<PAGE> 1
RULE 424(b)(4)
REGISTRATION STATEMENT NO. 333-84313
REGISTRATION STATEMENT NO. 333-84313-01
PROSPECTUS
1,400,000 PREFERRED SECURITIES
MBWM CAPITAL TRUST I
9.60% CUMULATIVE PREFERRED SECURITIES
MERCANTILE LOGO (LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED
ON A SUBORDINATED BASIS AS DESCRIBED IN THIS PROSPECTUS BY
MERCANTILE BANK CORPORATION
-------------------------
The preferred securities of MBWM Capital Trust I being offered generally
consist of an indirect beneficial interest in 9.60% junior subordinated
debentures of Mercantile Bank Corporation. The junior subordinated debentures
have the same payment terms as the preferred securities and will be purchased
and held by MBWM Trust using the proceeds of this offering. A brief description
of the preferred securities can be found under "Prospectus Summary -- The
Offering" in this prospectus.
The preferred securities have been approved for trading on the Nasdaq
National Market under the trading symbol "MBWMP".
-------------------------
YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 9 BEFORE INVESTING
IN THE PREFERRED SECURITIES.
-------------------------
THE PREFERRED SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS, OR OTHER
OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
PER PREFERRED
SECURITY TOTAL
---------------------- ----------------------
<S> <C> <C>
Price to Public............................................ $10.00 $14,000,000
Proceeds to MBWM Trust..................................... $10.00 $14,000,000
</TABLE>
This is a firm commitment underwriting. Mercantile will pay underwriting
commissions of $0.40 per preferred security, or a total of $560,000, for the
arranging of the investment in its junior subordinated debentures. The
underwriters have been granted a 30-day option to purchase up to an additional
200,000 preferred securities to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
STIFEL, NICOLAUS & COMPANY TUCKER ANTHONY CLEARY GULL
INCORPORATED
September 13, 1999
<PAGE> 2
[KENT COUNTY MICHIGAN MAP]
-------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information included in this prospectus includes forward-looking
statements, which can be identified by the use of forward-looking terminology
such as may, will, expect, anticipate, believe, estimate, or continue, or the
negative thereof or other variations thereon or comparable terminology.
Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. These forward-looking statements are intended to be covered by the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ materially include the risks
and uncertainties discussed in the "Risk Factors" section as well as continued
success of Mercantile's business strategy, general economic conditions, economic
conditions in the Grand Rapids area particularly and western Michigan generally,
the monetary policy of the Federal Reserve, changes in interest rates,
inflation, and changes in the state and federal regulatory regime applicable to
Mercantile and the Bank's operations.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
and may not contain all the information that may be important to you. You should
read the entire prospectus, including the financial statements and related
notes, before making a decision to invest in the preferred securities. Unless
indicated otherwise, all information in this prospectus assumes no exercise of
the underwriters' over-allotment option.
As used in this prospectus, the term "Mercantile" refers to Mercantile Bank
Corporation, a business corporation organized under Michigan law. The term "MBWM
Trust" refers to MBWM Capital Trust I, a Delaware business trust organized to
purchase Mercantile's junior subordinated debentures and issue the preferred
securities. The term "Bank" refers to Mercantile Bank of West Michigan, a bank
organized under the laws of Michigan that is a wholly owned subsidiary of
Mercantile. Unless the context otherwise requires, references in this prospectus
to Mercantile include Mercantile and the Bank, but not MBWM Trust.
MERCANTILE BANK CORPORATION
Mercantile is a single bank holding company headquartered in Grand Rapids,
Michigan. Mercantile owns the Bank and conducts business primarily in the Kent
and Ottawa counties of western Michigan.
Mercantile has a strong commitment to community banking and offers a wide
range of financial products and services, primarily for small- to medium-sized
businesses. Mercantile's lending strategy emphasizes commercial lending. The
Bank also provides services and makes residential and consumer loans to
individuals. Mercantile offers a broad array of deposit products, including
checking, savings, and money market accounts, business checking, direct deposits
and certificates of deposit.
Mercantile has grown significantly since the Bank opened in December 1997.
Mercantile first posted a profit in the third quarter of 1998, nine months after
the Bank opened. At June 30, 1999, Mercantile had total assets of $291.9
million, total loans of $246.7 million, total deposits of $245.8 million, and
shareholders' equity of $27.1 million. At that date Mercantile had no
non-performing assets and a ratio of allowance for loan losses to total loans of
1.50%. For the six months ended June 30, 1999, Mercantile recorded net income of
$855,000, or $0.35 per share.
While Mercantile has grown rapidly, management has placed an emphasis on
building a quality loan portfolio focusing on prudent lending and adequate
reserves. The allowance for loan losses is maintained at a level management
feels is adequate to absorb losses inherent in the loan portfolio, an evaluation
that is primarily based upon a review of Mercantile's and the banking industry's
historical loan experience, known and inherent risks contained in the loan
portfolio, composition and growth of the loan portfolio, and current and
projected economic factors. Mercantile has been successful in attracting local
deposits and has developed strategies to acquire wholesale deposits to provide
funding for the high level of loan demand Mercantile has experienced. Mercantile
has maintained a strong capital position by raising $30.3 million, in aggregate,
through its initial public offering in October 1997 and a second public offering
completed in July 1998. At June 30, 1999, Mercantile exceeded all applicable
minimum regulatory capital requirements.
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MARKET AREA
Mercantile's market area is the Kent and Ottawa counties of western
Michigan, which includes the City of Grand Rapids, the second largest city in
the State of Michigan. Kent County has a diverse economy based primarily on
manufacturing, retail and service businesses. According to available statistical
data, Kent County has approximately 547,000 people, 198,000 households and a
median household income that is estimated to have grown approximately 51% from
1990 to 1998. Kent County is a significant banking market in the State of
Michigan. According to available industry data, as of June 30, 1998, total
deposits in Kent County, including those of banks, thrifts and credit unions,
were approximately $7.9 billion.
BUSINESS STRATEGY
Mercantile's business strategy focuses on:
- recruiting and retaining highly-qualified people;
- commercial lending in western Michigan;
- using a combination of local deposits and wholesale funding to meet loan
growth;
- taking advantage of industry consolidation;
- community banking;
- using alternative delivery channels; and
- evaluating acquisition opportunities.
