<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 September 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)
At September 30, 1999, there were 2,472,500 shares of Common Stock outstanding
Transitional Small Business Disclosure Format:
Yes No X
-------- --------
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MERCANTILE BANK CORPORATION
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART 1. Financial Information Page No.
--------------------- --------
<S> <C> <C>
Item I. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and December 31, 1998................................. 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1999 (Unaudited)
and September 30, 1998 (Unaudited)................................................... 4
Condensed Consolidated Statements of Comprehensive Income -
Three and Nine Months Ended September 30, 1999 (Unaudited)
and September 30, 1998 (Unaudited)................................................... 5
Condensed Consolidated Statements of Changes in Shareholders Equity -
September 30, 1999 (Unaudited) and December 31, 1998................................. 6
Condensed Consolidated Statements of Cash Flows - Three and
Nine Months Ended September 30, 1999 (Unaudited) and
September 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......................................................... 21
Item 3. Defaults upon Senior Securities............................................... 21
Item 4. Submission of Matters to a Vote of Security Stockholders...................... 22
Item 5. Other Information............................................................. 22
Item 6. Exhibits and Reports on Form 8-K.............................................. 22
Signatures............................................................................. 23
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,394,058 $ 5,940,713
Short-term investments 557,822 515,283
Federal funds sold 0 0
--------------- ----------------
Total cash and cash equivalents 9,951,880 6,455,996
Securities available for sale 33,814,248 24,160,247
Securities held to maturity 1,930,043 0
Federal Home Loan Bank stock 784,900 0
Total loans 280,562,881 184,744,602
Allowance for loan losses (4,227,000) (2,765,100)
---------------- ----------------
Total loans, net 276,335,881 181,979,502
Premises and equipment - net 3,498,398 1,857,805
Organizational costs - net 0 64,210
Accrued interest receivable 1,582,813 1,147,832
Other assets 3,083,377 571,265
--------------- ----------------
Total assets $ 330,981,540 $ 216,236,857
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 21,409,787 $ 14,319,290
Interest-bearing 243,358,394 157,678,729
--------------- ----------------
Total 264,768,181 171,998,019
Securities sold under agreements to repurchase 20,808,907 17,037,601
Other borrowed money 13,325 0
Accrued expenses and other liabilities 1,850,474 500,721
--------------- ----------------
Total liabilities 287,440,887 189,536,341
Guaranteed preferred beneficial interests in
the Corporation's subordinated debentures 16,000,000 0
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
September 30, 1999 and December 31, 1998 28,181,798 28,181,798
Retained earnings (deficit) (95,615) (1,513,118)
Net unrealized gain (loss) on securities available for sale (545,530) 31,836
---------------- ----------------
Total shareholders' equity 27,540,653 26,700,516
--------------- ----------------
Total liabilities and shareholders' equity $ 330,981,540 $ 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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 5,499,495 $ 2,711,559 $ 14,257,021 $ 5,712,169
Investment securities 512,152 285,197 1,323,849 541,560
Federal funds sold 93,588 66,791 255,080 183,582
Short term investments 6,143 6,195 19,067 16,109
--------------- -------------- -------------- ---------------
Total interest income 6,111,378 3,069,742 15,855,017 6,453,420
Interest expense
Deposits 3,240,960 1,549,474 8,437,644 3,295,670
Other 279,394 164,412 631,857 296,671
--------------- -------------- -------------- ---------------
Total interest expense 3,520,354 1,713,886 9,069,501 3,592,341
--------------- -------------- -------------- ---------------
NET INTEREST INCOME 2,591,024 1,355,856 6,785,516 2,861,079
Provision for loan losses 526,000 470,000 1,461,900 1,941,800
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,065,024 885,856 5,323,616 919,279
Noninterest income
Other income 273,630 176,040 689,188 263,303
--------------- -------------- -------------- ---------------
Total noninterest income 273,630 176,040 689,188 263,303
Noninterest expense
Salaries and benefits 884,825 504,351 2,320,194 1,322,618
Occupancy 111,560 78,098 293,840 217,023
Furniture and equipment 101,715 44,671 233,685 116,412
Other expense 512,214 318,576 1,405,372 846,530
--------------- -------------- -------------- ---------------
Total noninterest expenses 1,610,314 945,696 4,253,091 2,502,583
