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, 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) <TABLE> <S> <C> Michigan 38-3360865 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) </TABLE> 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 --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- At November 8, 2005, there were 7,589,278 shares of Common Stock outstanding.
MERCANTILE BANK CORPORATION INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2005 (Unaudited) and December 31, 2004..... 3 Consolidated Statements of Income and Comprehensive Income - Three and Nine Months Ended September 30, 2005 (Unaudited) and September 30, 2004 (Unaudited)........... 4 Consolidated Statements of Changes in Shareholders' Equity - Nine Months Ended September 30, 2005 (Unaudited) and September 30, 2004 (Unaudited)........................... 5 Consolidated Statements of Cash Flows - Three and Nine Months Ended September 30, 2005 (Unaudited) and September 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.................................................. 29 Item 5. Other Information................................... 29 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, 2005 2004 -------------- -------------- (Unaudited) <S> <C> <C> ASSETS Cash and due from banks $ 38,894,000 $ 20,662,000 Short-term investments 392,000 149,000 Federal funds sold 33,800,000 0 -------------- -------------- Total cash and cash equivalents 73,086,000 20,811,000 Securities available for sale 109,966,000 93,826,000 Securities held to maturity (fair value of $61,856,000 at September 30, 2005 and $54,621,000 at December 31, 2004) 60,271,000 52,341,000 Federal Home Loan Bank stock 7,887,000 6,798,000 Total loans and leases 1,488,959,000 1,317,124,000 Allowance for loan and lease losses (19,571,000) (17,819,000) -------------- -------------- Total loans and leases, net 1,469,388,000 1,299,305,000 Premises and equipment, net 30,791,000 24,572,000 Bank owned life insurance policies 26,075,000 23,750,000 Accrued interest receivable 8,039,000 5,644,000 Other assets 11,267,000 9,072,000 -------------- -------------- Total assets $1,796,770,000 $1,536,119,000 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 116,107,000 $ 101,742,000 Interest-bearing 1,281,173,000 1,057,439,000 -------------- -------------- Total deposits 1,397,280,000 1,159,181,000 Securities sold under agreements to repurchase 62,994,000 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 2,211,000 1,609,000 Accrued expenses and other liabilities 13,975,000 9,405,000 -------------- -------------- Total liabilities 1,644,450,000 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; 7,587,365 shares outstanding at September 30, 2005 and 7,192,461 shares outstanding at December 31, 2004 148,472,000 131,010,000 Retained earnings 4,287,000 10,475,000 Accumulated other comprehensive income (loss) (439,000) 132,000 -------------- -------------- Total shareholders' equity 152,320,000 141,617,000 -------------- -------------- Total liabilities and shareholders' equity $1,796,770,000 $1,536,119,000 ============== ============== </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, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Interest income Loans and leases, including fees $24,570,000 $16,193,000 $66,592,000 $44,823,000 Investment securities 2,113,000 1,598,000 6,036,000 4,424,000 Federal funds sold 76,000 26,000 176,000 53,000 Short-term investments 5,000 2,000 11,000 3,000 ----------- ----------- ----------- ----------- Total interest income 26,764,000 17,819,000 72,815,000 49,303,000 Interest expense Deposits 10,554,000 5,706,000 26,886,000 15,385,000 Short-term borrowings 475,000 220,000 1,188,000 576,000 Federal Home Loan Bank advances 1,148,000 652,000 3,011,000 1,778,000 Long-term borrowings 515,000 385,000 1,395,000 1,219,000 ----------- ----------- ----------- ----------- Total interest expense 12,692,000 6,963,000 32,480,000 18,958,000 ----------- ----------- ----------- ----------- NET INTEREST INCOME 14,072,000 10,856,000 40,335,000 30,345,000 Provision for loan and lease losses 895,000 1,200,000 2,520,000 3,674,000 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 13,177,000 9,656,000 37,815,000 26,671,000 Noninterest income Services charges on accounts 369,000 319,000 1,048,000 930,000 Net gain on sales of securities 0 0 0 78,000 Net gain on sales of loans 56,000 135,000 84,000 175,000 Other income 905,000 702,000 2,626,000 2,013,000 ----------- ----------- ----------- ----------- Total noninterest income 1,330,000 1,156,000 3,758,000 3,196,000 Noninterest expense Salaries and benefits 4,983,000 3,589,000 13,547,000 10,382,000 Occupancy 805,000 401,000 1,889,000 1,170,000 Furniture and equipment 459,000 277,000 1,109,000 817,000 Other expense 2,073,000 2,148,000 5,770,000 4,601,000 ----------- ----------- ----------- ----------- Total noninterest expenses 8,320,000 6,415,000 22,315,000 16,970,000 ----------- ----------- ----------- ----------- INCOME BEFORE FEDERAL INCOME TAX EXPENSE 6,187,000 4,397,000 19,258,000 12,897,000 Federal income tax expense 1,887,000 1,283,000 5,906,000 3,664,000 ----------- ----------- ----------- ----------- NET INCOME $ 4,300,000 $ 3,114,000 $13,352,000 $ 9,233,000 =========== =========== =========== =========== COMPREHENSIVE INCOME $ 3,855,000 $ 4,275,000 $12,781,000 $ 9,378,000 =========== =========== =========== =========== Basic earnings per share $ 0.57 $ 0.41 $ 1.76 $ 1.23 =========== =========== =========== =========== Diluted earnings per share $ 0.56 $ 0.41 $ 1.72 $ 1.20 =========== =========== =========== =========== Cash dividends per share $ 0.11 $ 0.09 $ 0.32 $ 0.27 =========== =========== =========== =========== Average basic shares outstanding 7,585,879 7,534,833 7,577,339 7,527,657 =========== =========== =========== =========== Average diluted shares outstanding 7,732,872 7,684,262 7,747,293 7,682,335 =========== =========== =========== =========== </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 ------------ ------------ ------------- ------------- <S> <C> <C> <C> <C> 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, 1,693 shares 56,000 56,000 Dividend reinvestment plan, 2,431 shares 80,000 80,000 Stock option exercises, 35,735 shares 375,000 375,000 Stock tendered for stock option exercises, 7,596 shares (248,000) (248,000) Cash dividends, $0.27 per share (1,903,000) (1,903,000) 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 (loss) on securities available for sale, net of reclassifications and tax effect 145,000 145,000 ------------ Total comprehensive income 9,378,000 ------------ ------------ --------- ------------ BALANCE, SEPTEMBER 30, 2004 $130,935,000 $ 6,635,000 $ 365,000 $137,935,000 ============ ============ ========= ============ BALANCE, JANUARY 1, 2005 $131,010,000 $ 10,475,000 $ 132,000 $141,617,000 Payment of 5% stock dividend, 359,550 shares 17,187,000 (17,191,000) (4,000) Employee stock purchase plan, 1,679 shares 69,000 69,000 Dividend reinvestment plan, 3,312 shares 136,000 136,000 Stock option exercises, 37,568 shares 368,000 368,000 Stock tendered for stock option exercises, 7,205 shares (298,000) (298,000) Cash dividends, $0.32 per share (2,349,000) (2,349,000) Comprehensive income: Net income for the period from Janury 1, 2005 through September 30, 2005 13,352,000 13,352,000 Change in net unrealized gain on securities available for sale, net of reclassifications and tax effect (571,000) (571,000) ------------ Total comprehensive income 12,781,000 ------------ ------------ --------- ------------ BALANCE, SEPTEMBER 30, 2005 $148,472,000 $ 4,287,000 $(439,000) $152,320,000 ============ ============ ========= ============ </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, 2005 2004 2005 2004 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,300,000 $ 3,114,000 $ 13,352,000 $ 9,233,000 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 728,000 405,000 1,802,000 1,253,000 Provision for loan and lease losses 895,000 1,200,000 2,520,000 3,674,000 Net gain on sales of loans (56,000) (135,000) (84,000) (175,000) Net gain on sales of securities 0 0 0 (78,000) Net change in: Accrued interest receivable (1,489,000) (1,381,000) (2,395,000) (1,540,000) Bank owned life insurance policies (258,000) (170,000) (737,000) (525,000) Other assets 429,000 343,000 (2,203,000) (655,000) Accrued expenses and other liabilities 1,959,000 1,047,000 4,570,000 373,000 ------------ ------------ ------------- ------------- Net cash used in operating activities 6,508,000 4,423,000 16,825,000 11,560,000 CASH FLOWS FROM INVESTING ACTIVITIES Loan and leases originations and payments, net (64,620,000) (68,682,000) (172,519,000) (218,583,000) Purchases of: Securities available for sale (6,061,000) (24,759,000) (29,861,000) (37,723,000) Securities held to maturity (1,429,000) (2,210,000) (8,904,000) (6,546,000) Federal Home Loan Bank stock (462,000) (82,000) (1,089,000) (1,749,000) Proceeds from: Maturities, calls and repayments of available for sale securities 3,299,000 8,618,000 12,815,000 19,958,000 Maturities, calls and repayments of held to maturity securities 0 0 936,000 965,000 Sales of available for sale securities 0 0 0 1,748,000 Purchases of premises and equipment, net (2,263,000) (3,150,000) (7,640,000) (6,924,000) Purchases of bank owned life insurance policies (1,148,000) 0 (1,588,000) 0 ------------ ------------ ------------- ------------- Net cash from investing activities (72,684,000) (90,265,000) (207,850,000) (248,854,000) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 75,436,000 98,788,000 238,099,000 241,965,000 Net increase (decrease) in securities sold under agreements to repurchase 6,960,000 (269,000) 6,677,000 (2,854,000) Net decrease in federal funds purchased 0 (7,000,000) (15,000,000) (6,000,000) Proceeds from new FHLB advances 25,000,000 10,000,000 65,000,000 55,000,000 Maturities of FHLB advances (25,000,000) (10,000,000) (50,000,000) (25,000,000) Issuance of subordinated debt 0 16,495,000 0 16,495,000 Redemption of subordinated debt 0 (16,495,000) 0 (16,495,000) Net increase in other borrowed money 142,000 94,000 602,000 394,000 Employee stock purchase plan 30,000 18,000 69,000 56,000 Dividend reinvestment plan 52,000 15,000 136,000 80,000 Stock option exercises, net 17,000 0 70,000 127,000 Payment of cash dividends (834,000) (645,000) (2,349,000) (1,903,000) Cash paid in lieu of fractional shares on stock dividend 0 0 (4,000) (4,000) ------------ ------------ ------------- ------------- Net cash from financing activities 81,803,000 91,001,000 243,300,000 261,861,000 ------------ ------------ ------------- ------------- </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, 2005 2004 2005 2004 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net change in cash and cash equivalents 15,627,000 5,159,000 52,275,000 24,567,000 Cash and cash equivalents at beginning of period 57,459,000 35,972,000 20,811,000 16,564,000 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $73,086,000 $41,131,000 $73,086,000 $41,131,000 =========== =========== =========== =========== Cash paid during the period for: Interest $10,934,000 $ 6,329,000 $27,731,000 $18,512,000 Federal income tax 1,882,000 1,600,000 6,357,000 4,525,000 </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, 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 September 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, 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. 