Mercantile's and MBWM Trust's principal executive offices are located at
216 North Division Avenue, Grand Rapids, Michigan. Their telephone number is
(616) 242-9000.
MBWM Trust is a business trust created in 1999 for the single purpose of
offering the preferred securities and purchasing the junior subordinated
debentures of Mercantile. MBWM Trust will have a term of 30 years, but may
dissolve earlier as provided in its trust agreement.
2
<PAGE> 5
THE OFFERING
Preferred Securities issuer..... MBWM Trust
Securities offered.............. MBWM Trust is offering 1,400,000 of its
preferred securities, which represent an
indirect beneficial interest in junior
subordinated debentures issued by Mercantile
and held by MBWM Trust.
MBWM Trust will sell its preferred
securities to the public and its common
securities to Mercantile. Together, the
preferred securities and the common
securities are referred to as the trust
securities. MBWM Trust will use the proceeds
from the sale of the trust securities to buy
a series of 9.60% junior subordinated
debentures due September 16, 2029, from
Mercantile with the same payment terms as
the preferred securities.
Quarterly distributions are
payable to you on the Preferred
Securities.................... The distributions payable on each preferred
security will:
- be fixed and accumulate at a rate per year
of 9.60%;
- accrue from the date of issuance of the
preferred securities; and
- be payable quarterly on the 15th day of
October, January, April and July of each
year that the preferred securities are
outstanding, beginning on October 15,
1999, subject to the right to defer
distributions on the preferred securities.
Mercantile and MBWM Trust have
rights to defer distributions
to you on the Preferred
Securities.................... MBWM Trust will defer distributions on the
preferred securities if Mercantile defers
interest payments on the junior subordinated
debentures. Mercantile generally has the
right to defer interest payments on the
junior subordinated debentures for up to 20
consecutive quarters. During any deferral
period, you will still accumulate the right
to receive distributions when subsequently
made at the annual rate of 9.60%, plus you
will earn interest at the annual rate of
9.60%, compounded quarterly, on any unpaid
distributions.
You will still be taxed even if
distributions on the Preferred
Securities are deferred....... If distributions on the preferred securities
are deferred, you will also be required to
accrue interest income and include it in
your gross income
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<PAGE> 6
for United States federal income tax
purposes for as long as the junior
subordinated debentures remain outstanding,
even if you are a cash basis taxpayer. For
further information on deferrals and their
tax consequences, see "Risk
Factors -- Distributions on the preferred
securities may be deferred; you may have to
include interest in your taxable income
before you receive cash," "Description of
Junior Subordinated Debentures -- Option to
Extend Interest Payment Period" and
"Material Federal Income Tax
Consequences -- Interest Income and Original
Issue Discount."
You will be required to sell
your Preferred Securities to
MBWM Trust when the Junior
Subordinated Debentures
mature........................ The junior subordinated debentures will
mature on September 16, 2029. You will be
required to sell your preferred securities
to MBWM Trust upon the stated maturity date
of the junior subordinated debentures or
earlier if they are prepaid.
If the Junior Subordinated
Debentures are prepaid your
Preferred Securities will be
redeemed...................... Upon Mercantile having received prior
approval of the Board of Governors of the
Federal Reserve System, if required,
Mercantile may prepay the junior
subordinated debentures prior to maturity:
- on or after September 17, 2004; or
- at any time upon events occurring which
may have a significant adverse effect on
the benefits to Mercantile of having the
preferred securities outstanding.
Upon any prepayment of the junior
subordinated debentures, your preferred
securities will be redeemed at the
liquidation amount of $10 per preferred
security plus any accrued and unpaid
distributions to the date of redemption. For
further information on redemptions, see
"Description of the Preferred
Securities -- Redemption -- Mandatory and
Optional Rights of Mercantile" and
"Description of Junior Subordinated
Debentures -- Redemption."
At its option, Mercantile may
require you to exchange your
Preferred Securities for its
Junior Subordinated
Debentures.................... Mercantile has the right at any time to
dissolve or liquidate MBWM Trust and
distribute the junior subordinated
debentures to you in exchange for
4
<PAGE> 7
your preferred securities. However,
Mercantile must receive prior approval of
the Federal Reserve and first pay the
creditors, if any, of MBWM Trust. Upon a
dissolution or liquidation of MBWM Trust,
you will receive junior subordinated
debentures in exchange for the same
principal amount of your holdings in
preferred securities. For further
information concerning distribution of the
junior subordinated debentures, see
"Description of the Preferred
Securities -- Distribution of Junior
Subordinated Debentures." If the junior
subordinated debentures are distributed,
Mercantile will use reasonable efforts to
list them on a national securities exchange
or quotation system.
Your Preferred Securities are
fully and unconditionally
guaranteed by Mercantile on a
subordinated basis............ Mercantile will fully, irrevocably and
unconditionally guarantee the preferred
securities on a subordinated basis. If
Mercantile does not make a payment on the
junior subordinated debentures, MBWM Trust
will not have sufficient funds to make
payments on the preferred securities. The
preferred securities guarantee does not
cover payments when MBWM Trust does not have
sufficient funds. For further information
concerning the preferred securities
guarantee of Mercantile, see "Description of
Preferred Securities Guarantee."
Your Preferred Securities rank
lower in payment compared to
other obligations of
Mercantile.................... Mercantile's obligations under its preferred
securities guarantee, the junior
subordinated debentures and other governing
documents described in this prospectus are
unsecured and rank junior in right of
payment to all current and future senior and
subordinated debt of Mercantile. In
addition, because Mercantile is a bank
holding company, all existing and future
liabilities of any Mercantile subsidiary
will rank prior to all obligations of
Mercantile relating to the preferred
securities and the junior subordinated
debentures. There is no limit on the amount
of other preferred securities or other
junior subordinated debentures of Mercantile
that may be issued in the future. Future
issuances of this type will rank equally
with Mercantile's obligations under the
junior subordinated debentures and its
preferred securities guarantee described in
this prospectus. The preferred
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<PAGE> 8
securities will generally rank equally and
payments on them will be made
proportionately, with the common securities
of MBWM Trust, which will be held by
Mercantile.
You will have limited voting
rights.......................... As a holder of preferred securities, you
have only limited voting rights. These
rights relate only to the dissolution or
termination of MBWM Trust and removal of the
property trustee and the indenture trustee
of MBWM Trust upon selected events described
in this prospectus. See "Description of the
Preferred Securities -- Voting Rights;
Amendment of the Trust Agreement."
