10-Q 1 k96942e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2005 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 June 30, 2005 [ ] 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) 310 LEONARD STREET, NW, GRAND RAPIDS, MI 49504 (Address of principal executive offices) (Zip Code) (616) 406-3000 (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 August 8, 2005, there were 7,585,905 shares of Common Stock outstanding. 1 MERCANTILE BANK CORPORATION INDEX
Page No. -------- PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2005 (Unaudited) and December 31, 2004..................................... 3 Consolidated Statements of Income and Comprehensive Income - Three and Six Months Ended June 30, 2005 (Unaudited) and June 30, 2004 (Unaudited)........................................................... 4 Consolidated Statements of Changes in Shareholders' Equity - Six Months Ended June 30, 2005 (Unaudited) and June 30, 2004 (Unaudited)........................................................... 5 Consolidated Statements of Cash Flows - Three and Six Months Ended June 30, 2005 (Unaudited) and June 30, 2004 (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....................................................... 28 PART II. Other Information Item 1. Legal Proceedings............................................................. 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................... 29 Item 3. Defaults upon Senior Securities............................................... 29 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
June 30, December 31, 2005 2004 --------------- ---------------- (Unaudited) ASSETS Cash and due from banks $ 35,462,000 $ 20,662,000 Short-term investments 597,000 149,000 Federal funds sold 21,400,000 0 --------------- ---------------- Total cash and cash equivalents 57,459,000 20,811,000 Securities available for sale 107,896,000 93,826,000 Securities held to maturity (fair value of $60,735,000 at June 30, 2005 and $54,621,000 at December 31, 2004) 58,851,000 52,341,000 Federal Home Loan Bank stock 7,425,000 6,798,000 Total loans and leases 1,424,463,000 1,317,124,000 Allowance for loan and lease losses (18,856,000) (17,819,000) --------------- ---------------- Total loans and leases, net 1,405,607,000 1,299,305,000 Premises and equipment, net 29,118,000 24,572,000 Bank owned life insurance policies 24,669,000 23,750,000 Accrued interest receivable 6,550,000 5,644,000 Other assets 11,578,000 9,072,000 --------------- ---------------- Total assets $ 1,709,153,000 $ 1,536,119,000 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 136,830,000 $ 101,742,000 Interest-bearing 1,185,014,000 1,057,439,000 --------------- ---------------- Total deposits 1,321,844,000 1,159,181,000 Securities sold under agreements to repurchase 56,034,000 56,317,000 Federal funds purchased 0 15,000,000 Federal Home Loan Bank advances 135,000,000 120,000,000 Subordinated debentures 32,990,000 32,990,000 Other borrowed money 2,069,000 1,609,000 Accrued expenses and other liabilities 12,016,000 9,405,000 --------------- ---------------- Total liabilities 1,559,953,000 1,394,502,000 Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, none issued 0 0 Common stock, no par value: 20,000,000 shares authorized; 7,582,482 shares outstanding at June 30, 2005 and 7,192,461 shares outstanding at December 31, 2004 148,373,000 131,010,000 Retained earnings 821,000 10,475,000 Accumulated other comprehensive income 6,000 132,000 --------------- ---------------- Total shareholders' equity 149,200,000 141,617,000 --------------- ---------------- Total liabilities and shareholders' equity $ 1,709,153,000 $ 1,536,119,000 =============== ================
See accompanying notes to consolidated financial statements. 3 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 --------------- -------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest income Loans and leases, including fees $ 22,250,000 $ 14,722,000 $ 42,022,000 $ 28,630,000 Investment securities 2,036,000 1,400,000 3,923,000 2,826,000 Federal funds sold 56,000 8,000 100,000 27,000 Short-term investments 4,000 0 6,000 1,000 --------------- -------------- -------------- ------------- Total interest income 24,346,000 16,130,000 46,051,000 31,484,000 Interest expense Deposits 8,892,000 4,929,000 16,332,000 9,679,000 Short-term borrowings 375,000 186,000 713,000 356,000 Federal Home Loan Bank advances 1,006,000 597,000 1,863,000 1,126,000 Long-term borrowings 465,000 418,000 880,000 834,000 --------------- -------------- -------------- ------------- Total interest expense 10,738,000 6,130,000 19,788,000 11,995,000 --------------- -------------- -------------- ------------- NET INTEREST INCOME 13,608,000 10,000,000 26,263,000 19,489,000 Provision for loan and lease losses 900,000 1,230,000 1,625,000 2,474,000 --------------- -------------- -------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 12,708,000 8,770,000 24,638,000 17,015,000 Noninterest income Services charges on accounts 341,000 312,000 679,000 611,000 Net gain on sales of securities 0 0 0 78,000 Net gain on sales of loans 28,000 40,000 28,000 40,000 Other income 849,000 649,000 1,721,000 1,311,000 --------------- -------------- -------------- ------------- Total noninterest income 1,218,000 1,001,000 2,428,000 2,040,000 Noninterest expense Salaries and benefits 4,405,000 3,510,000 8,564,000 6,793,000 Occupancy 566,000 383,000 1,084,000 769,000 Furniture and equipment 362,000 267,000 650,000 540,000 Other expense 1,812,000 1,240,000 3,697,000 2,453,000 --------------- -------------- -------------- ------------- Total noninterest expenses 7,145,000 5,400,000 13,995,000 10,555,000 --------------- -------------- -------------- ------------- INCOME BEFORE FEDERAL INCOME TAX EXPENSE 6,781,000 4,371,000 13,071,000 8,500,000 Federal income tax expense 2,091,000 1,225,000 4,019,000 2,381,000 --------------- -------------- -------------- ------------- NET INCOME $ 4,690,000 $ 3,146,000 $ 9,052,000 $ 6,119,000 =============== ============== ============== ============= COMPREHENSIVE INCOME $ 5,424,000 $ 1,740,000 $ 8,926,000 $ 5,103,000 =============== ============== ============== ============= Basic earnings per share $ 0.62 $ 0.42 $ 1.20 $ 0.81 =============== ============== ============== ============= Diluted earnings per share $ 0.61 $ 0.41 $ 1.17 $ 0.80 =============== ============== ============== ============= Cash dividends per share $ 0.11 $ 0.09 $ 0.21 $ 0.18 =============== ============== ============== ============= Average basic shares outstanding 7,579,437 7,531,264 7,573,073 7,524,031 =============== ============== ============== ============= Average diluted shares outstanding 7,720,821 7,688,597 7,737,121 7,675,812 =============== ============== ============== =============
