-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TTY9Z8b55aUwvy5tJptQ9ERqmXlJVpcc8GpZUlZKSiKGVAm1C4FW0Q+DNmD+zJ1F TNoJDCnyFKDxQZwmcNBD7w== 0000950124-98-002825.txt : 19980514 0000950124-98-002825.hdr.sgml : 19980514 ACCESSION NUMBER: 0000950124-98-002825 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE BANK CORP CENTRAL INDEX KEY: 0001042729 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 383360865 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 333-33081 FILM NUMBER: 98618456 BUSINESS ADDRESS: STREET 1: 42 DEER RUN DRIVE CITY: ADA STATE: MI ZIP: 49301 BUSINESS PHONE: 6166760201 MAIL ADDRESS: STREET 1: 42 DEER RUN DRIVE CITY: ADA STATE: MI ZIP: 49301 10QSB 1 FORM 10QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No. 333-33081 MERCANTILE BANK CORPORATION (Exact name of small business issuer as specified in its charter) Michigan 38-3360865 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503 (Address of principal executive offices) (616) 242-9000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At April 30, 1998, there were 1,495,000 shares of Common Stock outstanding Transitional Small Business Disclosure Format: Yes No X --- --- 2 MERCANTILE BANK CORPORATION INDEX
PART 1. Financial Information Page No. --------------------- -------- Item I. Financial Statements Condensed Consolidated Balance Sheets - March 31, 1998 (Unaudited) and December 31, 1997 .............................. 3 Condensed Consolidated Statement of Income - Three Months Ended March 31, 1998 (Unaudited) ................................. 4 Condensed Consolidated Statement of Comprehensive Income - Three Months Ended March 31, 1998 (Unaudited) ................................. 5 Condensed Consolidated Statement of Changes in Shareholders Equity - March 31, 1998 (Unaudited) and December 31, 1997............................ .. 6 Condensed Consolidated Statement of Cash Flows - Three Months Ended March 31, 1998 (Unaudited) ................................. 7 Notes to Condensed Consolidated Financial Statements (Unaudited) ............... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................... 14 PART II. Other Information ----------------- Item 1. Legal Proceedings ..................................................... 19 Item 2. Changes in Securities and Use of Proceeds ............................. 19 Item 3. Defaults upon Senior Securities ....................................... 19 Item 4. Submission of Matters to a Vote of Security Stockholders .............. 19 Item 5. Other Information ..................................................... 19 Item 6. Exhibits and Reports on Form 8-K ...................................... 19 Signatures ..................................................................... 20 ----------
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1998 1997 ---------------- --------------- (Unaudited) ASSETS Cash and due from banks $ 6,175,366 $ 153,300 Short-term investments 2,753,575 3,250,000 Federal funds sold 400,000 3,700,000 ------------- ------------- Total cash and cash equivalents 9,328,941 7,103,300 Securities available for sale 6,495,983 2,997,500 Total loans 76,140,669 12,886,763 Allowance for loan losses (1,192,100) (193,300) ------------- ------------- Total loans, net 74,948,569 12,693,463 Premises and equipment - net 1,316,711 953,982 Organizational costs - net 76,496 74,871 Accrued interest receivable 481,766 52,811 Other assets 426,973 233,258 ------------- ------------- Total assets $ 93,075,439 $ 24,109,185 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 10,598,157 $ 7,207,482 Interest-bearing 64,786,174 2,480,782 ------------- ------------- Total 75,384,331 9,688,264 Securities sold under agreements to repurchase 5,088,198 655,447 Accrued expenses and other liabilities 268,433 292,204 ------------- ------------- Total liabilities 80,740,962 10,635,915 Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, none issued Common stock, no par value: 9,000,000 shares, authorized; 1,495,000 shares outstanding at March 31, 1998 and December 31, 1997 13,880,972 13,880,972 Retained earnings (deficit) (1,545,648) (404,071) Net unrealized loss on securities available for sale (847) (3,631) ------------- ------------- Total shareholders' equity 12,334,477 13,473,270 ------------- ------------- Total liabilities and shareholders' equity $ 93,075,439 $ 24,109,185 ============= =============