The Preferred Securities will be
in book entry form only......... You will not receive a certificate for your
preferred securities. Instead, the preferred
securities will be represented by a global
security that will be deposited with and
registered in the name of The Depository
Trust Company or its nominee.
Nasdaq National Market
Listing......................... The preferred securities have been approved
for trading on the Nasdaq National Market
under the trading symbol "MBWMP".
Use of proceeds of sale of the
Preferred Securities.......... The proceeds of the sale of the preferred
securities will be invested by MBWM Trust in
the junior subordinated debentures.
Substantially all of the proceeds from the
issuance of the junior subordinated
debentures will be contributed by Mercantile
to the capital of the Bank.
Mercantile expects approximately $9.3
million of the proceeds of the preferred
securities to qualify as Tier 1 (or core)
capital of Mercantile under the capital
adequacy guidelines of the Federal Reserve.
The remaining $4.7 million of such proceeds
will be included in Mercantile's total
qualifying capital for purposes of the
capital adequacy guidelines. See "Use of
Proceeds" and "Capitalization." See also
"Supervision and Regulation -- Mercantile --
Capital Requirements" for a definition of
Tier 1 (or core) capital.
6
<PAGE> 9
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial and other
data of Mercantile. The selected income statement data for the year ended
December 31, 1998 and the period ended December 31, 1997 has been derived from
the audited consolidated statements of income and notes thereto which are
included elsewhere in this prospectus. The selected balance sheet data as of
December 31, 1998 has been derived from the audited consolidated financial
statements and notes thereto which are included elsewhere in this prospectus.
The consolidated statement of income data for the six months ended June 30, 1999
and 1998, and the consolidated balance sheet data as of June 30, 1999 and 1998,
have been derived from unaudited consolidated financial statements, which, in
the opinion of Mercantile, reflect all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations of Mercantile for those periods. The consolidated
statements of income data for interim periods are not necessarily indicative of
results for subsequent periods or the full year. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with Mercantile's
consolidated financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS PERIOD ENDED
ENDED JUNE 30, DECEMBER 31,
-------------------------- ------------------------
1999 1998 1998 1997
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................................ $ 9,744 $ 3,384 $ 10,168 $ 154
Interest expense............................... 5,549 1,879 5,629 14
---------- ---------- ---------- ----------
Net interest income............................ 4,195 1,505 4,539 140
Provision for loan losses...................... 936 1,472 2,572 193
---------- ---------- ---------- ----------
Net interest income (loss) after provision for
loan losses................................. 3,259 33 1,967 (53)
Noninterest income............................. 416 87 488 --
Noninterest expense............................ 2,644 1,556 3,564 351
---------- ---------- ---------- ----------
Income (loss) before income taxes.............. 1,031 (1,436) (1,109) (404)
Provision for income taxes..................... 134 -- -- --
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting principle.............. 897 (1,436) (1,109) (404)
Cumulative effect of change in accounting
principle (net of income taxes)............. 42 -- -- --
---------- ---------- ---------- ----------
Net income..................................... $ 855 $ (1,436) $ (1,109) $ (404)
========== ========== ========== ==========
PER SHARE DATA(1):
Earnings (loss) per common share:
Basic and diluted before cumulative effect
of change in accounting principle......... $ 0.36 $ (0.96) $ (0.58) $ (0.27)
Basic and diluted........................... 0.35 (0.96) (0.58) (0.27)
Average common shares and common share
equivalents outstanding..................... 2,472,500 1,495,000 1,907,658 1,495,000
Diluted book value (period end)................ $ 10.94 $ 8.05 $ 10.80 $ 9.01
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS PERIOD ENDED
ENDED JUNE 30, DECEMBER 31,
-------------------------- ------------------------
1999 1998 1998 1997
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Investment Securities.......................... $ 29,605 $ 14,495 $ 24,160 $ 2,998
Loans.......................................... 246,725 113,406 184,745 12,887
Total assets................................... 291,935 139,593 216,237 24,109
Total deposits................................. 245,811 116,691 171,998 9,688
Repurchase agreements.......................... 17,866 10,555 17,038 655
Total shareholders' equity..................... 27,060 12,038 26,701 13,473
Average assets (unaudited for all periods)..... 258,178 86,984 129,399 NM
SELECTED RATIOS:
Return on average total assets................. 0.66% (3.30)% (0.86)% NM
Return on average total shareholders' equity... 6.34 (22.91) (6.40) NM
Net interest margin............................ 3.41 3.37 3.62 NM
Efficiency ratio(2)............................ 57.34 97.74 70.90 NM
Average assets per employee (in millions)...... $ 6.21 $ 4.65 $ 6.18 $ 1.42
ASSETS QUALITY RATIOS:
Allowance for possible loan losses to loans.... 1.50% 1.50% 1.50% 1.50%
Nonperforming loans to loans(3)................ 0 0 0 0
Allowance for possible loan losses to
nonperforming loans(3)...................... NA NA NA NA
Nonperforming assets to loans and foreclosed
assets(4)................................... 0 0 0 0
Net loan charge-offs to average loans.......... 0 0 0 0
CAPITAL RATIOS
Average shareholders' equity to average
assets...................................... 9.52% 14.41% 13.83% 69.72%
Total risk-based capital ratio................. 10.77 11.22 11.79 77.04
Leverage ratio................................. 10.03 10.63 13.01 78.12
RATIO OF EARNINGS (LOSS) TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS(5)
Including interest on deposits................. 1.18 0.25 0.81 NM
Excluding interest on deposits................. 3.71 (8.03) (0.73) NM
</TABLE>
- -------------------------
(1) No dividends have been paid or declared since inception of Mercantile.
(2) The efficiency ratio = noninterest expense / (net interest income +
noninterest income).
(3) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and loans with restructured terms. There have been no
nonperforming loans since inception of Mercantile.
(4) Nonperforming assets consist of nonperforming loans and foreclosed assets.
There have been no nonperforming assets since inception of Mercantile.
(5) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings consist of income before taxes plus
interest and rent expense. Fixed charges consist of interest and rent
expense.
