<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, 1999
[ ] 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 March 31, 1999, there were 2,472,500 shares of Common Stock outstanding
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE> 2
MERCANTILE BANK CORPORATION
INDEX
- --------------------------------------------------------------------------------
PART 1. Financial Information Page No.
--------
Item I. Financial Statements
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998..................................... 3
Condensed Consolidated Statement of Income -
Three Months Ended March 31, 1999 and March 31, 1998 (Unaudited)..................... 4
Condensed Consolidated Statement of Comprehensive Income -
Three Months Ended March 31, 1999 and March 31, 1998 (Unaudited)..................... 5
Condensed Consolidated Statement of Changes in Shareholders Equity -
March 31, 1999 (Unaudited) and December 31, 1998...................................... 6
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1999 and 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>
<PAGE> 3
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
(Unaudited)
ASSETS
Cash and due from banks $ 7,196,756 $ 5,940,713
Short-term investments 520,956 515,283
Federal funds sold 10,800,000 --
------------- -------------
Total cash and cash equivalents 18,517,712 6,455,996
Securities available for sale 27,256,775 24,160,247
Total loans 214,716,272 184,744,602
Allowance for loan losses (3,220,100) (2,765,100)
------------- -------------
Total loans, net 211,496,172 181,979,502
Premises and equipment - net 2,176,704 1,857,805
Organizational costs - net -- 64,210
Accrued interest receivable 1,277,596 1,147,832
Other assets 946,340 571,265
------------- -------------
Total assets $ 261,671,299 $ 216,236,857
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 15,333,254 $ 14,319,290
Interest-bearing 201,662,155 157,678,729
------------- -------------
Total 216,995,409 171,998,019
Securities sold under agreements to repurchase 16,995,344 17,037,601
Accrued expenses and other liabilities 722,140 500,721
------------- -------------
Total liabilities 234,712,893 189,536,341
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares
authorized, none issued
Common stock, no par value: 9,000,000 shares,
authorized; 2,472,500 shares outstanding
at March 31, 1999 and December 31, 1998 28,181,798 28,181,798
Retained deficit (1,161,427) (1,513,118)
Net unrealized gain (loss) on securities available for sale (61,965) 31,836
------------- -------------
Total shareholders' equity 26,958,406 26,700,516
------------- -------------
Total liabilities and shareholders' equity $ 261,671,299 $ 216,236,857
============= =============
</TABLE>
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See accompanying notes to condensed consolidated financial statements
3.
<PAGE> 4
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Interest income
Loans, including fees $ 4,061,230 $ 1,047,970
Investment securities 378,822 58,127
Federal funds sold 85,166 33,345
Short term investments 5,977 39,263
----------- -----------
Total interest income 4,531,195 1,178,705
Interest expense
Deposits 2,420,624 550,279
Other 180,793 28,662
----------- -----------
Total interest expense 2,601,417 578,941
----------- -----------
NET INTEREST INCOME 1,929,778 599,764
Provision for loan losses 455,000 998,800
----------- -----------
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES 1,474,778 (399,036)
Noninterest income
Other income 209,723 14,440
----------- -----------
Total noninterest income 209,723 14,440
Noninterest expense
Salaries and benefits 652,912 401,580
Occupancy 89,457 68,374
Furniture and equipment 62,423 39,176
Other expense 457,808 247,851
----------- -----------
Total noninterest expenses 1,262,600 756,981
----------- -----------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX 421,901 (1,141,577)
Federal income tax expense 28,000 --
----------- -----------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 393,901 (1,141,577)
Cumulative effect of change in accounting principle
(net of applicable income taxes) 42,210 --
----------- -----------
NET INCOME (LOSS) $ 351,691 $(1,141,577)
=========== ===========
Basic and diluted income (loss) per share before
cumulative effect of change in accounting principle $ 0.16 $ (0.76)
=========== ===========
Basic and diluted income (loss) per share $ 0.14 $ (0.76)
=========== ===========
Average shares outstanding 2,472,500 1,495,000
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to condensed financial statements.
4.
