-----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, EZcp9TEHv7vu17i3cgTi35lGwfXpxoSXxsN/IjdVMbIpthr0Dq2xR05vR/Fy9pLe CwB+IBzNMc6i5ELj7zsfWA== 0000950124-04-005417.txt : 20041108 0000950124-04-005417.hdr.sgml : 20041108 20041108161240 ACCESSION NUMBER: 0000950124-04-005417 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 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: 041125943 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 k88686e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED SEPTEMBER 30, 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 September 30, 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 November 5, 2004, there were 7,190,851 shares of Common Stock outstanding. 1 MERCANTILE BANK CORPORATION INDEX
PART I. Financial Information Page No. -------- Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2004 (Unaudited) and December 31, 2003 .................... 3 Consolidated Statements of Income and Comprehensive Income - Three and Nine Months Ended September 30, 2004 (Unaudited) and September 30, 2003 (Unaudited) .......................................... 4 Consolidated Statements of Changes in Shareholders' Equity - Nine Months Ended September 30, 2004 (Unaudited) and September 30, 2003 (Unaudited) .......................................... 5 Consolidated Statements of Cash Flows - Three and Nine Months Ended September 30, 2004 (Unaudited) and September 30, 2003 (Unaudited) .......................................... 6 Notes to Consolidated Financial Statements (Unaudited)...................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk ......... 26 Item 4. Controls and Procedures ............................................ 29 PART II. Other Information Item 1. Legal Proceedings .................................................. 30 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ........ 30 Item 3. Defaults upon Senior Securities .................................... 30 Item 4. Submission of Matters to a Vote of Security Holders ................ 30 Item 5. Other Information .................................................. 30 Item 6. Exhibits ........................................................... 30 Signatures ................................................................. 31
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MERCANTILE BANK CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2004 2003 --------------- --------------- (Unaudited) ASSETS Cash and due from banks $ 35,304,000 $ 16,309,000 Short-term investments 327,000 255,000 Federal funds sold 5,500,000 0 Total cash and cash equivalents 41,131,000 16,564,000 --------------- --------------- Securities available for sale 87,625,000 71,421,000 Securities held to maturity (fair value of $52,855,000 at September 30, 2004 and $47,102,000 at December 31, 2003) 50,668,000 45,112,000 Federal Home Loan Bank stock 6,726,000 4,977,000 Total loans and leases 1,253,713,000 1,035,963,000 Allowance for loan and lease losses (17,045,000) (14,379,000) --------------- --------------- Total loans and leases, net 1,236,668,000 1,021,584,000 Premises and equipment, net 21,319,000 15,305,000 Bank owned life insurance policies 16,966,000 16,441,000 Accrued interest receivable 5,638,000 4,098,000 Other assets 8,208,000 7,835,000 --------------- --------------- Total assets $ 1,474,949,000 $ 1,203,337,000 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 111,042,000 $ 76,579,000 Interest-bearing 1,033,815,000 826,313,000 --------------- --------------- Total deposits 1,144,857,000 902,892,000 Securities sold under agreements to repurchase 46,691,000 49,545,000 Federal funds purchased 0 6,000,000 Federal Home Loan Bank advances 120,000,000 90,000,000 Subordinated debentures 16,495,000 16,495,000 Other borrowed money 1,508,000 1,114,000 Accrued expenses and other liabilities 7,463,000 7,090,000 --------------- --------------- Total liabilities 1,337,014,000 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; 7,176,822 shares outstanding at September 30, 2004 and 6,805,914 shares outstanding at December 31, 2003 130,935,000 118,560,000 Retained earnings 6,635,000 11,421,000 Accumulated other comprehensive income 365,000 220,000 --------------- --------------- Total shareholders' equity 137,935,000 130,201,000 --------------- --------------- Total liabilities and shareholders' equity $ 1,474,949,000 $ 1,203,337,000 =============== ===============
See accompanying notes to consolidated financial statements. 3 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 --------------- -------------- -------------- --------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest income Loans and leases, including fees $ 16,193,000 $ 12,679,000 $ 44,823,000 $ 36,345,000 Investment securities 1,598,000 1,164,000 4,424,000 3,566,000 Federal funds sold 26,000 11,000 53,000 50,000 Short-term investments 2,000 0 3,000 1,000 --------------- -------------- -------------- --------------- Total interest income 17,819,000 13,854,000 49,303,000 39,962,000 Interest expense Deposits 5,706,000 4,952,000 15,385,000 15,353,000 Short-term borrowings 220,000 168,000 576,000 512,000 Federal Home Loan Bank advances 652,000 274,000 1,778,000 531,000 Long-term borrowings 385,000 415,000 1,219,000 1,240,000 --------------- -------------- -------------- --------------- Total interest expense 6,963,000 5,809,000 18,958,000 17,636,000 --------------- -------------- -------------- --------------- NET INTEREST INCOME 10,856,000 8,045,000 30,345,000 22,326,000 Provision for loan and lease losses 1,200,000 1,380,000 3,674,000 2,850,000 --------------- -------------- -------------- --------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 9,656,000 6,665,000 26,671,000 19,476,000 Noninterest income Services charges on accounts 319,000 303,000 930,000 852,000 Net gain on sales of securities 0 59,000 78,000 271,000 Net gain on sales of loans 135,000 0 175,000 0 Other income 702,000 709,000 2,013,000 2,184,000 --------------- -------------- -------------- --------------- Total noninterest income 1,156,000 1,071,000 3,196,000 3,307,000 Noninterest expense Salaries and benefits 3,589,000 3,029,000 10,382,000 8,285,000 Occupancy 401,000 353,000 1,170,000 1,032,000 Furniture and equipment 277,000 272,000 817,000 738,000 Other expense 2,148,000 1,110,000 4,601,000 3,099,000 --------------- -------------- -------------- --------------- Total noninterest expenses 6,415,000 4,764,000 16,970,000 13,154,000 --------------- -------------- -------------- --------------- INCOME BEFORE FEDERAL INCOME TAX EXPENSE 4,397,000 2,972,000 12,897,000 9,629,000 Federal income tax expense 1,283,000 744,000 3,664,000 2,628,000 --------------- -------------- -------------- --------------- NET INCOME $ 3,114,000 $ 2,228,000 $ 9,233,000 $ 7,001,000 =============== ============== ============== =============== COMPREHENSIVE INCOME $ 4,275,000 $ 1,611,000 $ 9,378,000 $ 6,035,000 =============== ============== ============== =============== Basic earnings per share $ 0.43 $ 0.38 $ 1.29 $ 1.22 =============== ============== ============== =============== Diluted earnings per share $ 0.43 $ 0.37 $ 1.26 $ 1.19 =============== ============== ============== =============== Cash dividends per share $ 0.09 $ 0.08 $ 0.27 $ 0.24 =============== ============== ============== =============== Average basic shares outstanding 7,176,032 5,792,537 7,169,198 5,723,020 =============== ============== ============== =============== Average diluted shares outstanding 7,318,345 5,945,459 7,316,510 5,862,644 =============== ============== ============== ===============
See accompanying notes to consolidated financial statements. 4 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 September 30, 2003 7,001,000 7,001,000 Change in net unrealized gain (loss) on securities available for sale, net of reclassifications and tax effect (966,000) (966,000) ------------- Total comprehensive income 6,035,000 Net proceeds from common stock sale, 1,255,075 shares 37,437,000 37,437,000 Common stock cash dividends, $0.24 per share (1,300,000) (1,300,000) Cash dividend reinvestment plan, 2,585 shares 77,000 77,000 Employee stock purchase plan, 1,435 shares 38,000 38,000 Stock option exercises, 21,024 shares 36,000 36,000 ------------- ------------- ------------- ------------- BALANCE, SEPTEMBER 30, 2003 $ 113,118,000 $ 8,951,000 $ 88,000 $ 122,157,000 ============= ============= ============= ============= 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 September 30, 2004 9,233,000 9,233,000 Change in net unrealized gain on securities available for sale, net of reclassifications and tax effect 145,000 145,000 ------------- Total comprehensive income 9,378,000 Payment of 5% stock dividend, 340,180 shares 12,112,000 (12,116,000) (4,000) Common stock cash dividends, $0.27 per share (1,903,000) (1,903,000) Cash dividend reinvestment plan, 2,316 shares 80,000 80,000 Employee stock purchase plan, 1,613 shares 56,000 56,000 Stock option exercises, 26,799 shares 127,000 127,000 ------------- ------------- ------------- ------------- BALANCE, SEPTEMBER 30, 2004 $ 130,935,000 $ 6,635,000 $ 365,000 $ 137,935,000 ============= ============= ============= =============
