-----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, K37eGP2Neo++ks9mhYT+kHmGY50C1FUHW2b/uEPix07Q8/JjDGNtUqywhExLoAYU nfTU8tFlXQhZ7jwZ/igjew== 0000950124-99-003127.txt : 19990513 0000950124-99-003127.hdr.sgml : 19990513 ACCESSION NUMBER: 0000950124-99-003127 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: 333-75521 FILM NUMBER: 99618186 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 10-QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No. 333-33081 MERCANTILE BANK CORPORATION (Exact name of small business issuer as specified in its charter) Michigan 38-3360865 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503 (Address of principal executive offices) (616) 242-9000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At March 31, 1999, there were 2,472,500 shares of Common Stock outstanding Transitional Small Business Disclosure Format: Yes No X --- --- 2 MERCANTILE BANK CORPORATION INDEX - -------------------------------------------------------------------------------- PART 1. Financial Information Page No. -------- Item I. Financial Statements Condensed Consolidated Balance Sheets - March 31, 1999 (Unaudited) and December 31, 1998..................................... 3 Condensed Consolidated Statement of Income - Three Months Ended March 31, 1999 and March 31, 1998 (Unaudited)..................... 4 Condensed Consolidated Statement of Comprehensive Income - Three Months Ended March 31, 1999 and March 31, 1998 (Unaudited)..................... 5 Condensed Consolidated Statement of Changes in Shareholders Equity - March 31, 1999 (Unaudited) and December 31, 1998...................................... 6 Condensed Consolidated Statement of Cash Flows - Three Months Ended March 31, 1999 and March 31, 1998 (Unaudited)..................... 7 Notes to Condensed Consolidated Financial Statements (Unaudited)....................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 14 PART II. Other Information Item 1. Legal Proceedings............................................................. 19 Item 2. Changes in Securities and Use of Proceeds..................................... 19 Item 3. Defaults upon Senior Securities............................................... 19 Item 4. Submission of Matters to a Vote of Security Stockholders...................... 19 Item 5. Other Information............................................................. 19 Item 6. Exhibits and Reports on Form 8-K.............................................. 19 Signatures............................................................................. 20
3 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
March 31, December 31, 1999 1998 ---- ---- (Unaudited) ASSETS Cash and due from banks $ 7,196,756 $ 5,940,713 Short-term investments 520,956 515,283 Federal funds sold 10,800,000 -- ------------- ------------- Total cash and cash equivalents 18,517,712 6,455,996 Securities available for sale 27,256,775 24,160,247 Total loans 214,716,272 184,744,602 Allowance for loan losses (3,220,100) (2,765,100) ------------- ------------- Total loans, net 211,496,172 181,979,502 Premises and equipment - net 2,176,704 1,857,805 Organizational costs - net -- 64,210 Accrued interest receivable 1,277,596 1,147,832 Other assets 946,340 571,265 ------------- ------------- Total assets $ 261,671,299 $ 216,236,857 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 15,333,254 $ 14,319,290 Interest-bearing 201,662,155 157,678,729 ------------- ------------- Total 216,995,409 171,998,019 Securities sold under agreements to repurchase 16,995,344 17,037,601 Accrued expenses and other liabilities 722,140 500,721 ------------- ------------- Total liabilities 234,712,893 189,536,341 Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, none issued Common stock, no par value: 9,000,000 shares, authorized; 2,472,500 shares outstanding at March 31, 1999 and December 31, 1998 28,181,798 28,181,798 Retained deficit (1,161,427) (1,513,118) Net unrealized gain (loss) on securities available for sale (61,965) 31,836 ------------- ------------- Total shareholders' equity 26,958,406 26,700,516 ------------- ------------- Total liabilities and shareholders' equity $ 261,671,299 $ 216,236,857 ============= =============
- -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 3. 4 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME - --------------------------------------------------------------------------------