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 6,825 shares were antidilutive and were not included in determining diluted earnings per share for the three and nine month periods ended September 30, 2005. 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 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. There were no stock options granted during the three and nine month periods ended September 30, 2005 and 2004. <TABLE> <CAPTION> Three months ended Nine months ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net income as reported $4,300,000 $3,114,000 $13,352,000 $9,233,000 Deduct: Stock-based compensation expense determined under fair value based method 94,000 63,000 281,000 188,000 ---------- ---------- ----------- ---------- Pro forma net income 4,206,000 3,051,000 13,071,000 9,045,000 ========== ========== =========== ========== Basic earnings per share as reported $ 0.57 $ 0.41 $ 1.76 $ 1.23 Pro forma basic earnings per share 0.55 0.40 1.73 1.20 Diluted earnings per share as reported $ 0.56 $ 0.41 $ 1.72 $ 1.20 Pro forma diluted earnings per share 0.54 0.40 1.69 1.18 </TABLE> 9
MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 dates, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that are scheduled to vest after the adoption date are expected to result in additional compensation expense of approximately $36,000 in 2006 and $29,000 in 2007. 2. LOANS AND LEASES Our total loans and leases at September 30, 2005 were $1,489.0 million compared to $1,317.1 million at December 31, 2004, an increase of $171.9 million, or 13.0%. The components of our outstanding balances at September 30, 2005 and December 31, 2004, and the percentage changes in loans and leases from the end of 2004 to the end of the third quarter 2005 are as follows: <TABLE> <CAPTION> September 30, 2005 December 31, 2004 Percent ---------------------- ---------------------- Increase/ Balance % Balance % (Decrease) -------------- ----- -------------- ----- ---------- <S> <C> <C> <C> <C> <C> Real Estate: Construction and land development $ 220,493,000 14.8% $ 136,705,000 10.3% 61.3% Secured by 1-4 family properties 131,415,000 8.8 122,635,000 9.3 7.2 Secured by multi-family properties 39,148,000 2.6 35,183,000 2.7 11.3 Secured by nonresidential properties 665,186,000 44.7 649,415,000 49.3 2.4 Commercial 425,350,000 28.6 365,615,000 27.8 16.3 Leases 2,067,000 0.1 2,573,000 0.2 (19.7) Consumer 5,300,000 0.4 4,998,000 0.4 6.0 -------------- ----- -------------- ----- ----- Total loans and leases $1,488,959,000 100.0% $1,317,124,000 100.0% 13.0% ============== ===== ============== ===== ===== </TABLE> 10
MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Balance at beginning of period $18,856,000 $16,312,000 $17,819,000 $14,379,000 Charge-offs (338,000) (581,000) (1,042,000) (1,143,000) Recoveries 158,000 114,000 274,000 135,000 Provision for loan and lease losses 895,000 1,200,000 2,520,000 3,674,000 ----------- ----------- ----------- ----------- Balance at September 30 $19,571,000 $17,045,000 $19,571,000 $17,045,000 =========== =========== =========== =========== </TABLE> 4. PREMISES AND EQUIPMENT - NET Premises and equipment are comprised of the following: <TABLE> <CAPTION> September 30, December 31, 2005 2004 ------------- ------------ <S> <C> <C> Land and improvements $ 6,489,000 $ 6,482,000 Buildings and leasehold improvements 20,193,000 16,547,000 Furniture and equipment 10,314,000 6,327,000 ----------- ----------- 36,996,000 29,356,000 Less accumulated depreciation 6,205,000 4,784,000 ----------- ----------- Premises and equipment, net $30,791,000 $24,572,000 =========== =========== </TABLE> Depreciation expense amounted to $590,000 during the third quarter of 2005, compared to $299,000 in the third quarter of 2004. Depreciation expense amounted to $1,422,000 during the first nine months of 2005, compared to $909,000 during the first nine months of 2004. 11
MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. DEPOSITS Our total deposits at September 30, 2005 were $1,397.3 million compared to $1,159.2 million at December 31, 2004, an increase of $238.1 million, or 20.5%. The components of our outstanding balances at September 30, 2005 and December 31, 2004, and percentage change in deposits from the end of 2004 to the end of the third quarter 2005 are as follows: <TABLE> <CAPTION> September 30, 2005 December 31, 2004 Percent ---------------------- ---------------------- Increase/ Balance % Balance % (Decrease) -------------- ----- -------------- ----- ---------- <S> <C> <C> <C> <C> <C> Noninterest-bearing demand $ 116,107,000 8.3% $ 101,742,000 8.8% 14.1% Interest-bearing checking 35,068,000 2.5 37,649,000 3.2 (6.9) Money market 9,508,000 0.7 10,528,000 0.9 (9.7) Savings 98,465,000 7.0 129,374,000 11.2 (23.9) Time, under $100,000 17,944,000 1.3 8,963,000 0.8 100.2 Time, $100,000 and over 159,026,000 11.4 99,760,000 8.6 59.4 -------------- ---- -------------- ----- ----- 436,118,000 