See accompanying notes to condensed consolidated financial statements. 3 4 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) Three Months Ended March 31, 1998 -------------- Interest income Loans, including fees $ 1,047,970 Federal funds sold 33,345 Investment securities 97,390 ------------- Total interest income 1,178,705 Interest expense Deposits 550,279 Other 28,662 ------------- Total interest expense 578,941 ------------- Net interest income 599,764 Provision for loan losses 998,800 ------------- Net interest income after provision for loan losses (399,036) Noninterest income Other income 13,592 ------------- Total noninterest income 13,592 Noninterest expense Salaries and benefits 401,580 Occupancy 68,374 Furniture and equipment 39,176 Other expense 247,003 ------------- Total noninterest expenses 756,133 ------------- Loss before federal income tax (1,141,577) Federal income tax expense ------------- Net loss $ (1,141,577) ============= Basic and diluted loss per share $ (.76) ============= Average shares outstanding $ 1,495,000 =============
See accompanying notes to condensed consolidated financial statements. 4 5 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended March 31, 1998 -------------- NET LOSS $ (1,141,577) Other comprehensive income, net of tax Change in unrealized gains on securities 2,784 ------------ COMPREHENSIVE LOSS $ (1,138,793) ============
See accompanying notes to condensed consolidated financial statements. 5 6 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Net Unrealized Loss on Securities Total Common Retained Available Shareholders' Stock Earnings for Sale Equity ----------- ------------ -------------- ------------- BALANCE, JANUARY 1, 1998 $13,880,972 $ (404,071) $ (3,631) $ 13,473,270 Net loss for the period from January 1, 1998 through March 31, 1998 (1,141,577) (1,141,577) Unrealized gain on securities available for sale, net of tax 2,784 2,784 ----------- ------------ ------------- ------------- BALANCE, MARCH 31, 1998 $13,880,972 $ (1,545,648) $ (847) $ 12,334,477 =========== ============ ============= =============
See accompanying notes to condensed consolidated financial statements. 6 7 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 1998 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,141,577) Adjustments to reconcile net loss to net cash from operating activities Depreciation and amortization 42,806 Provision for loan losses 998,800 Gain on loans sold (14,137) Loans originated for sale (1,209,620) Proceeds from loans sold 1,223,757 Net change in: Accrued interest receivable (428,955) Other assets (195,340) Accrued expenses and other liabilities (23,772) ------------- Net cash from operating activities (748,038) CASH FLOWS FROM INVESTING ACTIVITIES Net change in loans (63,253,906) Purchase of: Securities available for sale (3,496,607) Premises and equipment, net (404,626) ------------- Net cash used in investing activities (67,155,139) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 65,696,067 Net increase in securities sold under agreements to repurchase 4,432,751 ------------- Net cash from financing activities 70,128,818 ------------- Net change in cash and cash equivalents 2,225,641 Cash and cash equivalents at beginning of year 7,103,300 ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,328,941 ============= Supplemental disclosures of cash flow information Cash paid during the year for Interest $ 445,820
See accompanying notes to condensed consolidated financial statements. 7 8 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION: The unaudited financial statements for the three months ended March 31, 1998 include the consolidated results of operations of Mercantile Bank Corporation ("Corporation") and its wholly-owned subsidiary, Mercantile Bank of West Michigan ("Bank"). These consolidated financial statements have been prepared in accordance with the Instructions for Form 10-QSB and Item 310(b) of Regulation S-B and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Corporation's financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended March 31, 1998 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in the Corporation's annual report on Form 10-KSB for the year ended December 31, 1997. 2. ALLOWANCE FOR LOAN LOSSES The following is a summary of the activity in the allowance for loan losses account for the three months ended March 31, 1998: Balance at January 1, 1998 $ 193,300 Provision for loan losses charged to operating expense 998,800 ---------- Balance at March 31, 1998 $1,192,100 ==========
