<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] 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 March 31, 2000, there were 2,472,500 shares of Common Stock outstanding
<PAGE> 2
MERCANTILE BANK CORPORATION
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART 1. Financial Information Page No.
---------
<S> <C> <C>
Item I. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2000 (Unaudited) and December 31, 1999..................................... 3
Condensed Consolidated Statement of Income -
Three Months Ended March 31, 2000 and March 31, 1999 (Unaudited)..................... 4
Condensed Consolidated Statement of Comprehensive Income -
Three Months Ended March 31, 2000 and March 31, 1999 (Unaudited)..................... 5
Condensed Consolidated Statement of Changes in Shareholders Equity -
March 31, 2000 (Unaudited) and December 31, 1999..................................... 6
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2000 and March 31, 1999 (Unaudited)..................... 7
Notes to Condensed Consolidated Financial Statements (Unaudited)....................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.......................................................................... 21
PART II. Other Information
Item 1. Legal Proceedings............................................................. 24
Item 2. Changes in Securities and Use of Proceeds..................................... 24
Item 3. Defaults upon Senior Securities............................................... 24
Item 4. Submission of Matters to a Vote of Security Holders........................... 24
Item 5. Other Information............................................................. 24
Item 6. Exhibits and Reports on Form 8-K.............................................. 24
Signatures............................................................................. 25
</TABLE>
<PAGE> 3
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Unaudited) Audited
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,607,433 $ 6,570,631
Short-term investments 57,171 579,725
Federal funds sold 2,000,000 6,500,000
--------------- ----------------
Total cash and cash equivalents 10,664,604 13,650,356
Securities available for sale 37,392,204 34,115,303
Securities held to maturity (fair value of $8,282,649 at
March 31, 2000 and $6,982,329 at December 31, 1999) 8,409,139 7,056,492
Federal Home Loan Bank stock 784,900 784,900
Total loans 347,955,620 308,006,476
Allowance for loan losses (5,187,888) (4,620,469)
---------------- -----------------
Total loans, net 342,767,732 303,386,007
Premises and equipment - net 3,429,632 3,461,187
Accrued interest receivable 2,235,478 1,842,874
Other assets 4,055,299 3,739,969
--------------- ----------------
Total assets $ 409,738,988 $ 368,037,088
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 21,991,918 $ 19,513,231
Interest-bearing 312,456,847 275,315,741
--------------- ----------------
Total 334,448,765 294,828,972
Securities sold under agreements to repurchase 27,170,687 26,607,289
Other borrowed money 13,991 13,755
Accrued expenses and other liabilities 3,720,002 2,619,203
--------------- ----------------
Total liabilities 365,353,445 324,069,219
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures 16,000,000 16,000,000
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares
authorized, none issued
Common stock, no par value: 9,000,000 shares,
authorized; 2,472,500 shares outstanding
at March 31, 2000 and December 31, 1999 28,181,798 28,181,798
Retained earnings 1,087,931 587,639
Accumulated other comprehensive income (884,186) (801,568)
---------------- -----------------
Total shareholders' equity 28,385,543 27,967,869
--------------- ----------------
Total liabilities and shareholders' equity $ 409,738,988 $ 368,037,088
=============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3.
<PAGE> 4
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Interest income
Loans, including fees $ 7,050,132 $ 4,061,230
Investment securities 686,889 378,822
Federal funds sold 124,488 85,166
Short term investments 2,672 5,977
-------------- ---------------
Total interest income 7,864,181 4,531,195
Interest expense
Deposits 4,412,279 2,420,624
Short term borrowings 261,874 180,793
Long term borrowings 392,614 0
-------------- ---------------
Total interest expense 5,066,767 2,601,417
-------------- ---------------
NET INTEREST INCOME 2,797,414 1,929,778
Provision for loan losses 585,000 455,000
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,212,414 1,474,778
Noninterest income
Service charges on accounts 75,226 40,700
Other income 148,132 169,023
-------------- ---------------
Total noninterest income 223,358 209,723
Noninterest expense
Salaries and benefits 938,424 652,912
Occupancy 126,080 89,457
Furniture and equipment 105,011 62,423
Data processing 99,496 66,433
Other expense 441,469 391,375
-------------- ---------------
Total noninterest expenses 1,710,480 1,262,600
-------------- ---------------
INCOME BEFORE FEDERAL INCOME TAX 725,292 421,901
Federal income tax expense 225,000 28,000
-------------- ---------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 500,292 393,901
Cumulative effect of change in accounting principle
(net of applicable income taxes) 0 42,210
-------------- ---------------
NET INCOME $ 500,292 $ 351,691
============== ===============
Basic and diluted income per share before
cumulative effect of change in accounting principle $ 0.20 $ 0.16
============== ==============
Basic and diluted income per share $ 0.20 $ 0.14
============== ==============
Average shares outstanding 2,472,500 2,472,500
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4.