See accompanying notes to consolidated financial statements. 5 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,114,000 $ 2,228,000 $ 9,233,000 $ 7,001,000 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 405,000 535,000 1,253,000 1,502,000 Provision for loan and lease losses 1,200,000 1,380,000 3,674,000 2,850,000 Net gain on sales of loans (135,000) 0 (175,000) 0 Net gain on sales of securities 0 (59,000) (78,000) (271,000) Net change in: Accrued interest receivable (1,381,000) (681,000) (1,540,000) (806,000) Bank owned life insurance policies (170,000) (197,000) (525,000) (602,000) Other assets 343,000 (408,000) (655,000) (1,109,000) Accrued expenses and other liabilities 1,047,000 705,000 373,000 826,000 ------------- ------------- ------------- ------------- Net cash used in operating activities 4,423,000 3,503,000 11,560,000 9,391,000 CASH FLOWS FROM INVESTING ACTIVITIES Loan and leases originations and payments, net (68,682,000) (106,238,000) (218,583,000) (200,895,000) Purchases of: Securities available for sale (24,759,000) (11,847,000) (37,723,000) (36,976,000) Securities held to maturity (2,210,000) (2,234,000) (6,546,000) (6,873,000) Federal Home Loan Bank stock (82,000) (1,677,000) (1,749,000) (3,141,000) Proceeds from: Maturities, calls and repayments of available for sale securities 8,618,000 7,061,000 19,958,000 21,888,000 Maturities, calls and repayments of held to maturity securities 0 381,000 965,000 915,000 Sales of available for sale securities 0 3,150,000 1,748,000 11,486,000 Purchases of premises and equipment, net (3,150,000) (1,366,000) (6,924,000) (3,914,000) Purchases of bank owned life insurance policies 0 (235,000) 0 (535,000) ------------- ------------- ------------- ------------- Net cash used in investing activities (90,265,000) (113,005,000) (248,854,000) (218,045,000) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 98,788,000 45,994,000 241,965,000 135,468,000 Net increase (decrease) in securities sold under agreements to repurchase (269,000) 8,620,000 (2,854,000) (2,025,000) Net increase in Federal Home Loan Bank advances 0 25,000,000 30,000,000 55,000,000 Issuance of subordinated debt 16,495,000 0 16,495,000 0 Redemption of subordinated debt (16,495,000) 0 (16,495,000) 0 Net increase (decrease) in other borrowed money (6,906,000) 90,000 (5,606,000) 436,000 Net proceeds from sale of common stock 0 37,437,000 0 37,437,000 Stock option exercises 0 9,000 127,000 36,000 Employee stock purchase plan 18,000 14,000 56,000 38,000 Cash dividend reinvestment plan 15,000 63,000 80,000 77,000 Payment of cash dividends (645,000) (434,000) (1,903,000) (1,300,000) Cash paid in lieu of fractional shares on stock dividend 0 0 (4,000) 0 ------------- ------------- ------------- ------------- Net cash from financing activities 91,001,000 116,793,000 261,861,000 225,167,000 ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. 6 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net change in cash and cash equivalents 5,159,000 7,291,000 24,567,000 16,513,000 Cash and cash equivalents at beginning of period 35,972,000 37,339,000 16,564,000 28,117,000 ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,131,000 $ 44,630,000 $ 41,131,000 $ 44,630,000 ============= ============ ============ ============= Cash paid during the period for: Interest $ 6,329,000 $ 5,742,000 $ 18,512,000 $ 17,466,000 Federal income tax 1,600,000 1,150,000 4,525,000 3,725,000
See accompanying notes to consolidated financial statements. 7 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The unaudited financial statements for the three and nine months ended September 30, 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 periods ended September 30, 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. Mercantile Bank Capital Trust I ("the trust"), a business trust formed by Mercantile Bank Corporation, sold 16,000 trust preferred securities at $1,000.00 per trust preferred security in a September 2004 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. Under current accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the trust is not consolidated. Accordingly, Mercantile Bank Corporation does not report the securities issued by the trust as liabilities, but instead reports as liabilities the subordinated debentures issued by Mercantile Bank Corporation and held by the trust, as these are not eliminated in consolidation. The effect of not 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 a transfer from retained earnings to common stock for the value of the shares distributed. 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. 8 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 ended Nine months ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net income as reported $ 3,114,000 $ 2,228,000 $ 9,233,000 $ 7,001,000 Deduct: Stock-based compensation expense determined under fair value based method 63,000 81,000 188,000 244,000 ------------- ------------- ------------- ------------- Pro forma net income 3,051,000 2,147,000 9,045,000 6,757,000 ============= ============= ============= ============= Basic earnings per share as reported $ 0.43 $ 0.38 $ 1.29 $ 1.22 Pro forma basic earnings per share 0.43 0.37 1.26 1.18 Diluted earnings per share as reported $ 0.43 $ 0.37 $ 1.26 $ 1.19 Pro forma diluted earnings per share 0.42 0.36 1.24 1.15
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
Three months ended Nine months ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Risk-free interest rate 3.37% 4.78% 3.37% 4.78% Expected option life 7 Years 7 Years 7 Years 7 Years Expected stock price volatility 23% 30% 23% 30% Dividend yield 1.00% 1.00% 1.00% 1.00%
9 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. LOANS AND LEASES Our total loans and leases at September 30, 2004 were $1,253.7 million compared to $1,036.0 million at December 31, 2003, an increase of $217.7 million, or 21.0%. The components of our outstanding balances at September 30, 2004 and December 31, 2003, and the percentage changes in loans and leases from the end of 2003 to the end of the third quarter 2004 are as follows:
Percent September 30, 2004 December 31, 2003 Increase/ Balance % Balance % (Decrease) --------------- ----- -------------- ----- ---------- Real Estate: Construction and land development $ 132,396,000 10.6% $ 117,649,000 11.4% 12.5% Secured by 1-4 family properties 118,306,000 9.4 92,339,000 8.9 28.1 Secured by multi-family properties 35,509,000 2.8 28,950,000 2.8 22.7 Secured by nonresidential properties 608,608,000 48.5 485,080,000 46.8 25.5 Commercial 351,606,000 28.1 304,800,000 29.4 15.4 Leases 2,147,000 0.2 2,309,000 0.2 (7.0) Consumer 5,141,000 0.4 4,836,000 0.5 6.3 --------------- ---- -------------- ----- ---- Total loans and leases $ 1,253,713,000 100.0% $1,035,963,000 100.0% 21.0% =============== ===== ============== ===== ====
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 and nine months ended September 30:
Three months ended Nine months ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Balance at beginning of period $ 16,312,000 $ 12,158,000 $ 14,379,000 $ 10,890,000 Charge-offs (581,000) (95,000) (1,143,000) (524,000) Recoveries 114,000 39,000 135,000 266,000 Provision for loan and lease losses 1,200,000 1,380,000 3,674,000 2,850,000 ------------- ------------- ------------- ------------- Balance at June 30 $ 17,045,000 $ 13,482,000 $ 17,045,000 $ 13,482,000 ============= ============= ============= =============
10 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. PREMISES AND EQUIPMENT - NET Premises and equipment are comprised of the following:
September 30, December 31, 2004 2003 ------------- ------------- Land and improvements $ 5,753,000 $ 5,745,000 Buildings and leasehold improvements 14,699,000 8,183,000 Furniture and equipment 5,335,000 4,935,000 ------------- ------------- 25,787,000 18,863,000 Less accumulated depreciation 4,468,000 3,558,000 ------------- ------------- Premises and equipment, net $ 21,319,000 $ 15,305,000 ============= =============
Depreciation expense amounted to $299,000 during the third quarter of 2004, compared to $308,000 in the third quarter of 2003. Depreciation expense amounted to $909,000 during the first nine months of 2004, compared to $859,000 during the first nine months of 2003. 5. DEPOSITS Our total deposits at September 30, 2004 were $1,144.9 million compared to $902.9 million at December 31, 2003, an increase of $242.0 million, or 26.8%. The components of our outstanding balances at September 30, 2004 and December 31, 2003, and percentage change in deposits from the end of 2003 to the end of the third quarter 2004 are as follows:
Percent September 30, 2004 December 31, 2003 Increase/ Balance % Balance % (Decrease) --------------- ----- -------------- ------ ---------- Noninterest-bearing demand $ 111,042,000 9.7% $ 76,579,000 8.5% 45.0% Interest-bearing checking 35,435,000 3.1 34,241,000 3.8 3.5 Money market 9,974,000 0.9 8,290,000 0.9 20.3 Savings 138,337,000 12.1 101,710,000 11.3 36.0 Time, under $100,000 8,688,000 0.8 8,163,000 0.9 6.4 Time, $100,000 and over 86,886,000 7.5 82,288,000 9.1 5.6 ---------------- ----- -------------- ----- ---- 390,362,000 34.1 311,271,000 34.5 25.4 Out-of-area time, under $100,000 104,618,000 9.1 98,079,000 10.9 6.7 Out-of-area time, $100,000 and over 649,877,000 56.8 493,542,000 54.6 31.7 ---------------- ----- -------------- ----- ---- 754,495,000 65.9 591,621,000 65.5 27.5 ---------------- ----- -------------- ----- ---- Total deposits $ 1,144,857,000 100.0% $ 902,892,000 100.0% 26.8% ================ ===== ============== ===== ====
11 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. SHORT-TERM BORROWINGS Information relating to our securities sold under agreements to repurchase follows:
September 30, December 31, 2004 2003 ------------- ------------- Outstanding balance at end of period $ 46,691,000 $ 49,545,000 Average interest rate at end of period 1.73% 1.38% Average balance during the period $ 47,019,000 $ 45,865,000 Average interest rate during the period 1.45% 1.45% Maximum month end balance during the period $ 51,309,000 $ 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 September 30, 2004 and December 31, 2003 were as follows.