--------------- -------------- -------------- ---------------
INCOME (LOSS) BEFORE FEDERAL INCOME
TAX AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 728,340 116,200 1,759,713 (1,320,001)
Federal income tax expense 166,000 0 300,000 0
--------------- -------------- -------------- ---------------
Net income (loss) before cumulative
effect of change in accounting principle 562,340 116,200 1,459,713 (1,320,001)
Cumulative effect of change in accounting
principle (net of applicable income
taxes) 0 0 42,210 0
--------------- -------------- -------------- ---------------
NET INCOME (LOSS) $ 562,340 $ 116,200 $ 1,417,503 $ (1,320,001)
=============== ============== ============== ===============
Basic and diluted income (loss)
per share $ .23 $ .05 $ .57 $ (.77)
=============== ============== ============== ===============
Average shares outstanding 2,472,500 2,145,435 2,472,500 1,719,194
=============== ============== ============== ===============
</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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 562,340 $ 116,200 $ 1,417,503 $ (1,320,001)
Other comprehensive income (loss),
net of tax
Change in unrealized gains (losses)
on securities available for sale (82,126) 130,456 (577,366) 131,715
--------------- -------------- -------------- -------------
COMPREHENSIVE INCOME (LOSS) $ 480,214 $ 246,656 $ 840,137 $ (1,188,286)
============== ============== ============= ==============
- -------------------------------------------------------------------------------------------------------------------
</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, 1999 $ 13,880,972 $ (404,071) $ (3,631) $ 13,473,270
Common stock sale, June 30, 1999,
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
September 30, 1999 1,417,503 1,417,503
Change in net unrealized gain (loss)
on securities available for sale, net
of tax effect (577,366) (577,366)
---------------- --------------- ------------ -----------------
BALANCE, SEPTEMBER 30, 1999 $ 28,181,798 $ (95,615) $ (545,530) $ 27,540,653
================ ================ ============ ================
- -------------------------------------------------------------------------------------------------------------------
</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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 562,340 $ 116,200 $ 1,417,503 $ (1,320,001)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 131,347 71,816 331,475 184,472
Provision for loan losses 526,000 470,000 1,461,900 1,941,800
Net change in:
Accrued interest receivable (145,537) (246,522) (434,981) (914,761)
Other assets (1,275,564) 34,556 (2,162,294) (191,917)
Accrued expenses and other liabilities 666,185 140,657 1,349,753 156,221
------------ ------------- ------------- -------------
Net cash from operating activities 464,771 586,707 1,963,356 (144,186)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (33,838,095) (27,432,453) (95,818,279) (127,952,098)
Purchase of:
Securities available for sale (8,860,730) (10,048,616) (16,765,304) (23,577,469)
Securities held to maturity (1,496,905) 0 (1,930,132) 0
Federal Home Loan Bank stock 0 0 (784,900) 0
Premises and equipment (376,926) (57,698) (1,856,744) (570,965)
Proceeds from maturities and repayments of available for sale
securities 3,218,657 2,081,733 6,133,094 4,081,733
------------ ------------- ------------- -------------
Net cash used in investing activities (41,353,999) (35,457,034) (111,022,265) (148,018,799)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 18,956,932 19,351,539 92,770,162 126,354,461
Net proceeds from the sale of trust preferred securities 16,000,000 0 16,000,000 0
Net proceeds from the sale of common stock 0 14,300,826 0 14,300,826
Net increase in other borrowed money 0 0 13,325 0
Net increase in securities sold under agreements to repurchase 2,943,315 4,796,244 3,771,306 14,696,092
------------ ------------- ------------- -------------
Net cash from financing activities 37,900,247 38,448,609 112,554,793 155,351,379
------------ ------------- ------------- -------------
Net change in cash and cash equivalents (2,988,981) 3,578,282 3,495,884 7,188,394
Cash and cash equivalents at beginning of period 12,940,861 10,713,412 6,455,996 7,103,300
------------ ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,951,880 $ 14,291,694 $ 9,951,880 $ 14,291,694
============ ============= ============= =============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,245,579 $ 1,584,873 $ 8,493,954 $ 3,207,981
Federal income tax 430,000 0 1,160,773 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 nine months ended
September 30, 1999 include the consolidated results of operations of
Mercantile Bank Corporation ("Mercantile") and its wholly-owned
subsidiaries, Mercantile Bank of West Michigan ("Bank") and MBWM Capital
Trust I ("Capital Trust"). 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