31.2 388,016,000 33.5 12.4 Out-of-area time, under $100,000 84,048,000 6.0 90,829,000 7.8 (7.5) Out-of-area time, $100,000 and over 877,114,000 62.8 680,336,000 58.7 28.9 -------------- ----- -------------- ----- ----- 961,162,000 68.8 771,165,000 66.5 24.6 -------------- ----- -------------- ----- ----- Total deposits $1,397,280,000 100.0% $1,159,181,000 100.0% 20.5% ============== ===== ============== ===== ===== </TABLE> 6. SHORT-TERM BORROWINGS Information relating to our securities sold under agreements to repurchase follows: <TABLE> <CAPTION> September 30, December 31, 2005 2004 ------------- ------------ <S> <C> <C> Outstanding balance at end of period $62,994,000 $56,317,000 Average interest rate at end of period 2.91% 1.90% Average balance during the period $57,331,000 $49,935,000 Average interest rate during the period 2.39% 1.57% Maximum month end balance during the period $62,994,000 $61,678,000 </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. 12
MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. FEDERAL HOME LOAN BANK ADVANCES Our outstanding balances at September 30, 2005 and December 31, 2004 were as follows. <TABLE> <CAPTION> September 30, December 31, 2005 2004 ------------- ------------ <S> <C> <C> Maturities October 2005 through May 2008, fixed rates from 2.13% to 4.42%, averaging 3.43% $125,000,000 0 Maturities in May 2006, floating rates tied to Libor indices, averaging 3.86% 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 ============ ============ </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, 2005 totaled $201.3 million, with availability of $54.6 million. Maturities of FHLB advances currently outstanding during the next five years are: <TABLE> <S> <C> 2005 $15,000,000 2006 90,000,000 2007 25,000,000 2008 5,000,000 2009 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. 13
MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued) 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 related to loan commitments was $0.5 million and $0.2 million as of September 30, 2005 and December 31, 2004, respectively. A summary of the contractual amounts of our financial instruments with off-balance-sheet risk at September 30, 2005 and December 31, 2004 follows: <TABLE> <CAPTION> September 30, December 31, 2005 2004 ------------- ------------ <S> <C> <C> Commercial unused lines of credit $271,520,000 $226,935,000 Unused lines of credit secured by 1-4 family residential properties 26,556,000 24,988,000 Credit card unused lines of credit 7,538,000 8,307,000 Other consumer unused lines of credit 11,931,000 5,155,000 Commitments to make loans 65,259,000 55,440,000 Standby letters of credit 59,391,000 56,464,000 ------------ ------------ Total loan and leases commitments $442,195,000 $377,289,000 ============ ============ </TABLE> 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. 14
MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. REGULATORY MATTERS (Continued) 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 -------- ----- -------- ----- -------- ------ <S> <C> <C> <C> <C> <C> <C> September 30, 2005 Total capital (to risk weighted assets) Consolidated $204,330 12.2% $133,522 8.0% $166,902 10.0% Bank 200,975 12.1 133,345 8.0 166,681 10.0 Tier 1 capital (to risk weighted assets) Consolidated 184,759 11.1 66,761 4.0 100,141 6.0 Bank 181,404 10.9 66,673 4.0 100,009 6.0 Tier 1 capital (to average assets) Consolidated 184,759 10.6 69,609 4.0 87,010 5.0 Bank 181,404 10.4 69,513 4.0 86,891 5.0 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 </TABLE> Our consolidated capital levels as of September 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 September 30, 2005 and December 31, 2004, all $32.0 million of the trust preferred securities were included as Tier 1 capital. 15
MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. REGULATORY MATTERS (Continued) 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 three 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 was paid on September 9, 2005 to record holders as of August 10, 2005. On October 6, 2005, we declared a $0.11 per share cash dividend on our common stock, which is payable on December 9, 2005 to record holders as of November 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 nine months ended September 30, 2005, we issued 1,679 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", and 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, 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, 2005 to December 31, 2004 and the results of operations for the three and nine months ended September 30, 2005 and September 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. 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 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 18 to 24 months. 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 assembled an initial team comprised of a City President, commercial and retail lenders, branch and business development personnel and support staff. On September 12, 2005, we officially opened the Ann Arbor banking office. The Ann Arbor team is currently working out of a leased facility; however, we expect to acquire land and construct our own facility within the next 18 to 24 months. FINANCIAL CONDITION During the first nine months of 2005, our assets increased from $1,536.1 million on December 31, 2004, to $1,796.8 million on September 30, 2005. This represents a total increase in assets of $260.7 million, or 17.0%. The asset growth was comprised primarily of a $170.1 million increase in net loans, a $52.3 million increase in cash and cash equivalents and a $25.2 million increase in securities. The growth in total assets was primarily funded by a $238.1 million increase in deposits and a $15.0 million increase in Federal Home Loan Bank advances. 18
