-----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, NXWkrSBH/MguET+x7QHbM1LMkHFT6Iy43zCfrto9/g+NIMP5lRGmiPkk8zOLEW8F tfqSBsWvOHY98siKuXYrLw== 0000950124-04-002142.txt : 20040507 0000950124-04-002142.hdr.sgml : 20040507 20040507160349 ACCESSION NUMBER: 0000950124-04-002142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26719 FILM NUMBER: 04789290 BUSINESS ADDRESS: STREET 1: 5650 BYRON CENTER AVENUE S. W. CITY: WYOMING STATE: MI ZIP: 49509 BUSINESS PHONE: 616 406-3777 MAIL ADDRESS: STREET 1: 5650 BYRON CENTER AVENUE S. W. CITY: WYOMING STATE: MI ZIP: 49509 10-Q 1 k84950e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 03/31/2004 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, 2004 [ ] 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 registrant 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) (Zip Code) (616) 406-3777 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 3, 2004, there were 7,170,510 shares of Common Stock outstanding. MERCANTILE BANK CORPORATION INDEX
Page No. -------- PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2004 (Unaudited) and December 31, 2003................................... 1 Consolidated Statements of Income and Comprehensive Income - Three Months Ended March 31, 2004 (Unaudited) and March 31, 2003 (Unaudited)......................................................... 2 Consolidated Statement of Changes in Shareholders' Equity - Three Months Ended March 31, 2004 (Unaudited) and March 31, 2003 (Unaudited)......................................................... 3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 (Unaudited) and March 31, 2003 (Unaudited)......................................................... 4 Notes to Consolidated Financial Statements (Unaudited)................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 21 Item 4. Controls and Procedures....................................................... 23 PART II. Other Information Item 1. Legal Proceedings............................................................. 24 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.................................................................. 24 Item 3. Defaults upon Senior Securities............................................... 24 Item 4. Submission of Matters to a Vote of Security Holders........................... 24 Item 5. Other Information............................................................. 25 Item 6. Exhibits and Reports on Form 8-K.............................................. 25 Signatures............................................................................. 26
MERCANTILE BANK CORPORATION CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2004 2003 --------------- --------------- (Unaudited) ASSETS Cash and due from banks $ 29,948,000 $ 16,309,000 Short-term investments 717,000 255,000 Federal funds sold 5,000,000 0 --------------- --------------- Total cash and cash equivalents 35,665,000 16,564,000 Securities available for sale 64,974,000 71,421,000 Securities held to maturity (fair value of $49,401,000 at March 31, 2004 and $47,102,000 at December 31, 2003) 46,531,000 45,112,000 Federal Home Loan Bank stock 5,784,000 4,977,000 Total loans and leases 1,111,152,000 1,035,963,000 Allowance for loan and lease losses (15,337,000) (14,379,000) --------------- --------------- Total loans and leases, net 1,095,815,000 1,021,584,000 Premises and equipment, net 16,580,000 15,305,000 Bank owned life insurance policies 16,618,000 16,441,000 Accrued interest receivable 4,824,000 4,098,000 Other assets 7,140,000 7,835,000 --------------- --------------- Total assets $ 1,293,931,000 $ 1,203,337,000 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 85,900,000 $ 76,579,000 Interest-bearing 909,434,000 826,313,000 --------------- --------------- Total deposits 995,334,000 902,892,000 Securities sold under agreements to repurchase 41,613,000 49,545,000 Federal funds purchased 0 6,000,000 Federal Home Loan Bank advances 100,000,000 90,000,000 Subordinated debentures 16,495,000 16,495,000 Other borrowed money 1,361,000 1,114,000 Accrued expenses and other liabilities 6,057,000 7,090,000 --------------- --------------- Total liabilities 1,160,860,000 1,073,136,000 Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, none issued 0 0 Common stock, no par value: 9,000,000 shares authorized; 7,168,592 shares outstanding at March 31, 2004 and 6,805,914 shares outstanding at December 31, 2003 130,795,000 118,560,000 Retained earnings 1,666,000 11,421,000 Accumulated other comprehensive income 610,000 220,000 --------------- --------------- Total shareholders' equity 133,071,000 130,201,000 --------------- --------------- Total liabilities and shareholders' equity $ 1,293,931,000 $ 1,203,337,000 =============== ===============
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, 2004 2003 ------------ ------------ Interest income Loans and leases, including fees $13,908,000 $11,443,000 Investment securities 1,426,000 1,216,000 Federal funds sold 19,000 16,000 Short-term investments 1,000 0 ----------- ----------- Total interest income 15,354,000 12,675,000 Interest expense Deposits 4,750,000 5,236,000 Short-term borrowings 170,000 171,000 Federal Home Loan Bank advances 529,000 74,000 Long-term borrowings 416,000 410,000 ----------- ----------- Total interest expense 5,865,000 5,891,000 ----------- ----------- NET INTEREST INCOME 9,489,000 6,784,000 Provision for loan and lease losses 1,244,000 625,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 8,245,000 6,159,000 Noninterest income Service charges on accounts 299,000 269,000 Net gain on sales of securities 78,000 0 Other income 662,000 718,000 ----------- ----------- Total noninterest income 1,039,000 987,000 Noninterest expense Salaries and benefits 3,283,000 2,497,000 Occupancy 386,000 334,000 Furniture and equipment 273,000 221,000 Other expense 1,213,000 977,000 ----------- ----------- Total noninterest expenses 5,155,000 4,029,000 ----------- ----------- INCOME BEFORE FEDERAL INCOME TAX EXPENSE 4,129,000 3,117,000 Federal income tax expense 1,156,000 884,000 ----------- ----------- NET INCOME $ 2,973,000 $ 2,233,000 =========== =========== COMPREHENSIVE INCOME $ 3,363,000 $ 2,099,000 =========== =========== Basic earnings per share $ 0.42 $ 0.39 =========== =========== Diluted earnings per share $ 0.41 $ 0.38 =========== =========== Average basic shares outstanding 7,158,971 5,683,147 =========== =========== Average diluted shares outstanding 7,314,127 5,811,925 =========== ===========