Mercantile'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
September 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 Mercantile'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 nine months ended September 30, 1999:
<TABLE>
<S> <C>
Balance at January 1, 1999 $ 2,765,100
Provision for loan losses charged
to operating expense 1,461,900
--------------
Balance at September 30, 1999 $ 4,227,000
==============
</TABLE>
3. LOANS
Total loans at September 30, 1999 were $280.6 million compared to $184.7
million at December 31, 1998, an increase of $95.9 million or 51.9%. The
components of the outstanding balances and percentage increase in loans
from the end of 1998 to the end of the third quarter 1999 are as follows:
<TABLE>
<CAPTION>
Percent
September 30, 1999 December 31, 1998 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real Estate:
Construction and land
development $ 26,754 9.5% $ 13,656 7.4% 95.9%
Secured by 1-4 family
properties 20,093 7.2 10,656 5.8 88.6
Secured by multi-family
properties 2,376 0.9 2,521 1.4 (5.8)
Secured by nonfarm
nonresidential properties 151,581 54.0 100,742 54.5 50.5
Commercial 76,071 27.1 55,071 29.8 38.1
Consumer 3,688 1.3 2,099 1.1 75.7
----------- -------- ----------- ------- -----------
$ 280,563 100.0% $ 184,745 100.0% 51.9%
=========== ======== =========== ======= ===========
- ------------------------------------------------------------------------------------------------------------
</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>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Land and improvements $ 339,828 $ 315,020
Buildings and leasehold improvements 2,194,083 759,942
Construction in process 0 100,638
Furniture and equipment 1,367,628 869,195
-------------- ---------------
3,901,539 2,044,795
Less accumulated depreciation 403,141 186,990
-------------- ---------------
Premises and Equipment, net $ 3,498,398 $ 1,857,805
============== ===============
</TABLE>
Depreciation expense for the third quarter 1999 amounted to $92,667.
5. DEPOSITS
Total deposits at September 30, 1999 were $264.8 million compared to $172.0
million at December 31, 1998, an increase of $92.8 million or 54.0%. The
components of the outstanding balances at September 30, 1999 and December
31, 1998, and percentage increase in deposits from the end of 1998 to the
end of the third quarter 1999 are as follows:
<TABLE>
<CAPTION>
Percent
September 30, 1999 December 31, 1998 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
demand $ 21,410 8.1% $ 14,319 8.3% 50.0%
Interest-bearing
checking 8,145 3.1 7,766 4.5 4.9
Money market 4,247 1.6 3,822 2.2 11.1
Savings 35,920 13.6 28,797 16.8 24.7
Time, under
$100,000 4,728 1.8 3,306 1.9 43.0
Time, $100,000
and over 20,758 7.8 16,718 9.7 24.2
----------- -------- ----------- ------- -----------
95,208 36.0 74,728 43.4 27.4
Out-of-area time,
under $100,000 89,206 33.7 77,847 45.3 14.6
Out-of-area time,
$100,000 and over 80,354 30.3 19,423 11.3 313.7
----------- -------- ----------- ------- -----------
169,560 64.0 97,270 56.6 74.3
----------- -------- ----------- ------- -----------
Total Deposits $ 264,768 100.0% $ 171,998 100.0% 54.0%
=========== ========= =========== ======== ============
- -------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
6. 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 September 30, 1999 and December 31, 1998
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Commercial unused lines of credit $ 81,212,911 $ 61,600,909
Unused lines of credit secured by 1-4 family
residential properties 6,220,359 3,434,290
Credit card unused lines of credit 3,074,300 2,251,329
Other consumer unused lines of credit 2,869,916 1,534,497
Commitments to make loans 21,275,976 21,751,900
Standby letters of credit 27,575,046 19,271,848
-------------- ---------------
$ 142,228,508 $ 109,844,773
============== ===============
</TABLE>
7. REGULATORY MATTERS
Mercantile 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.
- --------------------------------------------------------------------------------
10
<PAGE> 11
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 less than 8 less than 4 less than 4
</TABLE>
Actual capital levels (dollars in thousands) and minimum required levels
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>
September 30, 1999
------------------
Total capital (to risk
weighted assets)
Consolidated $ 48,129 14.9% $ 25,858 8.0% $ 32,322 10.0%
Bank 46,205 14.3 25,780 8.0 32,224 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 37,448 11.6 12,936 4.0 19,404 6.0
Bank 42,174 13.1 12,898 4.0 19,346 6.0
Tier 1 capital (to
average assets)
Consolidated 37,448 11.9 12,624 4.0 15,779 5.0
Bank 42,174 13.4 12,622 4.0 15,778 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>
11
<PAGE> 12
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Mercantile and Bank were categorized as well capitalized at September 30,
1999 and December 31, 1998.