September 30, December 31, 2004 2003 ------------- ------------- Maturities November 2004 through September 2006, fixed rates from 1.62% to 3.21%, averaging 2.23% $ 110,000,000 0 Maturities in May 2006, floating rates tied to Libor indices, averaging 1.84% as of September 30, 2004 10,000,000 0 Maturities January 2004 through September 2006, fixed rates from 1.54% to 3.21%, averaging 2.07% 0 $ 90,000,000 ------------- ------------- Total Federal Home Loan Bank advances $ 120,000,000 $ 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 September 30, 2004 totaled $195.7 million, with availability approximating $65.0 million. 12 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. FEDERAL HOME LOAN BANK ADVANCES (Continued) Maturities of FHLB advances currently outstanding during the next five years are: 2004 $ 20,000,000 2005 65,000,000 2006 35,000,000 2007 0 2008 0
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 September 30, 2004 and December 31, 2003 follows:
September 30, December 31, 2004 2003 ------------- ------------- Commercial unused lines of credit $ 229,478,000 $ 176,943,000 Unused lines of credit secured by 1-4 family residential properties 23,961,000 19,020,000 Credit card unused lines of credit 7,855,000 8,990,000 Other consumer unused lines of credit 5,799,000 5,569,000 Commitments to make loans 41,133,000 73,570,000 Standby letters of credit 57,979,000 57,918,000 ------------- ------------- Total loan and leases commitments $ 366,205,000 $ 342,010,000 ============= =============
13 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. 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 not well 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 and minimum required levels were (dollars in thousands):
Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ---------------- ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- --------- ----- September 30, 2004 - ------------------ Total capital (to risk weighted assets) Consolidated $170,614 12.2% $111,786 8.0% $ 139,733 10.0% Bank 167,185 12.0 111,695 8.0 139,619 10.0 Tier 1 capital (to risk weighted assets) Consolidated 153,569 11.0 55,893 4.0 83,840 6.0 Bank 150,140 10.8 55,848 4.0 83,771 6.0 Tier 1 capital (to average assets) Consolidated 153,569 10.8 57,162 4.0 71,453 5.0 Bank 150,140 10.5 57,036 4.0 71,295 5.0
14 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. REGULATORY MATTERS (Continued)
Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ---------------- ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- --------- ----- 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
Our capital levels as of September 30, 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 September 30, 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 distributed 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 5% stock dividend. We have also paid three cash dividends on our common stock during 2004. 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. On April 7, 2004, we declared a $0.09 per share cash dividend on our common stock, which was paid on June 10, 2004 to record holders as of May 10, 2004. On July 7, 2004, we declared a $0.09 per share cash dividend on our common stock, which was paid on September 10, 2004 to record holders as of August 10, 2004. On October 6, 2004, we declared a $0.09 per share cash dividend on our common stock, which is payable on December 10, 2004 to record holders as of November 10, 2004. 15 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 10. BENEFIT PLANS We sponsor an employee stock purchase plan which allows employees to defer after-tax payroll dollars and purchase our common 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 nine months ended September 30, 2004, we issued 1,613 shares under the plan. 16 MERCANTILE BANK CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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, among others, 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 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, 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"), at September 30, 2004 to December 31, 2003 and the results of operations for the three and nine months ended September 30, 2004 and September 30, 2003. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included in this report. 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). 17 MERCANTILE BANK CORPORATION RECENT EVENTS On September 16, 2004, Mercantile Bank Corporation entered into several agreements providing for the private sale of Series A and Series B Floating Rate Preferred Securities by its newly formed Delaware trust subsidiary, Mercantile Bank Capital Trust I (the "trust") to STI Investment Management, Inc., a Delaware corporation (the "purchaser"). The sale of the Series A Preferred Securities to the purchaser for $16.0 million was completed on September 16, 2004. The agreements provide for the sale of the Series B Preferred Securities to the purchaser for $16.0 million on or before December 15, 2004, or such other later date as the parties may designate. The agreements also provide for the trust to sell $495,000 of Series A and Series B Common Securities to Mercantile Bank Corporation. The sale of the $495,000 of Series A Common Securities to Mercantile Bank Corporation was completed on September 16, 2004; and the $495,000 of Series B Common Securities is expected to be sold to Mercantile Bank Corporation later this year at the time that the Series B Preferred Securities are sold to the purchaser. The proceeds of the Series A Preferred Securities and the Series A Common Securities were used by the trust on September 16, 2004 to purchase $16,495,000 Series A Floating Rate Junior Subordinated Notes that were issued by Mercantile Bank Corporation. The agreements contemplate that the proceeds of the Series B Preferred Securities and the Series B Common Securities, when they are issued by the trust, will be used to purchase $16,495,000 Series B Floating Rate Junior Subordinated Notes that will be issued by Mercantile Bank Corporation. The Series A and B Floating Rate Junior Subordinated Notes ("Floating Rate Notes") mature 30 years after their date of issuance, and can be redeemed in whole or in part by Mercantile Bank Corporation, at its option, at 100% of the principal amount and accrued and unpaid interest, at any time after the fifth anniversary of the first interest payment date. The Floating Rate Notes bear interest at the three-month LIBOR rate plus 2.18%, subject to adjustment quarterly. Interest is payable on each January 18, April 18, July 18 and October 18. Mercantile Bank Corporation used the proceeds of the Series A Floating Rate Notes to finance the redemption on September 17, 2004 of the $16.0 million of 9.60% Cumulative Preferred Securities issued in 1999 by its business trust subsidiary, MBWM Capital Trust I. Noninterest expense for the third quarter of 2004 and year-to-date 2004 include an $845,000 ($549,000 after-tax) write-off associated with the unamortized balance of issuance costs related to the 9.60% Cumulative Preferred Securities. It is expected that a substantial portion of the proceeds of the Series B Floating Rate Notes, when issued, will be provided to the bank by Mercantile Bank Corporation as a capital injection, with the funds used by the bank in its general funding operations. FINANCIAL CONDITION During the first nine months of 2004, our assets increased from $1,203.3 million on December 31, 2003, to $1,474.9 million on September 30, 2004. This represents a total increase in assets of $271.6 million, or 22.6%. The asset growth was comprised primarily of a $215.1 million increase in net loans, an increase of $24.6 million in cash and cash equivalents and a $23.5 million increase in securities. The increase in assets was primarily funded by a $242.0 million growth in deposits and an increase of $30.0 million in Federal Home Loan Bank advances. 18 MERCANTILE BANK CORPORATION Commercial loans and leases increased by $191.5 million during the first nine months of 2004, and at September 30, 2004 totaled $1,130.3 million, or 90.2% 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 15 commercial lenders have over 220 years of combined commercial lending experience, ten 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 our primary source of demand deposits. Residential mortgage loans and consumer loans increased by $26.0 million and $0.3 million, respectively, during the first nine months of 2004. As of September 30, 2004, residential mortgage and consumer loans totaled a combined $123.4 million, or 9.8% 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 our lending efforts and resultant assets to remain the dominant loan portfolio category. Management believes the quality of our loan and lease portfolio remains strong. Net loan and lease charge-offs during the first nine months of 2004 totaled $1.0 million, or 0.12% of average total loans and leases on an annualized basis. During the first nine months of 2003, net loan and lease charge-offs totaled $0.3 million, or 0.04% of average total loans and leases on an annualized basis. A majority of the $1.0 million net loan and lease charge-offs during the first nine months of 2004 is primarily attributable to one commercial loan relationship. Nonperforming assets at September 30, 2004 totaled $3.0 million, or 0.20% of period-ending total assets. At December 31, 2003, nonperforming assets totaled $1.8 million, or 0.15% of period-ending total assets. The $1.2 million increase in nonperforming assets during the first nine months of 2004 is primarily attributable to one commercial loan relationship unrelated to the one noted above. 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 net 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 commercial banks outside the immediate area, which we underwrite using the same loan underwriting criteria as though our bank was the originating bank. Securities increased $23.5 million during the first nine months of 2004. Purchases during the first nine months of 2004 totaled $46.0 million. Proceeds from the sales of securities totaled $1.7 million, while proceeds from the maturities, calls and repayments of securities totaled $20.9 million. At September 30, 2004, the net unrealized gain on available for sale securities equaled $0.6 million, compared to a net unrealized gain of $0.3 million at December 31, 2003. 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 $24.6 million during the first nine months of 2004, totaling $41.1 million on September 30, 2004. Cash and due from bank balances were up $19.0 million, federal funds sold increased $5.5 million and short-term investments were relatively unchanged. 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 nine months of 2004 equaled $37.1 million, well above the relatively low balance of $16.6 million on December 31, 2003. 19 MERCANTILE BANK CORPORATION Premises and equipment at September 30, 2004 equaled $21.3 million, an increase of $6.0 million since December 31, 2003, and an increase of $8.8 million since March 31, 2003. The vast majority of the increase relates to our 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 downtown Grand Rapids, Michigan for $1.3 million. The building was 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 our commercial lending function, and will house the administration and loan operations functions currently housed at other of our locations. Expected completion date is during the second quarter of 2005. On September 29, 2003, our bank purchased ten acres of land located in Holland, Michigan for $0.9 million. We constructed a new two-story facility on this site to serve as the new location for our former full-service branch and lending office that had been operating out of a leased facility. This newly constructed facility opened on October 25, 2004. Deposits increased $242.0 million during the first nine months of 2004, totaling $1,144.9 million at September 30, 2004. Local deposits increased $79.1 million, or 25.4% and out-of-area deposits increased $162.9 million, or 27.5%. As a percent of total deposits, local deposits decreased slightly from 34.5% on December 31, 2003, to 34.1% on September 30, 2004. Noninterest-bearing demand deposits, comprising 9.7% of total deposits, increased $34.5 million during the first nine months of 2004. Savings deposits (12.1% of total deposits) increased $36.6 million, interest-bearing checking deposits (3.1% of total deposits) increased $1.2 million and money market deposit accounts (0.9% of total deposits) increased $0.5 million during the first nine months of 2004. Local certificates of deposit, comprising 8.3% of total deposits, increased $5.1 million during the first nine months of 2004. Out-of-area deposits increased $162.9 million during the first nine months of 2004, totaling $754.5 million as of September 30, 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 deposit interest rates that would have to be offered in the local market to generate a sufficient level of funds. During the first nine months of 2004 rates paid on new out-of-area certificates of deposit were generally only slightly higher than the rates paid on new certificates of deposit issued to local customers. 