Three Months Three Months Ended Ended March 31, March 31, 1999 1998 ---- ---- (Unaudited) (Unaudited) Interest income Loans, including fees $ 4,061,230 $ 1,047,970 Investment securities 378,822 58,127 Federal funds sold 85,166 33,345 Short term investments 5,977 39,263 ----------- ----------- Total interest income 4,531,195 1,178,705 Interest expense Deposits 2,420,624 550,279 Other 180,793 28,662 ----------- ----------- Total interest expense 2,601,417 578,941 ----------- ----------- NET INTEREST INCOME 1,929,778 599,764 Provision for loan losses 455,000 998,800 ----------- ----------- NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES 1,474,778 (399,036) Noninterest income Other income 209,723 14,440 ----------- ----------- Total noninterest income 209,723 14,440 Noninterest expense Salaries and benefits 652,912 401,580 Occupancy 89,457 68,374 Furniture and equipment 62,423 39,176 Other expense 457,808 247,851 ----------- ----------- Total noninterest expenses 1,262,600 756,981 ----------- ----------- INCOME (LOSS) BEFORE FEDERAL INCOME TAX 421,901 (1,141,577) Federal income tax expense 28,000 -- ----------- ----------- NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 393,901 (1,141,577) Cumulative effect of change in accounting principle (net of applicable income taxes) 42,210 -- ----------- ----------- NET INCOME (LOSS) $ 351,691 $(1,141,577) =========== =========== Basic and diluted income (loss) per share before cumulative effect of change in accounting principle $ 0.16 $ (0.76) =========== =========== Basic and diluted income (loss) per share $ 0.14 $ (0.76) =========== =========== Average shares outstanding 2,472,500 1,495,000 =========== ===========
- -------------------------------------------------------------------------------- See accompanying notes to condensed financial statements. 4. 5 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - --------------------------------------------------------------------------------
Three Months Three Months Ended Ended March 31, March 31, 1999 1998 ---- ---- (Unaudited) (Unaudited) NET INCOME (LOSS) $ 351,691 $(1,141,577) Other comprehensive income, net of tax Change in unrealized gains (losses) on securities available for sale (93,801) 2,784 ----------- ----------- COMPREHENSIVE INCOME (LOSS) $ 257,890 $(1,138,793) =========== ===========
- -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 5. 6 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) - --------------------------------------------------------------------------------
Net Unrealized Gain (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 Common stock sale, July 30, 1998 net of issuance expenses 14,300,826 14,300,826 Net income (loss) (1,109,047) (1,109,047) Change in net unrealized gain (loss) on securities available for sale, net of tax effect 35,467 35,467 ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1998 28,181,798 (1,513,118) 31,836 26,700,516 Net income for the period from January 1, 1999 through March 31, 1999 351,691 351,691 Change in net unrealized gain (loss) on securities available for sale, net of tax effect (93,801) (93,801) ------------ ------------ ------------ ------------ BALANCE, MARCH 31, 1999 $ 28,181,798 $ (1,161,427) $ (61,965) $ 26,958,406 ============ ============ ============ ============
- -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 6. 7 MERCANTILE BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
Three Months Three Months Ended Ended March 31, March 31, 1999 1998 ---- ---- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 351,691 $ (1,141,577) Adjustments to reconcile net income (loss) to net cash from operating activities Depreciation and amortization 101,233 42,806 Provision for loan losses 455,000 998,800 Net change in: Accrued interest receivable (129,764) (428,955) Other assets (284,136) (195,340) Accrued expenses and other liabilities 221,419 (23,772) ------------ ------------ Net cash from operating activities 715,443 (748,038) CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (29,971,670) (63,253,906) Purchase of: Securities available for sale (4,938,917) (3,496,607) Premises and equipment (378,501) (404,626) Proceeds from maturities and repayments of available for sale securities 1,680,228 -- ------------ ------------ Net cash used in investing activities (33,608,860) (67,155,139) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 44,997,390 65,696,067 Net increase (decrease) in securities sold under agreements to repurchase (42,257) 4,432,751 ------------ ------------ Net cash from financing activities 44,955,133 70,128,818 ------------ ------------ Net change in cash and cash equivalents 12,061,716 2,225,641 Cash and cash equivalents at beginning of period 6,455,996 7,103,300 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,517,712 $ 9,328,941 ============ ============ Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 2,479,996 $ 445,820 Federal income tax 234,773 --
