<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, 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. 000-26719
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, 1999, there were 2,472,500 shares of Common Stock outstanding
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE> 2
<TABLE>
<CAPTION>
PART 1. Financial Information Page No.
<S> <C>
Item I. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and December 31, 1998...................................... 3
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 1999(Unaudited)
and June 30 1998 (Unaudited)......................................................... 4
Condensed Consolidated Statements of Comprehensive Income -
Three and Six Months Ended June 30, 1999 (Unaudited)
and June 30, 1998 (Unaudited)........................................................ 5
Condensed Consolidated Statements of Changes in Shareholders Equity -
June 30, 1999 (Unaudited) and December 31, 1998...................................... 6
Condensed Consolidated Statements of Cash Flows - Three and
Six Months Ended June 30, 1999 (Unaudited) and 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.................................................. 15
PART II. Other Information
Item 1. Legal Proceedings............................................................. 21
Item 2. Changes in Securities and Use of Proceeds..................................... 21
Item 3. Defaults upon Senior Securities............................................... 21
Item 4. Submission of Matters to a Vote of Security Stockholders...................... 21
Item 5. Other Information............................................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................................. 22
Signatures............................................................................. 23
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,304,576 $ 5,940,713
Short-term investments 536,285 515,283
Federal funds sold 5,100,000 0
--------------- ----------------
Total cash and cash equivalents 12,940,861 6,455,996
Securities available for sale 28,387,567 24,160,247
Securities held to maturity 433,248 0
Federal Home Loan Bank stock 784,900 0
Total loans 246,724,786 184,744,602
Allowance for loan losses (3,701,000) (2,765,100)
---------------- ----------------
Total loans, net 243,023,786 181,979,502
Premises and equipment - net 3,214,138 1,857,805
Organizational costs - net 0 64,210
Accrued interest receivable 1,437,276 1,147,832
Other assets 1,713,118 571,265
--------------- ----------------
Total assets $ 291,934,894 $ 216,236,857
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 16,331,118 $ 14,319,290
Interest-bearing 229,480,131 157,678,729
--------------- ----------------
Total 245,811,249 171,998,019
Securities sold under agreements to repurchase 17,865,592 17,037,601
Other borrowed money 13,325 0
Accrued expenses and other liabilities 1,184,289 500,721
--------------- ----------------
Total liabilities 264,874,455 189,536,341
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 June 30, 1999 and December 31, 1998 28,181,798 28,181,798
Retained earnings (deficit) (657,955) (1,513,118)
Accumulated other comprehensive income (loss) (463,404) 31,836
--------------- ----------------
Total shareholders' equity 27,060,439 26,700,516
--------------- ----------------
Total liabilities and shareholders' equity $ 291,934,894 $ 216,236,857
=============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 4,696,296 $ 1,952,640 $ 8,757,526 $ 3,000,610
Investment securities 432,875 163,441 811,697 256,363
Federal funds sold 76,326 83,446 161,492 116,791
Short term investments 6,947 5,476 12,924 9,914
--------------- -------------- -------------- ---------------
Total interest income 5,212,444 2,204,973 9,743,639 3,383,678
Interest expense
Deposits 2,776,060 1,195,917 5,196,684 1,746,196
Other 171,670 103,597 352,463 132,259
--------------- -------------- -------------- ---------------
Total interest expense 2,947,730 1,299,514 5,549,147 1,878,455
--------------- -------------- -------------- ---------------
NET INTEREST INCOME 2,264,714 905,459 4,194,492 1,505,223
Provision for loan losses 480,900 473,000 935,900 1,471,800
