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
32