<PAGE> 5
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
(Unaudited) (Unaudited)
NET INCOME (LOSS) $ 351,691 $(1,141,577)
Other comprehensive income, net of tax
Change in unrealized gains (losses) on securities
available for sale (93,801) 2,784
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 257,890 $(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
Gain (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
Common stock sale, July 30, 1998
net of issuance expenses 14,300,826 14,300,826
Net income (loss) (1,109,047) (1,109,047)
Change in net unrealized gain
(loss) on securities available
for sale, net of tax effect 35,467 35,467
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 28,181,798 (1,513,118) 31,836 26,700,516
Net income for the period from
January 1, 1999 through
March 31, 1999 351,691 351,691
Change in net unrealized gain
(loss) on securities available
for sale, net of tax effect (93,801) (93,801)
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1999 $ 28,181,798 $ (1,161,427) $ (61,965) $ 26,958,406
============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
6.
<PAGE> 7
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 351,691 $ (1,141,577)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 101,233 42,806
Provision for loan losses 455,000 998,800
Net change in:
Accrued interest receivable (129,764) (428,955)
Other assets (284,136) (195,340)
Accrued expenses and other liabilities 221,419 (23,772)
------------ ------------
Net cash from operating activities 715,443 (748,038)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (29,971,670) (63,253,906)
Purchase of:
Securities available for sale (4,938,917) (3,496,607)
Premises and equipment (378,501) (404,626)
Proceeds from maturities and repayments of available
for sale securities 1,680,228 --
------------ ------------
Net cash used in investing activities (33,608,860) (67,155,139)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 44,997,390 65,696,067
Net increase (decrease) in securities sold under
agreements to repurchase (42,257) 4,432,751
------------ ------------
Net cash from financing activities 44,955,133 70,128,818
------------ ------------
Net change in cash and cash equivalents 12,061,716 2,225,641
Cash and cash equivalents at beginning of period 6,455,996 7,103,300
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,517,712 $ 9,328,941
============ ============
Supplemental disclosures of
cash flow information Cash paid during the period for:
Interest $ 2,479,996 $ 445,820
Federal income tax 234,773 --
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
7.
<PAGE> 8
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
The unaudited financial statements for the three months ended March 31,
1999 include the consolidated results of operations of Mercantile Bank
Corporation ("Corporation") and its wholly-owned subsidiary, Mercantile
Bank ("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, 1999 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, 1998.
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, 1999:
Balance at January 1, 1999 $2,765,100
Provision for loan losses charged
to operating expense 455,000
----------
Balance at March 31, 1999 $3,220,100
==========
3. LOANS
Total loans at March 31, 1999 were $214.7 million compared to $184.7
million at December 31, 1998, an increase of $30 million or 16.2%. The
components of the outstanding balances and percentage increase in loans
from the end of 1998 to the end of the first quarter 1999 are as follows:
<TABLE>
<CAPTION>
Percent
March 31, 1999 December 31, 1998 Increase/
Balance % Balance % (Decrease)
------- - ------- - --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Real Estate:
Construction and
land development $ 19,115 8.9% $ 13,656 7.4% 40.0%
Secured by 1 - 4
family properties 12,163 5.6 10,656 5.8 14.1
Secured by multi-
family properties 2,472 1.2 2,521 1.4 (1.9)
Secured by nonfarm
nonresidential
properties 118,367 55.1 100,742 54.5 17.5
Commercial 60,068 28.0 55,071 29.8 9.1
Consumer 2,531 1.2 2,099 1.1 20.6
-------- ----- ------- ----- ----
$214,716 100.0% $184,745 100.0% 16.2%
======== ===== ======== ===== ====
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
4. PREMISES AND EQUIPMENT - NET
Premises and equipment are comprised of the following:
March 31, December 31,
1999 1998
---- ----
Land and improvements $ 315,020 $ 315,020
Buildings and leasehold improvements 759,942 759,942
Construction in process 417,899 100,638
Furniture and equipment 930,435 869,195
---------- ----------
2,423,296 2,044,795
Less accumulated depreciation 246,592 186,990
---------- ----------
Premises and Equipment, net $2,176,704 $1,857,805
========== ==========
Depreciation expense for the first quarter 1999 amounted to $59,602.