<PAGE> 5
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
NET INCOME $ 500,292 $ 351,691
Other comprehensive income, net of tax
Change in unrealized gains (losses) on securities
available for sale (82,618) (93,801)
--------------- ---------------
COMPREHENSIVE INCOME $ 417,674 $ 257,890
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5.
<PAGE> 6
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
----- -------- ------ ------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 $ 28,181,798 $ (1,513,118) $ 31,836 $ 26,700,516
Net income 2,100,757 2,100,757
Change in net unrealized gain
(loss) on securities available
for sale, net of tax effect (833,404) (833,404)
---------------- --------------- ----------- ----------------
BALANCE, DECEMBER 31, 1999 28,181,798 587,639 (801,568) 27,967,869
Net income for the period from
January 1, 2000 through
March 31, 2000 500,292 500,292
Change in net unrealized gain
(loss) on securities available
for sale, net of tax effect (82,618) (82,618)
---------------- --------------- ----------- ----------------
BALANCE, MARCH 31, 2000 $ 28,181,798 $ 1,087,931 $ (884,186) $ 28,385,543
================ =============== =========== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6.
<PAGE> 7
MERCANTILE BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 500,292 $ 351,691
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 148,011 101,233
Provision for loan losses 585,000 455,000
Cumulative effect of change in accounting
principle, net of tax 0 42,210
Net change in:
Accrued interest receivable (392,604) (129,764)
Other assets (314,485) (326,346)
Accrued expenses and other liabilities 1,100,799 221,419
--------------- ----------------
Net cash from operating activities 1,627,013 715,443
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (39,966,725) (29,971,670)
Purchase of:
Securities available for sale (4,798,750) (4,938,917)
Securities held to maturity (1,353,880) 0
Premises and equipment (74,938) (378,501)
Proceeds from maturities and repayments of available
for sale securities 1,398,101 1,680,228
--------------- ----------------
Net cash used in investing activities (44,796,192) (33,608,860)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 39,619,793 44,997,390
Net increase in other borrowed money 236 0
Net increase (decrease) in securities sold under
agreements to repurchase 563,398 (42,257)
--------------- ----------------
Net cash from financing activities 40,183,427 44,955,133
--------------- ----------------
Net change in cash and cash equivalents (2,985,752) 12,061,716
Cash and cash equivalents at beginning of period 13,650,356 6,455,996
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,664,604 $ 18,517,712
=============== ================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 4,143,027 $ 2,479,996
Federal income tax 0 234,773
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7.
<PAGE> 8
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
The unaudited financial statements for the three months ended March 31,
2000 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-Q and Rule 10-01 of Regulation S-X 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 March 31, 2000 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, 1999.
2. LOANS
Total loans at March 31, 2000 were $348.0 million compared to $308.0
million at December 31, 1999, an increase of $40.0 million or 13.0%. The
components of the outstanding balances and percentage increase in loans
from the end of 1999 to the end of the first quarter 2000 are as follows:
<TABLE>
<CAPTION>
Percent
March 31, 2000 December 31, 1999 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real Estate:
Construction and
land development $ 35,081 10.1 $ 37,225 12.1% (5.8)%
Secured by 1 - 4
family properties 28,237 8.1 22,535 7.3 25.3
Secured by multi-
family properties 2,277 0.7 2,327 0.8 (2.1)
Secured by nonfarm
nonresidential
properties 172,497 49.6 157,686 51.2 9.4
Commercial 105,369 30.3 83,909 27.2 25.6
Consumer 4,495 1.2 4,324 1.4 4.0
----------- -------- ----------- ------- -------
$ 347,956 100.0% $ 308,006 100.0% 13.0%
=========== ======== =========== ======= =======
</TABLE>
(Continued)
8.
<PAGE> 9
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
3. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses
account for the three months ended March 31, 2000:
<TABLE>
<S> <C>
Balance at January 1, 2000 $ 4,620,469
Charge-Offs 21,781
Recoveries 4,200
Provision charged to operating expense 585,000
--------------
Balance at March 31, 2000 $ 5,187,888
==============
Balance at January 1, 1999 2,765,100
Charge-Offs 0
Recoveries 0
Provision charged to operating expense 455,000
--------------
Balance at March 31, 1999 $ 3,220,100
==============
</TABLE>
4. PREMISES AND EQUIPMENT - NET
Premises and equipment are comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Land and improvements $ 443,408 $ 443,408
Buildings and leasehold improvements 2,133,502 2,111,049
Furniture and equipment 1,469,571 1,417,086
-------------- ---------------
4,046,481 3,971,543
Less accumulated depreciation 616,849 510,356
-------------- ---------------
Premises and Equipment, net $ 3,429,632 $ 3,461,187
============== ===============
</TABLE>
Depreciation expense for the first quarter 2000 amounted to $106,493.
5. DEPOSITS
Total deposits at March 31, 2000 were $334.4 million compared to $294.8
million at December 31, 1999, an increase of $39.6 million or 13.4%. The
components of the outstanding balances and percentage increase in deposits
from the end of 1999 to the end of the first quarter 2000 are as follows:
(Continued)
9.