NA Not applicable
NM Not meaningful
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RISK FACTORS
You should carefully read and consider the following risks and
uncertainties together with the other information provided in this prospectus
before purchasing any preferred securities.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
IF MERCANTILE DOES NOT MAKE PAYMENTS UNDER THE JUNIOR SUBORDINATED
DEBENTURES, MBWM TRUST WILL BE UNABLE TO PAY DISTRIBUTIONS AND LIQUIDATION
AMOUNTS AND THE PREFERRED SECURITIES GUARANTEE WILL NOT APPLY.
The ability of MBWM Trust to pay distributions and the liquidation amount
of $10 per preferred security when due is solely dependent upon the ability of
Mercantile to make the related payments on the junior subordinated debentures
when due. If Mercantile defaults on its obligation to pay principal or interest
on the junior subordinated debentures, MBWM Trust will not have sufficient funds
to pay distributions or the liquidation amount. In that case, you will not be
able to rely upon the preferred securities guarantee for payment of these
amounts because the preferred securities guarantee only applies if Mercantile
makes a payment of principal or interest on the junior subordinated debentures.
For more information on Mercantile's obligations under the preferred securities
guarantee and the junior subordinated debentures, see "Description of Preferred
Securities Guarantee -- Status of Preferred Securities Guarantee" and
"Description of Junior Subordinated Debentures -- Subordination of Junior
Subordinated Debentures to Senior and Subordinated Debt of Mercantile."
INTEREST AND PRINCIPAL PAYMENTS BY MERCANTILE ON THE JUNIOR SUBORDINATED
DEBENTURES ARE DEPENDENT ON THE RECEIPT OF DIVIDENDS FROM THE BANK.
Substantially all of Mercantile's assets consist of its investments in the
Bank. Thus, Mercantile's ability to pay interest and principal on the junior
subordinated debentures to MBWM Trust depends primarily upon the cash dividends
Mercantile receives from the Bank. Dividend payments from the Bank to Mercantile
are subject to, among other things:
- regulatory limitations, generally based on current and retained earnings,
and capital maintenance requirements which are higher during the first
three years of operations, imposed by various bank regulatory agencies;
- profitability, tax burden, financial condition and capital expenditures
and other cash flow requirements of the Bank; and
- prior claims of creditors of the Bank.
The Bank has not previously declared or paid dividends. The Bank is
currently subject to restrictions applicable to it as a recently formed bank
during the first three years of operations, and will continue to be subject to
regulatory restrictions that limit the amount of dividends a bank can pay. If
the Bank is unable to pay sufficient dividends to Mercantile, Mercantile will
likely be unable to make payments on the junior subordinated debentures, thereby
leaving insufficient funds for MBWM Trust to make payments to you on the
preferred securities. See "Risk Factors Relating to Mercantile -- The Bank is
subject to regulatory restrictions on the dividends it can declare and pay."
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<PAGE> 12
DISTRIBUTIONS ON THE PREFERRED SECURITIES MAY BE DEFERRED; YOU MAY HAVE TO
INCLUDE INTEREST IN YOUR TAXABLE INCOME BEFORE YOU RECEIVE CASH.
It is possible that you will not receive cash distributions on your
preferred securities for one or more periods of up to five years. Because you
will still be required to include interest in your income for United States
federal income tax purposes as it accrues, you may have to pay taxes before you
actually receive the cash distributions.
Mercantile has the right, at one or more times, to defer interest payments
on the junior subordinated debentures for up to 20 consecutive quarters, but not
beyond the maturity date of the junior subordinated debentures. This right
exists only if no event of default under the junior subordinated debentures has
occurred and is continuing. If Mercantile exercises this right, MBWM Trust would
defer distributions on the preferred securities during any deferral period.
However, you would still accumulate the right to receive distributions when
subsequently made at the annual rate of 9.60% of the liquidation amount of $10
per preferred security, plus you will earn interest at the annual rate of 9.60%,
compounded quarterly, on those unpaid distributions. During a deferral period,
the preferred securities may trade at a price that does not fully reflect the
value of accrued but unpaid distributions.
During a deferral period and for as long thereafter as the junior
subordinated debentures remain outstanding, you will be required to accrue
interest income, as original issue discount, for United States federal income
tax purposes in respect of your pro rata share of the junior subordinated
debentures held by MBWM Trust. As a result, you would include the accrued
interest in your gross income for United States federal income tax purposes
prior to your receiving cash. You will also not receive the cash distributions
related to any accrued and unpaid interest from MBWM Trust if you sell the
preferred securities before the end of any deferral period. While Mercantile
will take the position that original issue discount will not arise before any
first deferral period, it is possible that all interest on the junior
subordinated debentures would be required to be accounted for as original issue
discount. In these circumstances, stated interest payments on interest
previously accrued would not separately be reported as taxable income.
Mercantile has no current intention of exercising its right to defer
interest payments on the junior subordinated debentures. However, if Mercantile
exercises its right in the future, the market price of the preferred securities
is likely to be adversely affected. If you sell the preferred securities during
an interest deferral period, you may not receive the same return on your
investment as someone else who continues to hold the preferred securities.
See "Material Federal Income Tax Consequences" for more information
regarding the tax consequences of the preferred securities.
YOU ARE SUBJECT TO PREPAYMENT RISK OF YOUR PREFERRED SECURITIES IN THE
EVENT OF TAX, LEGISLATIVE OR REGULATORY CHANGES THAT MAY TRIGGER THE REDEMPTION
OF THE JUNIOR SUBORDINATED DEBENTURES BY MERCANTILE AND PREPAYMENT OF THE
PREFERRED SECURITIES PRIOR TO THE STATED MATURITY DATE.
You are subject to prepayment risk relating to your preferred securities.
Although the junior subordinated debentures have a stated maturity date of
September 16, 2029, they
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<PAGE> 13
may be redeemed by Mercantile prior to maturity which would cause an early
redemption of the preferred securities, upon the following:
- In whole or in part, beginning on September 17, 2004 at the option of
Mercantile.
- In whole upon a change in the federal tax laws or a change in the
interpretation of the tax laws by the courts or the IRS, which would
result in a risk that (1) MBWM Trust may be subject to federal income
tax, (2) interest paid by Mercantile on the junior subordinated
debentures will not be deductible by Mercantile for federal income tax
purposes, or (3) MBWM Trust is or will be subject to more than a minimal
amount of other taxes or governmental charges.