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, 2004 $118,560,000 $ 11,421,000 $ 220,000 $130,201,000 Payment of 5% stock dividend, 357,189 shares 12,112,000 (12,116,000) (4,000) Employee stock purchase plan, 1,148 shares 38,000 38,000 Dividend reinvestment plan, 2,004 shares 65,000 65,000 Stock option exercises, 35,735 shares 375,000 375,000 Stock tendered for stock option exercises, 7,597 shares (248,000) (248,000) Cash dividends ($0.18 per share) (1,258,000) (1,258,000) Comprehensive income: Net income for the period from January 1, 2004 through June 30, 2004 6,119,000 6,119,000 Change in net unrealized gain (loss) on securities available for sale, net of reclassifications and tax effect (1,016,000) (1,016,000) ------------ Total comprehensive income 5,103,000 ------------ ------------ ------------- ------------ BALANCE, JUNE 30, 2004 $130,902,000 $ 4,166,000 $ (796,000) $134,272,000 ============ ============ ============= ============ BALANCE, JANUARY 1, 2005 $131,010,000 $ 10,475,000 $ 132,000 $141,617,000 Payment of 5% stock dividend, 361,159 shares 17,187,000 (17,191,000) (4,000) Employee stock purchase plan, 964 shares 39,000 39,000 Dividend reinvestment plan, 2,148 shares 84,000 84,000 Stock option exercises, 33,702 shares 319,000 319,000 Stock tendered for stock option exercises, 6,511 shares (266,000) (266,000) Cash dividends ($0.21 per share) (1,515,000) (1,515,000) Comprehensive income: Net income for the period from January 1, 2005 through June 30, 2005 9,052,000 9,052,000 Change in net unrealized gain (loss) on securities available for sale, net of reclassifications and tax effect (126,000) (126,000) ------------ Total comprehensive income 8,926,000 ------------ ------------ ------------- ------------ BALANCE, JUNE 30, 2005 $148,373,000 $ 821,000 $ 6,000 $149,200,000 ============ ============ ============= ============
See accompanying notes to consolidated financial statements. 5 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 -------------- ------------- ------------- -------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,690,000 $ 3,146,000 $ 9,052,000 $ 6,119,000 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 584,000 436,000 1,074,000 848,000 Provision for loan and lease losses 900,000 1,230,000 1,625,000 2,474,000 Net gain on sales of loans (28,000) (40,000) (28,000) (40,000) Net gain on sales of securities 0 0 0 (78,000) Net change in: Accrued interest receivable 333,000 567,000 (906,000) (159,000) Bank owned life insurance policies (243,000) (178,000) (479,000) (355,000) Other assets (1,503,000) (1,429,000) (2,632,000) (998,000) Accrued expenses and other liabilities 1,772,000 359,000 2,611,000 (674,000) ------------- ------------ ------------ ------------- Net cash from operating activities 6,505,000 4,091,000 10,317,000 7,137,000 CASH FLOWS FROM INVESTING ACTIVITIES Loan and leases originations and payments, net (49,999,000) (74,426,000) (107,899,000) (149,901,000) Purchases of: Securities available for sale (8,044,000) (9,970,000) (23,800,000) (12,964,000) Securities held to maturity (2,580,000) (2,910,000) (7,475,000) (4,336,000) Federal Home Loan Bank stock (403,000) (860,000) (627,000) (1,667,000) Proceeds from: Maturities, calls and repayments of available for sale securities 4,006,000 3,016,000 9,516,000 11,340,000 Maturities, calls and repayments of held to maturity securities 735,000 965,000 936,000 965,000 Sales of available for sale securities 0 0 0 1,748,000 Purchases of premises and equipment, net (2,999,000) (2,195,000) (5,377,000) (3,774,000) Purchases of bank owned life insurance policies (440,000) 0 (440,000) 0 ------------- ------------ ------------ ------------- Net cash from investing activities (59,724,000) (86,380,000) (135,166,000) (158,589,000) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 31,827,000 50,735,000 162,663,000 143,177,000 Net increase (decrease) in securities sold under agreements to repurchase (4,174,000) 5,347,000 (283,000) (2,585,000) Net increase (decrease) in federal funds purchased 0 0 (15,000,000) 0 Proceeds from new FHLB advances 20,000,000 20,000,000 40,000,000 30,000,000 Maturities of FHLB advances (10,000,000) 0 (25,000,000) 0 Net increase in other borrowed money 153,000 7,053,000 460,000 1,300,000 Employee stock purchase plan 22,000 22,000 39,000 38,000 Dividend reinvestment plan 51,000 46,000 84,000 65,000 Stock option exercises, net 0 39,000 53,000 127,000 Payment of cash dividends (794,000) (646,000) (1,515,000) (1,258,000) Cash paid in lieu of fractional shares on stock dividend (4,000) 0 (4,000) (4,000) ------------- ------------ ------------ ------------- Net cash from financing activities 37,081,000 82,596,000 161,497,000 170,860,000 ------------- ------------ ------------ -------------
See accompanying notes to consolidated financial statements. 6 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net change in cash and cash equivalents (16,138,000) 307,000 36,648,000 19,408,000 Cash and cash equivalents at beginning of period 73,597,000 35,665,000 20,811,000 16,564,000 ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57,459,000 $ 35,972,000 $ 57,459,000 $ 35,972,000 ============ ============= ============= ============= Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 9,070,000 $ 6,232,000 $ 16,796,000 $ 12,183,000 Federal income tax 4,150,000 2,550,000 4,475,000 2,925,000
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 six months ended June 30, 2005 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank of 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 June 30, 2005 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, 2004. 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. The trust sold an additional 16,000 trust preferred securities at $1,000.00 per trust preferred security in a December 2004 offering. Mercantile Bank Corporation issued subordinated debentures to the trust in exchange for the proceeds of the offerings. 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, and 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. Earnings Per Share: Basic earnings per share is based on weighted average common shares outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under stock options. Options for 6,500 shares were antidilutive and were not included in determining diluted earnings per share for the three and six month periods ended June 30, 2005. Stock Dividend: Per share amounts and average shares outstanding have been adjusted for all periods presented to reflect the 5% stock dividend distributed on August 1, 2005. The Statement of Changes in Shareholders' Equity reflects a transfer from retained earnings to common stock for the value of the shares distributed. 8 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan and Lease Losses: The allowance for loan and lease losses ("allowance") is a valuation allowance for probable incurred credit losses, increased by the provision for loan and lease losses and recoveries, and decreased by charge-offs. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Allocations of the allowance may be made for specific loans and leases, but the entire allowance is available for any loan or lease that, in management's judgment, should be charged-off. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan or lease balance is confirmed. A loan or lease is impaired when full payment under the loan or lease terms is not expected. Impairment is evaluated in aggregate for smaller-balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan or lease is impaired, a portion of the allowance is allocated so that the loan or lease is reported, net, at the present value of estimated future cash flows using the loan's or lease's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans and leases are evaluated for impairment when payments are delayed, typically 30 days or more, or when serious deficiencies are identified within the credit relationship. 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 Six months ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ------------- ------------- ------------- ------------- Net income as reported $ 4,690,000 $ 3,146,000 $ 9,052,000 $ 6,119,000 Deduct: Stock-based compensation expense determined under fair value based method 94,000 63,000 187,000 126,000 ------------- ------------- ------------- ------------- Pro forma net income 4,596,000 3,083,000 8,865,000 5,993,000 ============= ============= ============= ============= Basic earnings per share as reported $ 0.62 $ 0.42 $ 1.20 $ 0.81 Pro forma basic earnings per share 0.61 0.41 1.17 0.80 Diluted earnings per share as reported $ 0.61 $ 0.41 $ 1.17 $ 0.80 Pro forma diluted earnings per share 0.60 0.40 1.15 0.78
9 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES (Continued) The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
Three months ended Six months ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ------------- ------------- ------------- ------------- Risk-free interest rate 3.73% 3.25% 3.72% 3.25% Expected option life 7 Years 7 Years 7 Years 7 Years Expected stock price volatility 23% 22% 23% 22% Dividend yield 1.00% 1.00% 1.00% 1.00%
New Accounting Pronouncements: FAS 123, Revised, requires companies to record compensation cost for stock options provided to employees in return for employment service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. This will apply to awards granted or modified in fiscal years beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $36,000 in 2006 and $27,000 in 2007. 10 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. LOANS AND LEASES Our total loans and leases at June 30, 2005 were $1,424.5 million compared to $1,317.1 million at December 31, 2004, an increase of $107.4 million, or 8.1%. The components of our outstanding balances at June 30, 2005 and December 31, 2004, and the percentage change in loans and leases from the end of 2004 to the end of the second quarter 2005 are as follows:
Percent June 30, 2005 December 31, 2004 Increase/ Balance % Balance % (Decrease) -------------- ----- -------------- ----- ---------- Real Estate: Construction and land development $ 210,251,000 14.8% $ 136,705,000 10.3% 53.8% Secured by 1-4 family properties 127,949,000 9.0 122,635,000 9.3 4.3 Secured by multi-family properties 37,934,000 2.7 35,183,000 2.7 7.8 Secured by nonresidential properties 634,116,000 44.5 649,415,000 49.3 (2.4) Commercial 407,145,000 28.6 365,615,000 27.8 11.4 Leases 2,100,000 0.1 2,573,000 0.2 (18.4) Consumer 4,968,000 0.3 4,998,000 0.4 (0.6) -------------- ----- -------------- ----- ----- Total loans and leases $1,424,463,000 100.0% $1,317,124,000 100.0% 8.1% ============== ===== ============== ===== =====
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 six months ended June 30:
Three months ended Six months ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Beginning balance $18,097,000 $15,337,000 $17,819,000 $14,379,000 Charge-offs (211,000) (264,000) (704,000) (562,000) Recoveries 70,000 9,000 116,000 21,000 Provision for loan and lease losses 900,000 1,230,000 1,625,000 2,474,000 ----------- ----------- ----------- ----------- Balance at June 30 $18,856,000 $16,312,000 $18,856,000 $16,312,000 =========== =========== =========== ===========
11 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. PREMISES AND EQUIPMENT - NET Premises and equipment are comprised of the following:
June 30, December 31, 2005 2004 -------------- --------------- Land and improvements $ 6,482,000 $ 6,482,000 Buildings and leasehold improvements 19,515,000 16,547,000 Furniture and equipment 8,736,000 6,327,000 -------------- --------------- 34,733,000 29,356,000 Less accumulated depreciation 5,615,000 4,784,000 -------------- --------------- Premises and equipment, net $ 29,118,000 $ 24,572,000 ============== ===============
Depreciation expense amounted to $457,000 during the second quarter of 2005, compared to $307,000 in the second quarter of 2004. Depreciation expense amounted to $831,000 during the first six months of 2005, compared to $610,000 during the first six months of 2004. 5. DEPOSITS Our total deposits at June 30, 2005 were $1,321.8 million compared to $1,159.2 million at December 31, 2004, an increase of $162.6 million, or 14.0%. The components of our outstanding balances at June 30, 2005 and December 31, 2004, and percentage change in deposits from the end of 2004 to the end of the second quarter 2005 are as follows:
Percent June 30, 2005 December 31, 2004 Increase/ Balance % Balance % (Decrease) -------------- ----- ----------------- ----- ---------- Noninterest-bearing demand $ 136,830,000 10.4% $ 101,742,000 8.8% 34.5% Interest-bearing checking 36,803,000 2.8 37,649,000 3.2 (2.2) Money market 10,545,000 0.8 10,528,000 0.9 0.2 Savings 103,545,000 7.8 129,374,000 11.2 (20.0) Time, under $100,000 14,880,000 1.1 8,963,000 0.8 66.0 Time, $100,000 and over 120,391,000 9.1 99,760,000 8.6 20.7 -------------- ----- ----------------- ----- ---- 422,994,000 32.0 388,016,000 33.5 9.0 Out-of-area time, under $100,000 86,966,000 6.6 90,829,000 7.8 (4.3) Out-of-area time, $100,000 and over 811,884,000 61.4 680,336,000 58.7 19.3 -------------- ----- ----------------- ----- ---- 898,850,000 68.0 771,165,000 66.5 16.6 -------------- ----- ----------------- ----- ---- Total deposits $1,321,844,000 100.0% $ 1,159,181,000 100.0% 14.0% ============== ===== ================= ===== ====
12 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. SHORT-TERM BORROWINGS Information relating to our securities sold under agreements to repurchase follows:
June 30, December 31, 2005 2004 ------------- ------------- Outstanding balance at end of period $ 56,034,000 $ 56,317,000 Average interest rate at end of period 2.49% 1.90% Average balance during the period $ 57,228,000 $ 49,935,000 Average interest rate during the period 2.18% 1.57% Maximum month end balance during the period $ 60,208,000 $ 61,678,000
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 June 30, 2005 and December 31, 2004 were as follows.