<PAGE> 10
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent
March 31, 2000 December 31, 1999 Increase/
Balance % Balance % (Decrease)
------- - ------- - --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
demand $ 21,992 6.6% $ 19,513 6.6% 12.7%
Interest-bearing
checking 10,531 3.1 11,041 3.7 (4.6)
Money market 5,223 1.6 5,605 1.9 (6.8)
Savings 35,157 10.5 39,737 13.5 (11.5)
Time, under $100,000 4,983 1.5 4,873 1.7 2.2
Time, $100,000 and
over 27,351 8.2 22,573 7.7 21.1
----------- -------- ----------- ------- -------
105,237 31.5 103,342 35.1 1.8
Out-of-area time,
under $100,000 67,468 20.2 71,997 24.4 (6.3)
Out-of-area time,
$100,000 and over 161,744 48.3 119,490 40.5 35.4
----------- -------- ----------- ------- -------
229,212 68.5 191,487 64.9 19.7
----------- -------- ----------- ------- -------
Total deposits $ 334,449 100.0% $ 294,829 100.0% 13.4%
=========== ======== =========== ======= =======
</TABLE>
6. BORROWINGS
Information relating to securities sold under agreements to repurchase
follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Outstanding balance at end of period $ 27,170,687 $ 26,607,289
Average interest rate at end of period 4.38% 4.22%
Average balance during the period $ 24,800,535 $ 20,229,314
Average interest rate during the period 4.22% 4.13%
Maximum month end balance during the period $ 27,170,687 $ 26,607,289
</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.
(Continued) 10.
<PAGE> 11
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
7. 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 March 31, 2000 and December 31, 1999
follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Commercial unused lines of credit $ 88,070,422 $ 87,488,616
Unused lines of credit secured by 1 - 4 family
residential properties 6,860,841 6,112,897
Credit card unused lines of credit 3,868,175 3,419,628
Other consumer unused lines of credit 3,855,933 3,126,906
Commitments to make loans 19,168,600 26,395,600
Standby letters of credit 31,921,095 28,963,217
--------------- ----------------
$ 153,745,066 $ 155,506,864
=============== ================
</TABLE>
8. REGULATORY MATTERS
Mercantile and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications
in certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration are required.
The minimum requirements are:
(Continued) 11.
<PAGE> 12
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
<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
Mercantile and the Bank were:
<TABLE>
<CAPTION>
Minimum Required
to be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
March 31, 2000
Total capital (to risk
weighted assets)
Consolidated $ 50,308 12.5% $ 32,240 8.0% $ 40,300 10.0%
Bank 48,368 12.1 32,111 8.0 40,139 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 39,025 9.7 16,126 4.0 24,189 6.0
Bank 43,349 10.8 16,063 4.0 24,094 6.0
Tier 1 capital (to
average assets)
Consolidated 39,025 9.9 15,823 4.0 19,779 5.0
Bank 43,349 11.0 15,761 4.0 19,701 5.0
December 31, 1999
Total capital (to risk
weighted assets)
Consolidated $ 49,275 13.7% $ 28,830 8.0% $ 36,038 10.0%
Bank 47,402 13.2 28,714 8.0 35,893 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 38,359 10.6 14,420 4.0 21,630 6.0
Bank 42,914 12.0 14,363 4.0 21,544 6.0
Tier 1 capital (to
average assets)
Consolidated 38,359 10.9 14,097 4.0 17,621 5.0
Bank 42,914 12.2 14,042 4.0 17,554 5.0
</TABLE>
Mercantile and the Bank were categorized as well capitalized at March 31,
2000 and year end 1999.
(Continued) 12.
<PAGE> 13
MERCANTILE BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
Capital Trust, a business trust subsidiary of Mercantile, sold 1.6 million
Cumulative Preferred Securities ("trust preferred securities") at $10.00
per trust preferred security in a September 1999 offering. The proceeds
from the sale were used by Capital Trust to purchase an equivalent amount
of subordinated debentures from 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 January 15, April 15, July 15, and October 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.
The capital levels of Mercantile as of March 31, 2000 include an adjustment
for the 1.6 million trust preferred securities issued by Capital Trust
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 March 31, 2000,
approximately $9.7 million of the $16.0 million of the trust preferred
securities were included as Tier 1 capital with the remaining $6.3 million
included as Tier 2 capital, a component of risk-based capital.
13.
<PAGE> 14
MERCANTILE BANK CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion compares the financial condition of Mercantile Bank
Corporation ("Mercantile") and its wholly owned subsidiaries, Mercantile Bank of
West Michigan ("Bank") and MBWM Capital Trust I ("Capital Trust"), at March 31,
2000 to December 31, 1999 and the results of operations for the three months
ended March 31, 2000 and March 31, 1999. Capital Trust was formed in September
1999 for the sole purpose of issuing capital securities. This discussion should
be read in conjunction with the interim consolidated condensed financial
statements and footnotes included herein.