The capital levels as of September 30, 1999 include adjustment for the 1.6
million 9.60% Cumulative Preferred Securities issued by Capital Trust in
September 1999 (the "trust preferred securities"), subject to certain
limitations. Federal Reserve guidelines limit the amount of trust preferred
securities which can be included in Tier 1 capital of Mercantile to 25% of
total Tier 1 capital. As of September 30, 1999, approximately $9.4 million
of the $16.0 million of trust preferred securities were included as Tier 1
capital of Mercantile with the remaining $6.6 million included as Tier 2
capital, a component of risk-based capital. The trust preferred securities
will be used to support Mercantile's current capital position allowing for
future growth and increased common shareholder value.
8. CURRENT EVENTS
Capital Trust, a business trust subsidiary of Mercantile, sold 1.6 million
trust preferred securities at $10.00 per trust preferred security in a
September 1999 offering. The proceeds from the sale of the trust preferred
securities were used by Capital Trust to purchase an equivalent amount of
subordinated debentures of Mercantile. The trust preferred securities carry
a fixed rate of 9.60%, have a stated maturity of 30 years, and, in effect,
are guaranteed by Mercantile. The securities are redeemable at par after 5
years. Distributions on the Trust Preferred Securities are payable
quarterly on October 15, January 15, April 15 and July 15. The first
distribution was paid on October 15, 1999. Under certain circumstances,
distributions may be deferred for up to 20 calendar quarters. However,
during any such deferrals, interest accrues on any unpaid distributions at
the rate of 9.60% per annum.
9. YEAR 2000 ISSUE
The year 2000 issue confronting Mercantile 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.
Mercantile 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
Mercantile's information technology and non-information technology systems.
Mercantile's year 2000 plans are subject to modification and are revised
periodically as additional information is developed.
READINESS
Mercantile has completed the inventory, assessment and planning phases for
its mission-critical information technology and non-information technology
systems, which pose risks to Mercantile'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.
Mercantile recognizes that its ability to be year 2000 compliant is
somewhat dependent upon the year 2000 efforts of its vendors. In 1998 and
1999, Mercantile has requested year 2000 readiness
- --------------------------------------------------------------------------------
12
<PAGE> 13
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
information from its significant vendors. All mission-critical vendors
have represented that they are or will be year 2000 compliant.
Mercantile routinely monitors its non-mission critical vendors to
determine their level of year 2000 readiness as well.
Mercantile is also following regulatory requirements that require an
assessment of loan customers' year 2000 readiness. Letters and
questionnaires have been utilized to access 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 Mercantile's opinion, their
inability to become compliant will not have a material adverse effect on
Mercantile'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
Mercantile 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, Mercantile's
operations could be interrupted. Mercantile 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 Mercantile's year 2000 readiness plan. Mercantile'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.
COSTS
The total costs associated with Mercantile'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. Mercantile 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
- --------------------------------------------------------------------------------
13
<PAGE> 14
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
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 Mercantile Bank
Corporation ("Mercantile") and its wholly owned subsidiaries, the Mercantile
Bank of West Michigan ("Bank") and MBWM Capital Trust I ("Capital Trust"), at
September 30, 1999 to December 31, 1998 and the results of operations for the
three and nine months ended September 30, 1999 and September 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 Mercantile and the Bank.
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 forward-looking statements are intended to be covered by the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. 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. Mercantile 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; changes in the national and local economy; and other factors, including
risk factors, referred to from time to time in filings made by Mercantile with
the Securities and Exchange Commission. 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 nine months of 1999, the assets of Mercantile increased from
$216.2 million on December 31, 1998, to $331.0 million on September 30, 1999.
This represents a total increase in assets of $114.8 million, or 53.1%. The
asset growth was comprised primarily of a $94.3 million increase in net loans, a
$12.4 million increase in investment securities, and a $3.5 million increase in
cash and cash equivalents. The increase in assets was primarily funded by a
$92.8 million growth in deposits, the issuance of $16.0 million in trust
preferred securities, and an increase of $3.8 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 $84.8 million during the first nine months of
1999, and at September 30, 1999 comprised 92% of the total loan portfolio. The
significant concentration in commercial loans and the rapid growth of this
portion of business is in keeping with the stated strategy of focusing a
substantial amount of efforts on "wholesale" banking. Corporate and business
lending is an area of expertise for all of Mercantile's senior management team.