June 30, December 31, 2005 2004 ------------- ------------- Maturities July 2005 through May 2008, fixed rates from 2.01 to 4.22%, averaging 3.05% $ 125,000,000 $ 0 Maturities in May 2006, floating rates tied to Libor indices, averaging 3.35% 10,000,000 0 Maturities January 2005 through December 2006, fixed rates from 1.66% to 3.47%, averaging 2.51% 0 $ 110,000,000 Maturities in May 2006, floating rates tied to Libor indices, averaging 2.32% 0 10,000,000 ------------- ------------- Total Federal Home Loan Bank advances $ 135,000,000 $ 120,000,000 ============= =============
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 June 30, 2005 totaled $198.0 million, with availability approximating $51.0 million. 13 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: 2005 $ 40,000,000 2006 80,000,000 2007 10,000,000 2008 5,000,000 2009 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. If required, estimated loss exposure resulting from these instruments is expensed and recorded as a liability. The balance of the liability account was $0.5 million and $0.2 million as of June 30, 2005 and December 31, 2004, respectively. A summary of the contractual amounts of our financial instruments with off-balance-sheet risk at June 30, 2005 and December 31, 2004 follows:
June 30, December 31, 2005 2004 -------------- --------------- Commercial unused lines of credit $ 247,004,000 $ 226,935,000 Unused lines of credit secured by 1-4 family residential properties 27,207,000 24,988,000 Credit card unused lines of credit 7,350,000 8,307,000 Other consumer unused lines of credit 9,270,000 5,155,000 Commitments to make loans 70,419,000 55,440,000 Standby letters of credit 56,545,000 56,464,000 -------------- --------------- Total loan and leases commitments $ 417,795,000 $ 377,289,000 ============== ===============
14 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 ---------- ----- --------- ----- ---------- ----- June 30, 2005 Total capital (to risk weighted assets) Consolidated $ 200,054 12.6% $ 127,172 8.0% $ 158,965 10.0% Bank 196,807 12.4 126,990 8.0 158,737 10.0 Tier 1 capital (to risk weighted assets) Consolidated 181,198 11.4 63,586 4.0 95,379 6.0 Bank 177,951 11.2 63,495 4.0 95,242 6.0 Tier 1 capital (to average assets) Consolidated 181,198 10.9 66,769 4.0 83,461 5.0 Bank 177,951 10.7 66,727 4.0 83,408 5.0
15 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, 2004 Total capital (to risk weighted assets) Consolidated $ 191,304 13.0% $ 117,426 8.0% $ 146,782 10.0% Bank 188,075 12.8 117,288 8.0 146,610 10.0 Tier 1 capital (to risk weighted assets) Consolidated 173,485 11.8 58,713 4.0 88,070 6.0 Bank 170,256 11.6 58,644 4.0 87,966 6.0 Tier 1 capital (to average assets) Consolidated 173,485 11.5 60,182 4.0 75,227 5.0 Bank 170,256 11.3 60,088 4.0 75,110 5.0
The consolidated capital levels as of June 30, 2005 and December 31, 2004 include the $32.0 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 June 30, 2005 and December 31, 2004, all $32.0 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 July 6, 2005, that was distributed on August 1, 2005 to record holders as of July 18, 2005. All earnings per share and dividend per share information have been adjusted for the 5% stock dividend. We have also paid two cash dividends on our common stock during 2005. On January 11, 2005, we declared a $0.10 per share cash dividend on our common stock, which was paid on March 10, 2005 to record holders as of February 10, 2005. On April 6, 2005, we declared a $0.11 per share cash dividend on our common stock, which was paid on June 10, 2005 to record holders as of May 10, 2005. On July 6, 2005, we declared a $0.11 per share cash dividend on our common stock, which is payable on September 9, 2005 to record holders as of August 10, 2005. 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 28,940 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 six months ended June 30, 2005, we issued 964 shares under the plan. 16 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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 Michigan ("our bank"), our bank's four subsidiaries Mercantile Bank Mortgage Company ("our mortgage company"), Mercantile BIDCO, Inc. ("our BIDCO"), Mercantile Bank Real Estate Co., LLC ("our real estate company") and Mercantile Insurance Center, Inc. ("our insurance center"), at June 30, 2005 to December 31, 2004 and the results of operations for the three and six months ended June 30, 2005 and June 30, 2004. 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-34 through F-39 in our Form 10-K for the fiscal year ended December 31, 2004 (Commission file number 000-26719). Below is a discussion of our Allowance for Loan and Lease Losses policy. This policy is critical because it is highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements, and actual results may differ from those estimates. Management has reviewed the application of this policy with the Audit Committee of the company's Board of Directors. 17 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Allowance for Loan and Lease Losses: The allowance for loan and lease losses ("allowance") is a valuation allowance for probable incurred credit losses, increased by the provision for loan and lease losses and recoveries, and decreased by charge-offs. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Allocations of the allowance may be made for specific loans and leases, but the entire allowance is available for any loan or lease that, in management's judgment, should be charged-off. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan or lease balance is confirmed. A loan or lease is impaired when full payment under the loan or lease terms is not expected. Impairment is evaluated in aggregate for smaller-balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan or lease is impaired, a portion of the allowance is allocated so that the loan or lease is reported, net, at the present value of estimated future cash flows using the loan's or lease's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans and leases are evaluated for impairment when payments are delayed, typically 30 days or more, or when serious deficiencies are identified within the credit relationship. RECENT EVENTS On April 18, 2005, we issued a press release announcing that our bank had formalized its intention to expand into the Lansing, Michigan marketplace. Since that time, we have assembled an initial team comprised of a City President, commercial and retail lenders, branch and business development personnel and support staff. On July 11, 2005, we officially opened the Lansing banking office. The Lansing team is currently working out of a leased facility; however, we expect to acquire land and construct our own facility within the next two to three years. On June 14, 2005, we issued a press release announcing that our bank had formalized its intention to expand into the Ann Arbor, Michigan marketplace. Since that time, we have begun to assemble an initial team comprised of a City President, commercial and retail lenders, branch and business development personnel and support staff. We expect the banking office to open during the latter part of the third quarter of 2005. The Ann Arbor team will initially work out of a leased facility; however, we expect to acquire land and construct our own facility within the next two to three years. FINANCIAL CONDITION During the first six months of 2005, our assets increased from $1,536.1 million on December 31, 2004, to $1,709.2 million on June 30, 2005. This represents a total increase in assets of $173.1 million, or 11.3%. The asset growth was comprised primarily of a $106.3 million increase in net loans, a $36.7 million increase in cash and cash equivalents and a $21.2 million increase in securities. The growth in total assets was primarily funded by a $162.7 million increase in deposits and a $15.0 million increase in Federal Home Loan Bank advances. 