Mercantile's election to become a financial holding company pursuant to Title I
of the Gramm-Leach-Bliley Act and implementing Federal Reserve Board regulations
was effective March 23, 2000. At the present time Mercantile has no plans to
engage in any of the expanded activities permitted under the new regulations.
FORWARD LOOKING STATEMENTS
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. 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. 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; 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 quarter of 2000, the assets of Mercantile increased from $368.0
million on December 31, 1999, to $409.7 million on March 31, 2000. This
represents a total increase in assets of $41.7 million, or 11.3%. The asset
growth was comprised primarily of a $39.4 million increase in net loans and an
increase of $4.6 million in investment securities. The increase in assets was
primarily funded by a $39.6 million growth in deposits and a $3.0 million
decrease in cash and cash equivalents. In addition, securities sold under
agreements to repurchase ("repurchase agreements") increased $0.6 million and
shareholders' equity grew by $0.4 million. The growth in deposits was in both
local deposits and out-of-area CD's. While management expects continued growth,
it is anticipated to be at a slower rate.
14.
<PAGE> 15
MERCANTILE BANK CORPORATION
Commercial loans increased by $37.1 million during the first quarter of 2000,
and at quarter-end comprised 91.6% of the total loan portfolio. The significant
concentration in commercial loans and the rapid growth of this portion of
business is in keeping with the stated strategy of focusing a substantial amount
of efforts on "wholesale" banking. Corporate and business lending is an area of
expertise for all of Mercantile's senior management team. Commercial loans are
also the assets most easily originated and managed by the fewest number of
staff, thus reducing overhead through necessitating fewer full-time equivalents
(FTE's)/$million in assets. It is also the commercial sector of our business
that generates the greatest amount of local deposits, and it is virtually the
only source of significant demand deposits. Residential mortgage and consumer
loans also increased by $1.1 million and $1.8 million, respectively. As the
extremely rapid growth of our commercial loan portfolio gradually slows, the
retail portion of our loan assets should increase as a percentage of total
loans. However, our strategy for growth and profitability will result in the
commercial sector of the lending efforts and resultant assets continuing to be
the dominant portfolio category.
The quality of Mercantile's loan portfolio remains very strong. Net loan
charge-offs during the first quarter of 2000 totaled $17,581, or only 0.005% of
total loans. Past due loans at March 31, 2000 totaled $124,731, or only 0.04% of
total loans. Management believes it has instilled a very strong credit culture
within the lending departments as it pertains to the underwriting and
administration processes, which in part is reflected in the loan charge-off and
delinquency ratios. A vast majority of loans are extended directly to companies
and individuals doing business and residing within the Grand Rapids metropolitan
area, although subject to the same underwriting criteria, Mercantile
participates in commercial lending transactions with certain non-affiliated
commercial banks outside the immediate area.
Deposits increased $39.6 million during the first quarter of 2000, totaling
$334.4 million at March 31, 2000. On a net basis local deposits increased $1.9
million, while out-of-area deposits increased $37.7 million. Noninterest-bearing
demand deposits, comprising 6.6% of total deposits, increased $2.5 million
during the first quarter of 2000, while interest-bearing checking accounts (3.1%
of total deposits) decreased by $0.5 million and money market deposit accounts
(1.6% of total deposits) decreased by $0.4 million. Savings deposits, comprising
10.5% of total deposits, decreased by $6.6 million during the first quarter of
2000. The decline in savings deposits is believed to be seasonal in nature due
to business customers paying bonuses to business owners, federal income tax
payments, and other business purposes.
Out-of-area deposits totaled $229.2 million, or 68.5% of total deposits, as of
March 31, 2000. Out-of-area deposits consist of certificates of deposit
generally 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 sufficient 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.
Repurchase agreements increased by $0.6 million during the first quarter of
2000. 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.
15.
<PAGE> 16
MERCANTILE BANK CORPORATION
LIQUIDITY
Liquidity is measured by Mercantile's ability to raise funds through deposits,
borrowed funds, capital or cash flow from the repayment of loans and investment
securities. These funds are used to meet deposit withdrawals, maintain reserve
requirements, fund loans and operate Mercantile. Liquidity is primarily achieved
through the growth of deposits (both local and out-of-area) and liquid assets
such as securities available for sale, matured securities, and federal funds
sold. Asset and liability management is the process of managing the balance
sheet to achieve a mix of earning assets and liabilities that maximizes
profitability, while providing adequate liquidity.
Mercantile's liquidity strategy is to fund loan growth with deposits and
repurchase agreements and to maintain an adequate level of short- and
medium-term investments to meet typical daily loan and deposit activity.
Although deposit and repurchase agreement growth from depositors located in the
market area have consistently increased, the growth has not been sufficient to
meet the substantial loan growth and provide monies for additional investing
activities. To assist in providing the additional needed funds Mercantile has
regularly obtained certificates of deposit from customers outside of the market
area and placed by deposit brokers for a fee, but also included certificates of
deposit obtained from the deposit owners directly. As of March 31, 2000,
out-of-area deposits totaled approximately $229.2 million, or 63.4% of combined
deposits and repurchase agreements, an increase from the $191.5 million, or
59.6% of combined deposits and repurchase agreements, as of December 31, 1999.
