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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, 2003
[ ] 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)
5650 BYRON CENTER AVENUE SW, WYOMING, MI 49509
(Address of principal executive offices)
(616) 406-3777
(Registrant's telephone number, including area code)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
At May 8, 2003, there were 5,423,887 shares of Common Stock outstanding.
MERCANTILE BANK CORPORATION
INDEX
PART I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2003 (Unaudited) and December 31, 2002................................... 1
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 2003 (Unaudited) and
March 31, 2002 (Unaudited)......................................................... 2
Consolidated Statement of Changes in Shareholders' Equity -
Three Months Ended March 31, 2003 (Unaudited) and
March 31, 2002 (Unaudited)........................................................ 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 (Unaudited) and
March 31, 2002 (Unaudited)......................................................... 4
Notes to Consolidated Financial Statements (Unaudited)................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 20
Item 4. Controls and Procedures....................................................... 22
PART II. Other Information
Item 1. Legal Proceedings............................................................. 23
Item 2. Changes in Securities and Use of Proceeds..................................... 23
Item 3. Defaults upon Senior Securities............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders........................... 23
Item 5. Other Information............................................................. 23
Item 6. Exhibits and Reports on Form 8-K.............................................. 23
Signatures............................................................................. 24
Certifications......................................................................... 25
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 28,091,000 $ 23,404,000
Short-term investments 203,000 213,000
Federal funds sold 0 4,500,000
--------------- ----------------
Total cash and cash equivalents 28,294,000 28,117,000
Securities available for sale 61,465,000 59,614,000
Securities held to maturity (fair value of $41,321,000 at
March 31, 2003 and $37,985,000 at December 31, 2002) 39,168,000 36,493,000
Federal Home Loan Bank stock 786,000 786,000
Total loans 812,487,000 771,554,000
Allowance for loan and lease losses (11,406,000) (10,890,000)
--------------- ----------------
Total loans, net 801,081,000 760,664,000
Premises and equipment, net 12,459,000 12,174,000
Bank owned life insurance policies 15,384,000 14,876,000
Accrued interest receivable 3,860,000 3,336,000
Other assets 5,290,000 5,795,000
--------------- ----------------
Total assets $ 967,787,000 $ 921,855,000
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 68,858,000 $ 62,405,000
Interest-bearing 732,239,000 691,708,000
--------------- ----------------
Total deposits 801,097,000 754,113,000
Securities sold under agreements to repurchase 45,238,000 50,335,000
Federal funds purchased 2,000,000 0
Federal Home Loan Bank advances 15,000,000 15,000,000
Other borrowed money 839,000 576,000
Accrued expenses and other liabilities 6,083,000 5,997,000
Trust preferred securities 16,000,000 16,000,000
--------------- ----------------
Total liabilities 886,257,000 842,021,000
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares
authorized, none issued
Common stock, no par value: 9,000,000 shares authorized;
5,418,259 shares outstanding at March 31, 2003 and
5,405,706 shares outstanding at December 31, 2002 75,560,000 75,530,000
Retained earnings 5,050,000 3,250,000
Accumulated other comprehensive income 920,000 1,054,000
--------------- ----------------
Total shareholders' equity 81,530,000 79,834,000
--------------- ----------------
Total liabilities and shareholders' equity $ 967,787,000 $ 921,855,000
=============== ================
See accompanying notes to consolidated financial statements.
1.
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2003 2002
---- ----
Interest income
Loans, including fees $ 11,443,000 $ 9,907,000
Investment securities 1,216,000 1,097,000
Federal funds sold and short-term investments 16,000 36,000
-------------- ---------------
Total interest income 12,675,000 11,040,000
Interest expense
Deposits 5,236,000 5,409,000
Federal Home Loan Bank advances 74,000 0
Short-term borrowings 171,000 201,000
Long-term borrowings 400,000 396,000
-------------- ---------------
Total interest expense 5,881,000 6,006,000
-------------- ---------------
NET INTEREST INCOME 6,794,000 5,034,000
Provision for loan and lease losses 625,000 460,000
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 6,169,000 4,574,000
Noninterest income
Service charges on accounts 269,000 194,000
Net gain on sales of securities 0 149,000
Other income 708,000 226,000
-------------- ---------------
Total noninterest income 977,000 569,000
Noninterest expense
Salaries and benefits 2,497,000 1,678,000
Occupancy 334,000 265,000
Furniture and equipment 221,000 173,000
Other expense 977,000 749,000
-------------- ---------------
Total noninterest expenses 4,029,000 2,865,000
-------------- ---------------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 3,117,000 2,278,000
Federal income tax expense 884,000 674,000
-------------- ---------------
NET INCOME $ 2,233,000 $ 1,604,000
============== ===============
COMPREHENSIVE INCOME $ 2,099,000 $ 1,317,000
============== ===============
Basic earnings per share $ 0.41 $ 0.30
============== ===============
Diluted earnings per share $ 0.40 $ 0.29
============== ===============
Average basic shares outstanding 5,412,521 5,405,534
============== ===============
Average diluted shares outstanding 5,535,167 5,495,835
============== ===============
See accompanying notes to consolidated financial statements.
2.