18 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Commercial loans and leases increased by $102.0 million during the first six months of 2005, and at June 30, 2005 totaled $1,291.5 million, or 90.7% 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 commercial lenders have extensive commercial lending experience, with most having at least 10 years 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 increased by $5.3 million during the first six months of 2005, while the balance of our consumer loan portfolio remained virtually unchanged. As of June 30, 2005, residential mortgage and consumer loans totaled a combined $132.9 million, or 9.3% 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 six months of 2005 totaled $588,000, or 0.09% of average total loans and leases on an annualized basis. During the first six months of 2004, net loan and lease charge-offs totaled $541,000, or 0.10% of average total loans and leases on an annualized basis. Nonperforming assets at June 30, 2005 totaled $3.7 million, or 0.22% of period-ending total assets. Nonperforming assets at December 31, 2004 totaled $2.8 million, or 0.19% of period-ending total assets, while nonperforming assets at June 30, 2004 totaled $3.7 million, or 0.27% of period-ending total assets. 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 $21.2 million during the first six months of 2005. Purchases during the first six months of 2005 totaled $31.9 million, while proceeds from maturities, calls and repayments of securities totaled $10.5 million. Our securities portfolio primarily 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 $36.7 million during the first six months of 2005, totaling $57.5 million on June 30, 2005. Cash and due from bank balances were up $14.8 million and federal funds sold increased $21.4 million. Our commercial lending and wholesale funding focus results in relatively large day-to-day fluctuations of our cash and cash equivalent balances. The average cash and cash equivalents during the first six months of 2005 equaled $35.1 million, well below the relatively high balance of $57.5 million on June 30, 2005, but well above the relatively low balance of $20.8 million on December 31, 2004. 19 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Premises and equipment at June 30, 2005 equaled $29.1 million, an increase of $4.5 million over the past six months and an increase of $16.6 million since March 31, 2003. The vast majority of the increase relates to our bank's construction of two new banking facilities. On April 30, 2003, our bank purchased an existing building situated on 2.75 acres of land located about two miles north of downtown Grand Rapids, Michigan for $1.3 million. The building was demolished, and during the second quarter of 2005 we completed construction of a new four-story facility on this property. This facility serves as the new location of our functions formerly housed in our downtown leased facility, including our commercial lending function and a branch operation, and the administration and loan operations functions that were formerly housed at other of our locations. 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 property to serve as the new location for our full-service branch and lending office which had been operating out of a leased facility. This facility opened on October 25, 2004. Deposits increased $162.7 million during the first six months of 2005, totaling $1,321.8 million at June 30, 2005. Local deposits increased $35.0 million, while out-of-area deposits increased $127.7 million. As a percent of total deposits, local deposits decreased from 33.5% on December 31, 2004, to 32.0% on June 30, 2005. Noninterest-bearing demand deposits, comprising 10.4% of total deposits, increased $35.1 million during the first six months of 2005. Savings deposits (7.8% of total deposits) decreased $25.8 million, interest-bearing checking deposits (2.8% of total deposits) decreased $0.8 million and money market deposit accounts (0.8% of total deposits) remained relatively unchanged during the first six months of 2005. Local certificates of deposit, comprising 10.2% of total deposits, increased by $26.5 million during the first six months of 2005. Part of the increase in local certificates of deposit and the decrease in savings deposits is due to customers opening certificates of deposit with funds from their savings accounts, as rates offered on certificates of deposit have recently risen at a faster pace than the rates offered on savings accounts. Out-of-area deposits increased $127.7 million during the first six months of 2005, totaling $898.9 million as of June 30, 2005. 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 six months of 2005 rates paid on new out-of-area certificates of deposit were generally slightly higher than 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 is expected to continue. Securities sold under agreements to repurchase ("repurchase agreements") decreased by $0.3 million during the first six months of 2005, totaling $56.0 million as of June 30, 2005. 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. 20 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Federal funds purchased declined by $15.0 million during the first six months of 2005, with a zero balance as of June 30, 2005. FHLBI advances increased by $15.0 million during the first six months of 2005, totaling $135.0 million as of June 30, 2005. 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 June 30, 2005 totaled $198.0 million, with availability approximating $51.0 million. FHLBI advances, along with out-of-area deposits, are the primary components of our wholesale funding program. LIQUIDITY Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and securities. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and support our operations. Liquidity is primarily achieved through the growth of deposits (both local and out-of-area) and advances from the FHLBI, as well as liquid assets such as securities available for sale, matured securities, and federal funds sold. Asset and liability management is the process of managing 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 and repurchase agreements and to maintain an adequate level of short- and medium-term investments to meet typical daily loan and deposit activity. Although deposit and repurchase agreement growth from depositors located in our market area has 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 of certificates of deposit from customers outside of our market area and advances from the FHLBI, totaled $1,033.9 million, or 68.3% of combined deposits and borrowed funds as of June 30, 2005. As of December 31, 2004, wholesale funds totaled $891.2 million, or 66.7% 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 June 30, 2005, advances from the FHLBI totaled $135.0 million, up from the $120.0 million outstanding at December 31, 2004. Based on available collateral at June 30, 2005, our bank could borrow an additional $51.0 million. Our bank has the ability to borrow money on a daily basis through correspondent banks via established unsecured federal funds purchased lines, totaling $62.0 million as of June 30, 2005. The average balance of federal funds purchased during the first six months of 2005 equaled $6.8 million, compared to a $7.4 million average federal funds sold position during the same time period in 2004. 