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, 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 Common stock 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 ================ =============== =========== ================ BALANCE, JANUARY 1, 2004 $ 118,560,000 $ 11,421,000 $ 220,000 $ 130,201,000 Comprehensive income: Net income for the period from January 1, 2004 through March 31, 2004 2,973,000 2,973,000 Change in net unrealized gain (loss) on securities available for sale, net of reclassifications and tax effect 390,000 390,000 ---------------- Total comprehensive income 3,363,000 Payment of 5% stock dividend, 341,337 shares 12,111,000 (12,115,000) (4,000) Common stock cash dividend (613,000) (613,000) Employee stock purchase plan, 504 shares 17,000 17,000 Dividend reinvestment plan, 556 shares 19,000 19,000 Stock option exercises, 21,322 shares 88,000 88,000 ---------------- --------------- ----------- ---------------- BALANCE, MARCH 31, 2004 $ 130,795,000 $ 1,666,000 $ 610,000 $ 133,071,000 ================ =============== =========== ================
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, 2004 March 31, 2003 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,973,000 $ 2,233,000 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 412,000 451,000 Provision for loan and lease losses 1,244,000 625,000 Net gain on sales of securities (78,000) 0 Net change in: Accrued interest receivable (726,000) (524,000) Bank owned life insurance policies (177,000) (208,000) Other assets 431,000 516,000 Accrued expenses and other liabilities (1,033,000) 86,000 ------------ ------------ Net cash from operating activities 3,046,000 3,179,000 CASH FLOWS FROM INVESTING ACTIVITIES Loan and lease originations and payments, net (75,475,000) (41,042,000) Purchases of: Securities available for sale (2,994,000) (8,749,000) Securities held to maturity (1,426,000) (2,681,000) Federal Home Loan Bank stock (807,000) 0 Proceeds from: Sales of available for sale securities 1,748,000 0 Maturities, calls and repayments of available for sale securities 8,324,000 6,574,000 Purchases of premises and equipment, net (1,579,000) (551,000) Purchases of bank owned life insurance policies 0 (300,000) ------------ ------------ Net cash from investing activities (72,209,000) (46,749,000) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 92,442,000 46,984,000 Stock option exercises 88,000 20,000 Employee stock purchase plan 17,000 10,000 Dividend reinvestment plan 19,000 0 Cash paid in lieu of fractional shares on stock dividend (4,000) 0 Payment of cash dividend (613,000) (433,000) Net increase in Federal Home Loan Bank advances 10,000,000 0 Net increase (decrease) in federal funds purchase (6,000,000) 2,000,000 Net increase in other borrowed money 247,000 263,000 Net decrease in securities sold under agreements to repurchase (7,932,000) (5,097,000) ------------ ------------ Net cash from financing activities 88,264,000 43,747,000 ------------ ------------ Net change in cash and cash equivalents 19,101,000 177,000 Cash and cash equivalents at beginning of period 16,564,000 28,117,000 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,665,000 $ 28,294,000 ============ ============ Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 5,951,000 $ 5,430,000 Federal income tax 375,000 225,000
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, 2004 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 four subsidiaries, Mercantile Bank Mortgage Company, LLC ("our mortgage company"), Mercantile BIDCO, Inc. ("our BIDCO"), Mercantile Bank Real Estate Co., LLC ("our real estate company"), and Mercantile Insurance Center, Inc. ("our insurance center"). 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, 2004 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, 2003. MBWM Capital Trust I ("the trust"), a business trust formed by Mercantile Bank Corporation, sold 1.6 million trust preferred securities at $10.00 per trust preferred security in a September 1999 offering. Mercantile Bank Corporation issued subordinated debentures to the trust in exchange for the proceeds of the offering; the debentures and related debt issuance costs represent the sole assets of the trust. Prior to 2004, the trust was consolidated in our financial statements, with the trust preferred securities issued by the trust reported in liabilities as "Trust preferred securities" and the subordinated debentures eliminated in the consolidation. Under new accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the trust is no longer consolidated. Accordingly, Mercantile Bank Corporation does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures issued by Mercantile Bank Corporation and held by the trust, as these are no longer eliminated in consolidation. Amounts previously reported as "Trust preferred securities" in liabilities has been recaptioned "Subordinated debentures" and continue to be presented in liabilities on the balance sheet. The effect of no longer consolidating the trust does not significantly change the amounts reported as Mercantile Bank Corporation's assets, liabilities, equity or interest expense. Stock Dividend: All per share amounts and average shares outstanding have been adjusted for all periods presented to reflect the 5% stock dividend distributed on May 3, 2004. The Statement of Changes in Shareholders' Equity reflects the change in retained earnings and common stock for the value of the dividends paid. Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan and lease losses and recoveries, and decreased by charge-offs. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Allocations of the allowance may be made for specific loans and leases, but the entire allowance is available for any loan or lease that, in management's judgment, should be charged-off. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan or lease balance is confirmed. (Continued) 5. MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES (Continued) A loan or lease is impaired when full payment under the loan or lease terms is not expected. Impairment is evaluated in aggregate for smaller-balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan or lease is impaired, a portion of the allowance is allocated so that the loan or lease is reported, net, at the present value of estimated future cash flows using the loan's or lease's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans and leases are evaluated for impairment when payments are delayed, typically 90 days or more, or when the internal grading system indicates a doubtful classification. 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.