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
----- -------- ------ ------
BALANCE, JANUARY 1, 2002 $ 69,406,000 $ 1,649,000 $ 408,000 $ 71,463,000
Comprehensive income:
Net income for the period from
January 1, 2002 through
March 31, 2002 1,604,000 1,604,000
Change in net unrealized gain
(loss) on securities available
for sale, net of reclassifications
and tax effect (287,000) (287,000)
----------------
Total comprehensive income 1,317,000
Stock option exercise, 578 shares 6,000 6,000
Issuance costs from December 2001
common stock sale (15,000) (15,000)
---------------- --------------- ----------- ----------------
BALANCE, MARCH 31, 2002 $ 69,397,000 $ 3,253,000 $ 121,000 $ 72,771,000
================ =============== =========== ================
BALANCE, JANUARY 1, 2003 $ 75,530,000 $ 3,250,000 $ 1,054,000 $ 79,834,000
Comprehensive income:
Net income for the period from
January 1, 2003 through
March 31, 2003 2,233,000 2,233,000
Change in net unrealized gain
(loss) on securities available
for sale, net of reclassifications
and tax effect (134,000) (134,000)
----------------
Total comprehensive income 2,099,000
Cash dividend (433,000) (433,000)
Employee stock purchase plan, 442 shares 10,000 10,000
Stock option exercises, 12,111 shares 20,000 20,000
---------------- --------------- ----------- ----------------
BALANCE, MARCH 31, 2003 $ 75,560,000 $ 5,050,000 $ 920,000 $ 81,530,000
================ =============== =========== ================
See accompanying notes to consolidated financial statements.
3.
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,233,000 $ 1,604,000
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 451,000 301,000
Provision for loan and lease losses 625,000 460,000
Net gain on sale of securities 0 (149,000)
Net change in:
Accrued interest receivable (524,000) (360,000)
Bank owned life insurance policies (208,000) (45,000)
Other assets 516,000 307,000
Accrued expenses and other liabilities 86,000 212,000
--------------- ----------------
Net cash from operating activities 3,179,000 2,330,000
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and payments, net (41,042,000) (34,082,000)
Purchases of:
Securities available for sale (8,749,000) (11,877,000)
Securities held to maturity (2,681,000) (2,071,000)
Proceeds from:
Sales of available for sale securities 0 10,572,000
Maturities, calls and repayments of available
for sale securities 6,574,000 4,960,000
Purchases of premises and equipment, net (551,000) (627,000)
Purchases of bank owned life insurance policies (300,000) 0
--------------- ----------------
Net cash from investing activities (46,749,000) (33,125,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 46,984,000 26,899,000
Stock option exercises 20,000 6,000
Employee stock purchase plan 10,000 0
Issuance costs of prior period common stock sale 0 (15,000)
Payment of cash dividend (433,000) 0
Net increase in federal funds purchase 2,000,000 0
Net increase in other borrowed money 263,000 167,000
Net increase (decrease) in securities sold under
agreements to repurchase (5,097,000) 788,000
--------------- ----------------
Net cash from financing activities 43,747,000 27,845,000
--------------- ----------------
Net change in cash and cash equivalents 177,000 (2,950,000)
Cash and cash equivalents at beginning of period 28,117,000 19,938,000
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,294,000 $ 16,988,000
=============== ================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 5,430,000 $ 5,462,000
Federal income tax 225,000 0
See accompanying notes to consolidated financial statements.
4.
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation: The unaudited financial statements for the three months
ended March 31, 2003 include the consolidated results of operations of
Mercantile Bank Corporation and its consolidated subsidiaries. These
subsidiaries include Mercantile Bank of West Michigan ("our bank"), our bank's
three wholly owned subsidiaries, Mercantile Bank Mortgage Company ("our mortgage
company"), Mercantile BIDCO, Inc. ("our BIDCO") and Mercantile Insurance Center,
Inc. ("our insurance center"), and our subsidiary MBWM Capital Trust I ("the
trust"). These consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K
and do not include all disclosures required by accounting principles generally
accepted in the United States of America for a complete presentation of our
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, 2003 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 our
annual report on Form 10-K for the year ended December 31, 2002.
Stock Compensation: Employee compensation expense under stock option plans is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2003 2002
---- ----
Net income as reported $ 2,233,000 $ 1,604,000
Deduct: Stock-based compensation expense
determined under fair value based method 82,000 64,000
Pro forma net income 2,151,000 1,540,000
Basic earnings per share as reported $ 0.41 $ 0.30
Pro forma basic earnings per share 0.40 0.28
Diluted earnings per share as reported $ 0.40 $ 0.29
Pro forma diluted earnings per share 0.39 0.28
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003 2002
---- ----
Risk-free interest rate 3.90% 5.25%
Expected option life 7 Years 10 Years
Expected stock price volatility 22% 29%
Dividend yield 1.30% 0%
(Continued)
5.