3. LOANS Total loans at March 31, 1998 were $76.1 million compared to $12.9 million at December 31, 1997, an increase of $63.2 million or 490.8%. The components of the outstanding balances and percentage increase in loans from the end of 1997 to the end of the first quarter 1998 are as follows:
Percent March 31, 1998 December 31, 1997 Increase/ Balance % Balance % (Decrease) ------- ------- -------------- --------- ---------- (in thousands) Consumer loans $ 1,877 2.5% $ 15 .1% 12,413.3% Commercial, financial and other 23,497 30.8 7,433 57.7 216.1 Commercial real estate construction 1,888 2.5 N/A Commercial real estate mortgages 47,956 63.0 5,421 42.1 784.6 Residential real estate mortgages 923 1.2 18 .1 5,027.8 -------- ------- ---------- ----- --------- $ 76,141 100.0% $ 12,887 100.0% 490.8% ======== ======= ========== ===== =========
8 9 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. PREMISES AND EQUIPMENT - NET Premises and equipment are comprised of the following: March 31, December 31, 1998 1997 ---- ---- Leasehold improvements $ 714,383 $ 545,401 Furniture and equipment 644,225 408,581 ---------- ------------ 1,358,608 953,982 Less accumulated depreciation (41,897) ---------- ------------ $1,316,711 $ 953,982 ========== ============
Depreciation expense for the first quarter 1998 amounted to $41,897. 5. DEPOSITS Total deposits at March 31, 1998 were $75.4 million compared to $9.7 million at December 31, 1997, an increase of $65.7 million or 678.1%. The components of the outstanding balances and percentage increase in deposits from the end of 1997 to the end of the first quarter 1998 are as follows:
Percent March 31, 1998 December 31, 1997 Increase/ Balance % Balance % (Decrease) ------- ------- -------------- --------- ---------- (in thousands) Noninterest-bearing Demand $10,601 14.1% $ 7,208 74.4% 47.1% Interest-bearing Checking 1,617 2.1 213 2.2 659.2 Money market 144 .2 N/A Savings 11,908 15.8 2,089 21.6 470.0 Time, under $100,000 32,126 42.6 178 1.8 17,948.3 Time, $100,000 and over 18,988 25.2 ------- ------- ----------- --------- ---------- $75,384 100.0% $ 9,688 100.0% 678.1% ======= ======= ========== ========= ==========
9 10 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. BORROWINGS Information relating to securities sold under agreements to repurchase follows:
March 31 December 31, 1998 1997 ---- ---- Outstanding balance $5,088,198 $655,447 Average interest rate 4.70% 4.70% Average balance $2,777,086 $ 3,853 Average interest rate 4.70% 4.70% Maximum outstanding at any month end $5,088,198 $655,447
Securities sold under agreements to repurchase (repurchase agreements) generally have original maturities of less than one year. Repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with the agreements are recorded as assets of the Bank and are primarily held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain large deposit customers as deposit equivalent investments. 7. EMPLOYEE BENEFIT PLANS The Corporation established a 401(k) plan effective January 1, 1998, covering substantially all its employees. The Corporation's first quarter 1998 matching 401(k) contribution charged to expense was $15,771. The percent of the Corporation's matching contributions to the 401(k) is determined annually by the Board of Directors. 10 11 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. STOCK OPTION PLAN
Three months ended March 31, 1998 1997 ---- ---- Stock options outstanding Beginning 77,750 Granted 13,000 77,750 ----------- --------- Ending 90,750 77,750 =========== ========= Minimum exercise price $ 10.00 $ 10.00 Maximum exercise price 13.00 11.75 Average exercise price 10.78 10.75 Average remaining option term 9.5years 9.8years Estimated fair value of stock options granted: $ 67,080 $ 340,863 Assumptions used: Risk-free interest rate 5.62% 6.01% Expected option life 7years 7years Expected stock volatility 25% 25% Expected dividends 0% 0% Pro-forma (loss) per share, assuming SFAS 123 fair value method was used for stock options: Net loss $(1,191,871) $(448,029) Basic and diluted loss per share (.80) (.30)