Three Months Three Months Ended Ended March 31, 2004 March 31, 2003 ------------- ------------- Net income as reported $ 2,973,000 $ 2,233,000 Deduct: Stock-based compensation expense determined under fair value based method 63,000 81,000 ------------- ------------- Pro forma net income 2,910,000 2,152,000 Basic earnings per share as reported $ 0.42 $ 0.39 Pro forma basic earnings per share 0.41 0.38 Diluted earnings per share as reported $ 0.41 $ 0.38 Pro forma diluted earnings per share 0.40 0.37
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date. Risk-free interest rate 3.65% 3.90% Expected option life 7 Years 7 Years Expected stock price volatility 25% 22% Dividend yield 1.00% 1.30%
(Continued) 6. MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. LOANS Our total loans at March 31, 2004 were $1,111.2 million compared to $1,036.0 million at December 31, 2003, an increase of $75.2 million, or 7.3%. The components of our outstanding balances at March 31, 2004 and December 31, 2003, and percentage increase in loans from the end of 2003 to the end of the first quarter 2004 are as follows:
Percent March 31, 2004 December 31, 2003 Increase/ Balance % Balance % (Decrease) -------------- -------------- -------------- -------------- -------------- Real Estate: Construction and land development $ 128,915,000 11.6% $ 117,649,000 11.4% 9.6% Secured by 1-4 family properties 97,294,000 8.8 92,339,000 8.9 5.4 Secured by multi-family properties 29,350,000 2.6 28,950,000 2.8 1.4 Secured by nonresidential properties 531,987,000 47.9 485,080,000 46.8 9.7 Commercial 316,128,000 28.5 304,800,000 29.4 3.7 Leases 2,632,000 0.2 2,309,000 0.2 14.0 Consumer 4,846,000 0.4 4,836,000 0.5 0.2 -------------- -------------- -------------- -------------- -------------- Total loans and leases $1,111,152,000 100.0% $1,035,963,000 100.0% 7.3% ============== ============== ============== ============== ==============
3. ALLOWANCE FOR LOAN AND LEASE LOSSES The following is a summary of the change in our allowance for loan and lease losses account for the three months ended March 31:
2004 2003 ---- ---- Balance at January 1 $ 14,379,000 $ 10,890,000 Charge-offs (298,000) (132,000) Recoveries 12,000 23,000 Provision for loan and lease losses 1,244,000 625,000 ------------ ------------ Balance at March 31 $ 15,337,000 $ 11,406,000 ============ ============
(Continued) 7. 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, 2004 2003 ----------- ----------- Land and improvements $ 5,753,000 $ 5,745,000 Buildings and leasehold improvements 9,639,000 8,183,000 Furniture and equipment 5,050,000 4,935,000 ----------- ----------- 20,442,000 18,863,000 Less accumulated depreciation 3,862,000 3,558,000 ----------- ----------- Premises and equipment, net $16,580,000 $15,305,000 =========== ===========
Depreciation expense amounted to $304,000 during the first quarter of 2004, compared to $266,000 in the first quarter of 2003. 5. DEPOSITS Our total deposits at March 31, 2004 were $995.3 million compared to $902.9 million at December 31, 2003, an increase of $92.4 million, or 10.2%. The components of our outstanding balances at March 31, 2004 and December 31, 2003, and percentage increase in deposits from the end of 2003 to the end of the first quarter 2004 are as follows:
Percent March 31, 2004 December 31, 2003 Increase/ Balance % Balance % (Decrease) ----------- ----- ------------ ----- ---------- Noninterest-bearing demand $ 85,900,000 8.6% $ 76,579,000 8.5% 12.2% Interest-bearing checking 35,373,000 3.6 34,241,000 3.8 3.3 Money market 9,402,000 0.9 8,290,000 0.9 13.4 Savings 120,183,000 12.1 101,710,000 11.3 18.2 Time, under $100,000 7,819,000 0.8 8,163,000 0.9 (4.2) Time, $100,000 and over 93,565,000 9.4 82,288,000 9.1 13.7 ------------ ----- ------------ ----- ---- 352,242,000 35.4 311,271,000 34.5 13.2 Out-of-area time, under $100,000 108,553,000 10.9 98,079,000 10.9 10.7 Out-of-area time, $100,000 and over 534,539,000 53.7 493,542,000 54.6 8.3 ------------ ----- ------------ ----- ---- 643,092,000 64.6 591,621,000 65.5 8.7 ------------ ----- ------------ ----- ---- Total deposits $995,334,000 100.0% $902,892,000 100.0% 10.2% ============ ===== ============ ===== ====
(Continued) 8. 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, 2004 2003 ----------- ----------- Outstanding balance at end of period $41,613,000 $49,545,000 Average interest rate at end of period 1.36% 1.38% Average balance during the period $47,129,000 $45,865,000 Average interest rate during the period 1.39% 1.45% Maximum month end balance during the period $50,138,000 $55,270,000
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. FEDERAL HOME LOAN BANK ADVANCES Our outstanding balances at March 31, 2004 and December 31, 2003 were as follows.