- -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 7. 8 MERCANTILE BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION: The unaudited financial statements for the three months ended March 31, 1999 include the consolidated results of operations of Mercantile Bank Corporation ("Corporation") and its wholly-owned subsidiary, Mercantile Bank ("Bank"). These consolidated financial statements have been prepared in accordance with the Instructions for Form 10-QSB and Item 310(b) of Regulation S-B and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Corporation's financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended March 31, 1999 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in the Corporation's annual report on Form 10-KSB for the year ended December 31, 1998. 2. ALLOWANCE FOR LOAN LOSSES The following is a summary of the activity in the allowance for loan losses account for the three months ended March 31, 1999: Balance at January 1, 1999 $2,765,100 Provision for loan losses charged to operating expense 455,000 ---------- Balance at March 31, 1999 $3,220,100 ========== 3. LOANS Total loans at March 31, 1999 were $214.7 million compared to $184.7 million at December 31, 1998, an increase of $30 million or 16.2%. The components of the outstanding balances and percentage increase in loans from the end of 1998 to the end of the first quarter 1999 are as follows:
Percent March 31, 1999 December 31, 1998 Increase/ Balance % Balance % (Decrease) ------- - ------- - -------- (in thousands) Real Estate: Construction and land development $ 19,115 8.9% $ 13,656 7.4% 40.0% Secured by 1 - 4 family properties 12,163 5.6 10,656 5.8 14.1 Secured by multi- family properties 2,472 1.2 2,521 1.4 (1.9) Secured by nonfarm nonresidential properties 118,367 55.1 100,742 54.5 17.5 Commercial 60,068 28.0 55,071 29.8 9.1 Consumer 2,531 1.2 2,099 1.1 20.6 -------- ----- ------- ----- ---- $214,716 100.0% $184,745 100.0% 16.2% ======== ===== ======== ===== ====
- -------------------------------------------------------------------------------- (Continued) 8. 9 MERCANTILE BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- 4. PREMISES AND EQUIPMENT - NET Premises and equipment are comprised of the following: March 31, December 31, 1999 1998 ---- ---- Land and improvements $ 315,020 $ 315,020 Buildings and leasehold improvements 759,942 759,942 Construction in process 417,899 100,638 Furniture and equipment 930,435 869,195 ---------- ---------- 2,423,296 2,044,795 Less accumulated depreciation 246,592 186,990 ---------- ---------- Premises and Equipment, net $2,176,704 $1,857,805 ========== ========== Depreciation expense for the first quarter 1999 amounted to $59,602. 5. DEPOSITS Total deposits at March 31, 1999 were $217.0 million compared to $172.0 million at December 31, 1998, an increase of $45.0 million or 26.2%. The components of the outstanding balances and percentage increase in deposits from the end of 1998 to the end of the first quarter 1999 are as follows:
Percent March 31, 1999 December 31, 1998 Increase/ Balance % Balance % (Decrease) ------- - ------- - -------- (in thousands) Noninterest-bearing demand $ 15,333 7.1% $ 14,319 8.3% 7.1% Interest-bearing checking 7,402 3.4 7,766 4.5 (4.7) Money market 4,645 2.1 3,822 2.2 21.5 Savings 39,429 18.2 28,797 16.8 36.9 Time, under $100,000 3,610 1.7 3,306 1.9 9.2 Time, $100,000 and over 19,156 8.8 16,718 9.7 14.6 -------- --------- -------- -------- ---- 89,575 41.3 74,728 43.4 19.9 Out-of-area time, under $100,000 95,482 44.0 77,847 45.3 22.7 Out-of-area time, $100,000 and over 31,938 14.7 19,423 11.3 64.4 -------- --------- -------- -------- ---- 127,420 58.7 97,270 56.6 31.0 -------- --------- -------- -------- ---- Total deposits $216,995 100.0% $171,998 100.0% 26.2% ======== ========= ======== ===== ====
- -------------------------------------------------------------------------------- (Continued) 9. 10 MERCANTILE BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- 6. BORROWINGS Information relating to securities sold under agreements to repurchase follows:
March 31, December 31, 1999 1998 ---- ---- Outstanding balance at end of period $16,995,344 $17,037,601 Average interest rate at end of period 4.20% 4.20% Average balance during the period $17,800,661 $10,305,728 Average interest rate during the period 4.20% 4.72% Maximum month end balance during the period $17,194,685 $18,498,833
Securities sold under agreements to repurchase (repurchase agreements) generally have original maturities of less than one year. Repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with the agreements are recorded as assets of the Bank and are primarily held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain large deposit customers as deposit equivalent investments. 7. EMPLOYEE BENEFIT PLANS The Corporation established a 401(k) plan effective January 1, 1998, covering substantially all its employees. The Corporation's first quarter 1999 matching 401(k) contribution charged to expense was $16,171. The percent of the Corporation's matching contributions to the 401(k) is determined annually by the Board of Directors. 8. COMMITMENTS AND OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. - -------------------------------------------------------------------------------- (Continued) 10. 11 MERCANTILE BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- 8. COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued) These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. The Bank's maximum exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, property and equipment, is generally obtained based on management's credit assessment of the borrower. A summary of the notional or contractual amounts of financial instruments with off-balance sheet risk at March 31, 1999 and December 31, 1998 follows:
March 31, December 31, 1999 1998 ---- ---- Commercial unused lines of credit $ 58,555,005 $ 61,600,909 Unused lines of credit secured by 1 - 4 family residential properties 4,707,704 3,434,290 Credit card unused lines of credit 2,681,236 2,251,329 Other consumer unused lines of credit 1,466,054 1,534,497 Commitments to make loans 18,957,750 21,751,900 Standby letters of credit 24,554,911 19,271,848 --------------- ---------------- $ 110,922,660 $ 109,844,773 =============== ================
9. REGULATORY MATTERS The Corporation and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
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 8 4 4
- -------------------------------------------------------------------------------- (Continued) 11. 12 MERCANTILE BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- 9. REGULATORY MATTERS (Continued) Actual capital levels (in thousands) and minimum required levels for the Corporation and the Bank were:
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, 1999 Total capital (to risk weighted assets) Consolidated $ 30,240 11.5% $ 21,046 8.0% $ 26,308 10.0% Bank 29,347 11.2 21,044 8.0 26,305 10.0 Tier 1 capital (to risk weighted assets) Consolidated 27,020 10.3 10,523 4.0 15,785 6.0 Bank 26,127 9.9 10,522 4.0 15,783 6.0 Tier 1 capital (to average assets) Consolidated 27,020 11.2 9,673 4.0 12,092 5.0 Bank 26,127 10.8 9,671 4.0 12,088 5.0 December 31, 1998 Total capital (to risk weighted assets) Consolidated $ 29,434 13.0% $ 18,100 8.0% $ 22,625 10.0% Bank 28,453 12.6 18,093 8.0 22,616 10.0 Tier 1 capital (to risk weighted assets) Consolidated 26,669 11.8 9,050 4.0 13,575 6.0 Bank 25,688 11.4 9,047 4.0 13,570 6.0 Tier 1 capital (to average assets) Consolidated 26,669 13.8 7,711 4.0 9,639 5.0 Bank 25,688 13.3 7,707 4.0 9,634 5.0
The Corporation and Bank were categorized as well capitalized at March 31, 1999 and year end 1998. - -------------------------------------------------------------------------------- (Continued) 12. 13 MERCANTILE BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- 10. YEAR 2000 ISSUE The approach of the year 2000 presents potential problems to businesses that utilize computers in their daily operations. Some computer systems may not be able to properly interpret dates after December 31, 1999, because they use only two digits to indicate the year in the date. Therefore, a date using "00" as the year may recognize the year as 1900 rather than the year 2000. The Corporation has formed a Year 2000 Working Group to address the potential problems associated with the Year 2000 computer issue. The Year 2000 Working Group, consisting of senior officers and employees, meets on a regular basis and provides regular reports to the Board of Directors detailing progress with the Year 2000 issue. As with any organization that depends on technology, particularly computer systems and software, a Year 2000 related failure poses a significant threat to continued business operations. While the Corporation has developed a plan to achieve Year 2000 readiness, we recognize that the success of our third party providers is vital to our success. Vendors of particular concern include, but are not limited to, our computer service providers, electronic banking vendors, correspondent banks, and utility and telecommunications companies. Additional risks include the Bank's lending and deposit relationships, as well as security and heating, ventilation, and air conditioning systems. No in-house programmed software is used by the Corporation. Management believes that all significant vendors have been identified and contacted regarding their Year 2000 readiness. These vendors have indicated that either their products are currently Year 2000 compliant or will be by December 31, 1999. For computer-based systems that are considered vital to operations, such as data and transaction processing, actual testing has been or will be conducted prior to December 31, 1999, to test Year 2000 readiness. In addition, a Year 2000 questionnaire has been sent to all commercial loan customers (comprising 93% of the loan portfolio) requesting information concerning their Year 2000 readiness. Responses are currently being followed-up by the Year 2000 Working Group and lending staff. Total costs to the Corporation related to the Year 2000 issue are estimated to be between $10,000 and $25,000. These costs include testing of the data processing equipment and programs, equipment upgrades, and employee and customer education. It is impossible to predict the exact expenses associated with the Year 2000 issue and additional funds may be needed for unknown expenses relating to Year 2000 testing, training, and education, as well as system and software replacements. Despite careful planning by the Corporation, we recognize there may be circumstances beyond our control that may prohibit us from operating "as usual" after December 31, 1999. The Year 2000 Working Group is currently in the process of developing and testing a contingency plan to address potential Year 2000 problems. - -------------------------------------------------------------------------------- (Continued) 13. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion compares the financial condition of the Corporation and its wholly owned subsidiary, the Bank, at March 31, 1999 to December 31, 1998 and the results of operations for the three months ended March 31, 1999 and March 31, 1998. This discussion should be read in conjunction with the interim consolidated condensed financial statements and footnotes included herein. This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend, or clarify forward looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise. Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. During the first quarter of 1999, the assets of the Corporation increased from $216.2 million on December 31, 1998, to $261.7 million on March 31, 1999. This represents a total increase in assets of $45.5 million, or 21.1%. The asset growth was comprised primarily of a $29.5 million increase in net loans, a $12.0 million increase in cash and cash equivalents, and an increase of $3.1 million in investment securities. The increase in assets was primarily funded by a $45 million growth in deposits. Securities sold under agreements to repurchase and shareholders' equity remained virtually unchanged. The growth in deposits was in both local deposits and out-of-area CD's. While management expects continued growth, it is anticipated to be at a slower rate. Commercial loans increased by $28.0 million during the first quarter of 1999, and at quarter-end comprised 93% of the total loan portfolio. The significant concentration in commercial loans and the rapid growth of this portion of business is in keeping with the stated strategy of focusing a substantial amount of efforts on "wholesale" banking. Corporate and business lending is an area of expertise for all of the Corporation's senior management team. Commercial loans are also the assets most easily originated and managed by the fewest number of staff, thus reducing overhead through necessitating fewer full-time equivalents (FTE's)/$million in assets. It is also the commercial sector of our business that generates the greatest amount of local deposits, and it is virtually the only source of significant demand deposits. Residential mortgage and consumer loans also increased by $1.5 million and $0.4 million, respectively, during the first quarter of 1999. As the extremely rapid growth of our commercial loan portfolio gradually slows, the retail portion of our loan assets should increase as a percentage of total loans. However, our strategy for growth and profitability will result in the commercial sector of the lending efforts and resultant assets continuing to be the dominant portfolio category. - -------------------------------------------------------------------------------- (Continued) 14. 15 Deposits increased $45 million during the first quarter of 1999, totaling $217.0 million at March 31, 1999. Local deposits increased $14.9 million, while out-of-area deposits increased $30.1 million. Savings deposits experienced significant growth in the first three months of 1999, increasing by $10.6 million. This deposit type comprised 18% of total deposits as of March 31, 1999, up from 17% at December 31, 1998. Noninterest-bearing demand deposits, comprising 7% of total deposits, increased $1.0 million during the first quarter of 1999, while interest-bearing checking accounts (3% of total deposits) decreased by $0.4 million and money market deposit accounts (2% of total deposits) increased by $0.8 million. Out-of-area deposits totaled $127.4 million, or 58% of total deposits, as of March 31, 1999. Out-of-area deposits consist primarily of $99,000 certificates of deposit obtained from depositors located outside the market area and placed by deposit brokers for a fee, but also include certificates of deposit for larger dollar amounts (generally $100,000) and/or from the deposit owners directly. Out-of-area deposits are utilized to support the asset growth of the Corporation, and are generally a lower cost source of funds when compared to the interest rates that would have to be offered in the local market to generate a sufficient level of funds. The reliance on out-of-area deposits