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. LOANS
Our total loans at March 31, 2003 were $812.5 million compared to $771.6
million at December 31, 2002, an increase of $40.9 million, or 5.3%. The
components of our outstanding balances at March 31, 2003 and December 31,
2002, and percentage increase in loans from the end of 2002 to the end of
the first quarter 2003 are as follows:
Percent
March 31, 2003 December 31, 2002 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
(dollars in thousands)
Real Estate:
Construction and
land development $ 116,062 14.3% $ 103,900 13.5% 11.7%
Secured by 1 - 4
family properties 62,432 7.7 60,828 7.9 2.6
Secured by multi-
family properties 15,632 1.9 13,025 1.7 20.0
Secured by
nonresidential
properties 379,205 46.7 357,431 46.3 6.1
Commercial 233,571 28.7 230,662 29.9 1.3
Leases 936 0.1 850 0.1 10.1
Consumer 4,649 0.6 4,858 0.6 (4.3)
----------- ----- ----------- ----- ---
$ 812,487 100.0% $ 771,554 100.0% 5.3%
=========== ===== =========== ===== ===
3. ALLOWANCE FOR LOAN AND LEASE LOSSES
The following is a summary of the activity in our allowance for loan and
lease losses account for the three months ended March 31:
2003 2002
---- ----
Balance at January 1 $ 10,890,000 $ 8,494,000
Charge-offs (132,000) (93,000)
Recoveries 23,000 64,000
Provision for loan and lease losses 625,000 460,000
-------------- ---------------
Balance at March 31 $ 11,406,000 $ 8,925,000
============== ===============
(Continued)
6.
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,
2003 2002
---- ----
Land and improvements $ 3,252,000 $ 3,234,000
Buildings and leasehold improvements 7,371,000 7,009,000
Furniture and equipment 4,498,000 4,327,000
-------------- ---------------
15,121,000 14,570,000
Less accumulated depreciation 2,662,000 2,396,000
-------------- ---------------
Premises and equipment, net $ 12,459,000 $ 12,174,000
============== ===============
Depreciation expense for the first quarter 2003 amounted to $266,000.
5. DEPOSITS
Our total deposits at March 31, 2003 were $801.1 million compared to $754.1
million at December 31, 2002, an increase of $47.0 million, or 6.2%. The
components of our outstanding balances at March 31, 2003 and December 31,
2002, and percentage increase in deposits from the end of 2002 to the end
of the first quarter 2003 are as follows:
Percent
March 31, 2003 December 31, 2002 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
(dollars in thousands)
Noninterest-bearing
demand $ 68,858 8.6% $ 62,405 8.3% 10.3%
Interest-bearing
checking 25,254 3.2 28,130 3.7 (10.2)
Money market 7,437 0.9 8,592 1.1 (13.4)
Savings 69,081 8.6 69,461 9.2 (0.5)
Time, under $100,000 7,318 0.9 7,002 0.9 4.5
Time, $100,000 and
over 86,930 10.9 66,005 8.8 31.7
----------- ----- ----------- ----- ---
264,878 33.1 241,595 32.0 9.6
Out-of-area time,
under $100,000 89,675 11.2 85,557 11.4 4.8
Out-of-area time,
$100,000 and over 446,544 55.7 426,961 56.6 4.6
----------- ----- ----------- ----- ---
536,219 66.9 512,518 68.0 4.6
----------- ----- ----------- ----- ---
Total deposits $ 801,097 100.0% $ 754,113 100.0% 6.2%
=========== ===== =========== ===== ===
(Continued)
7.
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. SHORT-TERM BORROWINGS
Information relating to our securities sold under agreements to repurchase
follows:
March 31, December 31,
2003 2002
---- ----
Outstanding balance at end of period $ 45,238,000 $ 50,335,000
Average interest rate at end of period 1.54% 1.54%
Average balance during the period $ 44,572,000 $ 43,468,000
Average interest rate during the period 1.53% 2.03%
Maximum month end balance during the period $ 45,238,000 $ 52,000,000
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 our 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. COMMITMENTS AND OFF-BALANCE SHEET RISK
Our bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of our 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 our 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. Our 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. Our 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.
(Continued)
8.
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the notional or contractual amounts of our financial
instruments with off-balance sheet risk at March 31, 2003 and December 31,
2002 follows:
March 31, December 31,
2003 2002
---- ----
Commercial unused lines of credit $ 139,140,000 $ 131,161,000
Unused lines of credit secured by 1 - 4 family
residential properties 13,191,000 12,381,000
Credit card unused lines of credit 6,885,000 5,824,000
Other consumer unused lines of credit 4,014,000 4,415,000
Commitments to make loans 42,360,000 24,267,000
Standby letters of credit 40,301,000 39,338,000
--------------- ----------------
$ 245,891,000 $ 217,386,000
=============== ================
8. REGULATORY MATTERS
We 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 our 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.
(Continued)
9.
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our actual capital levels (dollars in thousands) and minimum required
levels 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, 2003
Total capital (to risk
weighted assets)
Consolidated $ 108,017 11.8% $ 73,290 8.0% $ 91,612 10.0%
Bank 105,102 11.5 73,213 8.0 91,516 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 96,611 10.6 36,645 4.0 54,968 6.0
Bank 93,696 10.2 36,607 4.0 54,910 6.0
Tier 1 capital (to
average assets)
Consolidated 96,611 10.3 37,522 4.0 46,903 5.0
Bank 93,696 10.0 37,469 4.0 46,837 5.0
December 31, 2002
Total capital (to risk
weighted assets)
Consolidated $ 105,671 12.1% $ 69,862 8.0% $ 87,328 10.0%
Bank 102,810 11.8 69,728 8.0 87,160 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 94,781 10.9 34,931 4.0 52,397 6.0
Bank 91,920 10.6 34,864 4.0 52,296 6.0
Tier 1 capital (to
average assets)
Consolidated 94,781 10.7 35,355 4.0 44,193 5.0
Bank 91,920 10.4 35,313 4.0 44,142 5.0
We were categorized as well capitalized at March 31, 2003 and year-end
2002.