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,783,814 432,459 3,258,592 33,423
Noninterest income
Other income 205,835 72,823 415,558 87,263
--------------- -------------- -------------- ---------------
Total noninterest income 205,835 72,823 415,558 87,263
Noninterest expense
Salaries and benefits 782,457 416,587 1,435,369 818,267
Occupancy 92,823 70,551 182,280 138,925
Furniture and equipment 69,547 32,565 131,970 71,741
Other expense 435,350 280,103 893,158 527,954
--------------- -------------- -------------- ---------------
Total noninterest expenses 1,380,177 799,906 2,642,777 1,556,887
--------------- -------------- -------------- ---------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX 609,472 (294,624) 1,031,373 (1,436,201)
Federal income tax expense 106,000 0 134,000 0
--------------- -------------- -------------- ---------------
Net income (loss) before cumulative
effect of change in accounting
principle 503,472 (294,624) 897,373 (1,436,201)
Cumulative effect of change in accounting
principle (net of applicable income
taxes) 0 0 42,210 0
--------------- -------------- -------------- ---------------
NET INCOME (LOSS) $ 503,472 $ (294,624) $ 855,163 $ (1,436,201)
=============== ============== ============== ===============
Basic and diluted income (loss)
per share $ 0.20 $ (.20) $ 0.35 $ (0.96)
=============== ============== ============== ===============
Average shares outstanding 2,472,500 1,495,000 2,472,500 1,495,000
=============== ============== ============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 503,472 $ (294,624) $ 855,163 $ (1,436,201)
Other comprehensive income (loss),
net of tax
Change in unrealized gains (losses)
on securities available for sale (401,439) (1,525) (495,240) 1,259
-------------- -------------- ------------- --------------
COMPREHENSIVE INCOME (LOSS) $ 102,033 $ (296,149) $ 359,923 $ (1,434,942)
============== ============== ============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS 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, June 30, 1998,
net of issuance expenses 14,300,826 14,300,826
Net 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
June 30, 1999 855,163 855,163
Change in net unrealized gain (loss)
on securities available for sale, net
of tax effect (495,240) (495,240)
---------------- --------------- ----------- ----------------
BALANCE, JUNE 30, 1999 $ 28,181,798 $ (657,955) $ (463,404) $ 27,060,439
================ =============== =========== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income (loss) $ 503,472 $ (294,624) $ 855,163 $ 1,436,201)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 98,895 68,299 200,128 111,105
Provision for loan losses 480,900 473,000 935,900 1,471,800
Net change in:
Accrued interest receivable (159,680) (239,284) (289,444) (668,239)
Other assets (560,384) (29,582) (886,730) (224,922)
Accrued expenses and other liabilities 462,149 39,335 683,568 15,564
------------- ------------- ------------- -------------
Net cash from operating activities 783,142 17,144 1,498,585 (730,863)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (32,008,514) (37,265,739) (61,980,184) (100,519,645)
Purchase of:
Federal Home Loan Bank stock (784,900) 0 (784,900) 0
Securities available for sale (2,965,657) (10,032,245) (7,904,574) (13,528,853)
Securities held to maturity (433,227) 0 (433,227) 0
Premises and equipment (1,101,317) (108,641) (1,479,818) (513,267)
Proceeds from maturities and repayments of
available for sale securities 1,234,209 2,000,000 2,914,437 2,000,000
------------- ------------- ------------- -------------
Net cash used in investing activities (36,059,406) (45,406,625) (68,883,366) (112,561,765)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 28,815,840 41,306,855 73,813,230 107,002,922
Net increase in other borrowed money 13,325 0 13,325 0
Net increase in securities sold under agreements
to repurchase 870,248 5,467,097 827,991 9,899,848
------------- ------------- ------------- -------------
Net cash from financing activities 29,699,413 46,773,952 74,654,546 116,902,770
------------- ------------- ------------- -------------