is expected to be ongoing due to the past and planned significant future growth; however, a modest decline in the out-of-area deposit concentration level is expected as new business, governmental and retail relationships continue to be established and as existing customers increase deposit accounts which have already been opened or as these customers require additional deposit products. Securities sold under agreements to repurchase declined by less than $0.1 million during the first quarter of 1999. As part of the Corporation's sweep account program, collected funds from certain business noninterest-bearing checking accounts are invested into over-night interest-bearing repurchase agreements. Although not considered a deposit account and therefore not afforded federal deposit insurance, the repurchase agreements have characteristics very similar to that of business checking deposit accounts. Net operating income for the first quarter of 1999 was $351,691 ($0.14 per share), which compares favorably to the net loss of $1,141,577 ($0.76 per share) recorded during the first quarter of 1998. The improvement is primarily the result of an increase in net interest income, greater employee efficiency and a reduction of provisions to the allowance for loan losses. First quarter 1999 net operating income includes a one-time $0.02 per share charge reflecting a recently mandated FASB accounting adjustment for organization costs. In accordance with previous accounting guidelines these costs were being amortized over a five-year period; however, as required by FASB Statement of Position 98-5, the unamortized balance was written off effective January 1, 1999 and is reflected in the Consolidated Financial Statements as a change in accounting principle. Interest income during the first quarter of 1999 was $4,531,195, a significant increase over the $1,178,705 earned during the first quarter of 1998. The growth in interest income is primarily attributable to an increase in earning assets. During the first three months of 1999 earning assets averaged $234.4 million, a level substantially higher than the average earning assets of $57.2 million during the same time period in 1998. Somewhat offsetting the increase in earning assets is the decline in yield on earning assets. During the first three months of 1999 and 1998 earning assets had a weighted average rate of 7.73% and 8.28%, respectively. This decline is primarily due to an overall decline of market interest rates between the two time periods, in part evidenced by the 75 basis point drop in the Prime Rate. - -------------------------------------------------------------------------------- (Continued) 15. 16 Interest expense during the first quarter of 1999 was $2,601,417, a significant increase over the $578,941 expensed during the first quarter of 1998. The growth in interest expense is primarily attributable to the growth in assets, which necessitated an increase in funding liabilities. During the first three months of 1999 interest-bearing liabilities averaged $200.0 million, a level substantially higher than average interest-bearing funds of $40.5 million during the same time period in 1998. Also adding to the level of interest expense when comparing the two time periods is the increase of interest-bearing liabilities as a percent of average assets. In the first quarter of 1999 interest-bearing liabilities averaged 82.7% of average assets, a notable increase from the 67.7% level of the first quarter of 1998. The increase is the result of the planned and expected leveraging of shareholders' equity. As of March 31, 1999, Tier 1 Capital ratio was 11.2%, a significant reduction from the 20.7% and 69.7% levels of March 31, 1998 and December 31, 1997, respectively. Somewhat offsetting the increase in interest-bearing liabilities is the decline in the average rate paid on interest-bearing liabilities. During the first three months of 1999 and 1998 interest-bearing liabilities had a weighted average rate of 5.2% and 5.9%, respectively. This decline is due in large part to the overall decline of market interest rates between the two time periods as mentioned previously. Net interest income during the first quarter of 1999 was $1,929,778, a significant increase over the $599,764 earned during the first quarter of 1998. As described above, the increase is primarily due to the substantial growth experienced between the two time periods. Additional factors impacting net interest income included, but were not limited to, changes in interest rates and a reduction of capital as a percentage of average assets. The following table sets forth certain information relating to the Corporation's consolidated average interest earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the first quarter of 1999. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented. During the period presented, there were no nonaccrual loans.