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 $2.9 million during the first nine months of 2004, totaling $46.7 million as of September 30, 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 $30.0 million during the first nine months of 2004, totaling $120.0 million as of September 30, 2004. The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans and 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 September 30, 2004 totaled $195.7 million, with availability of approximately $65.0 million. FHLBI advances, along with out-of-area deposits, are the primary components of our wholesale funding program. 20 MERCANTILE BANK CORPORATION 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 our balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity. Our liquidity strategy is to fund loan growth with deposits, repurchase agreements and FHLBI advances, 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 customers located in our market area have generally consistently increased, this growth has not been sufficient to meet our 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 primarily of certificates of deposit from customers outside of our market area and advances from the FHLBI, totaled $874.5 million, or 66.7% of combined deposits and borrowed funds as of September 30, 2004. As of December 31, 2003, wholesale funds totaled $681.6 million, or 65.4% 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 September 30, 2004, advances from the FHLBI totaled $120.0 million, up from the $90.0 million outstanding at December 31, 2003. Based on available collateral at September 30, 2004, our bank could borrow an additional $65.0 million. Our bank has the ability to borrow money on a daily basis through correspondent banks via established unsecured federal funds purchased lines, totaling $50.0 million as of September 30, 2004. The average balance of federal funds purchased during the first nine months of 2004 equaled $6.1 million, compared to a $6.3 million average federal funds sold position during the same time period. 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 September 30, 2004, our bank had a total of $308.2 million in unfunded loan commitments and $58.0 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $267.1 million were commitments available as lines of credit to be drawn at any time as customers' cash needs vary, and $41.1 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 our overall liquidity. CAPITAL RESOURCES Shareholders' equity is a noninterest-bearing source of funds that provides support for asset growth. Shareholders' equity increased by $7.7 million during the first nine months of 2004, from $130.2 million on December 31, 2003, to $137.9 million at September 30, 2004. The increase is primarily attributable to net income of $9.2 million recorded during the first nine months of 2004. Shareholders' equity was negatively impacted during the first nine months of 2004 by the payment of cash dividends totaling $1.9 million, slightly offset by a $0.1 million mark-to-market adjustment for available for sale securities as defined in SFAS No. 115. Shareholders' equity also increased $0.3 million from the issuance of 30,782 new shares of common stock resulting from our dividend reinvestment plan, employee stock purchase plan and stock option exercises. 21 MERCANTILE BANK CORPORATION 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 September 30, 2004 and December 31, 2003 are disclosed under Note 9 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 April 7, 2004, that was distributed on May 3, 2004 to record holders as of April 16, 2004. We paid a $0.09 per share cash dividend on our common stock on March 10, 2004, June 10, 2004 and September 10, 2004. On October 6, 2004, we declared a $0.09 per share cash dividend payable on December 10, 2004, to record holders as of November 10, 2004. RESULTS OF OPERATIONS Net income for the third quarter of 2004 was $3.1 million ($0.43 per basic and diluted share), which represents a 39.8% increase over net income of $2.2 million ($0.38 per basic share and $0.37 per diluted share) recorded during the third quarter of 2003. Net income for the first nine months of 2004 was $9.2 million ($1.29 per basic share and $1.26 per diluted share), which represents a 31.9% increase over net income of $7.0 million ($1.22 per basic share and $1.19 per diluted share) recorded during the first nine months of 2003. Per share amounts reflect the dilutive impact of the common stock sale completed during the latter part of 2003, with average diluted shares outstanding up 23.1% in the third quarter of 2004 and and 24.8% year-to-date 2004 when compared to the same time periods in 2003, respectively. The improvement in net income during both time periods is primarily due to an increase in net interest income and greater operating efficiency. Net income for the third quarter of 2004 and the first nine months of 2004 include an $845,000 ($549,000 after-tax) write-off associated with the unamortized balance of issuance costs related to the redemption of the $16.0 million of 9.60% Cumulative Preferred Securities issued in 1999 by our business trust subsidiary, MBWM Capital Trust I. Excluding this one-time expense, net income for the third quarter of 2004 was $3.7 million ($0.51 per basic share and $0.50 per diluted share), which represents a 64.4% increase over net income of $2.2 million ($0.38 per basic share and $0.37 per diluted share) recorded during the third quarter of 2003. Excluding this one-time expense, net income for the first nine months of 2004 was $9.8 million ($1.36 per basic share and $1.34 per diluted share), which represents a 39.7% increase over net income of $7.0 million ($1.22 per basic share and $1.19 per diluted share) recorded during the first nine months of 2003. 22 MERCANTILE BANK CORPORATION Interest income during the third quarter of 2004 was $17.8 million, an increase of 28.6% over the $13.9 million earned during the third quarter of 2003. Interest income during the first nine months of 2004 was $49.3 million, an increase of 23.4% over the $40.0 million earned during the first nine months of 2003. The growth in interest income during both time periods is primarily attributable to an increase in earning assets, which more than offset the negative impact of an overall declining interest rate environment. During the third quarter of 2004, earning assets averaged $1,362.0 million, $332.8 million higher than average earning assets of $1,029.2 million during the third quarter of 2003. Average loans were up $300.3 million and securities increased $28.9 million. During the first nine months of 2004, earning assets averaged $1,276.4 million, $317.3 million higher than average earning assets of $959.1 million during the same time period in 2003. Average loans were up $294.5 million and securities increased $21.9 million. Negatively impacting the growth in interest income was the decline in yield on earning assets. During the third quarter of 2004 and 2003, earning assets had a weighted average yield (tax equivalent-adjusted basis) of 5.26% and 5.49%, respectively. During the first nine months of 2004 and 2003 earning assets had a weighted average yield of 4.99% and 5.38%, respectively. The decrease in weighted average yields during both time periods is primarily due to a decline in market interest rates. However, over the past several months market interest rates have begun to increase which has had a positive impact on our asset yield. The third quarter of 2004 asset yield is 9 basis points higher than the second quarter of 2004 asset yield, primarily resulting from recent increases in the prime rate. With approximately 78% of our total loans and leases tied to the prime rate, we expect our asset yield to benefit from potential additional future increases in market interest rates stemming from possible further increases in the target federal funds rate by the Federal Open Market Committee. Interest expense during the third quarter of 2004 was $7.0 million, an increase of 19.9% over the $5.8 million expensed during the third quarter of 2003. Interest expense during the first nine months of 2004 was $19.0 million, an increase of 7.5% over the $17.6 million expensed during the first nine months of 2003. The increase in interest expense is primarily attributable to the increase in interest-bearing liabilities necessitated by the growth in assets, partially offset by a decline in the cost of funds. During the third quarter of 2004, interest-bearing liabilities averaged $1,186.8 million, $265.0 million higher than average interest-bearing liabilities of $921.8 million during the third quarter of 2003. Interest-bearing deposits were up $195.8 million and FHLBI advances increased $62.6 million. During the first nine months of 2004, interest-bearing liabilities averaged $1,111.7 million, $252.9 million higher than average interest-bearing liabilities of $858.8 million during the same time period in 2003. Interest-bearing deposits were up $172.8 million and FHLBI advances increased $73.2 million. During the third quarter of 2004 and 2003, interest-bearing liabilities had a weighted average rate of 2.33% and 2.50%, respectively. During the first nine months of 2004 and 2003, interest-bearing liabilities had a weighted average rate of 2.28% and 2.74%, respectively. The decrease in the weighted average cost of interest-bearing liabilities during both time periods is primarily due to the decline in market interest rates. However, over the past several months market interest rates have begun to increase which has had a negative impact on our cost of interest-bearing liabilities. The third quarter of 2004 cost of interest-bearing liabilities is 10 basis points higher than the second quarter of 2004 cost of interest-bearing liabilities. We expect our cost of interest-bearing liabilities to continue to increase in future periods as maturing fixed rate certificates of deposits and FHLBI advances mature and are renewed or replaced with certificates of deposit and FHLBI advances at rates higher than the rates on the maturing instruments. In addition, potential further increases in market interest rates would also likely result in further increases in the cost of our interest-bearing liabilities. 23 MERCANTILE BANK CORPORATION Net interest income during the third quarter of 2004 was $10.9 million, an increase of 34.9% over the $8.0 million earned during the third quarter of 2003. Net interest income during the first nine months of 2004 was $30.3 million, an increase of 35.9% over the $22.3 million earned during the same time period in 2003. The increase in net interest income is primarily due to the growth in earning assets, combined with a slightly improved net interest margin. The net interest margin during the third quarter of 2004 was 3.23%, compared to the 3.19% during the third quarter of 2003. During the first nine months of 2004 the net interest margin was 3.24%, compared to 3.20% during the same time period in 2003. 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 third 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 35%. Securities interest income was increased by $243,000 and $207,000 in the third quarter of 2004 and 2003, respectively, for this adjustment.