5. DEPOSITS
Total deposits at March 31, 1999 were $217.0 million compared to $172.0
million at December 31, 1998, an increase of $45.0 million or 26.2%. The
components of the outstanding balances and percentage increase in deposits
from the end of 1998 to the end of the first quarter 1999 are as follows:
<TABLE>
<CAPTION>
Percent
March 31, 1999 December 31, 1998 Increase/
Balance % Balance % (Decrease)
------- - ------- - --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
demand $ 15,333 7.1% $ 14,319 8.3% 7.1%
Interest-bearing
checking 7,402 3.4 7,766 4.5 (4.7)
Money market 4,645 2.1 3,822 2.2 21.5
Savings 39,429 18.2 28,797 16.8 36.9
Time, under $100,000 3,610 1.7 3,306 1.9 9.2
Time, $100,000 and
over 19,156 8.8 16,718 9.7 14.6
-------- --------- -------- -------- ----
89,575 41.3 74,728 43.4 19.9
Out-of-area time,
under $100,000 95,482 44.0 77,847 45.3 22.7
Out-of-area time,
$100,000 and over 31,938 14.7 19,423 11.3 64.4
-------- --------- -------- -------- ----
127,420 58.7 97,270 56.6 31.0
-------- --------- -------- -------- ----
Total deposits $216,995 100.0% $171,998 100.0% 26.2%
======== ========= ======== ===== ====
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
6. BORROWINGS
Information relating to securities sold under agreements to repurchase
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Outstanding balance at end of period $16,995,344 $17,037,601
Average interest rate at end of period 4.20% 4.20%
Average balance during the period $17,800,661 $10,305,728
Average interest rate during the period 4.20% 4.72%
Maximum month end balance during the period $17,194,685 $18,498,833
</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
1999 matching 401(k) contribution charged to expense was $16,171. The
percent of the Corporation's matching contributions to the 401(k) is
determined annually by the Board of Directors.
8. COMMITMENTS AND OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. Loan commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer
to a third party. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued)
These instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized, if any, in the balance sheet. The Bank's
maximum exposure to loan loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. Collateral, such as accounts receivable, securities,
inventory, property and equipment, is generally obtained based on
management's credit assessment of the borrower.
A summary of the notional or contractual amounts of financial instruments
with off-balance sheet risk at March 31, 1999 and December 31, 1998
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Commercial unused lines of credit $ 58,555,005 $ 61,600,909
Unused lines of credit secured by 1 - 4 family
residential properties 4,707,704 3,434,290
Credit card unused lines of credit 2,681,236 2,251,329
Other consumer unused lines of credit 1,466,054 1,534,497
Commitments to make loans 18,957,750 21,751,900
Standby letters of credit 24,554,911 19,271,848
--------------- ----------------
$ 110,922,660 $ 109,844,773
=============== ================
</TABLE>
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.
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>
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
9. REGULATORY MATTERS (Continued)
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, 1999
Total capital (to risk
weighted assets)
Consolidated $ 30,240 11.5% $ 21,046 8.0% $ 26,308 10.0%
Bank 29,347 11.2 21,044 8.0 26,305 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 27,020 10.3 10,523 4.0 15,785 6.0
Bank 26,127 9.9 10,522 4.0 15,783 6.0
Tier 1 capital (to
average assets)
Consolidated 27,020 11.2 9,673 4.0 12,092 5.0
Bank 26,127 10.8 9,671 4.0 12,088 5.0
December 31, 1998
Total capital (to risk
weighted assets)
Consolidated $ 29,434 13.0% $ 18,100 8.0% $ 22,625 10.0%
Bank 28,453 12.6 18,093 8.0 22,616 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 26,669 11.8 9,050 4.0 13,575 6.0
Bank 25,688 11.4 9,047 4.0 13,570 6.0
Tier 1 capital (to
average assets)
Consolidated 26,669 13.8 7,711 4.0 9,639 5.0
Bank 25,688 13.3 7,707 4.0 9,634 5.0
</TABLE>
The Corporation and Bank were categorized as well capitalized at March 31,
1999 and year end 1998.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
10. YEAR 2000 ISSUE
The approach of the year 2000 presents potential problems to businesses
that utilize computers in their daily operations. Some computer systems may
not be able to properly interpret dates after December 31, 1999, because
they use only two digits to indicate the year in the date. Therefore, a
date using "00" as the year may recognize the year as 1900 rather than the
year 2000.