Commercial loans are also the assets most easily originated and managed by the
fewest number of staff, thus reducing overhead through necessitating fewer
full-time equivalents (FTE's)/$million in assets. It is also the commercial
sector of our business that generates the
- --------------------------------------------------------------------------------
15
<PAGE> 16
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
greatest amount of local deposits, and it is virtually the only source of
significant noninterest-bearing deposits.
Residential mortgage and consumer loans also increased by $9.4 million and $1.6
million, respectively, during the first nine months of 1999. 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 $92.8 million during the first nine months of 1999, totaling
$264.8 million at September 30, 1999. Local deposits increased $20.4 million,
while out-of-area deposits increased $72.2 million. Although the level of local
deposits has declined as a percent of total deposits from 43.4% as of December
31, 1998 to 36.0% at September 30, 1999 due to the higher level of growth in
out-of-area deposits, there have been dollar volume increases in all categories
of the local deposits.
Out-of-area deposits totaled $169.6 million, or 64.0% of total deposits, as of
September 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 Mercantile, 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 considerably 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 relatively high reliance
on out-of-area deposits will likely remain.
On September 17, 1999, Mercantile completed a $16.0 million offering of trust
preferred securities. The net proceeds of the trust preferred securities were
contributed to the capital of the Bank, and have been invested by the Bank in
short term investments and loans.
Securities sold under agreements to repurchase increased by $3.8 million during
the first nine months of 1999. As part of Mercantile'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 third quarter of 1999 was $562,340 ($0.23 per
share), which compares favorably to the net income of $116,200 ($.05 per share)
recorded during the third quarter of 1998. Net operating income for the first
nine months of 1999 was $1,417,503 ($0.57 per share), which also compares
favorably to the net loss of $1,320,001 ($0.77 per share) recorded during the
first nine months of 1998. The improvement during both time periods is primarily
the result of an increase in net interest income, improved noninterest income,
and greater employee efficiency. The year-to-date 1999 net operating income
includes a one-time $42,210 ($0.02 per share) charge reflecting a mandated
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 third quarter of 1999 was $6,111,378, a significant
increase over the $3,069,742 earned during the third quarter of 1998. Interest
income during the first nine months of 1999 was $15,855,017, a significant
increase over the $6,453,420 earned during the first nine months of 1998. The
growth in interest income during both time periods is primarily attributable to
an increase in earning assets. During the third quarter of 1999 earning assets
averaged $305.5 million, a level substantially higher than the average earning
assets of $148.3 million during the third quarter of 1998. During the first nine
months of 1999 earning assets averaged $268.7 million, a level substantially
higher than the average earning assets of $104.3 million during the same time
period in 1998. Partially offsetting the positive impact of the increase in
earning assets is the decline in yield on earning assets, caused primarily by a
decline in the general interest rate environment during the latter 9 months of
1998 and early part of 1999. During the third quarter of 1999 and 1998 earnings
assets had a weighted average rate of 7.93% and 8.28%, respectively. During the
first nine months of 1999 and 1998 earning assets had a weighted average rate of
7.89% and 8.27%, respectively.
Interest expense during the third quarter of 1999 was $3,520,354, a significant
increase over the $1,713,886 expensed during the third quarter of 1998. Interest
expense during the first nine months of 1999 was $9,069,501, a significant
increase over the $3,592,341 expensed during the first nine 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 third quarter
of 1999 interest-bearing liabilities averaged $267.4 million, a level
substantially higher than average interest-bearing funds of $121.9 million
during the third quarter of 1998. During the first nine months of 1999
interest-bearing liabilities averaged $232.5 million, a level substantially
higher than average interest-bearing funds of $84.9 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 third quarter of 1999 interest-bearing liabilities averaged 84.7% of average
assets, an increase from the 78.2% level of the third quarter of 1998. During
the first nine months of 1999 interest-bearing liabilities averaged 83.8% of
average assets, an increase from the 77.2% level during the same time period in
1998. The increase is primarily the result of the leveraging of shareholders'
equity. During the third quarter of 1999 shareholders' equity averaged 8.6% of
average assets, a decline from the 14.0% level during the third quarter of 1998.