11 12 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. COMMITMENTS AND OFF-BALANCE-SHEET RISK Some financial instruments are used to meet financing needs and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to varying degrees, credit and interest-rate risk in excess of the amount reported in the financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates. Standby letters of credit are conditional commitments to guarantee a customer's performance to a third party. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. Collateral or other security is normally not obtained for these financial instruments prior to their use, and many of the commitments are expected to expire without being used. A summary of the notional or contractual amounts of financial instruments with off-balance-sheet risk at March 31, 1998 and December 31, 1997 follows:
March 31, December 31, 1998 1997 ---------- ------------ Commitments to make loans $ 4,803,967 $ 7,198,584 Commercial unused lines of credit 21,084,366 3,701,272 Consumer unused lines of credit 1,348,894 64,356
Commitments to make loans generally have termination dates of one year or less and may require a fee. Since many of the above commitments expire without being used, the above amounts do not necessarily represent future cash commitments. No losses are anticipated as a result of these transactions. 10. REGULATORY MATTERS The Corporation and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. 12 13 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
Capital to Risk- Weighted Assets ------------------ Tier 1 Capital Total Tier 1 to Average Assets -------- -------- ----------------- Well capitalized 10% 6% 5% Adequately capitalized 8 4 4 Undercapitalized 6 3 3
Actual capital levels (in thousands) and minimum required levels for the Corporation and the Bank were:
Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Regulations -------------- -------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- --------- --------- --------- --------- March 31, 1998 - ------------------------- Total capital (to risk weighted assets) Consolidated $13,360 16.3% $6,564 8.0% $8,204 10.0% Bank 12,759 15.6 6,556 8.0 8,195 10.0 Tier 1 capital (to risk weighted assets) Consolidated 12,334 15.0 3,282 4.0 4,923 6.0 Bank 11,735 14.3 3,272 4.0 4,917 6.0 Tier 1 capital (to average assets) Consolidated 12,334 20.7 2,387 4.0 2,984 5.0 Bank 11,735 19.7 2,383 4.0 2,979 5.0 December 31, 1997 - ------------------------- Total capital (to risk weighted assets) Consolidated $13,595 78.1% $1,392 8.0% $1,740 10.0% Bank 13,056 75.6 1,382 8.0 1,728 10.0 Tier 1 capital (to risk weighted assets) Consolidated 13,402 77.0 696 4.0 1,044 6.0 Bank 12,863 74.5 691 4.0 1,037 6.0 Tier 1 capital (to average assets) Consolidated 13,402 69.7 769 4.0 961 5.0 Bank 12,863 69.3 743 4.0 928 5.0
The Corporation and Bank were categorized as well capitalized at March 31, 1998 and year end 1997. 13 14 MERCANTILE BANK CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (March 31, 1998) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion compares the financial condition of the Corporation and its wholly owned subsidiary, the Bank; at March 31, 1998 to December 31, 1997, and the results of operations for the three months ended March 31, 1998. This discussion should be read in conjunction with the interim consolidated condensed financial statements and footnotes included herein. This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation. Words such as "anticipates", "believes", "estimates", "expects", "forecasts", "intends", "is likely", "plans", "projects", variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend, or clarify forward looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise. Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. During the first quarter of 1998, the assets of Mercantile Bank Corporation increased from $24,109,185 on December 31, 1997, to $93,075,439 on March 31, 1998. This represents a total increase in assets of $68,966,254. A $2,225,941 increase in cash and cash equivalents; a $3,498,483 increase in investment securities; and a $62,255,106 increase in net loans primarily supported this growth. The increase in assets was funded by a $65,696,067 growth in deposits, and an increase of $4,432,751 in repurchase agreements, partially offset by a $1,138,793 decrease in equity. The growth in deposits is the result of both core deposits and reliance on brokered CD's. While management expects continuing growth, it is anticipated to be at a slower rate. The following table sets forth certain information relating to the Corporation's consolidated average interest earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the period indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented. During the period presented, there were no nonaccrual loans. 14 15 MERCANTILE BANK CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (March 31, 1998)