The Corporation has formed a Year 2000 Working Group to address the
potential problems associated with the Year 2000 computer issue. The Year
2000 Working Group, consisting of senior officers and employees, meets on a
regular basis and provides regular reports to the Board of Directors
detailing progress with the Year 2000 issue.
As with any organization that depends on technology, particularly computer
systems and software, a Year 2000 related failure poses a significant
threat to continued business operations. While the Corporation has
developed a plan to achieve Year 2000 readiness, we recognize that the
success of our third party providers is vital to our success. Vendors of
particular concern include, but are not limited to, our computer service
providers, electronic banking vendors, correspondent banks, and utility and
telecommunications companies. Additional risks include the Bank's lending
and deposit relationships, as well as security and heating, ventilation,
and air conditioning systems. No in-house programmed software is used by
the Corporation.
Management believes that all significant vendors have been identified and
contacted regarding their Year 2000 readiness. These vendors have indicated
that either their products are currently Year 2000 compliant or will be by
December 31, 1999. For computer-based systems that are considered vital to
operations, such as data and transaction processing, actual testing has
been or will be conducted prior to December 31, 1999, to test Year 2000
readiness. In addition, a Year 2000 questionnaire has been sent to all
commercial loan customers (comprising 93% of the loan portfolio) requesting
information concerning their Year 2000 readiness. Responses are currently
being followed-up by the Year 2000 Working Group and lending staff.
Total costs to the Corporation related to the Year 2000 issue are estimated
to be between $10,000 and $25,000. These costs include testing of the data
processing equipment and programs, equipment upgrades, and employee and
customer education. It is impossible to predict the exact expenses
associated with the Year 2000 issue and additional funds may be needed for
unknown expenses relating to Year 2000 testing, training, and education, as
well as system and software replacements.
Despite careful planning by the Corporation, we recognize there may be
circumstances beyond our control that may prohibit us from operating "as
usual" after December 31, 1999. The Year 2000 Working Group is currently in
the process of developing and testing a contingency plan to address
potential Year 2000 problems.
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion compares the financial condition of the Corporation and
its wholly owned subsidiary, the Bank, at March 31, 1999 to December 31, 1998
and the results of operations for the three months ended March 31, 1999 and
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 1999, the assets of the Corporation increased from
$216.2 million on December 31, 1998, to $261.7 million on March 31, 1999. This
represents a total increase in assets of $45.5 million, or 21.1%. The asset
growth was comprised primarily of a $29.5 million increase in net loans, a $12.0
million increase in cash and cash equivalents, and an increase of $3.1 million
in investment securities. The increase in assets was primarily funded by a $45
million growth in deposits. Securities sold under agreements to repurchase and
shareholders' equity remained virtually unchanged. The growth in deposits was in
both local deposits and out-of-area CD's. While management expects continued
growth, it is anticipated to be at a slower rate.
Commercial loans increased by $28.0 million during the first quarter of 1999,
and at quarter-end comprised 93% of the total loan portfolio. The significant
concentration in commercial loans and the rapid growth of this portion of
business is in keeping with the stated strategy of focusing a substantial amount
of efforts on "wholesale" banking. Corporate and business lending is an area of
expertise for all of the Corporation's senior management team. Commercial loans
are also the assets most easily originated and managed by the fewest number of
staff, thus reducing overhead through necessitating fewer full-time equivalents
(FTE's)/$million in assets. It is also the commercial sector of our business
that generates the greatest amount of local deposits, and it is virtually the
only source of significant demand deposits.
Residential mortgage and consumer loans also increased by $1.5 million and $0.4
million, respectively, during the first quarter of 1999. As the extremely rapid
growth of our commercial loan portfolio gradually slows, the retail portion of
our loan assets should increase as a percentage of total loans. However, our
strategy for growth and profitability will result in the commercial sector of
the lending efforts and resultant assets continuing to be the dominant portfolio
category.
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 15
Deposits increased $45 million during the first quarter of 1999, totaling $217.0
million at March 31, 1999. Local deposits increased $14.9 million, while
out-of-area deposits increased $30.1 million. Savings deposits experienced
significant growth in the first three months of 1999, increasing by $10.6
million. This deposit type comprised 18% of total deposits as of March 31, 1999,
up from 17% at December 31, 1998. Noninterest-bearing demand deposits,
comprising 7% of total deposits, increased $1.0 million during the first quarter
of 1999, while interest-bearing checking accounts (3% of total deposits)
decreased by $0.4 million and money market deposit accounts (2% of total
deposits) increased by $0.8 million.