The trust 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 the trust
to purchase an equivalent amount of subordinated debentures from the
company. The trust preferred securities carry a fixed rate of 9.60%, have a
stated maturity of 30 years, and, in effect, are guaranteed by the company.
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.
(Continued)
10.
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our capital levels as of March 31, 2003 include an adjustment for the 1.6
million trust preferred securities issued by the trust subject to certain
limitations. Federal Reserve guidelines limit the amount of trust preferred
securities which can be included in our Tier 1 capital to 25% of total Tier
1 capital. As of March 31, 2003, the entire $16.0 million of the trust
preferred securities were included as Tier 1 capital.
Our and our bank's ability to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound
banking practices. We declared a 5% stock dividend on January 6, 2003, that
was paid on February 3, 2003 to record holders as of January 17, 2003. Also
on January 6, 2003, we declared a $0.08 per share cash dividend on our
common stock, which was paid on March 10, 2003 to record holders as of
February 10, 2003. That represented the first cash dividend on our common
stock since our formation in 1997. On April 8, 2003, we declared a $0.08
per share cash dividend on our common stock, payable on June 10, 2003 to
record holders as of May 12, 2003.
9. BENEFIT PLANS
We sponsor an employee stock purchase plan which allows employees to defer
after-tax payroll dollars and purchase our stock on a quarterly basis. We
have registered 25,000 shares of common stock to be issued and purchased
under the plan; however, the plan allows for shares to be purchased
directly from us or on the open market. During the three months ended March
31, 2003, we issued the first 442 shares under the plan.
11.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 our company. 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. We undertake 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.
INTRODUCTION
The following discussion compares the financial condition of Mercantile Bank
Corporation and its consolidated subsidiaries, Mercantile Bank of West Michigan
("our bank"), our bank's three wholly owned subsidiaries Mercantile Bank
Mortgage Company ("our mortgage company"), Mercantile BIDCO, Inc. ("our BIDCO"),
and Mercantile Insurance Center, Inc. ("our insurance company"), and our
subsidiary MBWM Capital Trust I ("the trust"), at March 31, 2003 to December 31,
2002 and the results of operations for the three months ended March 31, 2003 and
March 31, 2002. This discussion should be read in conjunction with the interim
consolidated financial statements and footnotes included herein. Unless the text
clearly suggests otherwise, references in this report to "us," "we," "our" or
"the company" include Mercantile Bank Corporation and its consolidated
subsidiaries referred to above.
SUBSEQUENT EVENTS
On April 30, 2003, our bank purchased an existing building situated on 2.75
acres of land located approximately two miles north of the center of downtown
Grand Rapids for approximately $1.3 million. Subject to banking regulatory
approvals, we plan to demolish the existing building and design and construct a
four-story facility on this property. This facility will serve as the new
location for our current downtown facility, and will house the administration
and loan operations functions currently housed at other of our locations.
Expected completion date of the new facility is late 2004 to early 2005.
On April 14, 2003, our bank entered into a lease agreement with an unaffiliated
third party to lease approximately 1,100 square feet in a facility located in
Holland, Michigan. The facility will house a new retail mortgage loan production
office scheduled to open by the end of the second quarter of 2003. The lease has
an initial term of six months, with three six-month renewal options.
12.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
During the first three months of 2003, assets increased from $921.9 million on
December 31, 2002, to $967.8 million on March 31, 2003. This represents a total
increase in assets of $45.9 million, or 5.0%. The asset growth was comprised
primarily of a $40.4 million increase in net loans and $4.5 million increase in
securities. The increase in total assets was primarily funded by $47.0 million
growth in deposits and a $4.5 million decline in federal funds sold.
Commercial loans increased by $39.5 million, or 5.6%, during the first three
months of 2003, and at March 31, 2003 totaled $745.4 million, or 91.7% of the
total loan portfolio. The continued significant concentration of the loan
portfolio in commercial loans and the rapid growth of this portion of business
is consistent with our stated strategy of focusing a substantial amount of
efforts on "wholesale" banking. Corporate and business lending continues to be
an area of expertise of our senior management team, and our eleven commercial
lenders have over 170 years of combined commercial lending experience. Of each
of the loan categories that we originate, commercial loans are the most
efficiently originated and managed, thus reducing overhead costs by
necessitating the attention of fewer employees. Our commercial lending business
generates the greatest amount of local deposits, and it is virtually the only
source of significant demand deposits.
Residential mortgage loans increased by $1.6 million during the first three
months of 2003, while the balance of our consumer loan portfolio declined by
$0.2 million. As of March 31, 2003, residential mortgage and consumer loans
totaled a combined $67.1 million, or 8.3% of the total loan portfolio. Although
our non-commercial loan portfolios are expected to increase in future periods,
given our wholesale banking strategy, the commercial sector of the lending
efforts and resultant assets are expected to remain the dominant loan portfolio
category.