Net change in cash and cash equivalents (5,576,851) 1,384,471 6,484,865 3,610,112
Cash and cash equivalents at beginning of period 18,517,712 9,328,941 6,455,996 7,103,300
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,940,861 $ 10,713,412 $ 12,940,861 $ 10,713,412
============= ============= ============= =============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 2,759,448 $ 1,177,115 $ 5,248,375 $ 1,616,566
Federal income tax 496,000 0 730,773 0
</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 and six months ended June
30, 1999 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, 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 six months ended June 30, 1999:
<TABLE>
<S> <C>
Balance at January 1, 1999 $ 2,765,100
Provision for loan losses charged
to operating expense 935,900
--------------
Balance at June 30, 1999 $ 3,701,000
==============
</TABLE>
3. LOANS
Total loans at June 30, 1999 were $246.7 million compared to $184.7 million
at December 31, 1998, an increase of $62.0 million or 33.5%. The components
of the outstanding balances and percentage increase in loans from the end
of 1998 to the end of the second quarter 1999 are as follows:
<TABLE>
<CAPTION>
Percent
June 30, 1999 December 31, 1998 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Real Estate:
Construction and land
development $ 22,466 9.1% $ 13,656 7.4% 64.5%
Secured by 1-4 family
properties 15,577 6.3 10,656 5.8 46.2
Secured by multi-family
properties 2,548 1.0 2,521 1.4 1.1
Secured by nonfarm
nonresidential properties 139,199 56.4 100,742 54.5 38.2
Commercial 64,437 26.2 55,071 29.8 17.0
Consumer 2,498 1.0 2,099 1.1 19.0
----------- -------- ----------- ------- -----------
$ 246,725 100.0% $ 184,745 100.0% 100.0%
=========== ======== =========== ======= ===========
</TABLE>
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,
1999 1998
---- ----
<S> <C> <C>
Land and improvements $ 315,020 $ 315,020
Buildings and leasehold improvements 1,992,790 759,942
Construction in process 0 100,638
Furniture and equipment 1,216,803 869,195
-------------- ---------------
3,524,613 2,044,795
Less accumulated depreciation 310,475 186,990
-------------- ---------------
Premises and Equipment, net $ 3,214,138 $ 1,857,805
============== ===============
</TABLE>
Depreciation expense for the second quarter 1999 amounted to $63,883.
5. DEPOSITS
Total deposits at June 30, 1999 were $245.8 million compared to $172.0
million at December 31, 1998, an increase of $73.8 million or 42.9%. The
components of the outstanding balances and percentage increase in deposits
from the end of 1998 to the end of the second quarter 1999 are as follows:
<TABLE>
<CAPTION>
Percent
June 30, 1999 December 31, 1998 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
demand $ 16,331 6.6% $ 14,319 8.3% 14.1%
Interest-bearing
checking 9,415 3.8 7,766 4.5 21.2
Money market 4,814 2.0 3,822 2.2 26.0
Savings 41,798 17.0 28,797 16.8 45.1
Time, under
$100,000 4,048 1.6 3,306 1.9 22.4
Time, $100,000
and over 19,833 8.1 16,718 9.7 18.6
----------- -------- ----------- ------- -----------
96,239 39.1 74,728 43.4 28.8
Out-of-area time,
under $100,000 97,045 39.5 77,847 45.3 24.7
Out-of-area time,
$100,000 and over 52,527 21.4 19,423 11.3 170.4
----------- -------- ----------- ------- -----------
149,572 60.9 97,270 56.6 53.8
----------- -------- ----------- ------- -----------
Total Deposits $ 245,811 100.0% $ 171,998 100.0% 42.9%
=========== ======== =========== ======= ===========
</TABLE>
9
<PAGE> 10
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. BORROWED MONEY
Information relating to securities sold under agreements to repurchase
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Outstanding balance at end of period $ 17,865,592 $ 17,037,601
Average interest rate at end of period 4.12% 4.20%
Average balance during the period $ 17,230,642 $ 10,305,728
Average interest rate during the period 4.12% 4.72%
Maximum month end balance during the period $ 17,865,592 $ 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 second quarter
1999 matching 401(k) contribution charged to expense was $18,774. 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. 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.
