U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to                    .

MERCANTILE BANK CORPORATION

(Exact name of registrant as specified in its charter)

Michigan (State or other jurisdiction of incorporation or organization)		38-3360865 (IRS Employer Identification No.)

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 þ      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large Accelerated filer o      Accelerated filer þ      Non-Accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

At November 8, 2007, there were 8,480,604 shares of Common Stock outstanding.

 

 

MERCANTILE BANK CORPORATION

INDEX

		Page No.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets — September 30, 2007 (Unaudited) and December 31, 2006			3
Consolidated Statements of Income — Three and Nine Months Ended September 30, 2007 (Unaudited) and September 30, 2006 (Unaudited)			4
Consolidated Statements of Changes in Shareholders’ Equity — Nine Months Ended September 30, 2007 (Unaudited) and September 30, 2006 (Unaudited)			5
Consolidated Statements of Cash Flows – Three and Nine Months Ended September 30, 2007 (Unaudited) and September 30, 2006 (Unaudited)			7
Notes to Consolidated Financial Statements (Unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			29
PART II. Other Information
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults upon Senior Securities			30
Item 4. Submission of Matters to a Vote of Security Holders			30
Item 5. Other Information			30
Item 6. Exhibits			31
Signatures			32
Additional Release of Claims Pursuant to Retirement Agreement dated May 24, 2007
Rule 13a-14(a) Certifications
Section 1350 Chief Executive Officer Certification
Section 1350 Chief Financial Officer Certification

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MERCANTILE BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2007				2006
		(Unaudited)
ASSETS
Cash and due from banks		$	28,764,000			$	51,098,000
Short-term investments			534,000				282,000
Total cash and cash equivalents			29,298,000				51,380,000
Securities available for sale			135,243,000				130,967,000
Securities held to maturity (fair value of $65,407,000 at September 30, 2007 and $65,025,000 at December 31, 2006)			64,863,000				63,943,000
Federal Home Loan Bank stock			7,534,000				7,509,000
Total loans and leases			1,796,962,000				1,745,478,000
Allowance for loan and lease losses			(24,857,000	)			(21,411,000	)
Total loans and leases, net			1,772,105,000				1,724,067,000
Premises and equipment, net			34,492,000				33,539,000
Bank owned life insurance policies			32,962,000				30,858,000
Accrued interest receivable			11,143,000				10,287,000
Other assets			18,787,000				14,718,000
Total assets		$	2,106,427,000			$	2,067,268,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing		$	121,336,000			$	133,197,000
Interest-bearing			1,519,648,000				1,513,706,000
Total deposits			1,640,984,000				1,646,903,000
Securities sold under agreements to repurchase			88,683,000				85,472,000
Federal funds purchased			3,300,000				9,800,000
Federal Home Loan Bank advances			135,000,000				95,000,000
Subordinated debentures			32,990,000				32,990,000
Other borrowed money			3,839,000				3,316,000
Accrued expenses and other liabilities			23,907,000				21,872,000
Total liabilities			1,928,703,000				1,895,353,000
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; 8,480,425 shares outstanding at September 30, 2007 and 8,042,411 shares outstanding at December 31, 2006			176,610,000				161,223,000
Retained earnings			2,220,000				11,794,000
Accumulated other comprehensive income (loss)			(1,106,000	)			(1,102,000	)
Total shareholders’ equity			177,724,000				171,915,000
Total liabilities and shareholders’ equity		$	2,106,427,000			$	2,067,268,000

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30,				September 30,				September 30,				September 30,
		2007				2006				2007				2006
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Interest income
Loans and leases, including fees		$	34,076,000			$	33,261,000			$	101,012,000			$	93,292,000
Investment securities			2,530,000				2,335,000				7,521,000				6,871,000
Federal funds sold			168,000				76,000				343,000				347,000
Short-term investments			5,000				3,000				13,000				10,000
Total interest income			36,779,000				35,675,000				108,889,000				100,520,000
Interest expense
Deposits			19,357,000				17,268,000				57,361,000				46,111,000
Short-term borrowings			900,000				707,000				2,598,000				2,028,000
Federal Home Loan Bank advances			1,759,000				1,452,000				4,343,000				4,136,000
Long-term borrowings			713,000				701,000				2,104,000				1,953,000
Total interest expense			22,729,000				20,128,000				66,406,000				54,228,000
Net interest income			14,050,000				15,547,000				42,483,000				46,292,000
Provision for loan and lease losses			2,800,000				1,350,000				6,170,000				4,075,000
Net interest income after provision for loan and lease losses			11,250,000				14,197,000				36,313,000				42,217,000
Noninterest income
Services charges on accounts			402,000				361,000				1,184,000				1,006,000
Net gain on sales of commercial loans			0				0				0				29,000
Other income			1,105,000				1,001,000				3,152,000				2,845,000
Total noninterest income			1,507,000				1,362,000				4,336,000				3,880,000
Noninterest expense
Salaries and benefits			5,425,000				4,731,000				17,330,000				14,179,000
Occupancy			881,000				802,000				2,462,000				2,404,000
Furniture and equipment			529,000				513,000				1,524,000				1,550,000
Other expense			2,734,000				1,982,000				7,032,000				5,932,000
Total noninterest expenses			9,569,000				8,028,000				28,348,000				24,065,000
Income before federal income tax expense			3,188,000				7,531,000				12,301,000				22,032,000
Federal income tax expense			821,000				2,329,000				3,430,000				6,790,000
Net income		$	2,367,000			$	5,202,000			$	8,871,000			$	15,242,000
Basic earnings per share		$	0.28			$	0.62			$	1.05			$	1.82
Diluted earnings per share		$	0.28			$	0.61			$	1.05			$	1.79
Cash dividends per share		$	0.14			$	0.12			$	0.41			$	0.36
Average basic shares outstanding			8,458,601				8,416,816				8,450,524				8,397,046
Average diluted shares outstanding			8,491,612				8,524,116				8,488,226				8,523,594