The quality of our loan portfolio remains strong. Net loan charge-offs during
the first three months of 2003 totaled $109,000, or 0.06% of average total loans
on an annualized basis. Past due loans and nonaccrual loans at March 31, 2003
totaled $533,000, or 0.07% of period-ending total loans. We believe we have
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. Over 98% of the loan
portfolio consists of loans extended directly to companies and individuals doing
business and residing within our market area. The remaining portion is comprised
of commercial loans participated with certain unaffiliated commercial banks
outside of the immediate area, which are underwritten using the same
underwriting criteria as though our bank was the originating bank.
Securities increased by $4.5 million, or 4.7%, during the first three months of
2003. Purchases during the first three months of 2003 totaled $11.4 million,
with maturities, calls and repayments totaling $6.6 million. There were no
security sales during the first three months of 2003. Holdings of securities
remained confined to U.S. Government Agency bonds, mortgage-backed securities
issued or guaranteed by U.S. Government Agencies, investment grade tax-exempt
municipal securities and Federal Home Loan Bank stock.
13.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Deposits increased $47.0 million during the first three months of 2003, totaling
$801.1 million at March 31, 2003. Local deposits increased $23.3 million, or
9.6%, while out-of-area deposits increased $23.7 million, or 4.6%. As a percent
of total deposits, local deposits increased from 32.0% on December 31, 2002, to
33.1% at March 31, 2003. Noninterest-bearing demand deposits, comprising 8.6% of
total deposits, increased $6.5 million during the first three months of 2003.
Savings deposits (8.6% of total deposits) decreased $0.4 million,
interest-bearing checking accounts (3.2% of total deposits) decreased $2.9
million and money market deposit accounts (0.9% of total deposits) decreased
$1.2 million during the first three months of 2003. Local certificates of
deposit, comprising 11.8% of total deposits, increased by $21.2 million during
the first three months of 2003.
Out-of-area deposits totaled $536.2 million, or 66.9% of total deposits, as of
March 31, 2003. Out-of-area deposits consist of certificates of deposit
primarily obtained from depositors located outside our 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
our asset growth, 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. During the first three months of 2003
rates paid on new out-of-area certificates of deposit were generally lower than
rates paid on new certificates of deposit issued to local customers. 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.
Securities sold under agreements to repurchase ("repurchase agreements")
decreased by $5.1 million during the first three months of 2003. As part of our
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 our business checking deposit accounts.
LIQUIDITY
Liquidity is measured by our ability to raise funds through deposits, borrowed
funds, capital or cash flow from the repayment of loans and securities. These
monies are used to fund loan requests, meet deposit withdrawals, maintain
reserve requirements, and support our operations. 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.
14.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Our 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 our 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, we have regularly obtained
certificates of deposit from customers outside of the market area and placed by
deposit brokers for a fee, as well as certificates of deposit obtained from the
deposit owners directly. As of March 31, 2003, out-of-area deposits totaled
$536.2 million, or 63.4% of combined deposits and repurchase agreements,
compared to $512.5 million, or 63.7% of combined deposits and repurchase
agreements, as of December 31, 2002. Reliance on out-of-area deposits is
expected to be ongoing due to our planned future growth.
As a member of the Federal Home Loan Bank of Indianapolis ("FHLBI"), our bank
has access to the FHLBI's borrowing programs. At March 31, 2003, advances from
the FHLBI totaled $15.0 million, unchanged from total advances outstanding at
December 31, 2002. Based on available collateral at March 31, 2003, our bank
could borrow up to approximately $100.0 million.
Our bank 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 and our bank was generally in a
federal funds sold position during the first quarter of 2003. The average
balance of federal funds purchased during the first three months of 2003 equaled
$0.8 million, compared to a $5.4 million average federal funds sold position. At
March 31, 2003 we were in a federal funds purchased position of $2.0 million,
compared to a federal funds sold position of $4.5 million as of December 31,
2002.
In addition to typical loan funding and deposit flow, we must maintain liquidity
to meet the demands of certain unfunded loan commitments and standby letters of
credit. As of March 31, 2003, our bank had a total of $205.6 million in unfunded
loan commitments and $40.3 million in unfunded standby letters of credit. Of the
total unfunded loan commitments, $163.2 million were commitments available as
lines of credit to be drawn at any time as customers' cash needs vary, and $42.4
million were for loan commitments scheduled to close and become funded within
the next three months. We monitor fluctuations in loan balances and commitment
levels, and include such data in managing overall liquidity.
CAPITAL RESOURCES
Shareholders' equity is a noninterest-bearing source of funds that provides
support for asset growth. Shareholders' equity increased by $1.7 million during
the first three months of 2003, from $79.8 million on December 31, 2002, to
$81.5 million at March 31, 2003. The increase is primarily attributable to net
income of $2.2 million recorded during the first quarter of 2003. Shareholders'
equity was negatively impacted during the first quarter of 2003 by the payment
of cash dividends totaling $0.4 million and a $0.1 million mark-to-market
adjustment for available for sale securities as defined in SFAS No. 115.