Quarter ended March 31, 1999 Average Average Balance Interest Rate ------- -------- ---- (in thousands) ASSETS Loans $ 200,739 $ 4,061 8.09% Investment securities 25,661 379 5.91 Federal funds sold 7,434 85 4.58 Short term investments 518 6 4.62 ----------- ----------- -------- Total interest-earning assets 234,352 4,531 7.73 Allowance for loan losses (3,220) Other assets 10,713 ----------- Total assets $ 241,845 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $ 182,198 $ 2,420 5.31% Other borrowings 17,801 181 4.06 ----------- ----------- -------- Total interest-bearing liabilities 199,999 2,601 5.20 Noninterest-bearing deposits 14,333 Other liabilities 679 Shareholders' equity 26,834 ----------- Total liabilities and shareholders' equity $ 241,845 =========== Net interest income $ 1,930 =========== Net interest rate spread 2.53% ======== Net interest margin on earning assets 3.29% ========
- -------------------------------------------------------------------------------- (Continued) 16. 17 Interest rate risk is the exposure of the Corporation's financial condition and operating performance to adverse movements in interest rates. The Corporation derives its income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-bearing liabilities. Since market rates are subject to change over time, the Corporation is exposed to lower profitability if it cannot adapt to interest rate changes. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to the Corporation's safety and soundness. The primary measurement method utilized by the Corporation to assess interest rate risk is commonly referred to as net interest income simulation analysis. This computer-based model measures the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates. Although the assumptions used within the model are inherently uncertain and subject to fluctuation and revision, and therefore actual results will differ from the simulated results, management believes this methodology provides sufficient information to manage the interest rate risk of the Corporation. The Corporation conducted multiple simulations as of March 31, 1999, whereby it was assumed that a simultaneous, instant and sustained change in market interest rates occurred. The following table reflects the suggested impact on net interest income over the next twelve months, which are well within the Corporation's policy parameters established to manage and monitor interest rate risk.
Dollar Change In Percent Change In Interest Rate Scenario Net Interest Income Net Interest Income ---------------------- ------------------- ------------------- Interest rates down 200 basis points $ 473,622 6.2% Interest rates down 100 basis points 287,619 3.7 No change in interest rates 101,303 1.3 Interest rates up 100 basis points 9,533 0.1 Interest rates up 200 basis points (80,102) (1.0)
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; client preferences; and other factors. Provisions to the allowance for loan losses during the first quarter of 1999 were $455,000, a significant reduction from the $998,800 expensed during the same time period in 1998. The reduction reflects the lower level of loan growth during the first three months of 1999 when compared to the first three months of 1998. The allowance for loan losses as a percentage of total loans outstanding as of March 31, 1999 was 1.5%, which also represents the level that has been maintained since inception of the Bank. The allowance for loan losses is maintained at a level management feels is adequate to absorb losses inherent in the loan portfolio. The evaluation is based upon a continuous review of the Corporation's and banking industry's historical loan loss experience, known and inherent risks contained in the loan portfolio, composition and growth of the loan portfolio, current and projected economic conditions and other factors. Reflecting its focus on credit quality, the Corporation has not experienced any loan charge-offs since its inception. Noninterest income during the first quarter of 1999 was $209,723, a significant increase over the $14,440 earned during the same time period in 1998. Fees earned on referring residential mortgage loan applicants to various third parties and commitment fees charged on issued standby letters of credit, combined with an increase in fee income earned on deposit and repurchase agreements resulting from an increase in deposit and repurchase accounts, comprise a majority of the increase. - -------------------------------------------------------------------------------- (Continued) 17. 