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 June 30, 2005, our bank had a total of $361.3 million in unfunded loan commitments and $56.5 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $290.9 million were commitments available as lines of credit to be drawn at any time as customers' cash needs vary, and $70.4 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. 21 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES Shareholders' equity is a noninterest-bearing source of funds that provides support for asset growth. Shareholders' equity increased by $7.6 million during the first six months of 2005, from $141.6 million on December 31, 2004, to $149.2 million at June 30, 2005. The increase is primarily attributable to net income of $9.1 million recorded during the first six months of 2005. Shareholders' equity was negatively impacted during the first six months of 2005 by the payment of cash dividends totaling $1.5 million and a $0.1 million mark-to-market adjustment for available for sale securities as defined in SFAS No. 115. Shareholders' equity also increased $0.2 million from the issuance of new shares of common stock resulting from our dividend reinvestment plan, employee stock purchase plan and stock option exercises. We are subject to regulatory capital requirements primarily administered by federal bank regulatory agencies. Failure to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The capital ratios of the company and our bank as of June 30, 2005 and December 31, 2004 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 July 6, 2005, that was distributed on August 1, 2005 to record holders as of July 18, 2005. We paid a $0.10 per share cash dividend on March 10, 2005 and a $0.11 per share cash dividend on June 10, 2005. On July 6, 2005, we declared a $0.11 per share cash dividend payable on September 9, 2005 to record holders as of August 10, 2005. RESULTS OF OPERATIONS Net income for the second quarter of 2005 was $4.7 million ($0.62 per basic share and $0.61 per diluted share), which represents a 49.1% increase over net income of $3.1 million ($0.42 per basic share and $0.41 per diluted share) recorded during the second quarter of 2004. Net income for the first six months of 2005 was $9.1 million ($1.20 per basic share and $1.17 per diluted share), which represents a 47.9% increase over net income of $6.1 million ($0.81 per basic share and $0.80 per diluted share) recorded during the first six months of 2004. The improvement in net income during both time periods is primarily the result of higher net interest income, lower provision expense and greater operating efficiency. Interest income during the second quarter of 2005 was $24.3 million, an increase of 50.9% over the $16.1 million earned during the second quarter of 2004. Interest income during the first six months of 2005 was $46.1 million, an increase of 46.3% over the $31.5 million earned during the first six months of 2004. The growth in interest income during both time periods is primarily attributable to growth in earning assets and an increased yield on assets. During the second quarter of 2005, earning assets averaged $1,582.5 million, $313.2 million higher than average earning assets of $1,269.3 million during the second quarter of 2004. Average loans were up $257.7 million and securities increased $51.0 million. During the first six months of 2005, earning assets averaged $1,547.4 million, $314.3 million higher than average earning assets of $1,233.1 million during the same time period in 2004. Average loans were up $267.8 million and securities increased $44.8 million. Also positively impacting the growth in interest income was the increased yield on earning assets. During the second quarter of 2005 and 2004, earning assets had a weighted average yield (tax equivalent-adjusted basis) of 6.24% and 5.17%, respectively. During the first six months of 2005 and 2004 earning assets had a weighted average yield of 6.07% and 5.21%, respectively. With approximately 78% of our total loans and leases tied to the prime rate, our asset yield has benefited from recent increases in the prime rate, which has increased a total of 225 basis points over the past twelve months. 22 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest expense during the second quarter of 2005 was $10.7 million, an increase of 75.2% over the $6.1 million expensed during the second quarter of 2004. Interest expense during the first six months of 2005 was $19.8 million, an increase of 65.0% over the $12.0 million expensed during the first six months of 2004. The increase in interest expense is primarily attributable to an increase in interest-bearing liabilities necessitated by asset growth and a higher interest rate environment. During the second quarter of 2005, interest-bearing liabilities averaged $1,398.4 million, $294.3 million higher than average interest-bearing liabilities of $1,104.1 million during the second quarter of 2004. Interest-bearing deposits were up $251.3 million and FHLBI advances increased $18.2 million. During the first six months of 2005, interest-bearing liabilities averaged $1,367.3 million, $293.6 million higher than average interest-bearing liabilities of $1,073.7 million during the same time period in 2004. Interest-bearing deposits were up $243.2 million and FHLBI advances increased $21.6 million. During the second quarter of 2005 and 2004, interest-bearing liabilities had a weighted average rate of 3.08% and 2.23%, respectively. During the first six months of 2005 and 2004, interest-bearing liabilities had a weighted average rate of 2.92% and 2.25%, respectively. The higher weighted average cost of interest-bearing liabilities is primarily due to the increase in market interest rates. Net interest income during the second quarter of 2005 was $13.6 million, an increase of 36.1% over the $10.0 million earned during the second quarter of 2004. Net interest income during the first six months of 2005 was $26.3 million, an increase of 34.8% over the $19.5 million earned during the same time period in 2004. The increase in net interest income is primarily due to the growth in earning assets and improved net interest margin. The net interest margin during the second quarter of 2005 was 3.52%, compared to 3.24% during the second quarter of 2004. During the first six months of 2005 the net interest margin was 3.49%, compared to 3.25% during the same time period in 2004. The improved net interest margin reflects the overall positive impact of the increasing interest rate environment. The following table sets forth certain information relating to our consolidated average interest earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the second quarter of 2005 and 2004. 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 $273,000 and $234,000 in the second quarter of 2005 and 2004, respectively, for this adjustment. 