Reliance on out-of-area deposits is expected to be ongoing due to the planned
future growth.
Mercantile has the ability to borrow money on a daily basis through
correspondent banks via established federal funds purchased lines; however, this
is viewed as only a secondary and temporary source of funds. The federal funds
purchased lines were utilized on several occasions during the first three months
of 2000, but the balance averaged only $44,000, or 0.01% of average assets,
during the quarter. During 2000, Mercantile's federal funds sold position
averaged $8.8 million. In addition, the Bank joined the Federal Home Loan Bank
of Indianapolis (FHLBI) during 1999, providing access to the FHLBI's borrowing
programs. Based on ownership of FHLBI stock and available collateral at March
31, 2000, the Bank could borrow up to about $10.0 million. The Bank has yet to
use its established borrowing line at the FHLBI.
In addition to normal loan funding and deposit flow, Mercantile also needs to
maintain liquidity to meet the demands of certain unfunded loan commitments and
standby letters of credit. As of March 31, 2000, Mercantile had a total of
$121.8 million in unfunded loan commitments and $31.9 million in unfunded
standby letters of credit. Of the total unfunded loan commitments, $102.7
million were commitments available as lines of credit to be drawn at any time as
customers' cash needs vary, and $19.2 million were for loan commitments
scheduled to close and become funded within the next three months. Mercantile
monitors fluctuations in loan balances and commitment levels, and includes such
data in its overall liquidity management.
CAPITAL RESOURCES
Shareholders' equity is a noninterest-bearing source of funds that provides
support for asset growth. Shareholders' equity was $28.4 million and $28.0
million at March 31, 2000 and December 31, 1999, respectively. The increase
during the first quarter of 2000 is primarily attributable to net income from
operations, which totaled $0.5 million. Shareholders' equity was negatively
impacted during the quarter by a $82,618 mark-to-market adjustment for available
for sale securities as defined in SFAS No. 115. The adjustment is due solely to
the increase in the interest rate environment in 2000.
16.
<PAGE> 17
MERCANTILE BANK CORPORATION
In September 1999 Mercantile, through its wholly-owned business trust subsidiary
Capital Trust, issued 1.6 million shares of trust preferred stock at $10.00 per
share. Substantially all of the net proceeds were ultimately contributed to the
Bank and were used to support anticipated growth in assets, fund investments in
loans and securities, and for general corporate purposes. Although not part of
shareholder's equity, subject to certain limitations the trust preferred
securities are considered a component of capital for purposes of calculating
regulatory capital ratios. At March 31, 2000, $9.7 million of the $16.0 million
was considered Tier 1 capital, with the remaining amount included as Tier 2
capital. The amount includable as Tier 1 capital is expected to gradually
increase in future periods as shareholders' equity increases from anticipated
net income from operations.
Mercantile and the Bank are subject to regulatory capital requirements
administered by the State of Michigan and federal banking agencies. Failure to
meet the various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements. Since the Bank began
operations, both Mercantile and the Bank have been categorized as "Well
Capitalized," the highest classification contained within the banking
regulations. The capital ratios of Mercantile and the Bank as of March 31, 2000
and December 31, 1999 are disclosed under Note 9 of the Notes to Consolidated
Financial Statements.
The ability of Mercantile and the Bank to pay cash and stock dividends is
subject to limitations under various laws and regulations and to prudent and
sound banking practices. No cash or stock dividends have been paid by Mercantile
since inception.
RESULTS OF OPERATIONS
Net operating income for the first quarter of 2000 was $500,292 ($0.20 per basic
and diluted share), which compares favorably to net income of $351,691 ($0.14
per basic and diluted share) recorded during the first quarter of 1999. The
results of operations for the first quarter of 1999 includes a one-time $42,210
($0.02 per share) after-tax charge reflecting a mandated AICPA accounting charge
for organization costs. These costs were being amortized over the then-standard
five-year period; however, effective January 1, 1999, the remaining balance was
expensed. The improvement in net income during the first quarter of 2000 over
the prior year comparable quarter was primarily the result of an increase in net
interest income and greater employee efficiency, which more than offset
increased provisions to the loan loss reserve and significantly higher federal
income tax expense.
Interest income during the first quarter of 2000 was $7,864,181, a substantial
increase of 73.6% over the $4,531,195 earned during the first quarter of 1999.
The growth in interest income is primarily attributable to an increase in
earning assets. During the first three months of 2000 earning assets averaged
$383.6 million, a level significantly higher than the average earning assets of
$234.4 million during the same time period in 1999. Increase in total loans and
investment securities accounted for 87.3% and 11.9% of the growth in average
earning assets, respectively. Also adding to the growth in interest income is
the increase in yield on earning assets. During the first three months of 2000
and 1999 earning assets had a weighted average rate of 8.38% and 7.82%,
respectively. This improvement is primarily due to an overall increase of market
interest rates between the two time periods, in part evidenced by the 125 basis
point rise in the Prime Rate.