MERCANTILE BANK CORPORATION Commercial loans and leases increased by $162.8 million during the first nine months of 2005, and at September 30, 2005, totaled $1,352.2 million, or 90.8% 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 and consumer loans increased by $8.8 million and $0.3 million, respectively, during the first nine months of 2005. As of September 30, 2005, residential mortgage and consumer loans totaled a combined $136.7 million, or 9.2% 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 2005 totaled $0.8 million, or 0.07% of average total loans and leases on an annualized basis. During the first nine months of 2004, net loan and lease charge-offs totaled $1.0 million, or 0.12% of average total loans and leases on an annualized basis. Nonperforming assets at September 30, 2005 totaled $2.1 million, or 0.12% 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 September 30, 2004 totaled $3.0 million, or 0.20% 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 low 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 $25.2 million during the first nine months of 2005. Purchases during the first nine months of 2005 totaled $39.9 million, while proceeds from the maturities, calls and repayments of securities totaled $13.8 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 $52.3 million during the first nine months of 2005, totaling $73.1 million on September 30, 2005. Cash and due from bank balances were up $18.2 million and federal funds sold increased $33.8 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 nine months of 2005 equaled $44.8 million, well below the relatively high balance of $73.1 million on September 30, 2005, but well above the relatively low balance of $20.8 million on December 31, 2004. 19
MERCANTILE BANK CORPORATION Premises and equipment at September 30, 2005 equaled $30.8 million, an increase of $6.2 million since December 31, 2004, and an increase of $18.3 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 for 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 former full-service branch and lending office which had been operating out of a leased facility. This facility opened on October 25, 2004. Deposits increased $238.1 million during the first nine months of 2005, totaling $1,397.3 million at September 30, 2005. Local deposits increased $48.1 million, while out-of-area deposits increased $190.0 million. As a percent of total deposits, local deposits decreased from 33.5% on December 31, 2004, to 31.2% on September 30, 2005. Noninterest-bearing demand deposits, comprising 8.3% of total deposits, increased $14.4 million during the first nine months of 2005. Savings deposits (7.0% of total deposits) decreased $30.9 million, interest-bearing checking deposits (2.5% of total deposits) decreased $2.6 million and money market deposit accounts (0.7% of total deposits) decreased $1.0 million during the first nine months of 2005. Local certificates of deposit, comprising 12.7% of total deposits, increased by $68.2 million during the first nine 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 risen at a faster pace than the rates offered on savings accounts. Out-of-area deposits increased $190.0 million during the first nine months of 2005, totaling $961.2 million as of September 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 nine months of 2005, 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 is expected to continue. Securities sold under agreements to repurchase ("repurchase agreements") increased $6.7 million during the first nine months of 2005, totaling $63.0 million as of September 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 Federal funds purchased declined by $15.0 million during the first nine months of 2005, with a zero balance as of September 30, 2005. FHLBI advances increased by $15.0 million during the first nine months of 2005, totaling $135.0 million as of September 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 September 30, 2005 totaled $201.3 million, with availability of $54.6 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, 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 of certificates of deposit from customers outside of our market area and advances from the FHLBI, totaled $1,096.2 million, or 68.7% of combined deposits and borrowed funds as of September 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 September 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 September 30, 2005, our bank could borrow an additional $54.6 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 September 30, 2005. The average balance of federal funds purchased during the first nine months of 2005 equaled $7.0 million, compared to a $7.7 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, 2005, our bank had a total of $382.8 million in unfunded loan commitments and $59.4 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $317.5 million were commitments available as lines of credit to be drawn at any time as customers' cash needs vary, and $65.3 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 CAPITAL RESOURCES Shareholders' equity is a noninterest-bearing source