23 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarters ended June 30, ---------------------------------------------------------------------------------- 2005 2004 -------------------------------------- -------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- (dollars in thousands) ASSETS Loans and leases $ 1,402,469 $ 22,250 6.36% $ 1,144,758 $ 14,722 5.16% Securities 171,620 2,309 5.38 120,632 1,634 5.42 Federal funds sold 7,853 56 2.82 3,282 8 0.94 Short term investments 511 4 2.81 627 0 0.30 ----------- ----------- ----------- ----------- Total interest-earning assets 1,582,453 24,619 6.24 1,269,299 16,364 5.17 Allowance for loan losses (18,620) (15,787) Other assets 105,370 76,995 ----------- ----------- Total assets $ 1,669,203 $ 1,330,507 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $ 1,169,350 $ 8,892 3.05% $ 918,006 $ 4,929 2.15% Short-term borrowings 62,802 375 2.40 55,142 186 1.35 FHLB advances 131,264 1,006 3.03 113,077 597 2.08 Long-term borrowings 34,965 465 5.26 17,878 418 9.35 ----------- ----------- ----------- ----------- Total interest-bearing liabilities 1,398,381 10,738 3.08 1,104,103 6,130 2.23 Noninterest-bearing deposits 112,302 86,645 Other liabilities 11,523 6,548 Shareholders' equity 146,997 133,211 ----------- ----------- Total liabilities and shareholders' equity $ 1,669,203 $ 1,330,507 =========== ----------- =========== ----------- Net interest income $ 13,881 $ 10,234 =========== =========== Net interest rate spread 3.16% 2.94% ======= ======= Net interest rate spread on average assets 3.34% 3.08% ======= ======= Net interest margin on earning assets 3.52% 3.24% ======= =======
Provisions to the allowance during the second quarter of 2005 were $0.9 million, compared to the $1.2 million that was expensed during the second quarter of 2004. Provisions to the allowance during the first six months of 2005 were $1.6 million, compared to the $2.5 million that was expensed during the same time period in 2004. The decrease during both time periods primarily reflects the lower volume of loan and lease growth and an improvement in the overall quality of the loan and lease portfolio. Loan and lease growth during the second quarter of 2005 was $49.9 million, compared to loan and lease growth of $74.2 million during the second quarter of 2004. Loan and lease growth during the first six months of 2005 was $107.3 million, compared to loan and lease growth of $149.4 million during the same time period in 2004. Net loan and lease charge-offs of $141,000 were recorded during the second quarter of 2005, compared to net loan and lease charge-offs of $255,000 during the second quarter of 2004. During the first six months of 2005, net loan and lease charge-offs totaled $588,000, compared to net loan and lease charge-offs of $541,000 during the same time period in 2004. The allowance as a percentage of total loans and leases outstanding as of June 30, 2005 was 1.32%, compared to 1.38% at June 30, 2004, with the decline primarily reflecting the overall improved quality of the loan and lease portfolio. 24 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In each accounting period, the allowance is adjusted to the amount believed necessary to maintain the allowance at adequate levels. Through the loan review and credit departments, we attempt to allocate specific portions of the allowance based on specifically identifiable problem loans and leases. The evaluation of the allowance 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 loan rating paradigm that is administered by our loan review function. For retail loans, reserve allocation factors are based upon the type of credit. Adjustments for specific loan relationships, including impaired loans, are made on a case-by-case basis. The reserve allocation factors are based on the experience of senior management making similar loans in the same community over almost 20 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 second quarter of 2005 was $1.2 million, an increase of 21.7% over the $1.0 million earned during the second quarter of 2004. Noninterest income during the first six months of 2005 was $2.4 million, an increase of 19.0% over the $2.0 million earned during the same time period in 2004. During both time periods we recorded increased fee income in virtually all major fee income categories with the exception of our mortgage banking operations which had a slight decline. There were no securities gains during the first six months of 2005, compared to securities gains of $78,000 recorded during the first quarter of 2004. Noninterest expense during the second quarter of 2005 was $7.1 million, an increase of 32.4% over the $5.4 million expensed during the second quarter of 2004. Noninterest expense during the first six months of 2005 was $14.0 million, an increase of 32.6% over the $10.6 million expensed during the same time period in 2004. Employee salary and benefit expenses were $0.9 million higher during the second quarter of 2005 than the level expensed during the second quarter of 2004, and were $1.8 million higher during the first six months of 2005 than the level expensed during the first six months of 2004. 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 183 at June 30, 2004 to 237 as of June 30, 2005. Other overhead costs, including occupancy and fixed asset costs, increased $0.9 million in the second quarter of 2005 over the level expensed in the second quarter of 2004, and increased $1.7 million during the first six months of 2005 over the level expensed during the first six months of 2004, primarily reflecting the opening of our Holland facility in October 2004, our new main office during the second quarter of 2005 and additional expenses required to administer our significantly increased asset base and staff. 25 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Monitoring and controlling noninterest costs, while at the same time providing high quality service to customers, is a key component to our business strategy. While the dollar volume of noninterest costs has increased, the rate of growth has been lower than the rate of increase in net interest income and noninterest income. Noninterest expenses increased by $1.7 million during the second quarter of 2005 over the amount expensed during the second quarter of 2004, and increased by $3.4 million during the first six months of 2005 over the amount expensed during the first six months of 2004. However, net revenues (net interest income plus noninterest income) increased at a substantially higher level of $3.8 million and $7.2 million during the same time periods, respectively. Federal income tax expense was $2.1 million during the second quarter of 2005, an increase of 70.7% over the $1.2 million expensed during the second quarter of 2004. Federal income tax expense was $4.0 million during the first six months of 2005, an increase of 68.8% over the $2.4 million expensed during the first six months of 2004. 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 is assumed to be insignificant. Interest rate risk is the exposure of our financial condition to adverse movements in interest rates. We derive our income primarily from the excess of interest collected on our interest-earning assets over the interest paid on our interest-bearing liabilities. The rates of interest we earn on our assets and owe on our liabilities generally are established contractually for a period of time. Since market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our safety and soundness. Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. Our interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk we assess the existing and potential future effects of changes in interest rates on our financial condition, including capital adequacy, earnings, liquidity and asset quality. We use two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures the difference between the dollar amounts of interest sensitive assets and liabilities that will be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to our net interest margin during periods of changing market interest rates. The following table depicts our GAP position as of June 30, 2005 (dollars in thousands): 26 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------ ------ ----- ----- ----- Assets: Commercial loans and leases (1) $ 987,076 $ 24,153 $ 246,250 $ 34,067 $ 1,291,546 Residential real estate loans 71,989 4,427 37,365 14,168 127,949 Consumer loans 1,127 501 3,052 288 4,968 Investment securities (2) 8,441 804 21,674 143,253 174,172 Federal funds sold 21,400 21,400 Short-term investments 597 597 Allowance for loan and leases losses (18,856) (18,856) Other assets 107,381 107,381 ----------- ----------- ----------- ----------- ----------- Total assets 1,090,630 29,885 308,341 280,301 1,709,157 Liabilities: Interest-bearing checking 36,803 36,803 Savings 103,545 103,545 Money market accounts 10,545 10,545 Time deposits < $100,000 26,986 36,562 38,298 101,846 Time deposits $100,000 and over 202,393 410,372 319,510 932,275 Short-term borrowings 56,034 56,034 FHLB advances 35,000 55,000 45,000 135,000 Long-term borrowings 35,059 35,059 Noninterest-bearing checking 136,830 136,830 Other liabilities 12,016 12,016 ----------- ----------- ----------- ----------- ----------- Total liabilities 506,365 501,934 402,808 148,846 1,559,953 Shareholders' equity 149,204 149,204 ----------- ----------- ----------- ----------- ----------- Total sources of funds 506,365 501,934 402,808 298,050 1,709,157 ----------- ----------- ----------- ----------- ----------- Net asset (liability) GAP $ 584,265 $ (472,049) $ (94,467) $ (17,749) =========== =========== =========== =========== Cumulative GAP $ 584,265 $ 112,216 $ 17,749 =========== =========== =========== Percent of cumulative GAP to total assets 34.2% 6.6% 1.0% =========== ========== ===========
(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 June 30, 2005 27 MERCANTILE BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The second interest rate risk measurement we use is commonly referred to as net interest income simulation analysis. We believe that this methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and therefore, serves as our primary interest rate risk measurement technique. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates. Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest-sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the 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 June 30, 2005, whereby it was assumed that changes in market interest rates occurred ranging from up 200 basis points to down 200 basis points in equal quarterly instalments over the next twelve months. The following table reflects the suggested impact on our net interest income over the next twelve months, which are 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 $ (5,380,000) (9.9)% Interest rates down 100 basis points (3,602,000) (6.6) No change in interest rates (1,918,000) (3.5) Interest rates up 100 basis points 413,000 0.8 Interest rates up 200 basis points 2,714,000 5.0
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; client preferences; and other factors. ITEM 4. CONTROLS AND PROCEDURES As of June 30, 2005, 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 June 30, 2005. There have been no significant changes in our internal controls over financial reporting during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. 28 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 On April 8, 2005, we issued 2,100 shares of our common stock to one of our employees upon his exercise of employee stock options issued under our 1997 Employee Stock Option Plan. We received a weighted average exercise price of $7.838 per share aggregating $16,454 for these shares. The exercise price for these shares was substantially paid by the employee delivering to us common stock of the company that he already owned having an aggregate value of $16,452, with the difference paid in cash. On April 18, 2005, we issued 6,300 shares of our common stock to one of our employees upon his exercise of employee stock options issued under our 1997 Employee Stock Option Plan. We received a weighted average exercise price of $8.228 per share aggregating $51,834 for these shares. The exercise price for these shares was substantially paid by the employee delivering to us common stock of the company that he already owned having an aggregate value of $51,811, with the difference paid in cash. The shares issued under the 1997 Employee Stock Option Plan were issued in reliance on an exemption from registration under the Securities Act of 1933 based on Section 4(2) of that Act, and Regulation D issued under that Act. Issuer Purchases of Equity Securities
(c) Total Number of (a) Total Shares Purchased as (d) Maximum Number of Number of (b) Average Part of Publicly Shares that May Yet Be Shares Price Paid Per Announced Plans or Purchased Under the Period Purchased Share Programs Plans or Programs ------ --------- ----- -------- ----------------- April 1 - 30 1,886 $ 38.80 0 0 May 1 - 31 0 N/A 0 0 June 1 - 30 499 40.22 0 0 Total 2,385 39.10 0 0
The shares shown in column (a) above as having been purchased were acquired from three of our employees when they used shares of common stock that they already owned to pay part of the exercise price when exercising stock options issued under our employee stock option plans. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. 29 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At our Annual Meeting held on April 28, 2005, our shareholders voted to elect five directors, Betty S. Burton, David M. Cassard, Peter A. Cordes, David M. Hecht and Merle J. Prins, each for a three year term expiring at the Annual Meeting of the shareholders of the company in 2008. The results of the election were as follows:
Votes Votes Votes Broker Nominee For Against Withheld Non-Votes ------- --- ------- -------- --------- Betty S. Burton 6,591,750 0 131,646 0 David M. Cassard 6,598,484 0 124,913 0 Peter A. Cordes 6,695,807 0 27,589 0 David M. Hecht 6,595,514 0 127,882 0 Merle J. Prins 6,680,003 0 43,393 0
The terms of office of the following directors (who were not up for election) continued after the Annual Meeting: Edward J. Clark, C. John Gill, Doyle A. Hayes, Gerald R. Johnson, Jr., Susan K. Jones, Lawrence W. Larsen, Calvin D. Murdock, Michael H. Price, Dale J. Visser and Donald Williams, Sr. 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 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 August 8, 2005. 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 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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