During the first nine months of 1999 shareholders' equity averaged 9.8% of
average assets, a decline from the 14.2% level during the first nine months of
1998. Somewhat offsetting the increased level of interest-bearing liabilities is
the decline in the average rate paid on interest-bearing liabilities that was
caused by the aforementioned decline in the general interest rate environment.
During the third quarter of 1999 and 1998 interest-bearing liabilities had a
weighted average rate of 5.22% and 5.62%, respectively. During the first nine
months of 1999 and 1998 interest-bearing liabilities had a weighted average rate
of 5.21% and 5.66%, respectively. This decline, as mentioned previously, is due
in large part to the overall decline of market interest rates.
Net interest income during the third quarter of 1999 was $2,591,024, a
significant increase over the $1,355,856 earned during the third quarter of
1998. Net interest income during the first nine months of 1999 was $6,785,516, a
significant increase over the $2,861,079 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 the reduction of shareholders' equity.
- --------------------------------------------------------------------------------
17
<PAGE> 18
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to Mercantile'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.
<TABLE>
<CAPTION>
Quarter ended September 30, 1999
Average Average
Balance Interest Rate
------- -------- ----
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Loans $ 264,747 $ 5,499 8.24%
Investment securities 32,896 512 6.17
Federal funds sold 7,362 94 5.07
Short term investments 539 6 4.42
----------- ----------- --------
Total interest-earning assets 305,544 6,111 7.93
Allowance for loan losses (3,985)
Other assets 14,123
-----------
Total assets $ 315,682
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 243,952 $ 3,241 5.27%
Borrowed money 23,407 279 4.73
----------- ----------- --------
Total interest-bearing liabilities 267,359 3,520 5.22
Noninterest-bearing deposits 19,530
Other liabilities 1,497
Shareholders' equity 27,296
-----------
Total liability and shareholders' equity $ 315,682
===========
Net interest income $ 2,591
===========
Net interest rate spread 2.71%
========
Net interest margin on earning assets 3.36%
========
</TABLE>
Interest rate risk is the exposure of Mercantile's financial condition and
operating performance to adverse movements in interest rates. Mercantile 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, Mercantile 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 Mercantile's safety and soundness. The primary
measurement method utilized by Mercantile 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. The
assumptions used within the model are inherently uncertain and subject to
fluctuation and revision. Accordingly, actual results will differ from
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18
<PAGE> 19
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
the simulated results. However, management believes this methodology provides
sufficient information to manage the interest rate risk of Mercantile.
Mercantile conducted multiple simulations as of September 30, 1999, in which 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 Mercantile'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 $ 207,473 2.3%
Interest rates down 100 basis points (21,208) (0.2)
No change in interest rates (249,993) (2.7)
Interest rates up 100 basis points (362,054) (4.0)
Interest rates up 200 basis points (474,323) (5.2)
</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 third quarter of 1999
were $526,000, compared to the $470,000 expensed during the same time period in
1998. The increase reflects the higher level of loan growth during the third
quarter of 1999 when compared to the same quarter in 1998. Provisions to the
allowance for loan losses during the first nine months of 1999 were $1,461,900,
a notable decline from the $1,941,800 expensed during the same time period in
1998. The reduction reflects the lower level of loan growth during the first
nine months of 1999 when compared to the first nine months of 1998. The
allowance for loan losses as a percentage of total loans outstanding as of
September 30, 1999 was 1.50%, 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
Mercantile'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.
Noninterest income during the third quarter of 1999 was $273,630, a significant
increase over the $176,040 earned during the same time period in 1998.
Noninterest income during the first nine months of 1999 was $689,188, a
significant increase over the $263,303 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 third quarter of 1999 was $1,610,314, a
significant increase over the $945,696 expensed during the same time period in
1998. Noninterest expense during the first nine months of 1999 was $4,253,091, a
significant increase over the $2,502,583 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
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19
<PAGE> 20
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
administer the significantly increased loan and deposit base and the opening of
the Bank's combined branch and operations center.
While the dollar volume of noninterest costs have increased, as a percent of
average assets the level has substantially declined as a result of Mercantile's
growth and realized operating efficiencies. During the third quarter of 1999
noninterest costs were 2.0% of average assets on an annualized basis, a
significant decline from the 2.4% level during the same time period in 1998.