Out-of-area deposits totaled $127.4 million, or 58% of total deposits, as of
March 31, 1999. Out-of-area deposits consist primarily of $99,000 certificates
of deposit obtained from depositors located outside the market area and placed
by deposit brokers for a fee, but also include certificates of deposit for
larger dollar amounts (generally $100,000) and/or from the deposit owners
directly. Out-of-area deposits are utilized to support the asset growth of the
Corporation, and are generally a lower cost source of funds when compared to the
interest rates that would have to be offered in the local market to generate a
sufficient level of funds. The reliance on out-of-area deposits is expected to
be ongoing due to the past and planned significant future growth; however, a
modest decline in the out-of-area deposit concentration level is expected as new
business, governmental and retail relationships continue to be established and
as existing customers increase deposit accounts which have already been opened
or as these customers require additional deposit products.
Securities sold under agreements to repurchase declined by less than $0.1
million during the first quarter of 1999. As part of the Corporation's sweep
account program, collected funds from certain business noninterest-bearing
checking accounts are invested into over-night interest-bearing repurchase
agreements. Although not considered a deposit account and therefore not afforded
federal deposit insurance, the repurchase agreements have characteristics very
similar to that of business checking deposit accounts.
Net operating income for the first quarter of 1999 was $351,691 ($0.14 per
share), which compares favorably to the net loss of $1,141,577 ($0.76 per share)
recorded during the first quarter of 1998. The improvement is primarily the
result of an increase in net interest income, greater employee efficiency and a
reduction of provisions to the allowance for loan losses. First quarter 1999 net
operating income includes a one-time $0.02 per share charge reflecting a
recently mandated FASB accounting adjustment for organization costs. In
accordance with previous accounting guidelines these costs were being amortized
over a five-year period; however, as required by FASB Statement of Position
98-5, the unamortized balance was written off effective January 1, 1999 and is
reflected in the Consolidated Financial Statements as a change in accounting
principle.
Interest income during the first quarter of 1999 was $4,531,195, a significant
increase over the $1,178,705 earned during the first quarter of 1998. The growth
in interest income is primarily attributable to an increase in earning assets.
During the first three months of 1999 earning assets averaged $234.4 million, a
level substantially higher than the average earning assets of $57.2 million
during the same time period in 1998. Somewhat offsetting the increase in earning
assets is the decline in yield on earning assets. During the first three months
of 1999 and 1998 earning assets had a weighted average rate of 7.73% and 8.28%,
respectively. This decline is primarily due to an overall decline of market
interest rates between the two time periods, in part evidenced by the 75 basis
point drop in the Prime Rate.
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 16
Interest expense during the first quarter of 1999 was $2,601,417, a significant
increase over the $578,941 expensed during the first quarter of 1998. The growth
in interest expense is primarily attributable to the growth in assets, which
necessitated an increase in funding liabilities. During the first three months
of 1999 interest-bearing liabilities averaged $200.0 million, a level
substantially higher than average interest-bearing funds of $40.5 million during
the same time period in 1998. Also adding to the level of interest expense when
comparing the two time periods is the increase of interest-bearing liabilities
as a percent of average assets. In the first quarter of 1999 interest-bearing
liabilities averaged 82.7% of average assets, a notable increase from the 67.7%
level of the first quarter of 1998. The increase is the result of the planned
and expected leveraging of shareholders' equity. As of March 31, 1999, Tier 1
Capital ratio was 11.2%, a significant reduction from the 20.7% and 69.7% levels
of March 31, 1998 and December 31, 1997, respectively. Somewhat offsetting the
increase in interest-bearing liabilities is the decline in the average rate paid
on interest-bearing liabilities. During the first three months of 1999 and 1998
interest-bearing liabilities had a weighted average rate of 5.2% and 5.9%,
respectively. This decline is due in large part to the overall decline of market
interest rates between the two time periods as mentioned previously.
Net interest income during the first quarter of 1999 was $1,929,778, a
significant increase over the $599,764 earned during the first quarter of 1998.