Quarter ended March 31, 1998 Average Average Balance Interest Rate ---------- -------------- ---------- (in thousands) ASSETS Federal funds sold and interest-bearing deposits with banks $ 2,699 $ 33 5.54% Investment securities - available for sale 6,464 97 5.83 Loans 48,078 1,049 8.76 ---------- -------------- ---------- 57,241 1,179 8.28 Other assets 2,567 ---------- $ 59,808 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $ 37,632 $ 550 6.00% Other borrowings 2,824 29 4.12 ---------- -------------- ---------- 40,456 579 5.87 Noninterest-bearing deposits 6,378 Other liabilities 106 Shareholders' equity 12,868 ---------- $ 59,808 ========== Net interest income $ 600 ============== Net interest rate spread 2.41% ========== Net interest margin on earning assets 2.82% ==========
15 16 MERCANTILE BANK CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (March 31, 1998) The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 1998, which are expected to mature or reprice in each of the time periods shown (in thousands):
Interest Rate Sensitivity Period Within Three to One to After Three Twelve Five Five Months Months Years Years Total -------- --------- -------- -------- ------- Earning assets Federal funds sold $ 400 $ 400 Securities available for sale 2,004 4,492 6,496 Total loans 31,447 482 $42,913 $ 1,299 76,141 -------- --------- -------- -------- ------- 33,851 4,974 42,913 1,299 83,037 Interest-bearing liabilities Savings and money market 13,669 13,669 Time deposits < $100,000 178 11,996 19,952 32,126 Time deposits $100,000 and over 1,577 14,745 2,666 18,988 Other borrowings 5,088 5,088 -------- --------- -------- ------- 20,512 26,741 22,618 69,871 -------- --------- -------- -------- ------- Net asset (liability) gap $ 13,339 $(21,767) $20,295 $ 1,299 $13,166 ======== ========= ======== ======== ======= Cumulative net asset (liability) gap $ 13,339 $ (8,428) $11,867 $13,166 ======== ========= ======== ========
The increase in investment securities was necessitated by additional requirements for liquidity resulting from strong loan growth as well as the need for collateral to support our Mercantile Business Investment Checking Account, which is essentially a combined sweep account and repurchase agreement. All marketable securities are classified as "available for sale." Total loans at March 31, 1998 were $76.1 million compared to $12.9 million at December 31, 1997, an increase of $63.2 million or 490.8%. The components of the outstanding balances and percentage increase in loans from the end of 1997 to the end of the first quarter 1998 are as follows:
March 31, 1998 December 31, 1997 Percent/Increase -------------- ----------------- ---------------- Balance Percent Balance Percent (Decrease) ------- ------- -------------- ------- ---------- (in thousands) Consumer loans $ 1,877 2.5% $ 15 .1% 12,413.3% Commercial, financial and other 23,497 30.9 7,433 57.7 216.1 Commercial real estate construction 1,888 2.5 N/A Commercial real estate mortgages 47,956 63.0 5,421 42.1 784.6 Residential real estate mortgages 923 1.2 18 .1 5,027.8 ------- ------- -------------- ------- ---------- $76,141 100.0% $12,887 100.0% 490.8% ======= ======= ============== ======= ==========