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 June 30, 1999 and December 31, 1998 follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Commercial unused lines of credit $ 65,154,486 $ 61,600,909
Unused lines of credit secured by 1-4 family
residential properties 6,242,134 3,434,290
Credit card unused lines of credit 2,850,696 2,251,329
Other consumer unused lines of credit 3,517,546 1,534,497
Commitments to make loans 29,065,700 21,751,900
Standby letters of credit 24,876,358 19,271,848
-------------- ---------------
$ 131,706,920 $ 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.
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, 1999
Total capital (to risk
weighted assets)
Consolidated $ 31,138 10.8% $ 23,124 8.0% $ 28,905 10.0%
Bank 30,311 10.5 23,120 8.0 28,900 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 27,524 9.5 11,566 4.0 17,348 6.0
Bank 26,698 9.2 11,564 4.0 17,345 6.0
Tier 1 capital (to
average assets)
Consolidated 27,524 10.0 10,980 4.0 13,725 5.0
Bank 26,698 9.7 10,974 4.0 13,717 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 June 30, 1999
and year end 1998.
12
<PAGE> 13
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. YEAR 2000 ISSUE
YEAR 2000
The year 2000 issue confronting the Corporation and its suppliers,
customers, and competitors, centers on the inability of computer systems and
embedded technology to properly recognize dates near the end of and beyond the
year 1999.
The Corporation has established a year 2000 working group consisting of
senior officers and other key employees and has been actively implementing a
comprehensive plan throughout 1998 and 1999, as required by bank regulatory
guidelines, to address the potential impact of the year 2000 problem on the
Corporation's information technology and non-information technology systems. The
Corporation's year 2000 plans are subject to modification and are revised
periodically as additional information is developed.
READINESS
The Corporation has completed the inventory, assessment and planning phases
for its mission-critical information technology and non-information technology
systems, which pose risks to the Corporation's ability to process data for its
loans, deposits and general ledger impacting revenues and operating results.
Based on testing that has been completed, management believes that all
mission-critical systems are year 2000 compliant.
The Corporation recognizes that its ability to be year 2000 compliant is
somewhat dependent upon the year 2000 efforts of its vendors. In 1998 and 1999,
the Corporation has requested year 2000 readiness information from its
significant vendors. All mission-critical vendors have represented that they are
or will be year 2000 compliant. The Corporation is continuing to monitor its
non-mission critical vendors to determine their level of year 2000 readiness as
well.
The Corporation is also following bank regulatory requirements that require
an assessment of loan customers' year 2000 readiness. Letters and questionnaires
have been utilized to assess material loan customers' readiness based on the
size of their loan type. The number of existing customers that have not
responded to the letters and questionnaires is minimal. Follow-up letters or
phone calls are being made when necessary to obtain additional information from
these customers. Of those who have responded, all material customers represented
that they are year 2000 compliant or are working toward compliance. Of those
customers still working towards year 2000 compliance, in the Corporation's
opinion, their inability to become compliant will not have a material adverse
effect on the Corporation's business or operating results. The Bank requires
business customers applying for new loans to disclose the potential impact of
the year 2000 problem on their businesses.
WORST CASE SCENARIO AND CONTINGENCY PLANS
The Corporation has determined the most reasonably likely worst case
scenario is the possibility of the lack of power or communication services for a
period of time in excess of one day. If this scenario were to occur, the
Corporation's operations could be interrupted. The Corporation has developed
plans and procedures to address this scenario, ranging from producing complete
printed reports from the core banking systems prior to January 1, 2000, to
ensure that a hard copy of the data is available in the event of a failure, to
preparations for failures of voice and data communications through the use of
manual posting and courier services, use of generators, alternative customer
service locations or reduced lobby hours.
Contingency planning, including the type discussed above is an integral
part of the Corporation's year 2000 readiness plan. The Corporation's
contingency plans attempt to address alternative courses of action in the event
that mission-critical systems do not function properly with the date change.