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

										Accumulated
										Other				Total
		Common				Retained				Comprehensive				Shareholders’
		Stock				Earnings				Income/(loss)				Equity
Balance, January 1, 2007		$	161,223,000			$	11,794,000			$	(1,102,000	)		$	171,915,000
Payment of 5% stock dividend, 401,023 shares			14,948,000				(14,952,000	)							(4,000	)
Employee stock purchase plan, 2,737 shares			72,000												72,000
Dividend reinvestment plan, 2,219 shares			60,000												60,000
Stock option exercises, 51,942 shares			641,000												641,000
Stock tendered for stock option exercises, 18,291 shares			(587,000	)											(587,000	)
Stock-based compensation expense			253,000												253,000
Cash dividends, $0.41 per share							(3,493,000	)							(3,493,000	)
Comprehensive income:
Net income for the period from January 1, 2007 through September 30, 2007							8,871,000								8,871,000
Change in net unrealized gain (loss) on securities available for sale, net of reclassifications and tax effect											(4,000	)			(4,000	)
Total comprehensive income															8,867,000
Balance, September 30, 2007		$	176,610,000			$	2,220,000			$	(1,106,000	)		$	177,724,000

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
(Unaudited)

										Accumulated
										Other				Total
		Common				Retained				Comprehensive				Shareholders’
		Stock				Earnings				Income/(loss)				Equity
Balance, January 1, 2006		$	148,533,000			$	8,000,000			$	(1,408,000	)		$	155,125,000
Payment of 5% stock dividend, 398,403 shares			12,014,000				(12,018,000	)							(4,000	)
Employee stock purchase plan, 2,251 shares			83,000												83,000
Dividend reinvestment plan, 2,068 shares			76,000												76,000
Stock option exercises, 62,082 shares			755,000												755,000
Stock tendered for stock option exercises, 15,243 shares			(569,000	)											(569,000	)
Stock-based compensation expense			153,000												153,000
Cash dividends, $0.36 per share							(2,994,000	)							(2,994,000	)
Comprehensive income:
Net income for the period from January 1, 2006 through September 30, 2006							15,242,000								15,242,000
Change in net unrealized gain (loss) on securities available for sale, net of reclassifications and tax effect											(319,000	)			(319,000	)
Total comprehensive income															14,923,000
Balance, September 30, 2006		$	161,045,000			$	8,230,000			$	(1,727,000	)		$	167,548,000

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30,				September 30,				September 30,				September 30,
		2007				2006				2007				2006
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Cash flows from operating activities
Net income		$	2,367,000			$	5,202,000			$	8,871,000			$	15,242,000
Adjustments to reconcile net income  to net cash from operating activities
Depreciation and amortization			802,000				781,000				2,290,000				2,360,000
Provision for loan and lease losses			2,800,000				1,350,000				6,170,000				4,075,000
Net gain on sales of commercial loans			0				0				0				(29,000	)
Stock-based compensation expense			84,000				51,000				253,000				153,000
Earnings on bank owned life insurance			(321,000	)			(298,000	)			(927,000	)			(872,000	)
Net change in:
Accrued interest receivable			(1,172,000	)			(1,391,000	)			(856,000	)			(2,164,000	)
Other assets			525,000				(465,000	)			(1,591,000	)			(1,982,000	)
Accrued expenses and other liabilities			(342,000	)			1,256,000				2,035,000				2,740,000
Net cash from operating activities			4,743,000				6,486,000				16,245,000				19,523,000
Cash flows for investing activities
Loan and lease originations and payments, net			(21,810,000	)			(41,301,000	)			(57,038,000	)			(152,066,000	)
Purchases of:
Securities available for sale			(1,955,000	)			(6,025,000	)			(10,412,000	)			(19,038,000	)
Securities held to maturity			(1,335,000	)			(352,000	)			(3,742,000	)			(2,107,000	)
Federal Home Loan Bank stock			0				0				(25,000	)			0
Proceeds from:
Maturities, calls and repayments of available for sale securities			2,866,000				1,720,000				6,241,000				5,807,000
Maturities, calls and repayments of held to maturity securities			126,000				0				2,786,000				730,000
Redemption of FHLB stock			0				123,000				0				123,000
Purchases of premises and equipment, net			(403,000	)			(2,129,000	)			(2,964,000	)			(4,050,000	)
Purchases of bank owned life insurance			(311,000	)			0				(1,177,000	)			(1,207,000	)
Net cash for investing activities			(22,822,000	)			(47,964,000	)			(66,331,000	)			(171,808,000	)
Cash flows for financing activities
Net increase (decrease) in deposits			1,974,000				66,791,000				(5,919,000	)			195,351,000
Net increase in securities sold under agreements to repurchase			3,696,000				9,680,000				3,211,000				1,910,000
Net decrease in federal funds purchased			(5,800,000	)			(11,400,000	)			(6,500,000	)			(9,600,000	)
Proceeds from Federal Home Loan Bank advances			15,000,000				15,000,000				105,000,000				65,000,000
Maturities of Federal Home Loan Bank advances			(15,000,000	)			(30,000,000	)			(65,000,000	)			(80,000,000	)
Net increase in other borrowed money			186,000				190,000				523,000				800,000
Employee stock purchase plan			25,000				28,000				72,000				83,000
Dividend reinvestment plan			16,000				31,000				60,000				76,000
Stock option exercises, net			24,000				63,000				54,000				186,000
Payment of cash dividends			(1,185,000	)			(1,042,000	)			(3,493,000	)			(2,994,000	)
Cash paid in lieu of fractional shares on stock dividend			0				0				(4,000	)			(4,000	)
Net cash for financing activities			(1,064,000	)			49,341,000				28,004,000				170,808,000