March 31, December 31, 2004 2003 ---- ---- Maturities April 2004 through September 2006, fixed rates from 1.46% to 3.21%, averaging 2.11% $100,000,000 Maturities January 2004 through September 2006, fixed rates from 1.54% to 3.21%, averaging 2.07% $ 90,000,000
Each advance is payable at its maturity date, and is subject to a prepayment fee if paid prior to the maturity date. The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of March 31, 2004 totaled $174.4 million, with availability approximating $66.0 million. Maturities of currently outstanding FHLB advances during the next five years are: 2004 $ 35,000,000 2005 45,000,000 2006 20,000,000 2007 0 2008 0
(Continued) 9. MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. 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. A summary of the contractual amounts of our financial instruments with off-balance sheet risk at March 31, 2004 and December 31, 2003 follows:
March 31, December 31, 2004 2003 ------------ ------------ Commercial unused lines of credit $193,021,000 $176,943,000 Unused lines of credit secured by 1 - 4 family residential properties 20,413,000 19,020,000 Credit card unused lines of credit 10,957,000 8,990,000 Other consumer unused lines of credit 6,978,000 5,569,000 Commitments to make loans 68,587,000 73,570,000 Standby letters of credit 57,704,000 57,918,000 ------------ ------------ $357,660,000 $342,010,000 ============ ============
9. 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. (Continued) 10. MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. REGULATORY MATTERS (Continued) 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. 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, 2004 Total capital (to risk weighted assets) Consolidated $163,802 13.2% $ 99,055 8.0% $123,819 10.0% Bank 160,249 13.0 98,924 8.0 123,655 10.0 Tier 1 capital (to risk weighted assets) Consolidated 148,465 12.0 49,528 4.0 74,292 6.0 Bank 144,912 11.7 49,462 4.0 74,193 6.0 Tier 1 capital (to average assets) Consolidated 148,465 11.9 50,030 4.0 62,537 5.0 Bank 144,912 11.6 49,954 4.0 62,442 5.0 December 31, 2003 Total capital (to risk weighted assets) Consolidated $160,360 13.8% $ 92,711 8.0% $115,888 10.0% Bank 156,950 13.6 92,556 8.0 115,695 10.0 Tier 1 capital (to risk weighted assets) Consolidated 145,981 12.6 46,356 4.0 69,533 6.0 Bank 142,571 12.3 46,278 4.0 69,417 6.0 Tier 1 capital (to average assets) Consolidated 145,981 12.5 46,756 4.0 58,444 5.0 Bank 142,571 12.2 46,703 4.0 58,378 5.0
(Continued) 11. MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. REGULATORY MATTERS (Continued) Our capital levels as of March 31, 2004 include the $16.0 million in 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, 2004, 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 April 7, 2004, that was paid on May 3, 2004 to record holders as of April 16, 2004. All earnings per share and dividend per share information have been adjusted for the payment of the 5% stock dividend. On January 6, 2004, we declared a $0.09 per share cash dividend on our common stock, which was paid on March 10, 2004 to record holders as of February 10, 2004. The $0.09 per share cash dividend represents an 18.4% increase from the $0.076 per share cash dividend that was paid during each of the four quarters during 2003. On April 7, 2004, we declared a $0.09 per share cash dividend on our common stock, which is payable on June 10, 2004 to record holders as of May 10, 2004. 10. 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 26,250 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, 2004, we issued 504 shares under the plan. (Continued) 12. 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 four subsidiaries Mercantile Bank Mortgage Company ("our mortgage company"), Mercantile BIDCO, Inc. ("our BIDCO"), Mercantile Bank Real Estate Co., LLC ("our real estate company") and Mercantile Insurance Center, Inc. ("our insurance company"), at March 31, 2004 to December 31, 2003 and the results of operations for the three months ended March 31, 2004 and March 31, 2003. 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. CRITICAL ACCOUNTING POLICIES Generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements included in this report. For a complete discussion of our significant accounting policies, see footnotes to our Consolidated Financial Statements included on pages F-27 through F-31 in our Form 10-K for the fiscal year ended December 31, 2003 (Commission file number 000-26719). Below is a discussion of our Allowance for Loan and Lease Losses policy. This policy is critical because it is highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements, and actual results may differ from those estimates. Management has reviewed the application of this policy with the Audit Committee of the Company's Board of Directors. 13. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan and lease losses and recoveries, and decreased by charge-offs. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Allocations of the allowance may be made for specific loans and leases, but the entire allowance is available for any loan or lease that, in management's judgment, should be charged-off. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan or lease balance is confirmed. A loan or lease is impaired when full payment under the loan or lease terms is not expected. Impairment is evaluated in aggregate for smaller-balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan or lease is impaired, a portion of the allowance is allocated so that the loan or lease is reported, net, at the present value of estimated future cash flows using the loan's or lease's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans and leases are evaluated for impairment when payments are delayed, typically 90 days or more, or when the internal grading system indicates a doubtful classification. FINANCIAL CONDITION During the first three months of 2004, our assets increased from $1,203.3 million on December 31, 2003, to $1,293.9 million on March 31, 2004. This represents a total increase in assets of $90.6 million, or 7.5%. The asset growth was comprised primarily of a $74.2 million increase in net loans and a $19.1 million increase in cash and cash equivalents. The increase in total assets was primarily funded by a $92.4 million increase in deposits. Commercial loans and leases increased by $70.2 million during the first three months of 2004, and at March 31, 2004 totaled $1,009.1 million, or 90.8% of the total loan and lease portfolio. The continued significant concentration of the loan and lease portfolio in commercial loans and leases and the rapid growth of this portion of our lending 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 13 commercial lenders have almost 200 years of combined commercial lending experience, eight of whom have 15 years or more experience. Of each of the loan categories that we originate, commercial loans and leases are most efficiently originated and managed, thus limiting overhead costs by necessitating the attention of fewer full-time employees. Our commercial lending business generates the greatest amount of local deposits and is virtually our only source of significant demand deposits. Residential mortgage loans increased by $5.0 million during the first three months of 2004, while the balance of our consumer loan portfolio was unchanged. As of March 31, 2004, residential mortgage and consumer loans totaled a combined $102.1 million, or 9.2% of the total loan and lease portfolio. Although we plan to increase our non-commercial loan portfolios in future periods, given our wholesale banking strategy, we expect the commercial sector of the lending efforts and resultant assets to remain the dominant loan portfolio category. 14. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management believes the quality of our loan and lease portfolio remains strong. Net loan and lease charge-offs during the first three months of 2004 totaled $286,000, or 0.11% of average total loans and leases on an annualized basis. During 2003, net loan and lease charge-offs equaled 0.04% of average total loans and leases. Past due loans and nonaccrual loans and leases at March 31, 2004 totaled $3.1 million, or 0.28% of period-ending total loans and leases. At December 31, 2003, past due loans and nonaccrual loans and leases totaled $1.8 million, or 0.17% of period-ending total loans and leases. The $1.3 million increase during the first quarter of 2004, as well as a vast majority of the $286,000 net loan and lease charge-off figure noted above, is primarily attributable to one commercial credit relationship. We believe we have instilled a strong credit culture within our lending departments as it pertains to the underwriting and administration processes, which in part is reflected in our loan and lease charge-off and delinquency ratios. Over 98% of the loan and lease 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 commercial banks outside the immediate area, which we underwrite using the same loan underwriting criteria as though our bank was the originating bank. Securities decreased by $4.2 million during the first three months of 2004. Purchases during the first three months of 2004 totaled $5.2 million. Proceeds from the sales of securities totaled $1.7 million, while proceeds from the maturities, calls and repayments of securities totaled $8.3 million. Our securities portfolio consists of 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 of Indianapolis ("FHLBI") stock. Cash and cash equivalents increased $19.1 million during the first three months of 2004, totaling $35.7 million on March 31, 2004. Cash and due from bank balances were up $13.7 million and federal funds sold increased $5.0 million. Our commercial lending and wholesale funding focus results in relatively large day-to-day fluctuations of our cash and cash equivalent balances. The average cash and cash equivalents during the first three months of 2004 equaled $33.6 million, well above the relatively low balance of $16.6 million on December 31, 2003. Premises and equipment at March 31, 2004 equaled $16.6 million, an increase of $4.1 million over the past twelve months. The majority of the increase relates to our bank's construction of two new banking facilities. On April 30, 2003, our bank purchased an existing building situated on 2.75 acres of land located about two miles north of the center of downtown Grand Rapids for $1.3 million. The building has been demolished, and we are now in the construction phase of building a new four-story facility on this property. This facility will serve as the new location for our current downtown leased facility, which includes a vast majority of our commercial lending function, and will house the administration and loan operations functions currently housed at other of our locations. Expected completion date is mid-2005. On September 29, 2003, our bank purchased ten acres of land located in Holland, Michigan for $0.9 million. We are now in the construction phase of building a new two-story facility on this property. This facility will serve as the new location for our current full-service branch and lending office which currently operates out of a leased facility. Expected completion date is during the fourth quarter of 2004. 15. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Deposits increased $92.4 million during the first three months of 2004, totaling $995.3 million at March 31, 2004. Local deposits increased $40.9 million, while out-of-area deposits increased $51.5 million. As a percent of total deposits, local deposits increased from 34.5% on December 31, 2003, to 35.4% at March 31, 2004. Noninterest-bearing demand deposits, comprising 8.6% of total deposits, increased $9.3 million during the first three months of 2004. Savings deposits (12.1% of total deposits) increased $18.5 million, interest-bearing checking accounts (3.6% of total deposits) increased $1.1 million and money market deposit accounts (0.9% of total deposits) increased $1.1 million during the first three months of 2004. Local certificates of deposit, comprising 10.2% of total deposits, increased by $10.9 million during the first three months of 2004. Out-of-area deposits increased $51.5 million during the first three months of 2004, totaling $643.1 million at March 31, 2004. Out-of-area deposits consist primarily of certificates of deposit 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 2004 rates paid on new out-of-area certificates of deposit were generally slightly 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, our relatively high reliance on out-of-area deposits will likely continue. Securities sold under agreements to repurchase ("repurchase agreements") decreased by $7.9 million during the first three months of 2004, totaling $41.6 million as of March 31, 2004. 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. FHLBI advances increased by $10.0 million during the first three months of 2004, totaling $100.0 million as of March 31, 2004. The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of March 31, 2004 totaled $174.4 million, with availability approximating $66.0 million. FHLBI advances, along with out-of-area deposits, are the primary components of our wholesale funding program. 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 funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and support our operations. Liquidity is primarily achieved through the growth of deposits (both local and out-of-area) and advances from the FHLBI, as well as 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. 