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
<Table>
<Caption>
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
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
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
=============== ===============
</Table>
See accompanying notes to consolidated financial statements.
3
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
<Table>
<Caption>
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
=============== ============== ============== ===============
</Table>
See accompanying notes to consolidated financial statements.
4
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<Table>
<Caption>
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
============= ============= ============= =============
</Table>
See accompanying notes to consolidated financial statements.
5
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
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
------------- ------------- ------------- -------------
</Table>
See accompanying notes to consolidated financial statements.
6
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<Table>
<Caption>
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
</Table>
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.
<Table>
<Caption>
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
</Table>
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
<Table>
<Caption>
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%
</Table>
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:
<Table>
<Caption>
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%
=============== ===== ============== ===== ====
</Table>
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:
<Table>
<Caption>
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
============= ============= ============= =============
</Table>
10
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. PREMISES AND EQUIPMENT - NET
Premises and equipment are comprised of the following:
<Table>
<Caption>
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
============= =============
</Table>
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:
<Table>
<Caption>
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%
================ ===== ============== ===== ====
</Table>
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:
<Table>
<Caption>
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
</Table>
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.
<Table>
<Caption>
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
============= =============
</Table>
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:
<Table>
2004 $ 20,000,000
2005 65,000,000
2006 35,000,000
2007 0
2008 0
</Table>
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:
<Table>
<Caption>
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
============= =============
</Table>
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):
<Table>
<Caption>
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
</Table>
14
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. REGULATORY MATTERS (Continued)
<Table>
<Caption>
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
</Table>
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.
<Table>
<Caption>
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%
==== ====
</Table>
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):
<Table>
<Caption>
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%
=========== =========== ===========
</Table>
(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.
<Table>
<Caption>
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
</Table>
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
<Table>
<Caption>
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
</Table>
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
<Table>
<Caption>
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
</Table>
32