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30,				September 30,				September 30,				September 30,
		2007				2006				2007				2006
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net change in cash and cash equivalents			(19,143,000	)			7,863,000				(22,082,000	)			18,523,000
Cash and cash equivalents at beginning of period			48,441,000				47,413,000				51,380,000				36,753,000
Cash and cash equivalents at end of period		$	29,298,000			$	55,276,000			$	29,298,000			$	55,276,000
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	22,613,000			$	18,306,000			$	65,566,000			$	48,483,000
Federal income tax			355,000				2,880,000				4,175,000				8,755,000
Transfers from loans and leases to foreclosed assets			131,000				585,000				2,830,000				975,000

See accompanying notes to consolidated financial statements.

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, 2007 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 three subsidiaries, Mercantile Bank Mortgage Company, LLC (“our mortgage company”), 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 period ended September 30, 2007 should not be considered as indicative of expected 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, 2006.
		We formed a business trust, Mercantile Bank Capital Trust I (“the trust”), in 2004 to issue trust preferred securities. We issued subordinated debentures to the trust in return for the proceeds raised from the issuance of the trust preferred securities. In accordance with FASB Interpretation No. 46, the trust is not consolidated, but instead we report the subordinated debentures issued to the trust as a liability.
		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 and the dilutive effect of restricted shares to the extent those shares have not vested. Options for 140,177 shares and 112,514 shares were antidilutive and were not included in determining diluted earnings per share for the three and nine month periods ended September 30, 2007, respectively. Options for 7,521 shares were antidilutive and were not included in determining diluted earnings per share for the three and nine month periods ended September 30, 2006.
		Stock Dividend: All per share amounts and average shares outstanding have been adjusted for all periods presented to reflect the 5% stock dividend distributed on May 4, 2007. The Statement of Changes in Shareholders’ Equity reflects a transfer from retained earnings to common stock for the value of the shares distributed to the extent of available retained earnings.
		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 likely.

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		SIGNIFICANT ACCOUNTING POLICIES (Continued)
		A loan or lease is impaired when full payment under the loan or lease terms is not expected. Impairment is evaluated in aggregate for smaller-balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan or lease is impaired, a portion of the allowance is allocated so that the loan or lease is reported, net, at the present value of estimated future cash flows using the loan’s or lease’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans and leases are evaluated for impairment when payments are delayed, typically 30 days or more, or when serious deficiencies are identified within the credit relationship.
		New Accounting Pronouncements: We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. The adoption of FIN 48 had no affect on the financial statements. We have no unrecognized tax benefits and do not anticipate any increase in unrecognized benefits within the next twelve months. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts; no such accruals exist as of September 30, 2007. We file U.S. federal income tax returns which are subject to examination for all years after 2003.
		In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, which provides a definition of fair value for accounting purposes, establishes a framework for measuring fair value, expands related financial statement disclosures and will be effective on January 1, 2008. We have not completed a review of this new standard.
		In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been selected are required to be reported in earnings at each reporting date. Statement No. 159 will be applied prospectively and implemented effective January 1, 2008. We have not completed a review of this new standard.

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.		LOANS AND LEASES
		Our total loans and leases at September 30, 2007 were $1,797.0 million compared to $1,745.5 million at December 31, 2006, an increase of $51.5 million, or 2.9%. The components of our outstanding balances at September 30, 2007 and December 31, 2006, and the percentage changes in loans and leases from the end of 2006 to the end of the third quarter 2007 are as follows:

																		Percent
		September 30, 2007								December 31, 2006								Increase/
		Balance				%				Balance				%				(Decrease)
Real Estate:
Construction and land development		$	294,237,000				16.4	%		$	299,792,000				17.1	%			(1.9	)%
Secured by 1-4 family properties			124,496,000				6.9				131,829,000				7.6				(5.6	)
Secured by multi-family properties			45,123,000				2.5				39,941,000				2.3				13.0
Secured by nonresidential properties			847,909,000				47.2				793,000,000				45.4				6.9
Commercial			476,722,000				26.5				471,272,000				27.0				1.2
Leases			2,594,000				0.1				1,388,000				0.1				86.9
Consumer			5,881,000				0.4				8,256,000				0.5				(28.8	)
Total loans and leases		$	1,796,962,000				100.0	%		$	1,745,478,000				100.0	%			2.9	%