In September 1999 we, through the trust, issued 1.6 million shares of trust
preferred securities at $10.00 per trust preferred security. Substantially all
of the net proceeds were contributed to our bank as capital and were used to
support growth in assets, fund investments in loans and securities, and for
general corporate purposes. Although not part of shareholders' 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,
2003, the entire $16.0 million of trust preferred securities were included as
Tier 1 capital.
15.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
We are subject to regulatory capital requirements primarily administered by
federal banking regulatory agencies. Failure to meet the various capital
requirements can initiate regulatory action that could have a direct material
effect on the financial statements. Since our bank commenced operations, both
the company and our bank have been categorized as "Well Capitalized," the
highest classification contained within the banking regulations. The capital
ratios of the company and our bank as of March 31, 2003 and December 31, 2002
are disclosed under Note 8 of the Notes to Consolidated Financial Statements.
Our and our bank's ability to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. We declared a 5% stock dividend on January 6, 2003, that was paid on
February 3, 2003 to record holders as of January 17, 2003. Also on January 6,
2003, we declared a $0.08 per share cash dividend on our common stock, which was
paid on March 10, 2003 to record holders as of February 10, 2003. That
represented the first cash dividend on our common stock since our formation in
1997. On April 8, 2003, we declared a $0.08 per share cash dividend on our
common stock, payable on June 10, 2003 to record holders as of May 12, 2003.
RESULTS OF OPERATIONS
Net income for the first quarter of 2003 was $2.2 million ($0.41 per basic share
and $0.40 per diluted share), which represents a 39.2% increase over net income
of $1.6 million ($0.30 per basic share and $0.29 per diluted share) recorded
during the first quarter of 2002. The improvement in net income was primarily
the result of an increase in net interest income, an improved net interest
margin and higher noninterest income.
Interest income during the first quarter of 2003 was $12.7 million, an increase
of 14.8% over the $11.0 million earned during the first quarter of 2002. The
growth in interest income is primarily attributable to an increase in earning
assets, which more than offset the negative impact of a declining interest rate
environment. During the first three months of 2003 earning assets averaged
$892.7 million, $200.5 million higher than the average earning assets of $692.2
million during the same time period in 2002. Average loans were up $180.3
million and securities increased $23.2 million, while average federal funds sold
were down $3.1 million. Negatively impacting the growth in interest income was
the decline in yield on earning assets. During the first three months of 2003
and 2002, earning assets had a weighted average rate (tax equivalent-adjusted
basis) of 5.84% and 6.55%, respectively. The decrease in the weighted average
yield was primarily due to the continued decline in market interest rates,
whereby many interest rate indices are currently near historical lows.
Interest expense during the first quarter of 2003 was $5.9 million, a decrease
of 2.1% from the $6.0 million expensed during the first quarter of 2002. The
decrease in interest expense is primarily attributable to a decline in market
interest rates, which more than offset an increase in interest-bearing
liabilities necessitated by asset growth. During the first three months of 2003
interest-bearing liabilities averaged $796.8 million, $192.8 million higher than
the average interest-bearing liabilities of $604.0 million during the same time
period in 2002. Average interest-bearing deposits were up $169.0 million, FHLB
advances increased $15.0 million and short term borrowings were up $8.4 million.
Positively impacting interest expense was the decline in the cost of
interest-bearing liabilities. During the first three months of 2003 and 2002,
interest-bearing liabilities had a weighted average rate of 2.99% and 4.03%,
respectively. The decrease was primarily due to the decline in market interest
rates.
16.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net interest income during the first quarter of 2003 was $6.8 million, an
increase of 35.0% over the $5.0 million earned during the first quarter of 2002.
The increase in net interest income was due to the growth in earning assets and
improved net interest margin. The net interest margin increased from 3.03%
during the first three months of 2002 to 3.17% during the first three months of
2003, primarily reflecting the overall positive impact of the declining and low
interest rate environment.
The following table sets forth certain information relating to our 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 2003 and 2002. 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%.
17.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Quarters ended March 31,
---------------------2 0 0 3--------------- --------------------2 0 0 2---------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
Loans $ 786,406 $ 11,443 5.90 $ 606,065 $ 9,907 6.63
Investment securities 100,700 1,405 5.58 77,538 1,236 6.46
Federal funds sold 5,351 16 1.19 8,424 35 1.69
Short term investments 203 0 0.75 194 1 1.25
-------------- ------------ ---- -------------- ------------- ----
Total interest - earning
assets 892,660 12,864 5.84 692,221 11,179 6.55
Allowance for loan and
lease losses (11,175) (8,751)
Other assets 56,558 36,696
-------------- --------------
Total assets $ 938,043 $ 720,166
============== ==============
Interest-bearing
deposits $ 719,789 $ 5,236 2.95 $ 550,840 $ 5,409 3.98
Short-term borrowings 45,327 171 1.53 36,880 201 2.21
Federal Home Loan
Bank advances 15,000 74 1.97 0 0 NA
Long-term borrowings 16,713 400 9.57 16,309 396 9.73
-------------- ------------ ---- -------------- ------------- ----
Total interest-bearing
liabilities 796,829 5,881 2.99 604,029 6,006 4.03
Noninterest-bearing
deposits 55,048 38,874
Other liabilities 5,560 4,888
Shareholders' equity 80,606 72,375
-------------- ------------ ---- -------------- ------------- ----
Total liabilities and
shareholders' equity $ 938,043 $ 720,166
============== ==============
Net interest income $ 6,983 $ 5,173
============ =============
Net interest rate spread 2.85% 2.52%
Net interest spread on average assets 3.02 2.91
Net interest margin on earning assets 3.17 3.03
Provisions to the allowance for loan and lease losses during the first quarter
of 2003 were $625,000, compared to the $460,000 that was expensed during the
first quarter of 2002. The increase primarily reflects the higher volume of loan
growth and net loan charge-offs during the first three months of 2003 compared
to the first three months of 2002. Net loan charge-offs of $109,000 were
recorded during the first three months of 2003, compared to net loan charge-offs
of $29,000 during the same time period in 2002. The allowance for loan and lease
losses as a percentage of total loans outstanding as of March 31, 2003 was
1.40%, compared to 1.44% at March 31, 2002.