Development of the contingency plans was recently completed. The year 2000
contingency plans have been tested and the effectiveness of contingent
procedures was validated by an independent accounting firm.
13
<PAGE> 14
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
COSTS
The total costs associated with the Corporation's year 2000 compliance are
estimated at less than $75,000. These costs principally relate to the added
personnel costs, the employment of external consultants, and the purchase of
software upgrades. The Corporation expects to pay these costs from operating
income.
Information technology staff and senior management have devoted significant
time and resources to year 2000 activities. While this has resulted in
allocating resources that would have otherwise been devoted to other information
technology projects, no projects have been delayed or postponed that would have
a material adverse impact on operations.
REGULATORY OVERSIGHT
Bank regulators have issued numerous statements and guidance on year 2000
compliance issues and the responsibilities of senior management and directors of
banks and bank holding companies. In addition, bank regulators have issued
safety and soundness guidelines to be followed by insured depository
institutions, such as the Bank, to ensure resolution of any year 2000 problems.
Periodic year 2000 reviews are performed by various bank regulatory agencies.
Most of the recent examinations have been performed by the FDIC and it is
expected that the FDIC will continue its frequent examinations throughout 1999.
The bank regulatory agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
examinations. Consequently, failure to address appropriately the year 2000 issue
could result in supervisory action, including the reduction of the Bank's
supervisory ratings, the denial of applications for examination, or the
imposition of civil money penalties.
14
<PAGE> 15
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The following discussion compares the financial condition of the Corporation and
its wholly owned subsidiary, the Bank, at June 30, 1999 to December 31, 1998 and
the results of operations for the three and six months ended June 30, 1999 and
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.
FINANCIAL CONDITION
During the first six months of 1999 the assets of the Corporation increased from
$216.2 million on December 31, 1998, to $291.9 million on June 30, 1999. This
represents a total increase in assets of $75.7 million, or 35.0%. The asset
growth was comprised primarily of a $61.0 million increase in net loans, a $6.5
million increase in cash and cash equivalents, and an increase of $5.4 million
in investment securities. The increase in assets was primarily funded by a $73.8
million growth in deposits and an increase of $0.8 million in securities sold
under agreements to repurchase. The growth in deposits was in both local
deposits and out-of-area CD's. While management expects continuing asset growth,
it is anticipated to be at a slower rate.
Commercial loans increased by $56.7 million during the first six months of 1999,
and at June 30, 1999 comprised 93% of the total loan portfolio. The significant
concentration in commercial loans and the rapid growth of this portion of
business is in keeping with the stated strategy of focusing a substantial amount
of efforts on "wholesale" banking. Corporate and business lending is an area of
expertise for all of the Corporation's senior management team. Commercial loans
are also the assets most easily originated and managed by the fewest number of
staff, thus reducing overhead through necessitating fewer full-time equivalents
(FTE's)/$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.
15
<PAGE> 16
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
Residential mortgage and consumer loans also increased by $4.9 million and $0.4
million, respectively, during the first six months of 1999. It was Mercantile's
belief that as the extremely rapid growth of the commercial loan portfolio
slowed the retail portion of the loan assets would increase as a percentage of
total loans; however, this outlook has changed. The commercial sector of the
lending efforts and resultant assets have been and continue to be our primary
strategy for growth and profitability, and it is expected that the current
composition of the loan portfolio will remain relatively stable.
Deposits increased $73.8 million during the first six months of 1999, totaling
$245.8 million at June 30, 1999. Local deposits increased $21.5 million, while
out-of-area deposits increased $52.3 million. Although the level of local
deposits has declined as a percent of total deposits from 43.4% as of December
31, 1998 to 39.1% at June 30, 1999 due to the higher level of growth in
out-of-area deposits, there have been significant dollar volume increases in all
categories of the local deposits.
Out-of-area deposits totaled $149.6 million, or 60.9% of total deposits, as of
June 30, 1999. Out-of-area deposits consist primarily of 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 obtained 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 commensurate level of funds. In addition, the overhead costs
associated with the out-of-area deposits are considerable less than the overhead
costs that would be incurred to administer a similar level of local deposits.