As described above, the increase is primarily due to the substantial growth
experienced between the two time periods. Additional factors impacting net
interest income included, but were not limited to, changes in interest rates and
a reduction of capital as a percentage of average assets.
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
first quarter of 1999. 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 March 31, 1999
Average Average
Balance Interest Rate
------- -------- ----
(in thousands)
<S> <C> <C> <C>
ASSETS
Loans $ 200,739 $ 4,061 8.09%
Investment securities 25,661 379 5.91
Federal funds sold 7,434 85 4.58
Short term investments 518 6 4.62
----------- ----------- --------
Total interest-earning assets 234,352 4,531 7.73
Allowance for loan losses (3,220)
Other assets 10,713
-----------
Total assets $ 241,845
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 182,198 $ 2,420 5.31%
Other borrowings 17,801 181 4.06
----------- ----------- --------
Total interest-bearing liabilities 199,999 2,601 5.20
Noninterest-bearing deposits 14,333
Other liabilities 679
Shareholders' equity 26,834
-----------
Total liabilities and shareholders' equity $ 241,845
===========
Net interest income $ 1,930
===========
Net interest rate spread 2.53%
========
Net interest margin on earning assets 3.29%
========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 17
Interest rate risk is the exposure of the Corporation's financial condition and
operating performance to adverse movements in interest rates. The Corporation
derives its income primarily from the excess of interest collected on its
interest-earning assets over the interest paid on its interest-bearing
liabilities. Since market rates are subject to change over time, the Corporation
is exposed to lower profitability if it cannot adapt to interest rate changes.
Accordingly, effective risk management that maintains interest rate risk at
prudent levels is essential to the Corporation's safety and soundness. The
primary measurement method utilized by the Corporation to assess interest rate
risk is commonly referred to as net interest income simulation analysis. This
computer-based model measures the direction and magnitude of variations in net
interest income resulting from potential changes in market interest rates.
Although the assumptions used within the model are inherently uncertain and
subject to fluctuation and revision, and therefore actual results will differ
from the simulated results, management believes this methodology provides
sufficient information to manage the interest rate risk of the Corporation.
The Corporation conducted multiple simulations as of March 31, 1999, whereby it
was assumed that a simultaneous, instant and sustained change in market interest
rates occurred. The following table reflects the suggested impact on net
interest income over the next twelve months, which are well within the
Corporation's policy parameters established to manage and monitor interest rate
risk.
<TABLE>
<CAPTION>
<S> <C> <C>
Dollar Change In Percent Change In
Interest Rate Scenario Net Interest Income Net Interest Income
---------------------- ------------------- -------------------
Interest rates down 200 basis points $ 473,622 6.2%
Interest rates down 100 basis points 287,619 3.7
No change in interest rates 101,303 1.3
Interest rates up 100 basis points 9,533 0.1
Interest rates up 200 basis points (80,102) (1.0)
</TABLE>
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of other variables, including: the growth,
composition and absolute levels of loans, deposits, and other earning assets and
interest-bearing liabilities; economic and competitive conditions; potential
changes in lending, investing and deposit gathering strategies; client
preferences; and other factors.
Provisions to the allowance for loan losses during the first quarter of 1999
were $455,000, a significant reduction from the $998,800 expensed during the
same time period in 1998. The reduction reflects the lower level of loan growth
during the first three months of 1999 when compared to the first three months of
1998. The allowance for loan losses as a percentage of total loans outstanding
as of March 31, 1999 was 1.5%, which also represents the level that has been
maintained since inception of the Bank. The allowance for loan losses is
maintained at a level management feels is adequate to absorb losses inherent in
the loan portfolio. The evaluation is based upon a continuous review of the
Corporation's and banking industry's historical loan loss experience, known and
inherent risks contained in the loan portfolio, composition and growth of the
loan portfolio, current and projected economic conditions and other factors.
Reflecting its focus on credit quality, the Corporation has not experienced any
loan charge-offs since its inception.
Noninterest income during the first quarter of 1999 was $209,723, a significant
increase over the $14,440 earned during the same time period in 1998. Fees
earned on referring residential mortgage loan applicants to various third
parties and commitment fees charged on issued standby letters of credit,
combined with an increase in fee income earned on deposit and repurchase
agreements resulting from an increase in deposit and repurchase accounts,
comprise a majority of the increase.