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, 2007 and September 30, 2006:

		Three months ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2007				2006				2007				2006
Balance at beginning of period		$	22,800,000			$	21,507,000			$	21,411,000			$	20,527,000
Charge-offs			(795,000	)			(1,250,000	)			(3,287,000	)			(3,113,000	)
Recoveries			52,000				331,000				563,000				449,000
Provision for loan and lease losses			2,800,000				1,350,000				6,170,000				4,075,000
Balance at September 30		$	24,857,000			$	21,938,000			$	24,857,000			$	21,938,000

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.		PREMISES AND EQUIPMENT — NET
		Premises and equipment are comprised of the following:

		September 30,				December 31,
		2007				2006
Land and improvements		$	8,531,000			$	8,021,000
Buildings and leasehold improvements			24,446,000				23,036,000
Furniture and equipment			11,732,000				10,773,000
			44,709,000				41,830,000
Less: accumulated depreciation			10,217,000				8,291,000
Premises and equipment, net		$	34,492,000			$	33,539,000

		Depreciation expense amounted to $0.7 million during the third quarter of 2007, compared to $0.6 million in the third quarter of 2006. Depreciation expense amounted to $2.0 million during the first nine months of 2007, compared to $1.9 million during the first nine months of 2006.
5.		DEPOSITS
		Our total deposits at September 30, 2007 were $1,641.0 million compared to $1,646.9 million at December 31, 2006, a decrease of $5.9 million, or 0.4%. The components of our outstanding balances at September 30, 2007 and December 31, 2006, and percentage change in deposits from the end of 2006 to the end of the third quarter 2007 are as follows:

																		Percent
		September 30, 2007								December 31, 2006								Increase/
		Balance				%				Balance				%				(Decrease)
Noninterest-bearing demand		$	121,336,000				7.4	%		$	133,197,000				8.1	%			(8.9	)%
Interest-bearing checking			42,135,000				2.6				39,943,000				2.4				5.5
Money market			11,944,000				0.7				9,409,000				0.6				26.9
Savings			78,636,000				4.8				92,370,000				5.6				(14.9	)
Time, under $100,000			54,408,000				3.3				47,840,000				2.9				13.7
Time, $100,000 and over			340,154,000				20.7				310,326,000				18.8				9.6
			648,613,000				39.5				633,085,000				38.4				2.5
Out-of-area time, under $100,000			87,497,000				5.3				82,330,000				5.0				6.3
Out-of-area time, $100,000 and over			904,874,000				55.2				931,488,000				56.6				(2.9	)
			992,371,000				60.5				1,013,818,000				61.6				(2.1	)
Total deposits		$	1,640,984,000				100.0	%		$	1,646,903,000				100.0	%			(0.4	)%

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.		SHORT-TERM BORROWINGS
		Information relating to our securities sold under agreements to repurchase follows:

		September 30,				December 31,
		2007				2006
Outstanding balance at end of period		$	88,683,000			$	85,472,000
Average interest rate at end of period			3.40	%			3.88	%
Average balance during the period		$	84,440,000			$	72,228,000
Average interest rate during the period			3.86	%			3.71	%
Maximum month end balance during the period		$	92,004,000			$	85,472,000

		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 held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain large deposit customers as deposit equivalent investments. Repurchase agreements were secured by securities with a market value of $101.7 million and $91.2 million as of September 30, 2007 and December 31, 2006, respectively.
7.		FEDERAL HOME LOAN BANK ADVANCES
		Our outstanding balances at September 30, 2007 and December 31, 2006 were as follows:

		September 30,				December 31,
		2007				2006
Maturities October 2007 through September 2009, fixed rates from 4.10% to 5.34%, averaging 5.10%		$	135,000,000			$	0
Maturities January 2007 through May 2008, fixed rates from 3.70% to 5.69%, averaging 4.90%			0				95,000,000
Total Federal Home Loan Bank advances		$	135,000,000			$	95,000,000

Each advance is payable at its maturity date, and is subject to a prepayment fee if paid prior to the maturity date. The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of September 30, 2007 totaled $326.4 million, with availability approximating $180.0 million.

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:

2007		$	25,000,000
2008			70,000,000
2009			40,000,000
2010			0
2011			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, and 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 as of September 30, 2007 and December 31, 2006.
		A summary of the contractual amounts of our financial instruments with off-balance-sheet risk at September 30, 2007 and December 31, 2006 follows:

		September 30,				December 31,
		2007				2006
Commercial unused lines of credit		$	364,214,000			$	345,195,000
Unused lines of credit secured by 1-4 family residential properties			32,727,000				29,314,000
Credit card unused lines of credit			8,921,000				8,510,000
Other consumer unused lines of credit			6,714,000				7,197,000
Commitments to make loans			73,948,000				60,850,000
Standby letters of credit			87,885,000				73,241,000
Total loan and lease commitments		$	574,409,000			$	524,307,000

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.		REGULATORY MATTERS
		We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on our financial statements.
		The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If not well capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
		Our actual capital levels and minimum required levels were (dollars in thousands):