16. 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 generally consistently increased, this 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 monies from wholesale funding sources. Wholesale funds, comprised of certificates of deposit from customers outside our market area and advances from the FHLBI, totaled $743.1 million, or 64.3% of combined deposits and borrowed funds as of March 31, 2004. As of December 31, 2003, wholesale funds totaled $681.6 million, or 63.9% of combined deposits and borrowed funds. Reliance on wholesale funds is expected to continue due to our anticipated future asset growth. As a member of the FHLBI, our bank has access to the FHLBI's borrowing programs. At March 31, 2004, advances from the FHLBI totaled $100.0 million, up from the $90.0 million outstanding at December 31, 2003. Based on available collateral at March 31, 2004, our bank could borrow an additional $66.0 million. Our bank has the ability to borrow money on a daily basis through correspondent banks via established unsecured federal funds purchased lines, totaling $35.0 million as of March 31, 2004. The average balance of federal funds purchased during the first three months of 2004 equaled $2.4 million, compared to a $8.0 million average federal funds sold position. 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, 2004, our bank had a total of $300.0 million in unfunded loan commitments and $57.7 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $231.4 million were commitments available as lines of credit to be drawn at any time as customers' cash needs vary, and $68.6 million were for loan commitments expected to close and become funded within the next three to six 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 $2.9 million during the first three months of 2004, from $130.2 million on December 31, 2003, to $133.1 million at March 31, 2004. The increase is primarily attributable to net income of $3.0 million recorded during the first quarter of 2004. Shareholders' equity was negatively impacted during the first quarter of 2004 by the payment of cash dividends totaling $0.6 million, but was positively impacted by a $0.4 million mark-to-market adjustment for available for sale securities as defined in SFAS No. 115. Shareholders' equity also increased $0.1 million from the issuance of a total of 21,316 new shares of common stock resulting from our dividend reinvestment plan, employee stock purchase plan and stock option exercises. We are subject to regulatory capital requirements primarily administered by federal bank regulatory agencies. Failure to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The capital ratios of the company and our bank as of March 31, 2004 and December 31, 2003 are disclosed under Note 9 of the Notes to Consolidated Financial Statements. 17. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 paid a $0.09 per share cash dividend on March 10, 2004, and on April 7, 2004, we declared a $0.09 per share cash dividend payable on June 10, 2004 to record holders as of May 10, 2004. We declared a 5% stock dividend on April 7, 2004, that was paid on May 3, 2004 to record holders as of April 16, 2004. RESULTS OF OPERATIONS Net income for the first quarter of 2004 was $3.0 million ($0.42 per basic share and $0.41 per diluted share after adjusting for 5% stock dividend), which represents a 33.1% increase over net income of $2.2 million ($0.39 per basic share and $0.38 per diluted after adjusting for 5% stock dividend) recorded during the first quarter of 2003. The 7.7% increase in basic earnings per share and the 7.9% increase in diluted earnings per share were lower than the percentage growth in net income due to the dilution impact of the common stock sale completed during the latter part of 2003. Average basic and diluted shares outstanding during the first quarter of 2004 were up 26.0% and 25.8% over the levels during the same time period in 2003, respectively. The improvement in net income is primarily the result of an increase in net interest income and greater operating efficiency. Interest income during the first quarter of 2004 was $15.4 million, an increase of 21.1% over the $12.7 million earned during the first quarter of 2003. 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 2004 earning assets averaged $1,196.9 million, $304.2 million higher than the average earning assets of $892.7 million during the same time period in 2003. Average loans were up $281.3 million and securities increased $19.6 million. Negatively impacting the growth in interest income was the decline in yield on earning assets. During the first three months of 2004 and 2003, earning assets had a weighted average rate (tax equivalent-adjusted basis) of 5.24% and 5.84%, respectively. The decrease in the weighted average yield is primarily due to the decline in market interest rates. Interest expense during the first quarter of 2004 was $5.87 million, a slight decline from the $5.89 million expensed during the first quarter of 2003. The slight decrease in interest expense is primarily attributable to a decline in market interest rates, which offset an increase in interest-bearing liabilities necessitated by asset growth. During the first three months of 2004 interest-bearing liabilities averaged $1,043.3 million, $246.0 million higher than the average interest-bearing liabilities of $797.3 million during the same time period in 2003. Average interest-bearing deposits were up $156.4 million and FHLBI advances increased $84.8 million. Positively impacting interest expense was the decline in the cost of interest-bearing liabilities. During the first three months of 2004 and 2003, interest-bearing liabilities had a weighted average rate of 2.20% and 3.00%, respectively. The decrease in the weighted average cost of interest-bearing liabilities is primarily due to the decline in market interest rates. Net interest income during the first quarter of 2004 was $9.5 million, an increase of 39.9% over the $6.8 million earned during the first quarter of 2003. 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 3.17% during the first three months of 2003 to 3.26% during the first three months of 2004, primarily reflecting the overall positive impact of the declining interest rate environment. 18. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 2004 and 2003. 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. Tax-exempt securities interest income and yield have been computed on a tax equivalent basis using a marginal tax rate of 34%. Securities interest income was increased by $226,000 and $189,000 in the first quarter of 2004 and 2003, respectively, for this adjustment.