- In whole upon a change in the laws or regulations to the effect that MBWM
Trust is or will be considered to be an investment company that is
required to be registered under the Investment Company Act of 1940.
- In whole upon a change in the laws or regulations if there is a risk that
Mercantile will not be able to treat all or a substantial portion of the
preferred securities as core capital for purposes of capital adequacy
guidelines of the Federal Reserve.
The exercise of these redemption rights is subject to Mercantile having received
prior approval of the Federal Reserve, if required. For further information
concerning tax, legislative or regulatory events that may trigger redemption of
the junior subordinated debentures and prepayment of the preferred securities,
see "Description of the Preferred Securities -- Redemption -- Mandatory and
Optional Rights of Mercantile."
YOU ARE SUBJECT TO PREPAYMENT RISK BECAUSE POSSIBLE TAX LAW CHANGES COULD
RESULT IN A REDEMPTION OF THE PREFERRED SECURITIES.
Future legislation may be proposed or enacted that may prohibit Mercantile
from deducting its interest payments on the junior subordinated debentures for
federal income tax purposes, making redemption of the junior subordinated
debentures likely and resulting in a redemption of the preferred securities.
From time to time, the Clinton Administration has proposed tax law changes
that would, among other things, generally deny interest deductions to a
corporate issuer if the debt instrument has a term exceeding 15 years and if the
debt instrument is not reflected as indebtedness on the issuer's consolidated
balance sheet. Other proposed tax law changes would have denied interest
deductions if the debt instrument had a term exceeding 20 years. Although it is
impossible to predict future proposals, if a future proposal of this sort were
to become effective in a form applicable to already issued and outstanding
securities, Mercantile could be precluded from deducting interest on the junior
subordinated debentures. Enactment of any such proposal might in turn give rise
to a tax event as described under "Description of the Preferred
Securities -- Redemption -- Mandatory and Optional Rights of Mercantile."
You should also be aware that a petition was recently filed in the United
States Tax Court as a result of a challenge by the IRS of a taxpayer's treatment
as indebtedness of a security issued with characteristics similar to the junior
subordinated indentures. Although the IRS agreed to dismissal of the adjustments
related to this issue, it could assert similar adjustments against other
taxpayers. If it were to do so and the issue were litigated to a conclusion in
which the IRS's position on this matter were sustained, such a judicial
determination could constitute a tax event which could result in an early
redemption of the preferred securities. For further information, see
"Description of the Preferred Securities -- Redemption -- Mandatory and Optional
Rights of Mercantile," "Description of Junior
11
<PAGE> 14
Subordinated Indentures -- Redemption" and "Material Federal Income Tax
Consequences."
MERCANTILE'S OBLIGATIONS UNDER THE PREFERRED SECURITIES GUARANTEE AND THE
JUNIOR SUBORDINATED DEBENTURES RANK LOWER THAN OTHER MERCANTILE OBLIGATIONS.
Mercantile's obligations under the junior subordinated debentures are
unsecured and will rank junior in priority of payment to any senior and
subordinated debt Mercantile may incur, which generally includes indebtedness,
liabilities or obligations of Mercantile, contingent or otherwise. Mercantile's
obligations under the junior subordinated debentures will also be effectively
subordinated to all existing and future liabilities and obligations of its
subsidiaries, including the Bank.
The preferred securities, the junior subordinated debentures and the
preferred securities guarantee do not limit the ability of Mercantile or the
Bank to incur unlimited future indebtedness, liabilities and obligations, which
may rank senior to the junior subordinated debentures and the preferred
securities guarantee.
For more information on Mercantile's obligations under the preferred
securities guarantee and the junior subordinated debentures, see "Description of
Preferred Securities Guarantee -- Status of Preferred Securities Guarantee" and
"Description of Junior Subordinated Debentures -- Subordination of Junior
Subordinated Debentures to Senior and Subordinated Debt of Mercantile."
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED
SECURITIES MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF YOUR HOLDINGS.
Your investment in the preferred securities may decrease in value if the
junior subordinated debentures are distributed to you. Mercantile cannot predict
the liquidity or market prices for the junior subordinated debentures that may
be distributed. Accordingly, the junior subordinated debentures that you receive
upon a distribution, or the preferred securities you hold pending such a
distribution, may trade at a discount to the price that you paid to purchase the
preferred securities.
Because you may receive junior subordinated debentures, you must also make
an investment decision with regard to the junior subordinated debentures. You
should carefully review all the information regarding the junior subordinated
debentures contained in this prospectus. If the junior subordinated debentures
are distributed, Mercantile will use reasonable efforts to list them on a
national securities exchange or quotation system.
The material United States federal income tax consequences of a
distribution of the junior subordinated debentures are discussed under "Material
Federal Income Tax Consequences -- Distribution of Junior Subordinated
Debentures to Holders of Preferred Securities."
YOU MUST RELY ON THE PROPERTY TRUSTEE OF MBWM TRUST TO ENFORCE YOUR RIGHTS
UNDER THE JUNIOR SUBORDINATED DEBENTURES IN THE EVENT OF DEFAULT.
You may not be able to directly enforce rights against Mercantile if an
event of default occurs. If an event of default under the junior subordinated
debentures occurs and is continuing, this event will also be an event of default
under the preferred securities. In that case, the holders of the preferred
securities would rely on the enforcement by the property trustee of its rights
as holder of the junior subordinated debentures against Mercantile. The holders
of a majority in liquidation amount of the preferred securities will have the
right to direct the property trustee to enforce its rights. If the property
trustee does not enforce its rights, any record holder may take action directly
against Mercantile
12
<PAGE> 15
to enforce the property trustee's rights. If a default under the preferred
securities occurs that is attributable to Mercantile's failure to pay interest
or principal on the junior subordinated debentures, a record holder of the
preferred securities may proceed directly against Mercantile. The holders of
preferred securities will not be able to exercise directly any other remedies
available to the holders of the junior subordinated debentures unless the
property trustee fails to do so. See "Description of the Preferred
Securities -- Events of Default; Notice" and "Description of Junior Subordinated
Debentures -- Indenture Events of Default" for more information on your rights
if an event of default occurs.
LIMITED COVENANTS RELATING TO THE PREFERRED SECURITIES AND THE JUNIOR
SUBORDINATED DEBENTURES DO NOT PROTECT YOU.
