depreciation (41,897)
---------- ------------
$1,316,711 $ 953,982
========== ============
</TABLE>
Depreciation expense for the first quarter 1998 amounted to $41,897.
5. DEPOSITS
Total deposits at March 31, 1998 were $75.4 million compared to $9.7 million
at December 31, 1997, an increase of $65.7 million or 678.1%. The
components of the outstanding balances and percentage increase in deposits
from the end of 1997 to the end of the first quarter 1998 are as follows:
<TABLE>
<CAPTION>
Percent
March 31, 1998 December 31, 1997 Increase/
Balance % Balance % (Decrease)
------- ------- -------------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
Demand $10,601 14.1% $ 7,208 74.4% 47.1%
Interest-bearing
Checking 1,617 2.1 213 2.2 659.2
Money market 144 .2 N/A
Savings 11,908 15.8 2,089 21.6 470.0
Time, under
$100,000 32,126 42.6 178 1.8 17,948.3
Time, $100,000
and over 18,988 25.2
------- ------- ----------- --------- ----------
$75,384 100.0% $ 9,688 100.0% 678.1%
======= ======= ========== ========= ==========
</TABLE>
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>
March 31 December 31,
1998 1997
---- ----
<S> <C> <C>
Outstanding balance $5,088,198 $655,447
Average interest rate 4.70% 4.70%
Average balance $2,777,086 $ 3,853
Average interest rate 4.70% 4.70%
Maximum outstanding at any month end $5,088,198 $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 first quarter
1998 matching 401(k) contribution charged to expense was $15,771. The
percent of the Corporation's matching contributions to the 401(k) is
determined annually by the Board of Directors.
10
<PAGE> 11
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. STOCK OPTION PLAN
<TABLE>
<CAPTION>
Three months
ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Stock options outstanding
Beginning 77,750
Granted 13,000 77,750
----------- ---------
Ending 90,750 77,750
=========== =========
Minimum exercise price $ 10.00 $ 10.00
Maximum exercise price 13.00 11.75
Average exercise price 10.78 10.75
Average remaining option term 9.5years 9.8years
Estimated fair value of stock options granted: $ 67,080 $ 340,863
Assumptions used:
Risk-free interest rate 5.62% 6.01%
Expected option life 7years 7years
Expected stock volatility 25% 25%
Expected dividends 0% 0%
Pro-forma (loss) per share, assuming SFAS 123
fair value method was used for stock options:
Net loss $(1,191,871) $(448,029)
Basic and diluted loss per share (.80) (.30)
</TABLE>
11
<PAGE> 12
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. 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 March 31, 1998 and December 31, 1997 follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Commitments to make loans $ 4,803,967 $ 7,198,584
Commercial unused lines of credit 21,084,366 3,701,272
Consumer unused lines of credit 1,348,894 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.
10. 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.
12
<PAGE> 13
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 6 3 3
</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>
March 31, 1998
- -------------------------
Total capital (to risk
weighted assets)
Consolidated $13,360 16.3% $6,564 8.0% $8,204 10.0%
Bank 12,759 15.6 6,556 8.0 8,195 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 12,334 15.0 3,282 4.0 4,923 6.0
Bank 11,735 14.3 3,272 4.0 4,917 6.0
Tier 1 capital (to
average assets)
Consolidated 12,334 20.7 2,387 4.0 2,984 5.0
Bank 11,735 19.7 2,383 4.0 2,979 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>
The Corporation and Bank were categorized as well capitalized at March 31, 1998
and year end 1997.
13
<PAGE> 14
MERCANTILE BANK CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (March 31, 1998)
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 March 31, 1998 to December 31,
1997, and the results of operations for the three months ended March 31, 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 first quarter of 1998, the assets of Mercantile Bank Corporation
increased from $24,109,185 on December 31, 1997, to $93,075,439 on March 31,
1998. This represents a total increase in assets of $68,966,254. A $2,225,941
increase in cash and cash equivalents; a $3,498,483 increase in investment
securities; and a $62,255,106 increase in net loans primarily supported this
growth. The increase in assets was funded by a $65,696,067 growth in deposits,
and an increase of $4,432,751 in repurchase agreements, partially offset by a
$1,138,793 decrease in equity. The growth in deposits is the result of both
core deposits and reliance on brokered CD's. While management expects
continuing growth, it is anticipated to be at a slower rate.
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.