																		Minimum Required
																		to be Well
										Minimum Required								Capitalized Under
										for Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Regulations
		Amount				Ratio				Amount				Ratio				Amount				Ratio
September 30, 2007
Total capital (to risk weighted assets)
Consolidated		$	235,687				11.4	%		$	165,441				8.0	%	$	NA				NA
Bank			232,391				11.3				165,205				8.0				206,506				10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated			210,830				10.2				82,721				4.0			NA				NA
Bank			207,534				10.1				82,603				4.0				123,904				6.0
Tier 1 capital (to average assets)
Consolidated			210,830				10.1				83,864				4.0			NA				NA
Bank			207,534				9.9				83,752				4.0				104,690				5.0

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, 2006
Total capital (to risk weighted assets)
Consolidated		$	226,428				11.5	%		$	158,196				8.0	%		$	NA			NA
Bank			222,812				11.3				158,019				8.0				197,524				10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated			205,017				10.4				79,098				4.0			NA				NA
Bank			201,401				10.2				79,010				4.0				118,514				6.0
Tier 1 capital (to average assets)
Consolidated			205,017				10.0				81,682				4.0			NA				NA
Bank			201,401				9.9				81,623				4.0				102,029				5.0

		Our consolidated capital levels as of September 30, 2007 and December 31, 2006 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, 2007 and December 31, 2006, 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 April 10, 2007, that was distributed on May 4, 2007 to record holders as of April 23, 2007. 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 2007. On January 9, 2007, we declared a stock dividend-adjusted $0.13 per share cash dividend on our common stock, which was paid on March 9, 2007 to record holders as of February 9, 2007. On April 10, 2007, we declared a $0.14 per share cash dividend on our common stock, which was paid on June 8, 2007 to record holders as of May 10, 2007. On July 10, 2007, we declared a $0.14 per share cash dividend on our common stock, which was paid on September 10, 2007 to record holders as of August 10, 2007. On October 9, 2007, we declared a $0.14 per share cash dividend on our common stock, which is payable on December 10, 2007 to record holders as of November 9, 2007.

MERCANTILE BANK CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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; changes in local real estate values; changes in the national and local economies; and risk factors described in our annual report on Form 10-K for the year ended December 31, 2006. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding 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 three subsidiaries Mercantile Bank Mortgage Company, LLC (“our mortgage company”), Mercantile Bank Real Estate Co., LLC (“our real estate company”) and Mercantile Insurance Center, Inc. (“our insurance center”), at September 30, 2007 to December 31, 2006 and the results of operations for the three and nine months ended September 30, 2007 and September 30, 2006. 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-35 through F-40 in our Form 10-K for the fiscal year ended December 31, 2006 (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.

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 likely.

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.

Financial Condition

During the first nine months of 2007, our assets increased from $2,067.3 million on December 31, 2006, to $2,106.4 million on September 30, 2007. This represents an increase in total assets of $39.1 million, or 1.9%. The asset growth was comprised primarily of a $48.0 million increase in net loans, a $5.2 million increase in securities and a $1.8 million increase in other real estate owned and repossessed assets, partially offset by a $22.1 million decline in cash and cash equivalents. The growth in total assets was primarily funded by a $40.0 million increase in Federal Home Loan Bank advances, partially offset by a $5.9 million decrease in deposits and a $6.5 million decrease in federal funds purchased.

Commercial loans and leases increased by $61.2 million during the first nine months of 2007, and at September 30, 2007, totaled $1,666.6 million, or 92.7% of the total loan and lease portfolio. The growth in our commercial loan and lease portfolio has slowed over the past several quarters, primarily reflecting the competitive pricing and underwriting environments within our markets. These competitive pressures, from financial institutions and other entities such as private equity funds, have negatively impacted the volume of loans we have booked and accelerated the level of loan payoffs. Despite these competitive pressures, we remain committed to our traditionally high standards of underwriting and believe the long term benefits of this posture outweigh the likely short term negative impact to our net interest income and net income.

The continued significant concentration of the loan and lease portfolio in commercial loans and leases and the typical 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 employees. Our commercial lending business generates the largest portion of local deposits, and is our primary source of demand deposits.

MERCANTILE BANK CORPORATION

Residential mortgage loans and consumer loans decreased an aggregate $9.7 million during the first nine months of 2007. As of September 30, 2007, residential mortgage and consumer loans totaled a combined $130.4 million, or 7.3% of the total loan and lease portfolio. Although we plan to increase our non-commercial loan portfolios in future periods, we expect the commercial sector of our lending efforts and resultant assets to remain the dominant loan portfolio category given our wholesale banking strategy.

Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans and leases to provide effective loan portfolio administration. The credit policies and procedures are meant to limit the risk and uncertainties inherent in lending. In following these policies and procedures, we must rely on estimates, appraisals and evaluations of loans and leases and the possibility that changes in these could occur quickly because of changing economic conditions. Identified problem loans and leases, which exhibit characteristics (financial or otherwise) that could cause the loans and leases to become nonperforming or require restructuring in the future, are included on the internal “watch list”. Senior management reviews this list regularly.