The covenants in the governing documents relating to the preferred
securities and the junior subordinated debentures are limited. As a result, the
governing documents do not protect you in the event of an adverse change in
Mercantile's financial condition or results of operations. Nor do the governing
instruments limit the ability of Mercantile or its subsidiary to incur
additional debt. You should not consider the terms of the governing documents to
be a significant factor in evaluating whether Mercantile will be able to comply
with its obligations under the junior subordinated debentures or the preferred
securities guarantee.
AS A HOLDER OF PREFERRED SECURITIES YOU WILL HAVE LIMITED VOTING RIGHTS.
As a holder of preferred securities, you have limited voting rights. These
rights relate only to the modification of the preferred securities and removal
of the property and indenture trustees of MBWM Trust upon the happening of a
limited number of events. You will not have any voting rights regarding
Mercantile or the administrative trustees. See "Description of the Preferred
Securities -- Voting Rights; Amendment of the Trust Agreement" for more
information on your limited voting rights.
INTEREST ACCRUALS ON THE PREFERRED SECURITIES MAY CREATE ADVERSE TAX
CONSEQUENCES FOR YOU IF THE PREFERRED SECURITIES ARE TRADED.
The preferred securities may trade at a price that does not reflect the
value of accrued but unpaid interest on the underlying junior subordinated
debentures. If you dispose of your preferred securities between record dates for
payments on the preferred securities, you may have adverse tax consequences.
Under these circumstances, you will be required to include accrued but unpaid
interest on the junior subordinated debentures allocable to the preferred
securities through the date of disposition in your income as ordinary income if
you use the accrual method of accounting or if such interest represents original
issue discount. If interest on the junior subordinated debentures is included in
income under the original issue discount provisions, you would add this amount
to your adjusted tax basis in your share of the underlying junior subordinated
debentures deemed disposed. If your selling price is less than your adjusted tax
basis, which will include all accrued but unpaid original issue discount
interest included in your income, you could recognize a capital loss which
cannot be applied to offset ordinary income for federal income tax purposes,
subject to exceptions. See "Material Federal Income Tax Consequences -- Interest
Income and Original Issue Discount" and "-- Sales or Redemption of Preferred
Securities" for more information on possible adverse tax consequences to you.
13
<PAGE> 16
THE PRICE OF YOUR PREFERRED SECURITIES COULD BE ADVERSELY AFFECTED BY A
POSSIBLE LIMITED PUBLIC MARKET.
There can be no assurance that an active and liquid trading market for the
preferred securities will develop or be sustained due to a possible limited
number of owners of the preferred securities or lack of interest by persons who
may want to trade the preferred securities. An inactive or illiquid trading
market could adversely affect the price of your preferred securities.
RISK FACTORS RELATING TO MERCANTILE
MERCANTILE HAS A LIMITED OPERATING HISTORY AND IS SUBJECT TO THE RISKS OF A
NEW BUSINESS.
Mercantile commenced its banking business on December 15, 1997, and has a
limited operating history. Mercantile is subject to the risks that accompany a
new business, including those relating to finding and retaining customers,
finding and hiring qualified people, growing the business, and developing and
offering products. Mercantile expects that its future operating earnings will be
adequate to enable it to make the quarterly distributions required to be paid to
MBWM Trust under the junior subordinated debentures. However, the level of
operating earnings in prior quarters would not have been adequate to fund the
payment of these amounts.
IF BORROWERS DO NOT REPAY LOANS IT WILL ADVERSELY AFFECT MERCANTILE.
Some borrowers may not repay loans that the Bank makes to them. This risk
is inherent in the commercial banking business. If a significant amount of loans
are not repaid, it would have an adverse effect on Mercantile's earnings and
overall financial condition, and could cause the insolvency of Mercantile.
Like all financial institutions, the Bank maintains an allowance for loan
losses to provide for loan defaults and nonperformance. The allowance for loan
losses is maintained at a level management feels is adequate to absorb losses
inherent in the loan portfolio, an evaluation that is primarily based upon a
review of the Bank's and the banking industry's historical loan loss experience,
known and inherent risks contained in the loan portfolio, composition, and
growth of the loan portfolio, and current and projected economic factors.
However, the Bank's allowance for loan losses may not be adequate to cover
actual losses, and future provisions for loan losses may adversely affect
Mercantile's earnings.
IF ECONOMIC CONDITIONS IN GENERAL AND IN MERCANTILE'S PRIMARY MARKET AREA
DETERIORATE, MERCANTILE'S REVENUES AND EARNINGS COULD DECREASE.
Mercantile's financial results may be adversely affected by changes in
prevailing economic conditions, including declines in real estate values, rapid
changes in interest rates, adverse employment conditions and the monetary and
fiscal policies of the federal government. Although economic conditions in
Mercantile's primary market area are good and have aided its recent growth,
there is no assurance that these conditions will continue. In addition,
substantially all of the loans made by the Bank are to individuals and
businesses in western Michigan, and any decline in the economy of this area
could have an adverse impact on the Mercantile. There is no assurance that
positive trends or developments discussed in this prospectus will continue or
that negative trends or developments will not have a significant adverse effect
on Mercantile.
14
<PAGE> 17
A DECREASE IN INTEREST RATE SPREADS MAY DECREASE MERCANTILE'S PROFITS.
Mercantile's profitability is in part a function of the spread between the
interest rates earned on assets and the interest rates paid on deposits and
other interest-bearing liabilities. A decrease in interest rate spreads would
have a negative effect on the net interest income and profitability of
Mercantile, and there is no assurance that a decrease will not occur. Although
management believes that the maturities of Mercantile's assets are moderately
balanced in relation to maturities of liabilities, this balance involves
estimates as to how changes in the general level of interest rates will impact
the yields earned on assets and the rates paid on liabilities.
THE BANK IS SUBJECT TO REGULATORY RESTRICTIONS ON THE DIVIDENDS IT CAN
DECLARE AND PAY TO MERCANTILE.
Mercantile's sources of funds for payment of interest on the junior
subordinated debentures (which payments will be the sole source of funds
available for payment of distributions on the preferred securities) will consist
primarily of dividends, if and when received, from the Bank. The Bank has not
paid any dividends to date, and no agreement, written or otherwise, between the
Bank and Mercantile exists that requires the Bank to pay any dividends to
service Mercantile's debt. The Bank is and will continue to be subject to
applicable regulatory restrictions which limit the amount of dividends that can
be paid by banking institutions.