14
<PAGE> 15
MERCANTILE BANK CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (March 31, 1998)
<TABLE>
<CAPTION>
Quarter ended March 31, 1998
Average Average
Balance Interest Rate
---------- -------------- ----------
(in thousands)
<S> <C> <C> <C>
ASSETS
Federal funds sold and interest-bearing
deposits with banks $ 2,699 $ 33 5.54%
Investment securities - available for sale 6,464 97 5.83
Loans 48,078 1,049 8.76
---------- -------------- ----------
57,241 1,179 8.28
Other assets 2,567
----------
$ 59,808
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 37,632 $ 550 6.00%
Other borrowings 2,824 29 4.12
---------- -------------- ----------
40,456 579 5.87
Noninterest-bearing deposits 6,378
Other liabilities 106
Shareholders' equity 12,868
----------
$ 59,808
==========
Net interest income $ 600
==============
Net interest rate spread 2.41%
==========
Net interest margin on earning assets 2.82%
==========
</TABLE>
15
<PAGE> 16
MERCANTILE BANK CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (March 31, 1998)
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 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 $ 400 $ 400
Securities available for sale 2,004 4,492 6,496
Total loans 31,447 482 $42,913 $ 1,299 76,141
-------- --------- -------- -------- -------
33,851 4,974 42,913 1,299 83,037
Interest-bearing liabilities
Savings and money market 13,669 13,669
Time deposits < $100,000 178 11,996 19,952 32,126
Time deposits $100,000 and over 1,577 14,745 2,666 18,988
Other borrowings 5,088 5,088
-------- --------- -------- -------
20,512 26,741 22,618 69,871
-------- --------- -------- -------- -------
Net asset (liability) gap $ 13,339 $(21,767) $20,295 $ 1,299 $13,166
======== ========= ======== ======== =======
Cumulative net asset (liability) gap $ 13,339 $ (8,428) $11,867 $13,166
======== ========= ======== ========
</TABLE>
The increase in investment securities was necessitated by additional
requirements for liquidity resulting from strong loan growth as well as the
need for collateral to support our Mercantile Business Investment Checking
Account, which is essentially a combined sweep account and repurchase
agreement. All marketable securities are classified as "available for sale."
Total loans at March 31, 1998 were $76.1 million compared to $12.9 million at
December 31, 1997, an increase of $63.2 million or 490.8%. The components of
the outstanding balances and percentage increase in loans from the end of 1997
to the end of the first quarter 1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997 Percent/Increase
-------------- ----------------- ----------------
Balance Percent Balance Percent (Decrease)
------- ------- -------------- ------- ----------
<S> <C> <C> <C> <C> <C>
(in thousands)
Consumer loans $ 1,877 2.5% $ 15 .1% 12,413.3%
Commercial, financial and
other 23,497 30.9 7,433 57.7 216.1
Commercial real estate
construction 1,888 2.5 N/A
Commercial real estate
mortgages 47,956 63.0 5,421 42.1 784.6
Residential real estate
mortgages 923 1.2 18 .1 5,027.8
------- ------- -------------- ------- ----------
$76,141 100.0% $12,887 100.0% 490.8%
======= ======= ============== ======= ==========
</TABLE>
16
<PAGE> 17
MERCANTILE BANK CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (March 31, 1998)
At quarter-end, commercial loans approximated 96% of our total loan portfolio.
The significant concentration in commercial loans and the rapid growth of this
portion of our business is in keeping with our stated strategy of focusing a
substantial amount of our efforts on "wholesale" banking. Corporate and
business lending is an area of expertise for all of the Corporation's senior
management team. Commercial loans are also the assets most easily originated
and managed by the fewest number of staff, thus reducing overhead through
necessitating fewer full-time equivalents (FTE's)/$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.
Mortgage and consumer loans also increased by $943,602 and $1,739,248,
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.