During the first nine months of 1999 noninterest costs were 2.1% of average
assets on an annualized basis, a significant decline from the 3.0% 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 Mercantile. The efficiency ratio, computed by dividing noninterest
expenses by net interest income plus noninterest income, was 56.2% and 56.9%
during the third quarter and first nine months of 1999, respectively. This
compares very favorably to the efficiency ratio of 61.7% and 80.1% during the
third quarter and first nine 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 Mercantile'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 $166,000 and $300,000 during the third quarter
and first nine months of 1999, respectively. No expense was recorded in 1998 due
to Mercantile's operating loss; however, federal income tax expense is being
recorded in 1999 as it is expected that a portion of Mercantile'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, Mercantile may be involved in various legal proceedings that
are incidental to their business. In the opinion of management, Mercantile is
not a party to any current legal proceedings that are material to the financial
condition of Mercantile, either individually or in the aggregate.
ITEM 2. CHANGES IN SECURITIES
On September 17, 1999, Capital Trust, a business trust subsidiary of Mercantile,
sold 1.6 million trust preferred securities in an underwritten public offering.
The registration statement relating to the offering included (a) the 1.6 million
trust preferred securities having an offering price of $10 per security, (b) an
equivalent amount of 9.60% junior subordinated debentures of Mercantile that
were purchased by Capital Trust with the proceeds of the trust preferred
securities and could later be distributed to the holders of the trust preferred
securities if Capital Trust were dissolved and distributed its assets, and (c) a
guarantee of Mercantile with respect to the trust preferred securities. The
co-registrants were Mercantile and Capital Trust. The registration statement was
declared effective by the SEC on September 13, 1999. The SEC registration
numbers for the registration statement were 333-84313 and 333-84313-01. It is
Mercantile's and Capital Trust's understanding that the offering terminated on
September 17, 1999 when the closing occurred for the trust preferred securities
and Capital Trust received the proceeds of the offering from the underwriters.
The expenses of the offering totaled approximately $1.0 million, including
$640,000 of underwriting commissions, none of which was paid to directors,
officers or owners of 10% or more of Mercantile or Capital Trust, or their
associates or affiliates. The managing underwriters for the offering were
Stifel, Nicolaus & Company Incorporated and Tucker Anthony Cleary Gull.
The $16.0 million of proceeds from the sale of the trust preferred securities
were used by Capital Trust to purchase $16.0 million of the debentures issued by
Mercantile. After paying the approximately $1.0 million of offering expenses,
Mercantile invested the remaining $15.0 million of the proceeds it received from
the sale of the debentures in the capital of the Bank. The Bank has invested the
capital contribution in short term investment securities and loans.
The documents governing these securities, including the Indenture under which
the debentures were issued, restrict Mercantile's right to pay a dividend on its
common stock under certain circumstances and give the holders of the trust
preferred securities preference on liquidation over the holders of Mercantile's
common stock. Specifically, Mercantile may not declare or pay a cash dividend on
its common stock if (a) an event of default has occurred as defined in the
Indenture, (b) Mercantile is in default under its guarantee of the trust
preferred securities, or (c) Mercantile has exercised its right under the
debentures and the trust preferred securities to extend the interest payment
period. In addition, if any of these conditions have occurred and until they are
cured, Mercantile is restricted from redeeming or purchasing any shares of its
common stock except under very limited circumstances. Mercantile's obligation
under the debentures purchased with the proceeds of trust preferred securities,
the guarantee, and related agreements is $16.0 million in principal amount, plus
certain expenses, and interest at the rate of 9.60% per annum, payable
quarterly, excepted to the extent that quarterly interest payments are deferred.