Also, in its original application to the FDIC for deposit insurance, the
Bank undertook not to declare or pay dividends for the first three years of
operation, or until December 15, 2000, absent regulatory consent. While the FDIC
has consented to the Bank declaring dividends sufficient to pay the amounts due
on the junior subordinated debentures so long as the Bank maintains a Tier I
leverage ratio of at least 8.0% until December 15, 2000, there can be no
assurance that the Bank will declare and pay dividends in amounts sufficient to
pay amounts due on the preferred securities.
MANAGEMENT WILL HAVE BROAD DISCRETION IN MERCANTILE'S USE OF THE PROCEEDS
IT RECEIVES.
Mercantile will receive approximately $13.2 million in net proceeds from
the sale of its junior subordinated debentures, after deducting underwriting
commissions and estimated expenses payable by Mercantile. The Bank's management
will have broad discretion to allocate these net proceeds to uses it believes
are appropriate. See "Use of Proceeds" for the application of the proceeds. The
amount and timing of the allocations will depend on a number of factors and may
affect Mercantile's earnings.
GOVERNMENT REGULATIONS IMPOSE LIMITATIONS AND MAY RESULT IN HIGHER
OPERATING COSTS AND COMPETITIVE DISADVANTAGES FOR MERCANTILE.
Mercantile and the Bank are subject to extensive state and federal
government supervision and regulation that is intended primarily to protect
depositors and the Federal Deposit Insurance Corporation's Bank Insurance Fund,
rather than investors. Existing state and federal banking laws subject the Bank
to substantial limitations with respect to loans, the purchase of securities,
the payment of dividends and many other aspects of its banking business. Some of
the banking laws may benefit the Bank, others may increase the cost of doing
business or otherwise adversely affect the Bank and create competitive
advantages for non-bank competitors. There can be no assurance that future
legislation or government policy will not adversely affect the banking industry
or the operations of the Bank. Federal
15
<PAGE> 18
economic and monetary policy may affect the Bank's ability to attract deposits,
make loans and achieve satisfactory interest spreads. See "Supervision and
Regulation."
THE BANKING BUSINESS IN MERCANTILE'S MARKET AREA IS HIGHLY COMPETITIVE.
Mercantile and the Bank face strong competition for deposits, loans and
other financial services from numerous banks, savings banks, thrifts, credit
unions and other financial institutions as well as other entities which provide
financial services, including consumer finance companies, securities brokerage
firms, mortgage brokers, insurance companies, mutual funds, and other lending
sources and investment alternatives. Some of the financial institutions and
financial services organizations with which the Bank competes are not subject to
the same degree of regulation as the Bank. Many of the financial institutions
and financial services organizations aggressively compete for business in the
Bank's market area. Most of these competitors have been in business for many
years, have customer bases, deposits and lending limits that are substantially
larger than those of the Bank, and are able to offer certain services that the
Bank does not currently provide, including branch networks, trust services and
international banking services. In addition, most of these entities have greater
capital resources than the Bank, which, among other things, may allow them to
price their services at levels more favorable to the customer and to provide
larger credit facilities than could the Bank. This competition may limit
Mercantile's growth or earnings. See "Business -- Competition." Additionally,
recently effective legislation regarding interstate branching and banking may
increase competition in the future from out-of-state banks.
IF THE COMPUTER SYSTEMS OF MERCANTILE OR ITS SUPPLIERS AND CUSTOMERS DO NOT
TIMELY BECOME YEAR 2000 COMPLIANT, MERCANTILE MAY BE ADVERSELY AFFECTED.
Mercantile faces a significant business issue regarding how existing
application software programs and operating systems can accommodate the date
value for the year 2000. Many existing software application products, including
software application products used by Mercantile and its suppliers and
customers, were designed to accommodate only a two-digit date value which
represents the year. Such faulty recognition could result in a system failure,
disruption of operations, or inaccurate information or calculations. The
interruption to Mercantile's business could be substantial if Mercantile's main
data processing service provider fails to become year 2000 compliant. In
addition, failure by suppliers and customers of Mercantile to modify and convert
their own computer systems could have a significant adverse effect on the
suppliers' or customers' operations and profitability, thus inhibiting their
ability to provide services or repay loans to Mercantile. For further
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000."
MERCANTILE WILL NEED TO APPLY NEW TECHNOLOGY TO SERVICE ITS CUSTOMERS.
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Mercantile's
future success will depend in part on its ability to address the needs of its
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
the Bank's operations. Many of the Bank's competitors have substantially greater
resources to invest in technological improvements. Such technology may permit
competitors to perform certain functions at a lower cost than the Bank. There
can be no assurance that the Bank will be able to effectively implement new
technology-driven
16
<PAGE> 19
products and services or be successful in marketing such products and services
to its customers.
MERCANTILE IS DEPENDENT ON KEY PERSONNEL.
Mercantile is dependent on the continued services of Mr. Johnson and Mr.
Price, the two senior executive officers of Mercantile who have provided vision
and leadership since its organization. The loss of either of these officers
could have an adverse affect on Mercantile's growth and performance. Mercantile
and the Bank have entered into employment contracts with Mr. Johnson and Mr.
Price that provide for their employment through December 31, 2001. Mercantile
presently maintains policies of key man life insurance on the lives of Mr.
Johnson and Mr. Price in the amount of $1 million each.
GROWTH AND EXPANSION MAY BE LIMITED BY MANY FACTORS.
Mercantile has pursued and intends to continue to pursue an internal growth
strategy, the success of which will depend primarily on generating an increasing
level of loans and deposits at acceptable risk levels without corresponding
increases in non-interest expenses. There can be no assurance that Mercantile
will be successful in continuing its growth strategies due to delays and other
impediments resulting from regulatory oversight, limited availability of
qualified personnel, unavailability of branch sites or poor site selection of
bank branches. In addition, the success of Mercantile's growth strategy will
depend on maintaining sufficient regulatory capital levels and on continued
favorable economic conditions in Mercantile's market area.
DECLINE IN AVAILABILITY OF OUT-OF-AREA DEPOSITS COULD CAUSE LIQUIDITY
CONCERNS OR LIMIT MERCANTILE'S GROWTH
Mercantile has utilized out-of-area deposits to support the asset growth of
Mercantile as these are generally a lower cost source of funds when compared to
the interest rates that would have to be offered in the local market to generate
a commensurate level of funds. In addition, the 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. A reduction
in the availability of such deposits would likely cause Mercantile to fund
growth with more costly funding sources which would reduce net interest margin,
or limit growth or reduce asset size.