18.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In each accounting period, the allowance for loan and lease losses is adjusted
to the amount believed necessary to maintain the allowance for loan and lease
losses at adequate levels. Through the loan review and credit departments, we
attempt to allocate specific portions of the allowance for loan and lease losses
based on specifically identifiable problem loans. The evaluation of the
allowance for loan and lease losses is further based on, although not limited
to, consideration of the internally prepared Loan Loss Reserve Analysis
("Reserve Analysis"), composition of the loan portfolio, third party analysis of
the loan administration processes and loan portfolio and general economic
conditions. In addition, the rapid loan growth since our inception is taken into
account.
The Reserve Analysis, used since the inception of our bank and completed
monthly, applies reserve allocation factors to outstanding loan balances to
calculate an overall allowance dollar amount. For commercial loans, which
continue to comprise a vast majority of total loans, reserve allocation factors
are based upon the loan ratings as determined by our comprehensive loan rating
paradigm that is administered by our loan review function. For retail loans
reserve allocation factors are based upon the type of credit. The reserve
allocation factors are based on the experience of senior management making
similar loans in the same community over the past 15 years. The Reserve Analysis
is reviewed regularly by senior management and the Board of Directors and is
adjusted periodically based upon identifiable trends and experience.
Noninterest income during the first quarter of 2003 was $977,000, an increase of
71.7% over the $569,000 earned during the first quarter of 2002. Service charge
income on deposit and repurchase agreements increased $75,000 (38.7%) during the
first quarter of 2003 over that earned in the comparable time period in 2002 due
primarily to new accounts opened during the last twelve months, a reduction of
the earnings credit rate and modest increases in fee structure. Reflecting the
declining interest rate environment and resulting increase in residential
mortgage loan refinancings, fees earned on referring residential mortgage loan
applicants to various third parties increased $184,000 (191.6%). Noninterest
income related to the cash surrender value of bank owned life insurance policies
("BOLI") increased $164,000 (364.4%), primarily reflecting the $10.8 million
purchase of additional BOLI subsequent to the end of the first quarter of 2002.
Noninterest expense during the first quarter of 2003 was $4.0 million, an
increase of 40.7% over the $2.9 million expensed during the first quarter of
2002. Employee salaries and benefits expense increased $819,000, primarily
resulting from the hiring of additional staff and merit annual pay raises. The
level of full-time equivalent employees increased from 101 at the end of the
first quarter in 2002 to 128 at the end of the first quarter in 2003, an
increase of 26.7%. Occupancy and furniture and equipment costs increased from
$438,000 during the first quarter of 2002 to $555,000 during the first quarter
of 2003, or 26.7%. A majority of this increase is related to our new branch
facility located in Southeast Grand Rapids that opened in December of 2002.
General overhead costs also increased, reflecting the additional expenses
required to administer the significantly increased asset base.
Monitoring and controlling noninterest costs, while at the same time providing
high quality service to customers, is a key component to our business strategy.
While the dollar volume of noninterest costs has increased, the rate of growth
has been lower than the increase in net interest income and noninterest income.
Noninterest expenses increased by $1.2 million during the first three months of
2003 over the amount expensed during the first three months of 2002; however,
net revenues (net interest income plus noninterest income) increased at a
substantially higher level of $2.2 million during the same time period.
19.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Federal income tax expense was $884,000 during the first three months of 2003,
an increase of 31.2% over the $674,000 expensed in the first three months of
2002. The increase was primarily due to the higher level of net income before
federal income tax.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure is interest rate risk and, to a lesser extent,
liquidity risk. All of our transactions are denominated in U.S. dollars with no
specific foreign exchange exposure. We have only limited agricultural-related
loan assets and therefore have 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 our financial condition to adverse movements in interest
rates. We derive our income primarily from the excess of interest collected on
our interest-earning assets over the interest paid on our interest-bearing
liabilities. The rates of interest we earn on our assets and owe on our
liabilities generally are established contractually for a period of time. Since
market interest rates change over time, we are exposed to lower profitability if
we 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 our earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to our 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. Our 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 we assess the existing and potential future effects of
changes in interest rates on our financial condition, including capital
adequacy, earnings, liquidity and asset quality.