In connection with the transaction in which the trust preferred securities were
issued, Mercantile also issued $494,850 of additional debentures to Capital
Trust that were purchased with the proceeds of common stock securities issued by
Capital Trust to Mercantile. These additional debentures also bear interest at
the rate of 9.60% per annum. See Note 8 of the Notes to Condensed Consolidated
Financial Statements included in this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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21
<PAGE> 22
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:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
3.1 Articles of Incorporation are incorporated by reference to Exhibit 3.1 of Mercantile's
Registration Statement on Form SB-2 (Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 Bylaws of Mercantile are incorporated by reference to Exhibit 3.2 of the Mercantile's
Registration Statement on Form SB-2 (Commission File No. 333-33081) that became
effective on October 23, 1997
10.1 Subordinated Indenture dated as of September 17, 1999 between Mercantile and Wilmington
Trust Company, as Trustee, relating to 9.60% Junior Subordinated Debentures due 2029 is
incorporated by reference to Exhibit 4.1 of the Registration Statement of Mercantile
and MBWM Capital Trust I on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01)
that became effective on September 13, 1999
10.2 Amended and Restated Trust Agreement dated as of September 17, 1999 among Mercantile,
as depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company,
as Delaware Trustee, and the Administrative Trustees is incorporated by reference to
Exhibit 4.5 of the Registration Statement of Mercantile and MBWM Capital Trust I on
Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that became effective on
September 13, 1999
10.3 Preferred Securities Guarantee Agreement between Mercantile and Wilmington Trust
Company dated September 17, 1999 is incorporated by reference to Exhibit 4.7 of the
Registration Statement of Mercantile and MBWM Capital Trust I on Form SB-2 (Commission
File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999
10.4 Agreement as to Expenses and Liabilities dated as of September 17, 1999 between
Mercantile and MBWM Capital Trust I (included as Exhibit D to Exhibit 10.2)
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
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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 November 10, 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 Mercantile's
Registration Statement on Form SB-2 (Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 Bylaws of Mercantile are incorporated by reference to exhibit 3.2 of the Mercantile's
Registration Statement on Form SB-2 (Commission File No. 333-33081) that became
effective on October 23, 1997
10.1 Subordinated Indenture dated as of September 17, 1999 between Mercantile and Wilmington
Trust Company, as Trustee, relating to 9.60% Junior Subordinated Debentures due 2029 is
incorporated by reference to Exhibit 4.1 of the Registration Statement of Mercantile
and MBWM Capital Trust I on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01)
that became effective on September 13, 1999
10.2 Amended and Restated Trust Agreement dated as of September 17, 1999 among Mercantile,
as depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company,
as Delaware Trustee, and the Administrative Trustees is incorporated by reference to
Exhibit 4.5 of the Registration Statement of Mercantile and MBWM Capital Trust I on
Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that became effective on
September 13, 1999
10.3 Preferred Securities Guarantee Agreement between Mercantile and Wilmington Trust
Company dated September 17, 1999 is incorporated by reference to Exhibit 4.7 of the
Registration Statement of Mercantile and MBWM Capital Trust I on Form SB-2 (Commission
File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999
10.4 Agreement as to Expenses and Liabilities dated as of September 17, 1999 between Mercantile
and MBWM Capital Trust I (included as Exhibit D to Exhibit 10.2)
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
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24
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
12/31/98
TO
ANNUALIZED 9/30/99
---------- -------
<S> <C> <C>
Return on average total assets 0.68% 0.51%
Return on average equity 7.00% 5.23%
Dividend Payout Ratio NA NA
Average Equity to Average Assets 9.76%
STATEMENT OF COMPUTER PER SHARE EARNINGS
Net income before cumulative effect of change
In accounting principle 1,459,713
Net income 1,417,503
Average Shares Outstanding 2,472,500
Basic and diluted net income per share before effect of
change in accounting principle 0.59
Basic and diluted net income per share 0.57
</TABLE>
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,394,058
<INT-BEARING-DEPOSITS> 557,822
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,599,148
<INVESTMENTS-CARRYING> 1,930,043
<INVESTMENTS-MARKET> 1,893,663
<LOANS> 280,562,881
<ALLOWANCE> 4,227,000
<TOTAL-ASSETS> 330,981,540
<DEPOSITS> 264,768,181
<SHORT-TERM> 20,808,907
<LIABILITIES-OTHER> 1,850,474
<LONG-TERM> 16,013,325
0
0
<COMMON> 28,181,798
<OTHER-SE> (641,145)
<TOTAL-LIABILITIES-AND-EQUITY> 330,981,540
<INTEREST-LOAN> 14,257,021
<INTEREST-INVEST> 1,323,849
<INTEREST-OTHER> 274,147
<INTEREST-TOTAL> 15,855,017
<INTEREST-DEPOSIT> 8,437,644
<INTEREST-EXPENSE> 9,069,501
<INTEREST-INCOME-NET> 6,785,516
<LOAN-LOSSES> 1,461,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,253,091
<INCOME-PRETAX> 1,759,713
<INCOME-PRE-EXTRAORDINARY> 1,459,713
<EXTRAORDINARY> 0
<CHANGES> 42,210
<NET-INCOME> 1,417,503
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 3.36
<LOANS-NON> 100
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,765,100
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4,227,000
<ALLOWANCE-DOMESTIC> 4,227,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