Quarters ended March 31, 2004 2003 ------------------------------------------ ------------------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate -------------- ------------ ------ -------------- ------------- ------- (dollars in thousands) Loans and leases $ 1,067,710 $ 13,908 5.24 $ 786,406 $ 11,443 5.90 Investment securities 120,344 1,652 5.49 100,700 1,405 5.58 Federal funds sold 8,033 19 0.94 5,351 16 1.19 Short-term investments 850 1 0.30 203 0 0.75 -------------- ------------ ------- -------------- ------------- ---- Total interest - earning assets 1,196,937 15,580 5.24 892,660 12,864 5.84 Allowance for loan and lease losses (14,825) (11,175) Other assets 68,621 57,147 -------------- -------------- Total assets $ 1,250,733 $ 938,632 ============== ============== Interest-bearing deposits $ 876,239 $ 4,750 2.18 $ 719,789 $ 5,236 2.95 Short-term borrowings 49,505 170 1.38 45,327 171 1.53 Federal Home Loan Bank advances 99,780 529 2.12 15,000 74 1.97 Long-term borrowings 17,736 416 9.38 17,207 410 9.57 -------------- ------------ ---- -------------- ------------- ---- Total interest-bearing liabilities 1,043,260 5,865 2.20 797,323 5,891 3.00 Noninterest-bearing deposits 70,323 55,048 Other liabilities 5,789 5,656 Shareholders' equity 131,361 80,605 -------------- ------------ ---- -------------- ------------- ---- Total liabilities and shareholders' equity $ 1,250,733 $ 938,632 ============== ============== Net interest income $ 9,715 $ 6,973 ============ ============= Net interest rate spread 3.04% 2.84% ==== ==== Net interest rate spread on average assets 3.12 3.01 ==== ==== Net interest margin on earning assets 3.26 3.17 ==== ====
19. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provisions to the allowance for loan and lease losses during the first quarter of 2004 were $1.2 million, compared to the $0.6 million that was expensed during the first quarter of 2003. The increase primarily reflects the higher volume of loan and lease growth and net loan and lease charge-offs during the first three months of 2004 compared to the first three months of 2003, slightly offset by a decline in the reserve coverage ratio. Loan and lease growth during the first quarter of 2004 was $75.2 million, compared to loan and lease growth of $40.9 million during the same time period in 2003. Net loan and lease charge-offs of $286,000 were recorded during the first three months of 2004, compared to net loan and lease charge-offs of $109,000 during the same time period in 2003. The allowance for loan and lease losses as a percentage of total loans outstanding as of March 31, 2004 was 1.38%, compared to 1.40% at March 31, 2003. 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 and leases. The evaluation of the allowance for loan and lease losses is further based on, although not limited to, consideration of the internally prepared Allowance Analysis, composition of the loan and lease portfolio, third party analysis of the administration processes and loan and lease portfolio and general economic conditions. In addition, the rapid growth of the loan and lease portfolio is taken into account. The Allowance Analysis, used since the inception of our bank and completed monthly, applies reserve allocation factors to outstanding loan and lease balances to calculate an overall allowance dollar amount. For commercial loans and leases, which continue to comprise a vast majority of our loan and lease portfolio, 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 Allowance 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 2004 was $1,039,000, an increase of 5.3% over the $987,000 earned during the first quarter of 2003. Service charge income on deposit and repurchase agreements increased $30,000 (11.2%) during the first quarter of 2004 when compared to the same time period in 2003 due primarily to new accounts opened during the last twelve months and adjustments in our deposit fee structure. Commercial letter of credit fees increased $66,000 (188.6%) during the first quarter of 2004 when compared to the same time period in 2003, primarily reflecting an accounting change in recognizing fee income and an increase in the dollar volume of commercial letters of credit outstanding. Primarily reflecting the recent increased interest rate environment and resulting decrease in residential mortgage loan refinancings, residential mortgage loan fees decreased $145,000 (51.6%) during the first quarter of 2004 when compared to the same time period in 2003. 20. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noninterest expense during the first quarter of 2004 was $5.2 million, an increase of 27.9% over the $4.0 million expensed during the first quarter of 2003. Employee salary and benefit expenses were $0.8 million higher during the first quarter of 2004 than the level expensed during the same time period in 2003, primarily reflecting the hiring of additional staff and merit annual pay raises. The level of full-time equivalent employees increased from 128 at the end of the first quarter in 2003 to 167 at the end of the first quarter in 2004, an increase of 30.5%. Occupancy and furniture and equipment costs increased $104,000 during the first quarter of 2004 over the level expensed during the same time period of 2003, primarily reflecting the addition of two branch offices. General overhead costs also increased, primarily 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 rate of increase in net interest income and noninterest income. Noninterest expenses increased by $1.1 million during the first quarter of 2004 over the amount expensed during the first quarter of 2003; however, net revenues (net interest income plus noninterest income) increased at a substantially higher level of $2.8 million during the same time period. Federal income tax expense was $1.2 million during the first three months of 2004, an increase of 30.8% over the $0.9 million expensed during the same time period in 2003. The increase is 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. 21. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2004 (dollars in thousands):
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------ ------ ----- ----- ----- Assets: Commercial loans and leases (1) $ 448,063 $ 29,623 $ 472,814 $ 58,512 $ 1,009,012 Residential real estate loans 50,327 4,256 32,524 10,187 97,294 Consumer loans 1,242 439 3,060 105 4,846 Investment securities (2) 7,903 651 20,538 88,197 117,289 Federal funds sold 5,000 5,000 Short-term investments 717 717 Allowance for loan and lease losses (15,337) (15,337) Other assets 75,114 75,114 ----------- ----------- ----------- ----------- ----------- Total assets 513,252 34,969 528,936 216,778 1,293,935 Liabilities: Interest-bearing checking 35,373 35,373 Savings 120,183 120,183 Money market accounts 9,402 9,402 Time deposits less than $100,000 27,115 58,877 30,380 116,372 Time deposits $100,000 and over 164,214 304,682 159,208 628,104 Short-term borrowings 41,613 41,613 FHLB advances 5,000 40,000 55,000 100,000 Long-term borrowings 1,361 16,495 17,856 Noninterest-bearing checking 85,900 85,900 Other liabilities 6,057 6,057 ----------- ----------- ----------- ----------- ----------- Total liabilities 404,261 403,559 244,588 108,452 1,160,860 Shareholders' equity 133,075 133,075 ----------- ----------- ----------- ----------- ----------- Total sources of funds 404,261 403,559 244,588 241,527 1,293,935 ----------- ----------- ----------- ----------- ----------- Net asset (liability) GAP $ 108,991 $ (368,590) $ 284,348 $ (24,749) =========== =========== =========== =========== Cumulative GAP $ 108,991 $ (259,599) $ 25,749 =========== =========== =========== Percent of cumulative GAP to total assets 8.4% (20.1)% 2.0% =========== =========== ===========