Quarters ended September 30, ----------------------------------------------------------------------------------- 2004 2003 --------------------------------------- --------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- ----------- ------- ----------- ----------- ------- (dollars in thousands) ASSETS Loans and leases $ 1,219,325 $ 16,193 5.27% $ 918,966 $ 12,679 5.47% Securities 134,418 1,841 5.48 105,485 1,371 5.20 Federal funds sold 7,634 26 1.34 4,309 11 0.97 Short term investments 609 2 0.90 444 0 0.50 ----------- ----------- ----------- ----------- Total interest-earning assets 1,361,986 18,062 5.26 1,029,204 14,061 5.49 Allowance for loan losses (16,684) (12,842) Other assets 83,757 66,464 ----------- ----------- Total assets $ 1,429,059 $ 1,082,826 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $ 994,777 $ 5,706 2.28% $ 798,947 $ 4,952 2.46% Short-term borrowings 54,777 220 1.59 49,437 168 1.35 FHLB advances 119,130 652 2.14 56,467 274 1.90 Long-term borrowings 18,124 385 8.50 16,958 415 9.51 ----------- ----------- ----------- ----------- Total interest-bearing liabilities 1,186,808 6,963 2.33 921,809 5,809 2.50 Noninterest-bearing deposits 99,389 68,344 Other liabilities 6,572 6,163 Shareholders' equity 136,290 86,510 ----------- ----------- Total liabilities and shareholders' equity $ 1,429,058 $ 1,082,826 =========== ----------- =========== ----------- Net interest income $ 11,099 $ 8,252 =========== =========== Net interest rate spread 2.93% 2.99% ==== ==== Net interest rate spread on average assets 3.08% 3.02% ==== ==== Net interest margin on earning assets 3.23% 3.19% ==== ====
24 MERCANTILE BANK CORPORATION Provisions to the allowance for loan and lease losses during the third quarter of 2004 were $1.2 million, compared to the $1.4 million that was expensed during the third quarter of 2003. The decline primarily reflects a lower volume of loan and lease growth during the third quarter of 2004 compared to the volume of loan and lease growth during the third quarter of 2003. Provisions to the allowance for loan and lease losses during the first nine months of 2004 were $3.7 million, compared to the $2.9 million that was expensed during the same time period in 2003. The increase primarily reflects the higher volume of loan and lease growth during the first nine months of 2004 compared to the volume of loan and lease growth during the first nine months of 2003. Loan and lease growth during the third quarter of 2004 was $68.4 million, compared to loan and lease growth of $106.2 million during the third quarter of 2003. Loan and lease growth during the first nine months of 2004 was $217.8 million, compared to loan and lease growth of $200.6 million during the same time period in 2003. Net loan and lease charge-offs of $467,000 were recorded during the third quarter of 2004, compared to net loan and lease charge-offs of $56,000 during the third quarter of 2003. During the first nine months of 2004 net loan and lease charge-offs totaled $1,008,000, compared to net loan and lease charge-offs of $258,000 during the same time period in 2003. The allowance for loan and lease losses as a percentage of total loans outstanding as of September 30, 2004 was 1.36%, compared to 1.39% at September 30, 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 loan administration processes and loan 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 third quarter of 2004 was $1.2 million, compared to the $1.1 million earned during the third quarter of 2003. Noninterest income during the first nine months of 2004 was $3.2 million, compared to the $3.3 million earned during the same time period in 2003. The relatively unchanged level of noninterest income during both time periods primarily reflects a higher level of fee income of virtually all products and services that was offset by a lower level of income from mortgage banking activities. There were no securities gains during the third quarter of 2004 compared to securities gains of $59,000 recorded during the third quarter of 2003, and securities gains totaled $78,000 during the first nine months of 2004 compared to $271,000 during the same time period in 2003. Gains on the sale of SBA-guaranteed loans totaled $135,000 during the third quarter of 2004, and totaled $175,000 during the first nine months of 2004. There were no gains on the sale of SBA-guaranteed loans during the third quarter of 2003 or during the first nine months of 2003. 25 MERCANTILE BANK CORPORATION Noninterest expense during the third quarter of 2004 was $6.4 million, compared to the $4.8 million expensed during the third quarter of 2003. Noninterest expense during the first nine months of 2004 was $17.0 million, compared to the $13.2 million expensed during the same time period in 2003. Employee salary and benefit expenses were $0.6 million higher during the third quarter of 2004 than the level expensed during the third quarter of 2003, and were $2.1 million higher during the first nine months of 2004 than the level expensed during the first nine months of 2003. The increases during both time periods primarily resulted from the hiring of additional staff and merit annual pay increases. The level of full-time equivalent employees increased from 156 at September 30, 2003 to 190 as of September 30, 2004. Including the $845,000 one-time expense associated with the redemption of the 9.60% Cumulative Preferred Securities, other overhead costs increased $1.1 million in the third quarter of 2004 over the level expensed in the third quarter of 2003, and increased $1.7 million during the first nine months of 2004 over the level expensed during the first nine months of 2003. Excluding the one-time charge, other overhead costs increased $0.3 million in the third quarter of 2004 over the level expensed in the third quarter of 2003, and increased $0.9 million during the first nine months of 2004 over the level expensed during the first nine months of 2003, primarily reflecting the additional expenses required to administer our significantly increased asset base and size. 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 (excluding the one-time charge) increased $0.8 million during the third quarter of 2004 over the amount expensed during the third quarter of 2003, and increased $3.0 million during the first nine months of 2004 over the amount expensed during the first nine months of 2003. However, net revenues (net interest income plus noninterest income) increased at a substantially higher level of $2.9 million and $7.9 million during the same time periods, respectively. Federal income tax expense was $1.3 million and $3.7 million during the third quarter and first nine months of 2004, respectively. Federal income tax expense was $0.7 million and $2.6 million during the third quarter and first nine months of 2003, respectively. The increases during both time periods primarily results from the increase in 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. 26 MERCANTILE BANK CORPORATION 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 September 30, 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) $ 769,215 $ 23,084 $ 313,248 $ 24,719 $ 1,130,266 Residential real estate loans 75,228 1,339 29,247 12,492 118,306 Consumer loans 1,146 651 3,279 65 5,141 Investment securities (2) 6,916 1,019 18,172 118,912 145,019 Short-term investments 5,827 5,827 Allowance for loan and leases losses (17,045) (17,045) Other assets 87,435 87,435 ----------- ----------- ----------- ----------- ----------- Total assets 858,332 26,093 363,946 226,578 1,474,949 Liabilities: Interest-bearing checking 35,435 35,435 Savings 138,337 138,337 Money market accounts 9,974 9,974 Time deposits < $100,000 32,952 42,509 37,845 113,306 Time deposits $100,000 and over 133,783 378,432 224,548 736,763 Short-term borrowings 46,691 46,691 FHLB advances 30,000 50,000 40,000 120,000 Long-term borrowings 18,003 18,003 Noninterest-bearing checking 111,042 111,042 Other liabilities 7,463 7,463 ----------- ----------- ----------- ----------- ----------- Total liabilities 445,175 470,941 302,393 118,505 1,337,014 Shareholders' equity 137,935 137,935 ----------- ----------- ----------- ----------- ----------- Total sources of funds 445,175 470,941 302,393 256,440 1,474,949 ----------- ----------- ----------- ----------- ----------- Net asset (liability) GAP $ 413,157 $ (444,848) $ 61,553 $ (29,862) =========== =========== =========== =========== Cumulative GAP $ 413,157 $ (31,691) $ 29,862 =========== =========== =========== Percent of cumulative GAP to total assets 28.0% (2.1)% 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 next repricing date. (2) Mortgage-backed securities are categorized by expected final maturities based upon prepayment trends as of September 30, 2004. 27 MERCANTILE BANK CORPORATION 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 the company's strategies, among other factors. We conducted multiple simulations as of September 30, 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 is well within our 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 $ (2,469,000) (5.9)% Interest rates down 100 basis points (1,309,000) (3.1) No change in interest rates (473,000) (1.1) Interest rates up 100 basis points 764,000 1.9 Interest rates up 200 basis points 2,034,000 4.8