16 17 MERCANTILE BANK CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (March 31, 1998) At quarter-end, commercial loans approximated 96% of our total loan portfolio. The significant concentration in commercial loans and the rapid growth of this portion of our business is in keeping with our stated strategy of focusing a substantial amount of our efforts on "wholesale" banking. Corporate and business lending is an area of expertise for all of the Corporation's senior management team. Commercial loans are also the assets most easily originated and managed by the fewest number of staff, thus reducing overhead through necessitating fewer full-time equivalents (FTE's)/$million in assets. It is also the commercial sector of our business that generates the greatest amount of deposits, and it is virtually the only source of significant demand deposits. Mortgage and consumer loans also increased by $943,602 and $1,739,248, respectively. As the extremely rapid growth of our commercial loan portfolio gradually slows, the retail portion of our loan assets is expected to increase as a percentage of total loans. However, our strategy for growth and profitability is expected to result in the commercial sector of our lending efforts and resultant assets continuing to be the dominant portfolio category. Final loan maturities and rate sensitivity of the loan portfolio at March 31, 1998 are as follows (in thousands):
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------- -------- ------- ------ ------- Consumer loans $ 834 $ 661 $ 382 $ 1,877 Commercial, financial and other 14,746 $ 70 8,344 337 23,497 Commercial real estate construction 1,270 618 1,888 Commercial real estate mortgages 14,580 209 32,587 580 47,956 Residential real estate mortgages 17 203 703 923 ------- -------- ------- ------ ------- $31,447 $482 $42,913 $1,299 $76,141 ======= ======== ======= ====== ======= Loans at fixed rates $40 $482 $42,913 $1,299 $44,738 Loans at variable interest rates 31,403 31,403 ------- -------- ------- ------ ------- $31,447 $482 $42,913 $1,299 $76,141 ======= ======== ======= ====== =======
The components of the outstanding balances and percentage increase in deposits from the end of 1997 to the end of the first quarter 1998 are as follows:
March 31, 1998 December 31, 1997 Percent/Increase -------------- ----------------- ---------------- Balance Percent Balance Percent (Decrease) ------- ------- -------------- ------- ---------- (in thousands) Noninterest-bearing Demand $10,601 14.1% $7,208 74.4% 47.1% Interest-bearing Checking 1,617 2.1 213 2.2 659.2 Money market 144 2 N/A Savings 11,908 15.8 2,089 21.6 470.0 Time, under $100,000 32,126 42.6 178 1.8 17,948.3 Time, $100,000 and over 18,988 25.2 N/A ------- ------- -------------- ------- ---------- $75,384 100.0% $9,688 100.0% 678.1% ======= ======= ============== ======= ==========
17 18 MERCANTILE BANK CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (March 31, 1998) Total deposits were $75,384,331 at March 31, 1998, compared to $9,688,264 at prior year-end. Of this amount, $10,598,157, or approximately 14%, were demand deposits. In addition, Business Investment Checking, our combined sweep account/repurchase agreement, increased from $655,447 on December 31, 1997, to $5,088,198 on March 31, 1998. Brokered deposits, consisting primarily of $99,000 certificates obtained from depositors located outside our market area and placed by deposit brokers for a fee, totaled $40,490,321, or approximately 50% of combined deposits and Business Investment Checking at quarter-end. Our reliance on brokered deposits declined during each month of the first quarter, with new brokered deposit dollars acquired as follows: $18,847,500 in January 1998; $17,947,000 in February 1998; and $3,695,821 in March 1998. Our reliance on brokered deposits is expected to be ongoing due to our planned significant future growth; however, the downward trend in brokered deposit concentration levels reflected above should also continue as new business and retail relationships continue to be established and as existing customers fund deposit accounts/business investment checking accounts which have already been opened or as these customers require additional deposit products. The net operating loss for the first quarter of $1,141,577 ($.76/share) is comprised primarily of $998,800 in provision for loan losses ($.66/share). The remainder of the loss, or $142,777 ($.10/share), consists of salary and benefit expense, normal operating costs and amortization of start-up expenses. Loan loss provisions are high due to the extremely rapid growth of the loan portfolio combined with management's decision to manage the portfolio utilizing a 1.5% allowance for loan and lease losses. Although the percentage loan loss reserve to total loans is high relative to the quality of the overall portfolio, company management feels it is prudent to operate with this level of reserves due