Net loan and lease charge-offs during the first nine months of 2007 totaled $2.7 million, or 0.21% of average total loans and leases on an annualized basis. During the first nine months of 2006, net loan and lease charge-offs also totaled $2.7 million, or 0.22% of average total loans and leases on an annualized basis. Nonperforming assets, including $2.8 million of foreclosed real estate and repossessed assets, totaled $25.9 million, or 1.23% of total assets, as of September 30, 2007. At December 31, 2006, nonperforming assets totaled $9.6 million, including $1.0 million of foreclosed real estate and repossessed assets, or 0.46% of total assets. The majority of the increase in nonperforming assets can be attributed to four commercial loan relationships totaling $12.0 million that were placed into non-accrual status during the second and third quarters of 2007. Over 80 percent of nonperforming loans are real estate-related, and the majority is associated with residential real estate development. The decline in real estate prices and slowdown in sales has stretched the cash flow of our local developers and eroded the value of our underlying collateral.

We continuously strive to improve our loan and lease underwriting and administration processes. We believe we have instilled a strong credit culture within our lending departments, which in part is reflected in our historically 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 areas. The remaining portion is comprised of commercial loans participated with certain unaffiliated commercial banks outside of our market areas, which are underwitten using the same loan underwriting criteria as though we were the originating bank.

Securities increased $5.2 million during the first nine months of 2007, totaling $207.6 million as of September 30, 2007. Purchases during the first nine months of 2007 totaled $14.2 million, while proceeds from the maturities, calls and repayments of securities totaled $9.0 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.

MERCANTILE BANK CORPORATION

Cash and cash equivalents decreased $22.1 million during the first nine months of 2007, totaling $29.3 million on September 30, 2007. Cash and due from bank balances were down $22.3 million, while short-term investments increased $0.2 million. Although our cash balances were relatively unchanged, there were two primary factors resulting in a relatively large decline in our due from bank balances: in early July, we initiated an image exchange program for our outgoing cash letter with our primary correspondent bank that resulted in faster collection, and in mid-September we instituted a deposit reclassification program, which impacts our reserve requirement calculation, that virtually eliminated our need to maintain balances with the Federal Reserve Bank of Chicago. The initiation of these two programs during the third quarter provided for a combined reduction in due from bank balances of approximately $13.0 million. The remainder of the decline in due from bank balances primarily results from the typical relatively large day-to-day fluctuations of our outgoing cash letter reflecting our commercial lending and wholesale funding focus. We did not have federal funds sold on either September 30, 2007 or December 31, 2006; however, our average federal funds sold position during the first nine months of 2007 equaled $8.8 million.

Premises and equipment at September 30, 2007 equaled $34.5 million, a net increase of $1.0 million over the past nine months. Purchases of premises and equipment during the first nine months of 2007 totaled $3.0 million, primarily reflecting a portion of the construction costs associated with our new banking facility located in East Lansing, Michigan, which opened in May 2007. Depreciation expense during the first nine months of 2007 equaled $2.0 million.

Deposits decreased $5.9 million during the first nine months of 2007, totaling $1,641.0 million at September 30, 2007. Local deposits increased $15.5 million, while out-of-area deposits decreased $21.4 million. As a percent of total deposits, local deposits equaled 39.5% on September 30, 2007, an increase over the 38.4% as of December 31, 2006. Noninterest-bearing demand deposits, comprising 7.4% of total deposits, decreased $11.9 million during the first nine months of 2007. Savings deposits (4.8% of total deposits) decreased $13.7 million, interest-bearing checking deposits (2.6% of total deposits) increased $2.2 million and money market deposit accounts (0.7% of total deposits) increased $2.5 million during the first nine months of 2007. Local certificates of deposit, comprising 24.0% of total deposits, increased by $36.4 million during the first nine months of 2007. The increase in local certificates of deposit is primarily attributable to increases in balances from municipalities and transfers of monies by consumer and commercial customers from savings accounts to certificates of deposit products, the latter of which primarily reflecting that rates offered on certificates of deposit products are higher than the rates offered on savings accounts.

Out-of-area deposits decreased $21.4 million during the first nine months of 2007, totaling $992.4 million as of September 30, 2007. Out-of-area deposits consist primarily of certificates of deposit obtained from depositors located outside our market areas and placed by deposit brokers for a fee, but also include certificates of deposit obtained from the deposit owners directly. The owners of out-of-area deposits include individuals, businesses and municipal governmental units located throughout the United States.

Securities sold under agreements to repurchase (“repurchase agreements”) increased $3.2 million during the first nine months of 2007, totaling $88.7 million as of September 30, 2007. 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.

MERCANTILE BANK CORPORATION

Federal funds purchased declined by $6.5 million during the first nine months of 2007, equaling $3.3 million as of September 30, 2007. Advances obtained from the FHLBI totaled $135.0 million as of September 30, 2007, an increase of $40.0 million from the $95.0 million outstanding on December 31, 2006. 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, 2007 totaled $326.4 million, with availability approximating $180.0 million.

Liquidity

Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and investment securities. These funds are used to meet deposit withdrawals, fund loans and operate our company. Liquidity is primarily achieved through the growth of local and out-of-area deposits, advances from the FHLBI and federal funds purchased, 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 areas has generally consistently increased, this growth has not been sufficient to meet our historical 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, primarily comprised of certificates of deposit from customers outside of our market areas and advances from the FHLBI, totaled $1,127.4 million, or 60.5% of combined deposits and borrowed funds as of September 30, 2007. As of December 31, 2006, wholesale funds totaled $1,108.8 million, or 60.7% of combined deposits and borrowed funds.