(1) Floating rate loans that are currently at interest rate floors are treated as fixed rate loans and are reflected using maturity date and not repricing frequency. (2) Mortgage-backed securities are categorized by average life calculations based upon prepayment trends as of March 31, 2004. 22. MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. We conducted multiple simulations as of March 31, 2004, 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 $(1,452,000) (3.5%) Interest rates down 100 basis points (450,000) (1.1) No change in interest rates 213,000 0.5 Interest rates up 100 basis points 1,216,000 3.0 Interest rates up 200 basis points 2,227,000 5.4
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, 2004, 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, 2004. 23. 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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES On February 12, 2004, we issued 7,753 shares of our common stock to one of our employees upon their exercise of employee stock options issued under our 1997 Employee Stock Option Plan. We received a weighted average exercise price of $10.96 per share aggregating $84,964 for these shares. The exercise price for these shares was substantially paid by the employee delivering to us common stock of the company that they already owned having an aggregate value of $84,942, with the difference paid in cash. On February 17, 2004, we issued 9,900 shares of our common stock to one of our employees upon their exercise of employee stock options issued under our 1997 Employee Stock Option Plan. We received a weighted average exercise price of $9.07 per share aggregating $89,793 for these shares. The exercise price for these shares was substantially paid by the employee delivering to us common stock of the company that they already owned having an aggregate value of $89,760, with the difference paid in cash. The shares issued under the 1997 Employee Stock Option Plan were issued in reliance on an exemption from registration under the Securities Act of 1933 based on Section 4(2) of that Act, and Regulation D issued under that Act. Issuer Purchases of Equity Securities
(c) Total Number of (a) Total Shares Purchased as (d) Maximum Number Number of (b) Average Part of Publicly of Shares that May Yet Shares Price Paid Per Announced Plans or Be Purchased Under the Period Purchased Share Programs Plans or Programs ------ --------- ----- -------- ----------------- January 1 - 31 328 $ 35.893 0 0 February 1 - 29 4,873 35.851 0 0 March 1 - 31 0 N/A 0 0 Total 5,201 35.854 0 0
The shares shown in column (a) above as having been purchased were acquired from four of our employees when they used shares of common stock that they already owned to pay part of the exercise price when exercising stock options issued under our employee stock option plans. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 24. 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 31 Rule 13a-14(a) Certifications 32.1 Section 1350 Chief Executive Officer Certification 32.2 Section 1350 Chief Financial Officer Certification
(b) Reports on Form 8-K. During the first quarter of 2004, the Company furnished the following report on Form 8-K: i) Dated January 7, 2004, pertaining to the Company's press release issued January 7, 2004 reporting financial results and earnings for the quarter and year ended December 31, 2003 25. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 3, 2004. 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) 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 31 Rule 13a-14(a) Certifications 32.1 Section 1350 Chief Executive Officer Certification 32.2 Section 1350 Chief Financial Officer Certification
EX-11 2 k84950exv11.txt STATEMENT RE COMPUTATION OF PER SHARE EARNINGS . . . EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS RETURN ON EQUITY AND ASSETS
12/31/03 TO ANNUALIZED 3/31/04 ---------- ----------- Return on average total assets 0.96% 0.24% Return on average equity 9.10% 2.26% Dividend payout ratio 20.62% Average equity to average assets 10.50% STATEMENT OF COMPUTED PER SHARE EARNINGS Net income $ 2,973,000 Average basic shares outstanding 7,158,971 Average diluted shares outstanding 7,314,127 Basic earnings per share $ 0.42 Diluted earnings per share $ 0.41
EX-31 3 k84950exv31.txt RULE 13A-14(A) CERTIFICATIONS EXHIBIT 31 RULE 13a-14(a) CERTIFICATIONS I, Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of Mercantile Bank Corporation, certify that: 1. I have reviewed this report on Form 10-Q of Mercantile Bank Corporation (the "registrant"); 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 3, 2004 /s/ Gerald R. Johnson, Jr. ----------------------------------- Gerald R. Johnson, Jr. Chairman and Chief Executive Officer I, Charles E. Christmas, Senior Vice President, Chief Financial Officer and Treasurer of Mercantile Bank Corporation, certify that: 1. I have reviewed this report on Form 10-Q of Mercantile Bank Corporation (the "registrant"); 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 3, 2004 /s/ Charles E. Christmas ----------------------------------- Charles E. Christmas. Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 4 k84950exv32w1.txt SECTION 1350 CHIEF EXECUTIVE OFFICER CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the quarterly report on Form 10-Q for the quarter ended March 31, 2004 (the "Form 10-Q") of Mercantile Bank Corporation (the "Issuer"). I, Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of the Issuer, certify that: (i) the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: May 3, 2004 /s/ Gerald R. Johnson, Jr. ----------------------------- Gerald R. Johnson, Jr. Chairman and Chief Executive Officer EX-32.2 5 k84950exv32w2.txt SECTION 1350 CHIEF FINANCIAL OFFICER CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the quarterly report on Form 10-Q for the quarter ended March 31, 2004 (the "Form 10-Q") of Mercantile Bank Corporation (the "Issuer"). I, Charles E. Christmas, Senior Vice President, Chief Financial Officer and Treasurer of the Issuer, certify that: (i) the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: May 3, 2004 /s/ Charles E. Christmas --------------------------------- Charles E. Christmas Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----