18 Noninterest expense during the first quarter of 1999 was $1,262,600, a significant increase over the $756,981 expensed during the same time period in 1998. An increase in all major overhead cost categories, including salaries and benefits, occupancy, and furniture and equipment, was recorded. The increases primarily result from the hiring of additional staff, as the number of full time equivalent employees has doubled between the time periods. All other noninterest costs have also increased, reflecting the additional expenses required to administer the significantly increased loan and deposit base. While the dollar volume of noninterest costs has increased, as a percent of average assets the level has substantially declined (2.1% first quarter 1999 annualized versus 5.1% first quarter 1998 annualized) as the Corporation has grown and operating efficiencies have been realized. Monitoring and controlling noninterest costs, while at the same time providing high quality service to customers, is of utmost importance to the Corporation. The efficiency ratio, computed by dividing noninterest expenses by net interest income plus noninterest income, was 59% during the first quarter of 1999. This compares very favorably to the efficiency ratio of 123% during the first quarter of 1998. This improved performance is primarily due to the rapid asset growth that has translated into increased net interest income, as well as the Corporation's lending philosophy of concentrating on commercial lending that results in higher average loan balances compared to residential mortgage and consumer loans which provides for a greater dollar volume of loans with fewer people. Federal income tax expense of $28,000 was recorded during the first quarter of 1999, compared to $0 in the first quarter of 1998. No expense was recorded in 1998 due to the Corporation's operating loss; however, federal income tax expense is being recorded in 1999 as it is expected that a portion of the Corporation's 1999 net operating income will be subject to federal income tax. - -------------------------------------------------------------------------------- 18. 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. From time to time, the Corporation and Bank may be involved in various legal proceedings that are incidental to their business. In the opinion of management, neither the Corporation or Bank is a party to any current legal proceedings that are material to the financial condition of the Corporation or the Bank, either individually or in the aggregate. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Corporation's Registration Statement on Form SB-2 (Commission File no. 333-33081) that became effective on October 23, 1997 3.2 Bylaws of the Corporation are incorporated by reference to exhibit 3.2 of the Corporation's Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 11 Statement re Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Corporation during the quarter for which this report is filed. - -------------------------------------------------------------------------------- 19. 20 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 12, 1999. MERCANTILE BANK CORPORATION By: /s/ Gerald R. Johnson, Jr. -------------------------------- Gerald R. Johnson, Jr. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Michael H. Price -------------------------- Michael H. Price President and Chief Operating Officer By: /s/ Charles E. Christmas ------------------------------ Charles E. Christmas Chief Financial Officer, Treasurer and Compliance Officer (Principal Financial and Accounting Officer) - -------------------------------------------------------------------------------- 20. 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 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS RETURN ON EQUITY AND ASSETS
12/31/98 TO ANNUALIZED 3/31/99 ---------- -------- Return on average total assets 0.58% 0.15% Return on average equity 5.24% 1.31% Dividend Payout Ratio NA NA Average Equity to Average Assets 11.10% STATEMENT OF COMPUTER PER SHARE EARNINGS Net income before cumulative effect of change in accounting principle $393,901 Net income $351,691 Average Shares Outstanding 2,472,500 Basic and diluted net income per share before effect of change in accounting principle $0.16 Basic and diluted net income per share $0.14
- -------------------------------------------------------------------------------- 22. EX-27 3 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-1999 MAR-31-1999 7,196,756 520,956 10,800,000 0 0 27,256,775 27,256,775 214,716,272 (3,220,100) 261,671,299 216,995,409 16,995,409 722,140 0 0 0 28,181,798 (1,223,392) 261,671,299 4,061,230 378,822 91,143 4,531,195 2,420,624 2,601,417 1,929,778 455,000 0 1,262,600 421,901 421,901 0 42,210 351,691 0.14 0.14 3.29 0 0 0 0 (2,765,100) 0 0 (3,220,100) (3,220,100) 0 0
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