to the newness of the organization and the significant number of credits at the legal lending limit of the Bank. Loan loss provisions are an immediate reduction to earnings. These provisions will also continue to reduce earnings, although more moderately, as the anticipated rate of loan growth slows. Our payroll and other operating expenses are expected to decline as a percentage of income as the Corporation grows. It is anticipated that our efficiency ratio, currently at 81%, should decrease as the Corporation continues to grow and more adequately absorb the current salary and benefit expense and amortization of prior period organization and start-up costs. Immediate and future plans for the remainder of 1998 include the near-term implementation of telephone banking, which is currently in the testing phase, as well as the introduction of PC banking to both our retail and commercial customers later in the year. It is management's opinion that the use of state-of-the-art technology will offset some of the potential advantages that establishing branch banking locations might provide. This is especially true if ATM kiosks are strategically located throughout our market area and used in connection with and as an adjunct to our technology. 18 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As a depository of funds, the Bank may occasionally be named as a defendant in lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Such litigation is incidental to the Bank's business. The Corporation's management is not aware of any pending litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. As reported in the Company's Form 10-KSB at December 31, 1997, the Company applied the proceeds of the public offering of its Common Stock in October 1997 to repay loans from Directors, pay officer salaries and other expenses of the offering, invest in securities and fixed assets, and fund new loans to customers. At December 31, 1997, approximately $6,503,000 remained in working capital of the Bank. This remaining working capital was used during the first quarter of 1998 to fund the loan growth during the period, along with increases in deposits. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Corporation's Registration Statement on Form SB-2 (Commission File no. 333-33081) that became effective on October 23, 1997 3.2 Bylaws of the Corporation are incorporated by reference to exhibit 3.2 of the Corporation's Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 11 Statement re Computation of Per Share Earnings 27 Financial Data Schedule 19 20 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 13, 1998. MERCANTILE BANK CORPORATION By: /s/ Gerald R. Johnson, Jr. ------------------------------------------------ Gerald R. Johnson, Jr. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Michael H. Price ------------------------------------------------ Michael H. Price President and Chief Operating Officer By: /s/ Charles E. Christmas ------------------------------------------------ Charles E. Christmas (Principal Financial and Accounting Officer) 20 21 EXHIBIT INDEX EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Corporation's Registration Statement on Form SB-2 (Commission File no. 333-33081) that became effective on October 23, 1997 3.2 Bylaws of the Corporation are incorporated by reference to exhibit 3.2 of the Corporation's Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 11 Statement re Computation of Per Share Earnings 27 Financial Data Schedule 21 EX-11 2 EXHIBIT 11 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS RETURN ON EQUITY AND ASSETS
12/31/97 TO ANNUALIZED 3/31/98 ---------- ------- Return on average total assets -7.7% -1.9% Return on average equity -37.1% -9.3% Dividend Payout Ratio N/A Average Equity to Average Assets 20.7% STATEMENT OF COMPUTER PER SHARE EARNINGS Net Loss (1,141,577) Average Shares Outstanding 1,495,000 Basic and Diluted Loss Per Share ($0.76)
22 EX-27 3 FDS
9 3-MOS DEC-31-1997 MAR-31-1998 6,175,366 2,753,575 400,000 0 0 0 6,495,983 76,140,669 (1,192,100) 93,075,439 75,384,331 5,088,198 268,433 0 0 0 13,880,972 (1,545,648) 93,075,439 1,047,970 33,345 97,390 1,178,705 550,279 28,662 599,764 988,800 0 756,133 (1,141,577) (1,141,577) 0 0 (1,141,577) (0.76) (0.76) 0 0 0 0 0 (193,300) 0 0 (1,192,100) 0 0 (1,192,100)
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