of funds that provides support for asset growth. Shareholders' equity increased by $10.7 million during the first nine months of 2005, from $141.6 million on December 31, 2004, to $152.3 million at September 30, 2005. The increase is primarily attributable to net income of $13.4 million recorded during the first nine months of 2005. Shareholders' equity was negatively impacted during the first nine months of 2005 by the payment of cash dividends totaling $2.3 million and a $0.6 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 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 September 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 and September 9, 2005. On October 6, 2005, we declared a $0.11 per share cash dividend payable on December 9, 2005 to record holders as of November 10, 2005. RESULTS OF OPERATIONS Net income for the third quarter of 2005 was $4.3 million ($0.57 per basic share and $0.56 per diluted share), which represents a 38.1% increase over net income of $3.1 million ($0.41 per basic and diluted share) recorded during the third quarter of 2004. Net income for the first nine months of 2005 was $13.4 million ($1.76 per basic share and $1.72 per diluted share), which represents a 44.6% increase over net income of $9.2 million ($1.23 per basic share and $1.20 per diluted share) recorded during the first nine months of 2004. The improvement in net income during both time periods is primarily due to an increase in net interest income and lower provision expense. In addition, net income for the third quarter of 2004 and the first nine months of 2004 includes an $845,000 ($548,000 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 ($0.49 per basic share and $0.48 per diluted share), while net income for the first nine months of 2004 was $9.8 million ($1.30 per basic share and $1.27 per diluted share). 22
MERCANTILE BANK CORPORATION Interest income during the third quarter of 2005 was $26.8 million, an increase of 50.2% over the $17.8 million earned during the third quarter of 2004. Interest income during the first nine months of 2005 was $72.8 million, an increase of 47.7% over the $49.3 million earned during the first nine 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 third quarter of 2005, earning assets averaged $1,647.3 million, $285.3 million higher than average earning assets of $1,362.0 million during the third quarter of 2004. Average loans were up $241.5 million and securities increased $43.1 million. During the first nine months of 2005, earning assets averaged $1,581.0 million, $304.6 million higher than average earning assets of $1,276.4 million during the same time period in 2004. Average loans were up $259.1 million and securities increased $44.2 million. Also positively impacting the growth in interest income was the increased yield on earning assets. During the third quarter of 2005 and 2004, earning assets had a weighted average yield (tax equivalent-adjusted basis) of 6.51% and 5.26%, respectively. During the first nine months of 2005 and 2004 earning assets had a weighted average yield of 6.23% and 5.23%, respectively. With approximately 75% of our total loans and leases tied to the prime rate, our asset yield has benefited from the 275 basis point increase in the prime rate since June 30, 2004. Interest expense during the third quarter of 2005 was $12.7 million, an increase of 82.3% over the $7.0 million expensed during the third quarter of 2004. Interest expense during the first nine months of 2005 was $32.5 million, an increase of 71.3% over the $19.0 million expensed during the first nine months of 2004. The increase in interest expense is primarily attributable to the increase in interest-bearing liabilities necessitated by the growth in assets and a higher interest rate environment. During the third quarter of 2005, interest-bearing liabilities averaged $1,461.7 million, $274.9 million higher than average interest-bearing liabilities of $1,186.8 million during the third quarter of 2004. Interest-bearing deposits were up $229.7 million and FHLBI advances increased $18.0 million. During the first nine months of 2005, interest-bearing liabilities averaged $1,399.1 million, $287.4 million higher than average interest-bearing liabilities of $1,111.7 million during the same time period in 2004. Interest-bearing deposits were up $238.8 million and FHLBI advances increased $20.4 million. During the third quarter of 2005 and 2004, interest-bearing liabilities had a weighted average rate of 3.44% and 2.33%, respectively. During the first nine months of 2005 and 2004, interest-bearing liabilities had a weighted average rate of 3.10% and 2.28%, 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 third quarter of 2005 was $14.1 million, an increase of 29.6% over the $10.9 million earned during the third quarter of 2004. Net interest income during the first nine months of 2005 was $40.3 million, an increase of 32.9% over the $30.3 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 an improved net interest margin. The net interest margin during the third quarter of 2005 was 3.46%, compared to the 3.23% during the third quarter of 2004. During the first nine months of 2005 the net interest margin was 3.48%, compared to 3.24% during the same time period in 2004. The improved net interest margin reflects the overall positive impact of the increasing interest rate environment. Our earning assets, led by the relatively high level of floating rate loans tied to the prime rate, have generally repriced faster than our interest-bearing liabilities, led by our relatively high level of fixed rate certificates of deposit. 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 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 $282,000 and $243,000 in the third quarter of 2005 and 2004, respectively, for this adjustment. 23