17.
<PAGE> 18
MERCANTILE BANK CORPORATION
Interest expense during the first quarter of 2000 was $5,066,767, a significant
increase over the $2,601,417 expensed during the first quarter of 1999. The
growth in interest expense is primarily attributable to the growth in assets,
which necessitated an increase in funding liabilities. During the first three
months of 2000 interest-bearing liabilities averaged $343.3 million, a level
substantially higher than average interest-bearing funds of $200.0 million
during the same time period in 1999. Also adding to the level of interest
expense when comparing the two time periods was the September 1999 issuance of
trust preferred securities, an increased reliance on out-of-area deposits and an
increasing interest rate environment. The trust preferred securities, totaling
$16.0 million, carry a relatively high rate of 9.81% including the amortization
of the broker underwriting fee. Although deposit and repurchase agreement growth
from depositors located in the market area have consistently increased, the
growth has not been sufficient to meet the substantial loan growth and provide
monies for additional investing activities. As a result, the reliance on
out-of-area deposits has increased. As a percent of total deposits and
repurchase agreements out-of-area deposits comprised an average of 62% during
the first quarter of 2000, up from the 54% during the first quarter of 1999. The
increase in market interest rates, as mentioned in the previous paragraph, has
also added to the level of interest expense.
Net interest income during the first quarter of 2000 was $2,797,414, a
significant increase over the $1,929,778 earned during the first quarter of
1999. However, in comparing the same time periods the net interest spread
declined from 3.24% in 1999 to 2.88% in 2000. As described above, the increase
in net interest income is primarily due to the substantial growth experienced
between the two time periods. Additional factors impacting net interest income
and the resulting net interest spread, included, but were not limited to,
issuance of trust preferred securities, increased reliance on out-of-area
deposits and changes in interest rates.
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
first quarter of 2000 and 1999. Such yields and costs are derived by dividing
income or expense by the average daily balance of assets or liabilities,
respectively, for the period presented. For tax-exempt securities interest
income and yield have been computed on a tax equivalent basis using a marginal
tax rate of 34%.
<TABLE>
<CAPTION>
Quarters ended March 31,
---------------------2 0 0 0--------------- --------------------1 9 9 9---------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans $ 331,065 $ 7,050 8.54% $ 200,739 $ 4,061 8.20%
Investment securities 43,451 734 6.76 25,661 379 5.91
Federal funds sold 8,801 124 5.60 7,434 85 4.60
Short term investments 237 3 4.57 518 6 4.64
-------------- ------------ ------- -------------- ------------- -------
Total interest - earning
assets 383,554 7,911 8.38 234,352 4,531 7.82
Allowance for loan
losses (4,934) (3,220)
Other assets 16,941 10,713
-------------- --------------
Total assets $ 395,561 $ 241,845
============== ==============
</TABLE>
18.
<PAGE> 19
MERCANTILE BANK CORPORATION
<TABLE>
<CAPTION>
Quarters ended March 31,
------------------2000----------------- ---------------------1999----------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 302,425 $ 4,412 5.85% $ 182,198 $ 2,420 5.39%
Short term borrowings 24,845 262 4.23 17,801 181 4.12
Long term borrowings 16,014 393 9.81
--------- -------- --------- --------
Total interest-bearing
liabilities 343,284 5,067 5.92 199,999 2,601 5.27
-------- --------
Noninterest-bearing
deposits 21,116 14,333
Other liabilities 3,055 679
Shareholders' equity 28,106 26,834
--------- ---------
Total liabilities and
shareholders' equity $ 395,561 $ 241,845
========= =========
Net interest income $ 2,844 $ 1,930
======== ========
Net interest rate spread 2.46% 2.55%
Net interest spread on average assets 2.88 3.24
Net interest margin on earning assets 2.97 3.34
</TABLE>
Provisions to the allowance for loan losses during the first quarter of 2000
were $585,000, an increase from the $455,000 expensed during the same time
period in 1999. The increase primarily reflects the higher level of loan growth
during the first three months of 2000 when compared to the first three months of
1999. Net loan charge-offs during the first three months of 2000 was $17,581,
compared to net loan charge-offs of $0 in the same period during 1999. The
allowance for loan losses as a percentage of total loans outstanding as of March
31, 2000 was 1.49%. 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
economic conditions and other factors.
Noninterest income during the first quarter of 2000 was $223,358, an increase
over the $209,723 earned during the same time period in 1999. Service charge
income on deposit and repurchase agreements increased $34,526 during the first
quarter of 2000 over that earned in the comparable time period in 1999 due
primarily from new accounts opened during the last 12 months. Other increases in
noninterest income during the same time period, also generally reflecting
additional new accounts, include letter of credit fees and credit card fees.