Final loan maturities and rate sensitivity of the loan portfolio at March 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Consumer loans $ 834 $ 661 $ 382 $ 1,877
Commercial, financial and other 14,746 $ 70 8,344 337 23,497
Commercial real estate construction 1,270 618 1,888
Commercial real estate mortgages 14,580 209 32,587 580 47,956
Residential real estate mortgages 17 203 703 923
------- -------- ------- ------ -------
$31,447 $482 $42,913 $1,299 $76,141
======= ======== ======= ====== =======
Loans at fixed rates $40 $482 $42,913 $1,299 $44,738
Loans at variable interest rates 31,403 31,403
------- -------- ------- ------ -------
$31,447 $482 $42,913 $1,299 $76,141
======= ======== ======= ====== =======
</TABLE>
The components of the outstanding balances and percentage increase in deposits
from the end of 1997 to the end of the first quarter 1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997 Percent/Increase
-------------- ----------------- ----------------
Balance Percent Balance Percent (Decrease)
------- ------- -------------- ------- ----------
<S> <C> <C> <C> <C> <C>
(in thousands)
Noninterest-bearing
Demand $10,601 14.1% $7,208 74.4% 47.1%
Interest-bearing
Checking 1,617 2.1 213 2.2 659.2
Money market 144 2 N/A
Savings 11,908 15.8 2,089 21.6 470.0
Time, under $100,000 32,126 42.6 178 1.8 17,948.3
Time, $100,000 and over 18,988 25.2 N/A
------- ------- -------------- ------- ----------
$75,384 100.0% $9,688 100.0% 678.1%
======= ======= ============== ======= ==========
</TABLE>
17
<PAGE> 18
MERCANTILE BANK CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (March 31, 1998)
Total deposits were $75,384,331 at March 31, 1998, compared to $9,688,264 at
prior year-end. Of this amount, $10,598,157, or approximately 14%, were demand
deposits. In addition, Business Investment Checking, our combined sweep
account/repurchase agreement, increased from $655,447 on December 31, 1997, to
$5,088,198 on March 31, 1998. Brokered deposits, consisting primarily of
$99,000 certificates obtained from depositors located outside our market area
and placed by deposit brokers for a fee, totaled $40,490,321, or approximately
50% of combined deposits and Business Investment Checking at quarter-end. Our
reliance on brokered deposits declined during each month of the first quarter,
with new brokered deposit dollars acquired as follows: $18,847,500 in January
1998; $17,947,000 in February 1998; and $3,695,821 in March 1998. Our reliance
on brokered deposits is expected to be ongoing due to our planned significant
future growth; however, the downward trend in brokered 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 first quarter of $1,141,577 ($.76/share) is
comprised primarily of $998,800 in provision for loan losses ($.66/share). The
remainder of the loss, or $142,777 ($.10/share), consists of salary and benefit
expense, normal operating costs and amortization of start-up expenses. 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. These provisions will also continue to reduce
earnings, although more moderately, as the anticipated rate of loan growth
slows.
Our payroll and other operating expenses are expected to decline as a percentage
of income as the Corporation grows. It is anticipated that our efficiency
ratio, currently at 81%, should decrease as the Corporation continues to grow
and more adequately absorb the current salary and benefit expense and
amortization of prior period organization and start-up costs.
Immediate and future plans for the remainder of 1998 include the near-term
implementation of telephone banking, which is currently in the testing phase,
as well as the introduction of PC banking to both our retail and commercial
customers later in the year. 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.
As reported in the Company's Form 10-KSB at December 31, 1997, the Company
applied the proceeds of the public offering of its Common Stock in October 1997
to repay loans from Directors, pay officer salaries and other expenses of the
offering, invest in securities and fixed assets, and fund new loans to
customers. At December 31, 1997, approximately $6,503,000 remained in working
capital of the Bank. This remaining working capital was used during the first
quarter of 1998 to fund the loan growth during the period, along with increases
in deposits.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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
19
<PAGE> 20
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 May 13, 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
(Principal Financial and Accounting Officer)
20
<PAGE> 21
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
21
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
12/31/97
TO
ANNUALIZED 3/31/98
---------- -------
<S> <C> <C>
Return on average total assets -7.7% -1.9%
Return on average equity -37.1% -9.3%
Dividend Payout Ratio N/A
Average Equity to Average Assets 20.7%
STATEMENT OF COMPUTER PER SHARE EARNINGS
Net Loss (1,141,577)
Average Shares Outstanding 1,495,000
Basic and Diluted Loss Per Share ($0.76)
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 6,175,366
<INT-BEARING-DEPOSITS> 2,753,575
<FED-FUNDS-SOLD> 400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 6,495,983
<LOANS> 76,140,669
<ALLOWANCE> (1,192,100)
<TOTAL-ASSETS> 93,075,439
<DEPOSITS> 75,384,331
<SHORT-TERM> 5,088,198
<LIABILITIES-OTHER> 268,433
<LONG-TERM> 0
0
0
<COMMON> 13,880,972
<OTHER-SE> (1,545,648)
<TOTAL-LIABILITIES-AND-EQUITY> 93,075,439
<INTEREST-LOAN> 1,047,970
<INTEREST-INVEST> 33,345
<INTEREST-OTHER> 97,390
<INTEREST-TOTAL> 1,178,705
<INTEREST-DEPOSIT> 550,279
<INTEREST-EXPENSE> 28,662
<INTEREST-INCOME-NET> 599,764
<LOAN-LOSSES> 988,800
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 756,133
<INCOME-PRETAX> (1,141,577)
<INCOME-PRE-EXTRAORDINARY> (1,141,577)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,141,577)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
<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> (1,192,100)
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (1,192,100)
</TABLE>