MERCANTILE BANK CORPORATION <TABLE> <CAPTION> Quarters ended September 30, ----------------------------------------------------------------- 2005 2004 ------------------------------- ------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ---------- -------- ------- ---------- -------- ------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> ASSETS Loans and leases $1,460,792 $24,570 6.67% $1,219,325 $16,193 5.27% Securities 177,539 2,395 5.40 134,418 1,841 5.48 Federal funds sold 8,274 76 3.58 7,634 26 1.34 Short term investments 689 5 2.68 609 2 0.90 ---------- ------- ---------- ------- Total interest-earning assets 1,647,294 27,046 6.51 1,361,986 18,062 5.26 Allowance for loan losses (19,343) (16,684) Other assets 112,252 83,757 ---------- ---------- Total assets $1,740,203 $1,429,059 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $1,224,483 $10,554 3.42% $ 994,777 $ 5,706 2.28% Short-term borrowings 64,970 475 2.90 54,777 220 1.59 FHLB advances 137,120 1,148 3.28 119,130 652 2.14 Long-term borrowings 35,110 515 5.82 18,124 385 8.50 ---------- ------- ---------- ------- Total interest-bearing liabilities 1,461,683 12,692 3.44 1,186,808 6,963 2.33 Noninterest-bearing deposits 115,003 99,389 Other liabilities 12,977 6,572 Shareholders' equity 150,540 136,290 ---------- ---------- Total liabilities and shareholders' equity $1,740,203 $1,429,059 ========== ------- ========== ------- Net interest income $14,354 $11,099 ======= ======= Net interest rate spread 3.07% 2.93% ==== ==== Net interest rate spread on average assets 3.27% 3.08% ==== ==== Net interest margin on earning assets 3.46% 3.23% ==== ==== </TABLE> Provisions to the allowance during the third quarter of 2005 were $0.9 million, compared to the $1.2 million that was expensed during the third quarter of 2004. Provisions to the allowance during the first nine months of 2005 were $2.5 million, compared to the $3.7 million that was expensed during the same time period in 2004. The decrease during both time periods primarily reflects the lower volume of net loan and lease charge-offs and an improvement in the overall quality of the loan and lease portfolio. In addition, in comparing the first nine months of 2005 with the same time period in 2004, loan and lease growth was lower in 2005 than 2004. Net loan and lease charge-offs of $180,000 were recorded during the third quarter of 2005, compared to net loan and lease charge-offs of $467,000 during the third quarter of 2004. During the first nine months of 2005, net loan and lease charge-offs totaled $768,000, compared to net loan and lease charge-offs of $1,008,000 during the same time period in 2004. Loan and lease growth during the third quarter of 2005 was $64.5 million, compared to loan and lease growth of $68.4 million during the third quarter of 2004. Loan and lease growth during the first nine months of 2005 was $171.8 million, compared to loan and lease growth of $217.8 million during the same time period in 2004. The allowance as a percentage of total loans outstanding as of September 30, 2005 was 1.31%, compared to 1.36% at September 30, 2004, with the decline primarily reflecting the overall improved quality of the loan and lease portfolio. 24
MERCANTILE BANK CORPORATION 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 third quarter of 2005 was $1.3 million, an increase of 15.1% over the $1.2 million earned during the third quarter of 2004. Noninterest income during the first nine months of 2005 was $3.8 million, an increase of 17.6% over the $3.2 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. Noninterest expense during the third quarter of 2005 was $8.3 million, an increase of 29.7% over the $6.4 million expensed during the third quarter of 2004. Excluding the $845,000 one-time expense associated with the redemption of the 9.60% Cumulative Preferred Securities recorded during the third quarter of 2004, the increase in noninterest expense during the third quarter of 2005 over the third quarter of 2004 equals 49.4%. Noninterest expense during the first nine months of 2005 was $22.3 million, an increase of 31.5% over the $17.0 million expensed during the same time period in 2004. Excluding the $845,000 one-time expense associated with the redemption of the 9.60% Cumulative Preferred Securities recorded during the third quarter of 2004, the increase in noninterest expense during the first nine months of 2005 over the first nine months of 2004 equals 38.4%. Employee salary and benefit expenses were $1.4 million higher during the third quarter of 2005 than the level expensed during the third quarter of 2004, and were $3.2 million higher during the first nine months of 2005 than the level expensed during the first nine 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 190 at September 30, 2004 to 263 as of September 30, 2005. Occupancy, furniture and equipment costs were $0.6 million higher during the third quarter of 2005 than the level expensed during the third quarter of 2004, and were $1.0 million higher during the first nine months of 2005 than the level expensed during the first nine months of 2004. The increases during both time periods primarily reflects the opening of our new Holland facility in October 2004, the opening of our new main office during the second quarter of 2005 and the opening of our new leased facilities in Lansing and Ann Arbor during the third quarter of 2005. Excluding the one-time charge, other overhead costs increased $0.8 million in the third quarter of 2005 over the level expensed in the third quarter of 2004, and increased $2.0 million during the first nine months of 2005 over the level expensed during the first nine months of 2004, primarily reflecting the additional expenses required to administer our significantly increased asset base and size. 25