The results detailed above have been influenced by the basis risk contained within our earning assets and interest-bearing liabilities. Interest rates on our floating rate loans, comprising approximately 64% of total assets as of September 30, 2004, are tied to the prime rate. Interest rates on our wholesale funds, and to a lesser degree on our local interest-bearing deposits, closely mirror shorter-term U.S. Treasury and Libor interest rates. Since the second quarter of 2004, U.S. Treasury and Libor interest rates have increased significantly, reflecting the interest rate market's reaction to the Federal Reserve decision to raise the target federal funds rate by 25 basis points on three separate occasions since June 30, 2004, combined with the interest rate market's expectations that the Federal Reserve would raise the federal funds target rate even higher in future periods. For example, from the period of April 1, 2004 through September 30, 2004, the Federal Reserve had raised the targeted federal funds rate by 75 basis points, while the interest rate on one year brokered CDs and FHLB bullet advances had increased by about 100 basis points. In conducting the net interest income simulation we used brokered CD and FHLB bullet advance rates in effect as of September 30, 2004. Therefore, it is likely that future net interest income would be higher than what is detailed above. 28 MERCANTILE BANK CORPORATION 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 September 30, 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 September 30, 2004. 29 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. UNREGISTERED SALES OF EQUITY 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
EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 Our Articles of Incorporation are incorporated by reference to Exhibit 3.1 of our Form 10-Q for the quarter ended June 30, 2004 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 10.1 2004 Employee Stock Option Plan 10.2 Form of Stock Option Agreement for options issued under the 2004 Employee Stock Option Plan 10.3 Nonlender Bonus Plan 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
30 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 November 5, 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) 31 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 Our Articles of Incorporation are incorporated by reference to Exhibit 3.1 of our Form 10-Q for the quarter ended June 30, 2004 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 10.1 2004 Employee Stock Option Plan 10.2 Form of Stock Option Agreement for options issued under the 2004 Employee Stock Option Plan 10.3 Nonlender Bonus Plan 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
32 EX-10.1 2 k88686exv10w1.txt 2004 EMPLOYEE STOCK OPTION PLAN EXHIBIT 10.1 MERCANTILE BANK CORPORATION 2004 EMPLOYEE STOCK OPTION PLAN ----------------------- As adopted by the Board of Directors on February 12, 2004 ----------------------- ARTICLE I - PURPOSE The purpose of the 2004 Employee Stock Option Plan (the "Plan") of Mercantile Bank Corporation (the "Company") is to enable officers and other employees of the Company or any Subsidiary to participate in the Company's future growth and profitability by offering them long-term performance-based incentive compensation. The Plan also provides a means through which the Company and its Subsidiaries can attract and retain key employees. ARTICLE II - DEFINITIONS 2.1 The following terms have the meaning described below when used in the Plan: (a) "Board of Directors" shall mean the board of directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended, and as it may be further amended from time to time. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean Mercantile Bank Corporation. (e) "Fair Market Value" on a particular date shall mean the average of the highest and lowest sales prices of shares of the Common Stock reported on The Nasdaq Stock Market (or any successor exchange or system that is the primary exchange or system for trading of the Common Stock) on such date, or if The Nasdaq Stock Market (or any such successor) is closed on that date, the last preceding date on which The Nasdaq Stock Market (or any such successor) was open for trading and on which shares of the Common Stock were traded. For purposes of determining Fair Market Value, if there is only one sale of the Common Stock reported on the applicable date, the sales price for such sale shall be used instead, as though it were the average of the highest and lowest sales prices. If for any reason it is not practical for the Fair Market Value to be determined as provided for above in this paragraph, Fair Market Value shall be determined by any fair and reasonable means prescribed by the Board of Directors. (f) "Incentive Stock Option" shall mean a stock option granted under Article VI that is intended to meet the requirements of Section 422 of the Code. (g) "Non-Qualified Stock Option" shall mean a stock option granted under Article VI that is not intended to be an Incentive Stock Option. (h) "Option" shall mean an Incentive Stock Option or Non-Qualified Stock Option. (i) "Participant" shall mean an eligible employee who has been granted an Option. (j) "Subsidiary" shall mean with respect to an Incentive Stock Option any "subsidiary corporation" (as such term is defined in Section 424(f) of the Code or in any successor provision thereto), and as to a Nonqualified Stock Option, Subsidiary shall mean any "subsidiary corporation", as described above, or any other entity in which the Company, either directly or indirectly, owns a majority voting interest. ARTICLE III - ADMINISTRATION 3.1 (a) Stock Option Plan Administration. The Board of Directors of the Company shall administer the Plan. The Board of Directors shall have full power and authority to grant to eligible employees (as determined by the Board of Directors) Options under Article VI of the Plan, to interpret the provisions of the Plan and any agreements relating to Options granted under the Plan, and to administer the Plan. In making determinations of eligibility for the Plan, the Board of Directors may consider the position and responsibilities of the employee, the nature and value of his or her services and accomplishments, the present and potential contribution of the employee to the success of the Company, and such other factors as the Board of Directors may deem relevant. (b) Decisions of Board of Directors. All decisions made by the Board of Directors pursuant to the provisions of the Plan shall be final, conclusive and binding on all persons, including the Company, its shareholders and employees, and beneficiaries of employees. ARTICLE IV - SHARES SUBJECT TO THE PLAN 4.1 (a) Number of Shares. Subject to adjustment as provided for in Section 4.1(b), the maximum number of shares of Common Stock with respect to which Options may be granted shall be 250,000 shares of Common Stock. Shares of Common Stock shall be made available from the authorized but unissued shares of the Company (including shares reacquired by the Company). If an Option granted under the Plan shall expire or terminate for any reason, the shares subject to, but not delivered, under such Option shall be available for other Options to be issued under the Plan. (b) Adjustments. All as may be deemed appropriate by the Board of Directors, the aggregate number of shares of Common Stock which may be issued under the Plan, the number of shares covered by each outstanding Option, and the price per share in each Option, may be proportionately adjusted for any increase or decrease in the number of issued shares of Common 2 Stock of the Company resulting from a subdivision or consolidation of shares or any other capital adjustment, a stock split, the payment of a stock dividend, or other increase or decrease in such shares effected without receipt of consideration by the Company. ARTICLE V - ELIGIBILITY 5.1 The persons eligible to participate in the Plan and receive Options under the Plan are officers and other employees of the Company and its Subsidiaries, including directors who are full time employees, as determined by the Board of Directors. ARTICLE VI - STOCK OPTIONS 6.1 Grant of Options. Subject to the limitations of the Plan, the Board of Directors, after such consultation with and consideration of the recommendations of management as the Board of Directors considers desirable, shall select from eligible employees Participants to be granted Options and determine the time when each Option shall be granted and the number of shares subject to each Option. Options may be either Incentive Stock Options or Non-Qualified Stock Options. More than one Option may be granted to the same person. The Board of Directors may not grant a Participant Incentive Stock Options which in the aggregate are first exercisable during any one calendar year with respect to Common Stock the aggregate Fair Market Value of which (determined as of the time of grant) exceeds $100,000. 6.2 Option Agreements. Each Option under the Plan shall be evidenced by an option agreement that shall be signed by an officer of the Company and the Participant and shall contain such provisions as may be approved by the Board of Directors. Any such option agreement may be amended from time to time as approved by the Board of Directors and the Participant, provided that the terms of such option agreement after being amended conform to the terms of the Plan. 6.3 Option Price. The price at which shares of Common Stock may be purchased upon exercise of an Option shall be not less than one hundred percent (100%) of the Fair Market Value of such shares on the date such Option is granted. 6.4 Exercise of Options. (a) The period during which each Option may be exercised shall be fixed by the Board of Directors at the time such Option is granted, but such period in no event shall expire later than ten (10) years from the date the Option is granted. (b) Subject to the terms and conditions of the option agreement and unless canceled prior to exercise, each Option shall be exercisable in whole or in part in installments at such time or times as the Board of Directors may prescribe and specify in the applicable option agreement. (c) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment shall be made in cash or through the delivery of shares of Common Stock of the Company owned by the 3 Participant for more than six (6) months with a value equal to the total option price or a combination of cash and such shares. Any shares so delivered shall be valued at their Fair Market Value on the exercise date. No Participant shall be deemed to be a holder of any shares subject to any Option prior to the issuance of such shares upon exercise of such Option. 