Although local deposits have and are expected to increase as new business,
governmental and consumer deposit relationships are established and as existing
customers increase their deposit accounts, the high reliance on out-of-area
deposits will likely remain.
Securities sold under agreements to repurchase increased by $0.8 million during
the first six months of 1999. 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.
RESULTS OF OPERATIONS
Net operating income for the second quarter of 1999 was $503,472 ($0.20 per
share), which compares favorably to the net loss of $294,624 ($0.20 per share)
recorded during the second quarter of 1998. Net operating income for the first
six months of 1999 was $855,163 ($0.35 per share), which also compares favorably
to the net loss of $1,436,201 ($0.96 per share) recorded during the first six
months of 1998. The improvement during both time periods 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. The year-to-date 1999
net operating income includes a one-time $42,210 ($0.02 per share) charge
reflecting an 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 AICPA 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.
16
<PAGE> 17
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
Interest income during the second quarter of 1999 was $5,212,444, a significant
increase over the $2,204,973 earned during the second quarter of 1998. Interest
income during the first six months of 1999 was $9,743,639, a significant
increase over the $3,383,678 earned during the first six months of 1998. The
growth in interest income during both time periods is primarily attributable to
an increase in earning assets. During the second quarter of 1999 earning assets
averaged $266.2 million, a level substantially higher than the average earning
assets of $107.5 million during the second quarter of 1998. During the first six
months of 1999 earning assets averaged $250.3 million, a level substantially
higher than the average earning assets of $82.4 million during the same time
period in 1998. Somewhat offsetting the positive impact of the increase in
earning assets is the decline in yield on earning assets. During the second
quarter of 1999 and 1998 earnings assets had a weighted average rate of 7.85%
and 8.23%, respectively. During the first six months of 1999 and 1998 earning
assets had a weighted average rate of 7.79% and 8.26% respectively. This decline
is primarily due to an overall decline of market interest rates, in part
evidenced by the 75 basis point drop in the Prime Rate during the last six
months of 1998.
Interest expense during the second quarter of 1999 was $2,947,730, a significant
increase over the $1,299,514 expensed during the second quarter of 1998.
Interest expense during the first six months of 1999 was $5,549,147, a
significant increase over the $1,878,455 expensed during the first six months of
1998. The growth in interest expense is primarily attributable to the growth in
assets, which necessitated an increase in funding liabilities. During the second
quarter of 1999 interest-bearing liabilities averaged $230.1 million, a level
substantilly higher than average interest-bearing funds of $92.3 million during
the second quarter of 1998. During the first six months of 1999 interest-bearing
liabilities averaged $215.1 million, a level substantially higher than average
interest-bearing funds of $66.4 million during the same time period in 1998.
Also adding to the increased level of interest expense is the increase of
interest -bearing liabilities as a percent of average assets. During the second
quarter of 1999 interest-bearing liabilities averaged 83.8% of average assets,
an increase from the 80.9% level of the second quarter of 1998. During the first
six months of 1999 interest-bearing liabilities averaged 83.3% of average
assets, a notable increase from the 76.3% level during the same time
period in 1998. The increase is primarily the result of the planned and expected
leveraging of shareholders' equity. During the second quarter of 1999
shareholders' equity averaged 9.9% of average assets, a decline from the 10.7%
level during the second quarter of 1998. During the first six months of 1999
shareholders' equity averaged 10.4% of average assets, a decline from the 14.4%
level during the first six months of 1998. Somewhat offsetting the increased
level of interest-bearing liabilities is the decline in the average rate paid on
interest-bearing liabilities. During the second quarter of 1999 and 1998
interest-bearing liabilities had a weighted average rate of of 5.14% and 5.65%,
respectively. During the first six months of 1999 and 1998 interest-bearing
liabilities had a weighted average rate of 5.17% and 5.76%, respectively. This
decline, as mentioned previously, is due in large part to the overall decline of
market interest rates during the last six months of 1998.