MERCANTILE BANK CORPORATION 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 $2.8 million during the third quarter of 2005 over the amount expensed during the third quarter of 2004, and increased $6.2 million during the first nine months of 2005 over the amount expensed during the first nine months of 2004. However, net revenues (net interest income plus noninterest income) increased at a higher level of $3.4 million and $10.6 million during the same time periods, respectively. Federal income tax expense was $1.9 million during the third quarter of 2005, an increase of 47.1% over the $1.3 million expensed during the third quarter of 2004. Federal income tax expense was $5.9 million during the first nine months of 2005, an increase of 61.2% over the $3.7 million expensed during the first nine months of 2004. The increases during both time periods primarily results from the increase in net income before federal income tax and in increase in the effective tax rate, the latter due to a decline in the level of tax-exempt income as a percent of 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. 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, 2005 (dollars in thousands): 26
MERCANTILE BANK CORPORATION <TABLE> <CAPTION> Within Three to One to After Three Twelve Five Five Months Months Years Years Total ---------- --------- -------- ---------- ---------- <S> <C> <C> <C> <C> <C> Assets: Commercial loans and leases (1) $1,017,362 $ 31,278 $268,626 $ 34,978 $1,352,244 Residential real estate loans 69,428 3,302 44,279 14,406 131,415 Consumer loans 1,389 608 3,053 250 5,300 Investment securities (2) 9,064 854 27,306 140,900 178,124 Federal funds sold 33,800 33,800 Short-term investments 392 392 Allowance for loan and leases losses (19,571) (19,571) Other assets 115,066 115,066 ---------- --------- -------- -------- ---------- Total assets 1,131,435 36,042 343,264 286,029 1,796,770 Liabilities: Interest-bearing checking 35,068 35,068 Savings 98,465 98,465 Money market accounts 9,508 9,508 Time deposits < $100,000 23,745 41,316 36,931 101,992 Time deposits $100,000 and over 234,379 475,828 325,933 1,036,140 Short-term borrowings 62,994 62,994 FHLB advances 25,000 60,000 50,000 135,000 Long-term borrowings 35,201 35,201 Noninterest-bearing checking 116,107 116,107 Other liabilities 13,975 13,975 ---------- --------- -------- -------- ---------- Total liabilities 524,360 577,144 412,864 130,082 1,644,450 Shareholders' equity 152,320 152,320 ---------- --------- -------- -------- ---------- Total sources of funds 524,360 577,144 412,864 282,402 1,796,770 ---------- --------- -------- -------- ---------- Net asset (liability) GAP $ 607,075 $(541,102) $(69,600) ========== ========= ======== Cumulative GAP $ 607,075 $ 65,973 $ (3,627) ========== ========= ======== Percent of cumulative GAP to total assets 33.8% 3.7% (0.2)% ========== ========= ======== </TABLE> (1) Floating rate loans that are currently at interest rate floors or ceilings 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, 2005 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. 27
MERCANTILE BANK CORPORATION We conducted multiple simulations as of September 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 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 ---------------------- ------------------- ------------------- <S> <C> <C> Interest rates down 200 basis points $(5,204,000) (9.4)% Interest rates down 100 basis points (3,608,000) (6.5) No change in interest rates (2,040,000) (3.7) Interest rates up 100 basis points 209,000 0.4 Interest rates up 200 basis points 2,455,000 4.4 </TABLE> 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, 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 September 30, 2005. There have been no significant changes in our internal controls over financial reporting during the quarter ended September 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 Issuer Purchases of Equity Securities <TABLE> <CAPTION> (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 ------ --------- -------------- ------------------- ---------------------- <S> <C> <C> <C> <C> July 1 - 31 698 $45.40 0 0 August 1 - 31 0 N/A 0 0 September 1 - 30 0 N/A 0 0 Total 698 $45.40 0 0 </TABLE> The shares shown in column (a) above as having been purchased were acquired from one 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. 29
ITEM 6. EXHIBITS <TABLE> <CAPTION> EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- <S> <C> 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 </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 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 <TABLE> <CAPTION> EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- <S> <C> 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 </TABLE> 32