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
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