Net interest income during the second quarter of 1999 was $2,264,714, a
significant increase over the $905,459 earned during the second quarter of 1998.
Net interest income during the first six months of 1999 was $4,194,492, a
significant increase over the $1,505,223 earned during the same time period in
1998. As described above, the increase is primarily due to the substantial
growth experienced between the compared time periods. Additional factors
impacting net interest income included, but were not limited to, changes in
interest rates and a reduction of the capital level.
17
<PAGE> 18
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
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, 1999
Average Average
Balance Interest Rate
------- -------- ----
(in thousands)
<S> <C> <C> <C>
ASSETS
Loans $ 230,483 $ 4,696 8.17%
Investment securities 28,634 433 6.07
Federal funds sold 6,451 76 4.73
Short term investments 586 7 4.79
----------- ----------- --------
Total interest-earning assets 266,154 5,212 7.85
Allowance for loan losses (3,393)
Other assets 11,734
-----------
Total assets $ 274,495
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 213,432 $ 2,776 5.22%
Other borrowings 16,674 172 4.14
----------- ----------- --------
Total interest-bearing liabilities 230,106 2,948 5.14
Noninterest-bearing deposits 16,235
Other liabilities 1,026
Shareholders' equity 27,128
-----------
Total liability and shareholders' equity $ 274,495
===========
Net interest income $ 2,264
===========
Net interest rate spread 2.71%
========
Net interest margin on earning assets 3.41%
========
</TABLE>
18
<PAGE> 19
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
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 June 30, 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>
Dollar Change In Percent Change In
Interest Rate Scenario Net Interest Income Net Interest Income
---------------------- ------------------- -------------------
<S> <C> <C>
Interest rates down 200 basis points $ 670,911 8.3%
Interest rates down 100 basis points 388,640 4.8
No change in interest rates 106,422 1.3
Interest rates up 100 basis points (132,375) (1.6)
Interest rates up 200 basis points (372,083) (4.6)
</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.
19
<PAGE> 20
Provisions to the allowance for loan losses during the second quarter of 1999
were $480,900, a level similar to the $473,000 expensed during the same time
period in 1998. Provisions to the allowance for loan losses during the first six
months of 1999 were $935,900, a notable decline from the $1,471,800 expensed
during the same time period in 1998. The reduction reflects the lower level of
loan growth during the first six months of 1999 when compared to the first six
months of 1998. The allowance for loan losses as a percentage of total loans
outstanding as of June 30, 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 second
quarter of 1999 was $205,835, a significant increase over the $72,823 earned
during the same time period in 1998. Noninterest income during the first six
months of 1999 was $415,558, a significant increase over the $87,263 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.
Noninterest expense during the second quarter of 1999 was $1,380,177, a
significant increase over the $799,906 expensed during the same time period in
1998. Noninterest expense during the first six months of 1999 was $2,642,777, a
significant increase over the $1,556,887 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. All other noninterest
costs have also increased, reflecting additional expenses required to administer
the significantly increased loan and deposit base.
While the dollar volume of noninterest costs have increased, as a percent of
average assets the level has substantially declined as a result of Corporation's
growth and realized operating efficiencies. During the second quarter of 1999
noninterest costs were 2.01% of average assets on an annualized basis, a
significant decline from the 2.80% level during the same time period in 1998.
During the first six months of 1999 noninterest costs were 2.05% of average
assets on an annualized basis, a significant decline from the 3.58% level during
the same time period in 1998. 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 55.9%
and 57.3% during the second quarter and first six months of 1999, respectively.
This compares very favorably to the efficiency ratio of 81.8% and 97.8% during
the second quarter and first six months of 1998, respectively. 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 was $106,000 and $134,000 during the second quarter
and first six months of 1999, respectively. 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.