6.5 Ten-Percent Shareholder Rule. If a Participant owns more than ten percent (10%) of the total combined voting power of all classes of the Company or of any Subsidiary's stock at the time an Incentive Stock Option is granted to such Participant, the option price to such Participant shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of the Common Stock on the date of grant, and such Incentive Stock Option by its terms shall not be exercisable after the expiration of five (5) years from the date of grant. 6.6 Non-Transferability of Options. No Option or any rights with respect thereto shall be subject to any debts or liabilities of a Participant, nor be assignable or transferable except by Will or the laws of descent and distribution, nor be exercisable during the Participant's lifetime other than by the Participant, nor shall Common Stock be issued to or in the name of one other than the Participant; provided, however, that an Option may after the death or disability of a Participant be exercised pursuant to Section 6.7; and provided further that any Common Stock issued to a Participant hereunder may at the request of the Participant, and with the consent of the Company, be issued in the names of the Participant and one other person, as joint tenants with right of survivorship and not as tenants in common, or in the name of a trust for the benefit of the Participant or for the benefit of the Participant and others. 6.7 Termination of Employment; Death and Disability. Subject to the condition that no Option may be exercised in whole or in part after the expiration of the option period specified in the applicable option agreement: (a) Except as hereinafter provided, an Option may be exercised by the Participant only while such Participant is in the employ of the Company or a Subsidiary. In the event that the employment of a Participant to whom an Option has been granted under the Plan shall terminate (except as set forth below) such Option may be exercised, to the extent that the Option was exercisable on the date of termination of employment, only until the earlier of three (3) months after such termination or the original expiration date of the Option; provided, however, that if termination of employment results from death or total and permanent disability, such three (3) month period shall be extended to twelve (12) months. (b) In the event of the permanent disability of a Participant as determined by the Board of Directors, an Option which is otherwise exercisable may be exercised by the Participant's legal representative or guardian. In the event of the death of the Participant, an Option which is otherwise exercisable may be exercised by the person or persons whom the Participant shall have designated in writing on forms prescribed by and filed with the Board of Directors ("Beneficiaries"), or, if no such designation has been made, by the person or persons to whom the Participant's rights shall have passed by Will or the laws of descent and distribution ("Successors"). The Board of Directors may require an indemnity and/or such evidence or other assurances as the Board of Directors in its sole and absolute discretion may deem necessary in connection with an exercise by a legal representative, guardian, Beneficiary or Successor. 4 ARTICLE VII - GENERAL PROVISIONS 7.1 Change in Control. (a) In the case of a Change in Control (as defined below) of the Company, unless the Board of Directors determines otherwise, each Option then outstanding shall become exercisable in full immediately prior to such Change in Control. (b) Any determination by the Board of Directors made pursuant to subsection (a) above may be made as to all outstanding Options or only as to certain Options specified by the Board of Directors and any such determinations shall be made in cases covered by subparagraphs 7.1(c)(i) and (ii) below prior to or as soon as practicable after the occurrence of such event and in the cases covered by subparagraphs 7. 1 (c) (iii) or (iv) prior to the occurrence of such event. (c) A Change in Control shall occur if: (i) Any "person" or "group of persons" as such terms are defined in Section 13(d) and 14(c) of the Securities Exchange Act of 1934 (the "Exchange Act") directly or indirectly purchases or otherwise becomes the "beneficial owner" (as defined in the Exchange Act) or has the right to acquire such beneficial ownership (whether or not such right is exercised immediately, with the passage of time or subject to any condition) of voting securities representing forty percent (40%) or more of the combined voting power of all outstanding voting securities of the Company, (ii) During any period of two consecutive calendar years the individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least the majority of the members thereof unless (1) there are five or more directors then still in office who were directors at the beginning of the period and (2) the election or the nomination for election by the Company's shareholders of each new director was approved by at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period, (iii) The shareholders of the Company shall approve an agreement to merge or consolidate the Company with or into another corporation as a result of which less than fifty percent (50%) of the outstanding voting securities of the surviving or resulting entity are or are to be owned by the former shareholders of the Company (excluding from former shareholders a shareholder who is or as a result of the transaction in question, becomes an affiliate as defined in Rule 12b-2 under the Exchange Act of any party to such consolidation or merger), or (iv) The shareholders of the Company shall approve the sale of all or substantially all of the Company's business and/or assets to a person or entity that is not a wholly-owned subsidiary of the Company. 7.2 No Right of Continued Employment. Neither the establishment of the Plan, the granting of Options or any action of the Company or of the Board of Directors shall be held or 5 construed to confer upon any person any legal right to be continued in the employ of the Company or its Subsidiaries, each of which expressly reserves the right to discharge any employee whenever the interest of any such company in its sole discretion may so require without liability to such company or the Board of Directors, except as to any rights that may be expressly conferred upon such employee under the Plan. 7.3 No Segregation of Cash or Shares. The Company shall not be required to segregate any shares of Common Stock that may at any time be represented by Options, and the Plan shall constitute an "unfunded" plan of the Company. No employee shall have rights with respect to shares of Common Stock prior to the delivery of such shares. The Company shall not, by any provisions of the Plan, be deemed to be a trustee of any Common Stock or any other property and the liabilities of the Company to any employee pursuant to the Plan shall be those of a debtor pursuant to such contract obligations as are created by or pursuant to the Plan, and the rights of any employee, former employee or beneficiary under the Plan shall be limited to those of a general creditor of the Company. 7.4 Delivery of Shares. No shares shall be delivered pursuant to any exercise of an Option under the Plan unless the requirements of such laws and regulations as may be deemed by the Board of Directors to be applicable thereto are satisfied. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Board of Directors may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange or quotation system upon which the Common Stock is then listed, and any applicable Federal or state securities law, and the Board of Directors may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 7.5 Governing Law. The Plan and all determinations made and action taken pursuant thereto shall be governed by the laws of the State of Michigan and construed in accordance therewith. 7.6 Payments and Tax Withholding. The delivery of any shares of Common Stock under the Plan shall be for the account of the Company and any such delivery or distribution shall not be made until the recipient shall have made satisfactory arrangements for the payment of any applicable withholding taxes. 6 ARTICLE VIII - AMENDMENT AND TERMINATION 8.1 Amendment or Termination. The Board of Directors may amend or terminate the Plan provided, however, that no such amendment or termination shall adversely affect any Option then in effect unless the prior approval of the Participant so affected is obtained. No Option may be granted under the Plan after December 31, 2013. ARTICLE IX - EFFECTIVENESS OF PLAN 9.1 The Plan was adopted by the Board of Directors on February 12, 2004 subject to the approval of the shareholders of the Company. ARTICLE X - SEVERABILITY 10.1 If any provision of the Plan, or any term or condition of any Option granted under the Plan, is invalid, such provision, term, condition or application shall to that extent be void (or, in the discretion of the Board of Directors, such provision, term or condition may be amended so as to avoid such invalidity or failure), and shall not affect other provisions, terms or conditions or applications thereof, and to this extent such provisions, terms and conditions are severable. 