Reflecting increasing interest rates and the resulting decline in residential
mortgage loan refinancings, fees earned on referring residential mortgage loan
applicants to various third parties declined from $68,996 earned in the first
quarter of 1999 to $27,352 posted in the first quarter of 2000.
19.
<PAGE> 20
MERCANTILE BANK CORPORATION
Noninterest expense during the first quarter of 2000 was $1,710,480, a
significant increase over the $1,262,600 expensed during the same time period in
1999. An increase in all major overhead cost categories, including salaries and
benefits, occupancy, and furniture and equipment, was recorded. The increases
primarily result from the hiring of additional staff, as the number of full time
equivalent employees has doubled between the time periods. All other noninterest
costs have also increased, reflecting the additional expenses required to
administer the significantly increased loan and deposit base.
While the dollar volume of noninterest costs has increased, as a percent of
average assets the level has substantially declined (1.7% first quarter 2000
annualized versus 2.1% first quarter 1999 annualized) as Mercantile has grown
and operating efficiencies have been realized. Monitoring and controlling
noninterest costs, while at the same time providing high quality service to
customers, is of utmost importance to Mercantile. The efficiency ratio, computed
by dividing noninterest expenses by net interest income plus noninterest income,
was 56.6% during the first quarter of 2000. This compares favorably to the
efficiency ratio of 59.0% during the first quarter of 1999. This improved
performance is primarily due to the strong 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 that provides for a greater
dollar volume of loans with fewer people. Although noninterest expense increased
by 35.5% during the first quarter of 2000 over the amount expensed during the
first quarter of 1999, net interest income increased at a higher rate of 45.0%
during the same time period.
Federal income tax expense was $225,000 during the first quarter of 2000, a
significant increase over the $28,000 expensed in the first quarter of 1999.
During fiscal 1999 Mercantile used tax-loss carryforwards generated in 1997 and
1998 to reduce federal income tax expense. These tax-loss carryforwards were
fully utilized over the course of 1999; therefore, Mercantile is now subject to
the full statutory tax rate starting in the first quarter of 2000.
20.
<PAGE> 21
MERCANTILE BANK CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mercantile's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. All of Mercantile's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. Mercantile has only limited
agricultural-related loan assets and therefore has no significant exposure to
changes in commodity prices. Any impact that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be
insignificant. Interest rate risk is the exposure of Mercantile's financial
condition 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. The rates of
interest Mercantile earns on its assets and owes on its liabilities generally
are established contractually for a period of time. Since market interest rates
change over time, Mercantile is exposed to lower profitability if it cannot
adapt to interest rate changes. Accepting interest rate risk can be an important
source of profitability and shareholder value; however, excessive levels of
interest rate risk could pose a significant threat to Mercantile's earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to Mercantile's safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. Mercantile's interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information systems and
internal controls are in place to maintain interest rate risk at prudent levels
with consistency and continuity. In evaluating the quantitative level of
interest rate risk Mercantile assesses the existing and potential future effects
of changes in interest rates on its financial condition, including capital
adequacy, earnings, liquidity and asset quality.
There are two interest rate risk measurement techniques used by Mercantile. The
first, which is commonly referred to as GAP analysis, measures the difference
between the dollar amounts of interest-sensitive assets and liabilities that
will be refinanced or repriced during a given time period. A significant
repricing gap could result in a negative impact to the net interest margin
during periods of changing market interest rates. The following table depicts
Mercantile's GAP position as of March 31, 2000 (dollars in thousands):
21.
<PAGE> 22
MERCANTILE BANK CORPORATION
<TABLE>
<CAPTION>
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------ -------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Assets:
Commercial loans $ 103,834 $ 4,958 $ 191,960 $ 14,472 $ 315,224
Residential real estate loans 7,217 1,134 13,946 5,940 28,237
Consumer loans 809 700 2,859 127 4,495
Investment securities (1) 785 18,159 27,642 46,586
Federal funds sold 2,000 2,000
Short term investments 57 57
Allowance for loan losses (5,188) (5,188)
Other assets 18,328 18,328
----------- ----------- ----------- ----------- -----------
Total Assets 114,702 6,792 226,924 61,321 409,739
Liabilities:
Interest-bearing checking 10,531 10,531
Savings 35,157 35,157
Money market accounts 5,223 5,223
Time deposits < $100,000 20,690 44,879 6,963 72,451
Time deposits $100,000 and over 63,947 104,907 20,241 189,095
Short term borrowings 27,171 27,171
Long term borrowings 14 16,000 16,014
Noninterest-bearing checking 21,992 21,992
Other liabilities 3,720 3,720
----------- ----------- ----------- ----------- -----------
Total Liabilities 162,652 149,786 27,204 41,712 381,354
Shareholders' Equity 28,385 28,385
----------- ----------- ----------- ----------- -----------
Total Sources of Funds 162,652 149,786 27,204 70,097 409,739
----------- ----------- ----------- ----------- -----------
Net asset (liability) GAP $ (47,950) $ (142,994) $ 199,720 $ (8,776)
=========== =========== =========== ===========
Cumulative GAP $ (47,950) $ (190,944) $ 8,776
=========== =========== ===========
Percent of cumulative GAP to
total assets (11.7)% (46.6)% 2.1%
=========== =========== ===========
</TABLE>
(1) Mortgage-backed securities are categorized by expected final maturities
based upon prepayment trends as of March 31, 2000
The second interest rate risk measurement used is commonly referred to as net
interest income simulation analysis. Mercantile believes that this methodology
provides a more accurate measurement of interest rate risk than the GAP
analysis, and therefore, serves as the primary interest rate risk measurement
technique used by Mercantile. The simulation model assesses the direction and
magnitude of variations in net interest income resulting from potential changes
in market interest rates. Key assumptions in the model include prepayment speeds
on various loan and investment assets; cash flows and maturities of
interest-sensitive assets and liabilities; and changes in market conditions
impacting loan and deposit volume and pricing. These assumptions are inherently
uncertain, subject to fluctuation and revision in a dynamic environment;
therefore, the model cannot precisely estimate net interest income or exactly
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions and
Mercantile's strategies, among other factors.