We use two interest rate risk measurement techniques. 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 our net interest margin during periods of changing market
interest rates. The following table depicts our GAP position as of March 31,
2003 (dollars in thousands):
20.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------ ------ ----- ----- -----
Assets:
Commercial loans $ 302,457 $ 43,675 $ 363,817 $ 35,457 $ 745,406
Residential real estate loans 30,049 1,778 23,369 7,236 62,432
Consumer loans 926 476 3,142 105 4,649
Investment securities (1) 1,011 2,386 42,203 55,819 101,419
Short-term investments 203 203
Allowance for loan and
lease losses (11,406) (11,406)
Other assets 65,084 65,084
----------- ----------- ----------- ----------- -----------
Total assets 334,646 48,315 432,531 152,295 967,787
Liabilities:
Interest-bearing checking 25,254 25,254
Savings 69,081 69,081
Money market accounts 7,437 7,437
Time deposits less than $100,000 20,685 39,975 36,333 96,993
Time deposits $100,000 and over 129,151 266,889 137,434 533,474
Short-term borrowings 47,238 47,238
FHLB advances 10,000 5,000 15,000
Long-term borrowings 839 16,000 16,839
Noninterest-bearing checking 68,858 68,858
Other liabilities 6,083 6,083
----------- ----------- ----------- ----------- -----------
Total liabilities 299,685 316,864 178,767 90,941 886,257
Shareholders' equity 81,530 81,530
----------- ----------- ----------- ----------- -----------
Total sources of funds 299,685 316,864 178,767 172,471 967,787
----------- ----------- ----------- ----------- -----------
Net asset (liability) GAP $ 34,961 $ (268,549) $ 253,764 $ (20,176)
=========== =========== =========== ===========
Cumulative GAP $ 34,961 $ (233,588) $ 20,176
=========== =========== ===========
Percent of cumulative GAP to
total assets 3.6% (24.1)% 2.1%
=========== =========== ===========
(1) Mortgage-backed securities are categorized by expected final maturities
based upon prepayment trends as of March 31, 2003
The second interest rate risk measurement we use is commonly referred to as net
interest income simulation analysis. We believe that this methodology provides a
more accurate measurement of interest rate risk than the GAP analysis, and
therefore, serves as our primary interest rate risk measurement technique. 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 our strategies, among other factors.
21.
MERCANTILE BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
We conducted multiple simulations as of March 31, 2003, whereby it was assumed
that a simultaneous, instant and sustained change in market interest rates
occurred. The following table reflects the suggested impact on our net interest
income over the next twelve months, which are well within the 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 $ 134,000 0.5%
Interest rates down 100 basis points 687,000 2.3
No change in interest rates 1,046,000 3.5
Interest rates up 100 basis points 1,722,000 5.7
Interest rates up 200 basis points 2,408,000 8.0
The increase in our net interest income under all interest rate scenarios
reflects the expected repricing of local and out-of-area certificates of deposit
during the next twelve months. Unlike interest rates on our floating rate loans
that have declined since the beginning of 2001 as market interest rates began to
decline, our certificates of deposit have fixed interest rates and only reprice
at maturity. Throughout most of the remainder of 2003 we have a large volume of
certificates of deposit that will mature and are expected to be refinanced at
lower interest rates.
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.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the supervision of and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on that evaluation, our
management, including our Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective as of March
31, 2003. There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
March 31, 2003.
22.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may be involved in various legal proceedings that are
incidental to our business. In our opinion, we are not a party to any current
legal proceedings that are material to our financial condition, 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 Our Articles of Incorporation are incorporated by reference to Exhibit 3.1 of our
Registration Statement on Form SB-2 (Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 Our Amended and Restated Bylaws dated as of January 16, 2003 are incorporated by
reference to Exhibit 3.2 of our Registration Statement on Form S-3 (Commission File No.
333-103376) that became effective on February 21, 2003
11 Statement re Computation of Per Share Earnings
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
We filed no reports on Form 8-K during the quarter for which this report is
filed.
23.
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 8, 2003.
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/ Charles E. Christmas
---------------------------------
Charles E. Christmas
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
24.
CERTIFICATION
I, Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of Mercantile
Bank Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mercantile Bank
Corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 8, 2003 /s/ Gerald R. Johnson, Jr.
-----------------------------
Gerald R. Johnson, Jr.
Chairman and Chief Executive Officer
25.
CERTIFICATION
I, Charles E. Christmas, Senior Vice President, Chief Financial Officer and
Treasurer of Mercantile Bank Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mercantile Bank
Corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 8, 2003 /s/ Charles E. Christmas
----------------------------------------------
Charles E. Christmas.
Senior Vice President, Chief Financial Officer
and Treasurer
26.
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
3.1 Our Articles of Incorporation are incorporated by reference to Exhibit 3.1 of our
Registration Statement on Form SB-2 (Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 Our Amended and Restated Bylaws dated as of January 16, 2003 are incorporated by
reference to Exhibit 3.2 of our Registration Statement on Form S-3 (Commission File No.
333-103376) that became effective on February 21, 2003
11 Statement re Computation of Per Share Earnings
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
27.