20
<PAGE> 21
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 of
the Bank, either individually or in the aggregate.
ITEM 2. CHANGES IN SECURITIES.
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 15, 1999, the Corporation's stockholders
voted to elect four directors, Betty S. Burton, Peter A. Cordes, David M. Hecht,
and Robert M. Wynalda, each for a three year term expiring at the Annual Meeting
of the stockholders of the Corporation in 2002. The results of the election were
as follows:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
Nominee For Withheld Abstained No Votes
------- --- -------- --------- --------
<S> <C> <C> <C> <C>
Betty S. Burton 2,261,224 6,410 --- ---
Peter A. Cordes 2,261,224 6,410 --- ---
David M. Hecht 2,261,224 6,410 --- ---
Robert M. Wynalda 2,261,224 6,410 --- ---
</TABLE>
The terms of office of the following directors (who were not up for election)
continued after the Annual Meeting: Edward J. Clark, C. John Gill, Gerald R.
Johnson, Jr., Susan K. Jones, Lawrence W. Larsen, Calvin D. Murdock, Michael H.
Price, Dale J, Visser, and Donald Williams, Sr.
ITEM 5. OTHER INFORMATION.
Not applicable.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
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
10.6 Mercantile Bank of West Michigan Deferred Compensation Plan for Members of the Board of
Directors is incorporated by reference to Exhibit 10.6 of the Corporation's Registration
Statement on Form SB-2 (Commission File No. 333-84313) filed with the Commission on
August 2, 1999
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
22
<PAGE> 23
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 2, 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)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. EXHIBIT DESCRIPTION
- ----------- -------------------
<S> <C>
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
10.6 Mercantile Bank of West Michigan Deferred Compensation Plan for Members of the Board of
Directors is incorporated by reference to Exhibit 10.6 of the Corporation's Registration
Statement on Form SB-2 (Commission File No. 333-84313 filed with the Commission on August 2, 1999.
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
24
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
12/31/98
TO
ANNUALIZED 6/30/99
---------- -------
<S> <C> <C>
Return on average total assets 0.66% 0.33%
Return on average equity 6.34% 3.17%
Dividend Payout Ratio NA NA
Average Equity to Average Assets 9.52%
STATEMENT OF COMPUTER PER SHARE EARNINGS
Net income before cumulative effect of change
in accounting principle 897,373
Net income 855,163
Average Shares Outstanding 2,472,500
Basic and diluted net income per share before effect of
change in accounting principle 0.36
Basic and diluted net income per share 0.35
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,304,576
<INT-BEARING-DEPOSITS> 536,285
<FED-FUNDS-SOLD> 5,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 29,605,715
<INVESTMENTS-MARKET> 29,593,986
<LOANS> 246,724,786
<ALLOWANCE> (3,701,000)
<TOTAL-ASSETS> 291,934,894
<DEPOSITS> 245,811,249
<SHORT-TERM> 17,865,592
<LIABILITIES-OTHER> 1,184,288
<LONG-TERM> 13,325
0
0
<COMMON> 28,181,798
<OTHER-SE> (1,121,359)
<TOTAL-LIABILITIES-AND-EQUITY> 291,934,894
<INTEREST-LOAN> 8,757,526
<INTEREST-INVEST> 811,697
<INTEREST-OTHER> 174,416
<INTEREST-TOTAL> 9,743,639
<INTEREST-DEPOSIT> 5,196,684
<INTEREST-EXPENSE> 5,549,147
<INTEREST-INCOME-NET> 4,194,492
<LOAN-LOSSES> 935,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,642,777
<INCOME-PRETAX> 1,031,373
<INCOME-PRE-EXTRAORDINARY> 897,373
<EXTRAORDINARY> 0
<CHANGES> 42,210
<NET-INCOME> 855,163
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 3.41
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (2,765,100)
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (3,701,000)
<ALLOWANCE-DOMESTIC> (3,701,000)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