Although local deposits have and are expected to increase as new business, governmental and individual deposit relationships are established and as existing customers increase balances in their accounts, the relatively high reliance on wholesale funds will likely remain. As part of our interest rate risk management strategy, a majority of our wholesale funds are comprised of fixed rate certificates of deposit and FHLBI advances that mature within one year, reflecting the fact that a majority of our loans and leases have a floating rate tied to either the Prime Rate or Libor. While this maturity strategy increases inherent liquidity risk, we believe the increased liquidity risk is sufficiently mitigated by the benefits derived from an interest rate risk management standpoint. In addition, we have developed a comprehensive contingency funding plan which we believe further mitigates the increased liquidity risk.

Wholesale funds are generally a lower all-in cost source of funds when compared to the interest rates that would have to be offered in our local markets to generate a commensurate level of funds. As has historically been the case, interest rates paid on new out-of-area deposits and FHLBI advances throughout 2007 were very similar to interest rates paid on new certificates of deposit issued to local customers. In addition, the overhead costs associated with wholesale funds are considerably less than the overhead costs that would be incurred to administer a similar level of local deposits, especially if the estimated costs of a required expanded branching network were taken into account. We believe the relatively low overhead costs reflecting our limited branch network mitigate our high reliance on wholesale funds and resulting relatively low net interest margin.

MERCANTILE BANK CORPORATION

As a member of the FHLBI, our bank has access to the FHLBI’s borrowing programs. FHLBI advances totaled $135.0 million as of September 30, 2007, compared to $95.0 as of December 31, 2006. Based on available collateral as of September 30, 2007, we could borrow an additional $180.0 million. Our bank has the ability to borrow money on a daily basis through correspondent banks via established unsecured federal funds purchased lines, totaling $72.0 million as of September 30, 2007. The average balance of federal funds purchased during the first nine months of 2007 equaled $3.8 million.

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, 2007, our bank had a total of $486.5 million in unfunded loan commitments and $87.9 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $412.6 million were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $73.9 million were for loan commitments expected to close and become funded within the next twelve months. We monitor fluctuations in loan balances and commitment levels and include such data in managing our overall liquidity.

We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events, changes in economic or market conditions, earnings problems, declining capital levels or situations beyond our control could cause either short or long term liquidity challenges. While we believe it is unlikely that a funding crisis of any significant degree is likely to materialize, we have developed a comprehensive contingency funding plan that provides a framework for meeting both temporary and longer-term liquidity disruptions. Depending upon the particular circumstances of a liquidity situation, possible strategies may include obtaining funds via one or a combination of the following sources of funds: established lines of credit at correspondent banks and the FHLBI, brokered certificate of deposit market, wholesale securities repurchase markets, issuance of term debt, sale of assets, or sale of common stock or other securities.

Capital Resources

Shareholders’ equity is a noninterest-bearing source of funds that provides support for asset growth. Shareholders’ equity increased by $5.8 million during the first nine months of 2007, from $171.9 million on December 31, 2006, to $177.7 million at September 30, 2007. The increase is primarily attributable to net income of $8.9 million recorded during the first nine months of 2007. 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. Shareholders’ equity was negatively impacted during the first nine months of 2007 by the payment of cash dividends totaling $3.5 million.

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, 2007 and December 31, 2006 are disclosed under Note 9 of the Notes to Consolidated Financial Statements.

Our and our bank’s ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. We declared a 5% stock dividend on April 10, 2007, that was distributed on May 4, 2007 to record holders as of April 23, 2007. All earnings per share and cash dividend per share information have been adjusted for the 5% stock dividend. We paid a stock dividend-adjusted $0.13 per share cash dividend on March 9, 2007, and a $0.14 per share cash dividend on June 8, 2007 and September 10, 2007. On October 9, 2007, we declared a $0.14 per share cash dividend payable on December 10, 2007 to record holders as of November 9, 2007.

MERCANTILE BANK CORPORATION

Results of Operations

Net income for the third quarter of 2007 was $2.4 million ($0.28 per basic and diluted share), which represents a 54.5% decrease from net income of $5.2 million ($0.62 per basic share and $0.61 per diluted share) recorded during the third quarter of 2006. Net income for the first nine months of 2007 was $8.9 million ($1.05 per basic and diluted share), which represents a 41.8% decrease from net income of $15.2 million ($1.82 per basic share and $1.79 per diluted share) recorded during the first nine months of 2006. The decline in net income during both time periods is primarily the result of lower net interest income and a higher provision for loan and lease losses. In addition, net income for the first nine months of 2007 includes a one-time $1.2 million ($0.8 million after-tax) expense associated with the financial retirement package for former Chairman and Chief Executive Officer Gerald R. Johnson Jr. which was recorded during the second quarter of 2007 in conjunction with Mr. Johnson’s retirement effective June 30, 2007. Excluding this one-time expense, net income for the first nine months of 2007 was $9.7 million ($1.14 per basic and diluted share).