22.
<PAGE> 23
MERCANTILE BANK CORPORATION
Mercantile conducted multiple simulations as of March 31, 2000, 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 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 $240,897 1.9%
Interest rates down 100 basis points (13,992) (0.1)
No change in interest rates (266,925) (2.1)
Interest rates up 100 basis points (373,491) (2.9)
Interest rates up 200 basis points (479,419) (3.7)
</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.
As part of its program to manage interest rate risk the Bank entered into an
interest rate swap agreement with a correspondent bank on April 14, 2000. The
notional amount of the two-year agreement is $50 million. Under the terms of the
agreement, the Bank will receive quarterly interest payments based on the Prime
Rate and will pay quarterly payments based on a fixed rate of 9.74%.
23.
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, Mercantile may be involved in various legal proceedings that
are incidental to its 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 AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. EXHIBIT DESCRIPTION
3.1 Articles of Incorporation are incorporated by reference to
exhibit 3.1 of the Corporation's Registration Statement on Form
SB-2 (Commission File no. 333-33081) that became effective on
October 23, 1997
3.2 Bylaws of the Corporation are incorporated by reference to
exhibit 3.2 of the Corporation's Registration Statement on Form
SB-2 (Commission File No. 333-33081) that became effective on
October 23, 1997
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
24.
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 11, 2000.
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)
25.
<PAGE> 26
EXHIBIT INDEX
Exhibit No. EXHIBIT DESCRIPTION
3.1 Articles of Incorporation are incorporated by reference to
exhibit 3.1 of the Corporation's Registration Statement on Form
SB-2 (Commission File no. 333-33081) that became effective on
October 23, 1997
3.2 Bylaws of the Corporation are incorporated by reference to
exhibit 3.2 of the Corporation's Registration Statement on Form
SB-2 (Commission File No. 333-33081) that became effective on
October 23, 1997
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
26.
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
12/31/99
TO
ANNUALIZED 3/31/00
---------- --------
<S> <C> <C>
Return on average total assets 0.51% 0.13%
Return on average equity 7.14% 1.78%
Dividend Payout Ratio NA NA
Average Equity to Average Assets 7.11%
STATEMENT OF COMPUTER PER SHARE EARNINGS
Net income $ 500,292
Average Shares Outstanding 2,472,500
Basic and diluted net income per share $ 0.20
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,607,433
<INT-BEARING-DEPOSITS> 57,171
<FED-FUNDS-SOLD> 2,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,177,104
<INVESTMENTS-CARRYING> 8,409,139
<INVESTMENTS-MARKET> 8,282,649
<LOANS> 347,955,620
<ALLOWANCE> 5,187,888
<TOTAL-ASSETS> 409,738,988
<DEPOSITS> 334,448,765
<SHORT-TERM> 27,170,687
<LIABILITIES-OTHER> 3,720,002
<LONG-TERM> 16,013,991
0
0
<COMMON> 28,181,798
<OTHER-SE> 203,745
<TOTAL-LIABILITIES-AND-EQUITY> 409,738,988
<INTEREST-LOAN> 7,050,132
<INTEREST-INVEST> 686,889
<INTEREST-OTHER> 127,160
<INTEREST-TOTAL> 7,864,181
<INTEREST-DEPOSIT> 4,412,279
<INTEREST-EXPENSE> 5,066,767
<INTEREST-INCOME-NET> 2,797,414
<LOAN-LOSSES> 585,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,710,480
<INCOME-PRETAX> 725,292
<INCOME-PRE-EXTRAORDINARY> 500,292
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 500,292
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 2.97
<LOANS-NON> 124,731
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,620,469
<CHARGE-OFFS> 21,781
<RECOVERIES> 4,200
<ALLOWANCE-CLOSE> 5,187,888
<ALLOWANCE-DOMESTIC> 5,187,888
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