7 EX-10.2 3 k88686exv10w2.txt FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.2 STOCK OPTION AGREEMENT FOR AN INCENTIVE STOCK OPTION UNDER THE MERCANTILE BANK CORPORATION 2004 EMPLOYEE STOCK OPTION PLAN This STOCK OPTION AGREEMENT is executed and delivered in duplicate, as of the ____ day of __________, ______ (the "Option Date"), by and between Mercantile Bank Corporation, a Michigan corporation (the "Company"), and _________________, an employee of the Company or a Subsidiary (the "Optionee"). NOW, THEREFORE, in consideration of the mutual covenants of the parties hereinafter set forth, the parties have agreed and do hereby agree, as follows: 1. The Company, pursuant to the 2004 Employee Stock Option Plan of the Company (the "Plan"), which is incorporated into this Agreement by reference, and subject to the terms and conditions of the Plan, grants to the Optionee an Incentive Stock Option (the "Option") to purchase ________ shares (the "Optioned Shares") of Common Stock of the Company at an option price of $_______ per share (which price represents the fair market value of such Common Stock of the Company on the Option Date), which Option may be exercised at any time on or after ____________, 20__ [with respect to _________ shares, and at any time on or after _________ ___, 20__ with respect to the remaining _________ shares, in each case] through the date that the Option terminates as set forth in Section 2 below. 2. The option granted hereby shall terminate, subject to the provisions of the Plan, no later than at the close of business on _________, 20___. 3. The option granted by this Agreement shall during the lifetime of the Optionee be exercisable only by the Optionee in accordance with the terms of the Plan and shall not be assignable or transferable except by Will or by the laws of descent and distribution; provided, however, that the option granted by this Agreement may after the death of the Optionee be exercised pursuant to the terms of the Plan by a Beneficiary or Beneficiaries of the Optionee as designated by such Optionee in accordance with Section 6.7(b) of the Plan. 4. The Optionee agrees to comply with and be bound by all the terms and conditions contained in the Plan. 5. Any notice by the Optionee to the Company under this Agreement shall be in writing and shall be deemed duly given only upon receipt of the notice by the Company at its principal executive offices. Any notice by the Company to the Optionee shall be in writing and shall be deemed duly given if mailed to the Optionee at the address specified below by the Optionee, or to such other address as the Optionee may later designate by notice given to the Company. 6. The Optionee, from time to time during the period when the Option may by its terms be exercised, may exercise the Option in whole, or in part in minimum installments of 500 shares, by delivering to the Company: (i) a written notice signed by the Optionee stating the number of shares that the Optionee has elected to purchase at that time from the Company, and (ii) cash, a check, bank draft or money order payable to the Company in an amount equal to the purchase price of the shares then to be purchased, or (iii) through the delivery of shares of Common Stock of the Company owned by the Optionee for more than six months with a value equal to the option price, provided, however, that shares of Common Stock acquired by the Optionee through the exercise of an incentive stock option may not be used for payment prior to the expiration of holding periods prescribed by the Internal Revenue Code, or (iv) by a combination of (ii) and (iii) above. The value of the shares of the Common Stock delivered shall be the Fair Market Value of the Common Stock as defined in Section 2.1(e) of the Plan. The Board of Directors of the Company, acting pursuant to the Plan, if it shall deem it necessary or desirable for any reason connected with any law or regulation of any governmental authority relating to the regulation of securities, may require the Optionee to execute and file with it such evidence as it may deem necessary that the Optionee is acquiring such shares for investment and not with a view to their distribution. 7. A dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation, at the discretion of the Board of Directors of the Company, shall cause this Option to terminate, provided that this Option shall be fully vested and exercisable immediately prior to such dissolution or liquidation, or such merger or consolidation, and the Optionee has the right to exercise this Option prior to such dissolution or liquidation, or such merger or consolidation. This Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 8. The validity and construction of this Agreement shall be governed by the laws of the State of Michigan. 2 The Company has caused this Agreement to be executed by its duly authorized officer, and the Optionee has executed this Agreement, as of the Option Date. MERCANTILE BANK CORPORATION By: ----------------------------- Its: ------------------------- OPTIONEE ----------------------------- (Signature) ----------------------------- ----------------------------- ----------------------------- (Print address) 3 MERCANTILE BANK CORPORATION STOCK OPTION PLAN DESIGNATION OF BENEFICIARY Check One, ______ I do not wish to designate a Beneficiary at this time; Complete as it is my desire that any right to exercise this option Applicable, after my death pass by my Will or if applicable, the and Sign laws of descent and distribution. ______ In the event of my death it is my desire that any right to exercise this option pass to the following designated Beneficiar(ies): Name Relationship Address -------------------------------------------------------- -------------------------------------------------------- (If more than one Beneficiary is named, the Beneficiaries shall share equally in the rights unless otherwise stated above). Unless otherwise expressly provided, if any Beneficiary above-designated predeceases me, any rights shall pass equally to the remaining designated Beneficiar(ies) if any, who survive me, but if no designated Beneficiary survives me, any rights shall pass to my estate. Optionee may change the Beneficiar(ies) by filing written notice with the Company. The designation of Beneficiary herein is subject to all the terms and conditions of the Plan and all applicable laws, rules and regulations. In addition, the Company may require an indemnity and/or other assurances from the Beneficiar(ies) prior to the exercise of any rights by such Beneficiar(ies) under this option. Date: -------------- ------------------------------- Signature of Optionee 4 EX-10.3 4 k88686exv10w3.txt NONLENDER BONUS PLAN EXHIBIT 10.3 MERCANTILE BANK OF WEST MICHIGAN NON-LENDER BONUS PLAN The Mercantile Bonus Plan is designed to reflect the fact that the directors and management of Mercantile Bank of West Michigan and Mercantile Bank Corporation believe that the company's shareholders are willing to share financially in operation results that are superior to those forecast by the company and approved by the Board of Directors. The purpose of the Plan is to: o promote the growth, profitability and expense control necessary to accomplish corporate strategic long term plans o encourage superior results by providing a meaningful incentive o support the Mercantile Teamwork ELIGIBILITY All non-lenders and non-commissioned employees are included in the Plan. The employee must be an active employee on the day that the bonus awards are distributed. An employee that is out on medical leave at the time the awards are distributed will be eligible to receive a bonus. An employee that is suspended with or without pay at the time the awards are distributed will not be eligible to receive the bonus award. If an employee terminates his or her association with Mercantile Bank of West Michigan, any accrued but unpaid bonus award is cancelled. PERFORMANCE GOALS The bonus payout is determined by the overall performance of the Bank. The total payout is calculated by comparing current year after tax net operating income (NOI), inclusive of pre-tax bonus accrual expense, with the prior year NOI. If current year NOI is not greater than 120% of the prior year NOI, the pre-tax bonus accrual will be adjusted downward until current year NOI, inclusive of pre-tax bonus accrual expense, exceeds 120% of prior year NOI. The maximum bonus payout for each employee is calculated as a percentage of salary with the percentage applied to each salary based on the employee's job title within the organization. The maximum bonus pool is the sum of each employee's maximum bonus payout, and once this maximum pool is achieved, no additional bonus expense will be accrued. The Board of Directors annually approves the percentages that are applied to employee salaries. 2005 BONUS STRUCTURE EMPLOYEE BONUS - NON-LENDER NON-EXEMPT/EXEMPT 10% OFFICER 15% ASSISTANT VICE PRESIDENT 25% VICE PRESIDENT 30% SENIOR VICE PRESIDENT 40% COO/CFO 45% CHAIRMAN, PRESIDENT 50%
EX-11 5 k88686exv11.txt STATEMENT RE COMPUTATION OF PER SHARE EARNINGS . . . EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS RETURN ON EQUITY AND ASSETS
JANUARY 1, 2004 TO ANNUALIZED SEPTEMBER 30, 2004 ---------- ------------------ Return on average total assets 0.92% 0.69% Return on average equity 9.23% 6.91% Dividend payout ratio 20.61% Average equity to average assets 9.99% STATEMENT OF COMPUTED PER SHARE EARNINGS Net income $9,233,000 Average basic shares outstanding 7,169,198 Average diluted shares outstanding 7,316,510 Basic earnings per share $ 1.29 Diluted earnings per share $ 1.26
EX-31 6 k88686exv31.txt SECTION 302 CERTIFICATIONS OF CEO AND CFO 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: November 5, 2004 /s/ Gerald R. Johnson, Jr. ------------------------------------ Gerald R. Johnson, Jr. Chairman and Chief Executive Officer RULE 13a-14(a) CERTIFICATIONS 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: November 5, 2004 /s/ Charles E. Christmas ---------------------------------------------- Charles E. Christmas. Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 7 k88686exv32w1.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 September 30, 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: November 5, 2004 /s/ Gerald R. Johnson, Jr. ------------------------------------ Gerald R. Johnson, Jr. Chairman and Chief Executive Officer EX-32.2 8 k88686exv32w2.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 September 30, 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: November 5, 2004 /s/ Charles E. Christmas ------------------------------- Charles E. Christmas Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----