Interest income during the third quarter of 2007 was $36.8 million, an increase of 3.1% over the $35.7 million earned during the third quarter of 2006. Interest income during the first nine months of 2007 was $108.9 million, an increase of 8.3% over the $100.5 million earned during the first nine months of 2006. The growth in interest income during both time periods is primarily attributable to growth in earning assets. During the third quarter of 2007, earning assets averaged $1,992.1 million, $110.2 million higher than average earning assets of $1,881.9 million during the third quarter of 2006. Average loans were up $88.5 million and average securities increased $14.3 million. During the first nine months of 2007, earning assets averaged $1,970.4 million, $135.9 million higher than average earning assets of $1,834.5 million during the same time period in 2006. Average loans were up $119.9 million and average securities increased $16.8 million. Negatively impacting the growth in interest income was a decreasing yield on earning assets. During the third quarter of 2007 and 2006, earning assets had a weighted average yield (tax equivalent-adjusted basis) of 7.38% and 7.58%, respectively. During the first nine months of 2007 and 2006, earning assets had a weighted average yield of 7.45% and 7.39%, respectively. The recent decline in our yield on earning assets is directly attributable to a decline in the yield of our commercial loan portfolio, primarily reflecting an increase in nonaccrual commercial loans and corresponding reduction in interest income, and a very competitive lending environment. These factors resulted in relatively low interest rates on many new commercial loans relationships and the reduction of interest rates on certain existing commercial loan relationships during the past 12 to 18 months.

Interest expense during the third quarter of 2007 was $22.7 million, an increase of 12.9% over the $20.1 million expensed during the third quarter of 2006. Interest expense during the first nine months of 2007 was $66.4 million, an increase of 22.5% over the $54.2 million expensed during the first nine months of 2006. The growth in interest expense is primarily attributable to the increase in interest-bearing liabilities necessitated by asset growth and a higher cost of funds. During the third quarter of 2007, interest-bearing liabilities averaged $1,780.9 million, $97.0 million higher than average interest-bearing liabilities of $1,683.9 million during the third quarter of 2006. Interest-bearing deposits were up $63.9 million, repurchase agreements increased $21.0 million and FHLBI advances were up $11.8 million. During the first nine months of 2007, interest-bearing liabilities averaged $1,763.2 million, $123.9 million higher than average interest-bearing liabilities of $1,639.3 million during the same time period in 2006. Interest-bearing deposits were up $123.5 million and repurchase agreements increased $15.2 million, while FHLBI advances declined $15.5 million. During the third quarter of 2007 and 2006, interest-bearing liabilities had a weighted average rate of 5.06% and 4.74%, respectively. During the first nine months of 2007 and 2006, interest-bearing liabilities had a weighted average rate of 5.04% and 4.42%, respectively. The higher weighted average cost of interest-bearing liabilities primarily results from maturing fixed rate certificates of deposit and FHLBI advances that were originated in lower interest rate environments that have been renewed or replaced with similar products in the current higher interest rate environment.

MERCANTILE BANK CORPORATION

Net interest income during the third quarter of 2007 was $14.1 million, a decline of 9.6% from the $15.5 million earned during the third quarter of 2006. Net interest income during the first nine months of 2007 was $42.5 million, a decline of 8.2% from the $46.3 million earned during the same time period in 2006. The decrease in net interest income is primarily due to a decline in the net interest margin resulting from a declining yield on assets and a higher average rate on interest-bearing liabilities, which more than offset the positive impact from growth in earning assets. The net interest margin during the third quarter of 2007 was 2.86%, compared to the 3.34% during the third quarter of 2006. During the first nine months of 2007, the net interest margin was 2.94%, compared to 3.44% during the same time period in 2006.

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 2007 and 2006. 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 $300,000 and $296,000 in the third quarter of 2007 and 2006, respectively, for this adjustment.

MERCANTILE BANK CORPORATION

		Quarters ended September 30,
		2007												2006
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
		(dollars in thousands)
ASSETS
Loans and leases		$	1,773,151			$	34,077				7.62	%		$	1,684,700			$	33,261				7.83	%
Securities			205,426				2,830				5.51				191,160				2,631				5.51
Federal funds sold			12,845				168				5.13				5,750				76				5.17
Short-term investments			653				5				4.50				262				3				5.15
Total interest-earning assets			1,992,075				37,080				7.38				1,881,872				35,971				7.58
Allowance for loan and lease losses			(23,508	)											(21,697	)
Other assets			128,030												124,024
Total assets		$	2,096,597											$	1,984,199
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits		$	1,516,905			$	19,357				5.06	%		$	1,453,005			$	17,268				4.72	%
Short-term borrowings			92,323				900				3.87				71,652				707				3.91
FHLB advances			135,000				1,759				5.10				123,206				1,452				4.61
Long-term borrowings			36,694				713				7.60				36,004				701				7.62
Total interest-bearing liabilities			1,780,922				22,729				5.06				1,683,867				20,128				4.74
Noninterest-bearing deposits			115,248												116,609
Other liabilities			23,946												19,163
Shareholders’ equity			176,481												164,560
Total liabilities and shareholders’ equity		$	2,096,597											$	1,984,199
Net interest income						$	14,351											$	15,843
Net interest rate spread											2.32	%											2.84	%
Net interest rate margin on average assets											2.72	%											3.17	%
Net interest margin on earning assets											2.86	%											3.34	%