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 18
Noninterest expense during the first quarter of 1999 was $1,262,600, a
significant increase over the $756,981 expensed during the same time period in
1998. An increase in all major overhead cost categories, including salaries and
benefits, occupancy, and furniture and equipment, was recorded. The increases
primarily result from the hiring of additional staff, as the number of full time
equivalent employees has doubled between the time periods. All other noninterest
costs have also increased, reflecting the additional expenses required to
administer the significantly increased loan and deposit base.
While the dollar volume of noninterest costs has increased, as a percent of
average assets the level has substantially declined (2.1% first quarter 1999
annualized versus 5.1% first quarter 1998 annualized) as the Corporation has
grown and operating efficiencies have been realized. Monitoring and controlling
noninterest costs, while at the same time providing high quality service to
customers, is of utmost importance to the Corporation. The efficiency ratio,
computed by dividing noninterest expenses by net interest income plus
noninterest income, was 59% during the first quarter of 1999. This compares very
favorably to the efficiency ratio of 123% during the first quarter of 1998. This
improved performance is primarily due to the rapid asset growth that has
translated into increased net interest income, as well as the Corporation's
lending philosophy of concentrating on commercial lending that results in higher
average loan balances compared to residential mortgage and consumer loans which
provides for a greater dollar volume of loans with fewer people.
Federal income tax expense of $28,000 was recorded during the first quarter of
1999, compared to $0 in the first quarter of 1998. No expense was recorded in
1998 due to the Corporation's operating loss; however, federal income tax
expense is being recorded in 1999 as it is expected that a portion of the
Corporation's 1999 net operating income will be subject to federal income tax.
- --------------------------------------------------------------------------------
18.
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Corporation and Bank may be involved in various legal
proceedings that are incidental to their business. In the opinion of management,
neither the Corporation or Bank is a party to any current legal proceedings that
are material to the financial condition of the Corporation or the Bank, either
individually or in the aggregate.
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.
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
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Corporation during the quarter for
which this report is filed.
- --------------------------------------------------------------------------------
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 12, 1999.
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
Chief Financial Officer, Treasurer and
Compliance Officer
(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>
12/31/98
TO
ANNUALIZED 3/31/99
---------- --------
<S> <C> <C>
Return on average total assets 0.58% 0.15%
Return on average equity 5.24% 1.31%
Dividend Payout Ratio NA NA
Average Equity to Average Assets 11.10%
STATEMENT OF COMPUTER PER SHARE EARNINGS
Net income before cumulative effect of change
in accounting principle $393,901
Net income $351,691
Average Shares Outstanding 2,472,500
Basic and diluted net income per share before effect
of change in accounting principle $0.16
Basic and diluted net income per share $0.14
</TABLE>
- --------------------------------------------------------------------------------
22.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,196,756
<INT-BEARING-DEPOSITS> 520,956
<FED-FUNDS-SOLD> 10,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 27,256,775
<INVESTMENTS-MARKET> 27,256,775
<LOANS> 214,716,272
<ALLOWANCE> (3,220,100)
<TOTAL-ASSETS> 261,671,299
<DEPOSITS> 216,995,409
<SHORT-TERM> 16,995,409
<LIABILITIES-OTHER> 722,140
<LONG-TERM> 0
0
0
<COMMON> 28,181,798
<OTHER-SE> (1,223,392)
<TOTAL-LIABILITIES-AND-EQUITY> 261,671,299
<INTEREST-LOAN> 4,061,230
<INTEREST-INVEST> 378,822
<INTEREST-OTHER> 91,143
<INTEREST-TOTAL> 4,531,195
<INTEREST-DEPOSIT> 2,420,624
<INTEREST-EXPENSE> 2,601,417
<INTEREST-INCOME-NET> 1,929,778
<LOAN-LOSSES> 455,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,262,600
<INCOME-PRETAX> 421,901
<INCOME-PRE-EXTRAORDINARY> 421,901
<EXTRAORDINARY> 0
<CHANGES> 42,210
<NET-INCOME> 351,691
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
<YIELD-ACTUAL> 3.29
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (2,765,100)
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (3,220,100)
<ALLOWANCE-DOMESTIC> (3,220,100)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