17
<PAGE> 20
USE OF PROCEEDS
MBWM Trust will use all of the proceeds from the sale of preferred
securities to purchase the junior subordinated debentures from Mercantile. The
net proceeds to Mercantile from the sale of the junior subordinated debentures,
after deducting underwriting commissions and offering expenses, are expected to
be approximately $13.2 million, or $15.1 million if the underwriters'
over-allotment option is exercised in full. Mercantile intends to use
substantially all of the net proceeds to make a contribution to the capital of
the Bank. The Bank will use the net proceeds to invest in both short term
investment securities and loans.
Mercantile is required by the Federal Reserve to maintain defined levels of
capital for bank regulatory purposes. In 1996, the Federal Reserve announced
that qualifying amounts of securities having the characteristics of the
preferred securities could be included as core capital for bank holding
companies subject to certain limits. See "Capitalization." This capital
treatment, together with Mercantile's ability to deduct, for federal income tax
purposes, interest payable on the junior subordinated debentures, are expected
to provide Mercantile with a cost-effective means of obtaining capital for bank
regulatory purposes.
Therefore, a portion of these proceeds will qualify as core capital. To
support its growth, the Bank will be able to leverage this core capital by
continuing to grow deposits internally or through wholesale deposits and
borrowing additional funds. The additional capital that will be contributed to
the Bank will result in an increased legal lending limit which may add to the
Bank's ability to serve additional borrowing needs of the Bank's current
customers and larger customers in the Bank's market.
18
<PAGE> 21
MARKET FOR MERCANTILE'S COMMON STOCK AND PRICE RANGE
The common stock of Mercantile is quoted on the Nasdaq National Market
under the symbol MBWM. Prior to July 19, 1999, Mercantile's common stock was
quoted on the OTC Bulletin Board under the same symbol. At August 24, 1999,
there were 94 record holders of Mercantile's common stock. In addition,
Mercantile estimates that there are more than 1,500 beneficial owners of its
common stock who own their shares through brokers or banks. Mercantile has not
paid dividends since its formation in 1997.
The following table shows the high and low bid prices by quarter during the
period from the date of Mercantile's initial public stock offering (October 23,
1997) through June 30, 1999. The quotations reflect bid prices as reported by
the OTC Bulletin Board, and do not include retail mark-up, mark-down or dealer
commission.
<TABLE>
<CAPTION>
BID PRICES
----------------
HIGH LOW
------ ------
<S> <C> <C>
CALENDAR YEAR 1999
First Quarter............................................... $17.50 $13.00
Second Quarter.............................................. $16.63 $13.00
CALENDAR YEAR 1998
First Quarter............................................... $18.50 $10.25
Second Quarter.............................................. $19.00 $14.50
Third Quarter............................................... $17.12 $15.50
Fourth Quarter.............................................. $16.75 $12.37
CALENDAR YEAR 1997
Fourth Quarter (October 23, 1997 through December 31,
1997)..................................................... $11.75 $ 9.75
</TABLE>
19
<PAGE> 22
ACCOUNTING TREATMENT
For financial reporting purposes, MBWM Trust will be treated as a
subsidiary of Mercantile and, accordingly, the accounts of MBWM Trust will be
included in the consolidated financial statements of Mercantile. The preferred
securities will be presented as a separate line item in the consolidated balance
sheets of Mercantile under the caption "Guaranteed Preferred Beneficial
Interests in the Company's Subordinated Debentures," and appropriate disclosures
about the preferred securities, the preferred securities guarantee of Mercantile
and the junior subordinated debentures will be included in the notes to
consolidated financial statements. For financial reporting purposes, Mercantile
will record distributions payable on the preferred securities as interest
expense in the consolidated statements of income.
Future reports of Mercantile filed under the Securities Exchange Act of
1934, as amended, will include a footnote to the consolidated financial
statements stating that:
- MBWM Trust is a wholly-owned subsidiary of Mercantile;
- the sole asset of MBWM Trust is the junior subordinated debentures,
specifying the principal amount, interest rate and maturity date of the
junior subordinated debentures; and
- the obligations of Mercantile described in this prospectus, in the
aggregate, constitute a full, irrevocable and unconditional guarantee on
a subordinated basis by Mercantile of the obligations of MBWM Trust under
the preferred securities. MBWM Trust will not provide separate reports
under the Securities Exchange Act of 1934.
No separate financial statements of MBWM Trust have been included in this
prospectus. Mercantile and MBWM Trust do not consider that financial statements
of MBWM Trust would be material to holders of the preferred securities because
MBWM Trust is a newly formed, special purpose entity, has no operating history
or independent operations and is not engaged in and does not propose to engage
in any activity other than holding as assets the junior subordinated debentures
of Mercantile and issuing the preferred securities. For more information, see
"Description of the Preferred Securities," "Description of Junior Subordinated
Debentures" and "Description of Preferred Securities Guarantee."
20
<PAGE> 23
CAPITALIZATION
The following table shows (1) the consolidated capitalization of Mercantile
at June 30, 1999 and (2) the consolidated capitalization of Mercantile giving
effect to the issuance of the preferred securities of MBWM Trust in this
offering and receipt by Mercantile of the net proceeds from the corresponding
sale of the junior subordinated debentures to MBWM Trust, as if the sale of the
preferred securities had been consummated on June 30, 1999, and assuming the
Underwriter's over-allotment option is not exercised.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG TERM DEBT........................................... $ 0 $ 0
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE
COMPANY'S SUBORDINATED DEBENTURES...................... 0 14,000
SHAREHOLDERS' EQUITY
Preferred Stock, no par value; 1,000,000 shares
authorized; 0 shares issued and outstanding......... $ 0 $ 0
Common stock, no par value; 9,000,000 shares
authorized; 2,472,500 shares issued and
outstanding......................................... 28,182 28,182
Retained earnings (deficit)............................ (658) (658)
Unrealized gain (loss), net of tax, on available for
sale securities..................................... (464) (464)
------- -------
Total shareholders' equity.......................... 27,060 27,060
------- -------
Total capitalization................................ $27,060 $41,060
======= =======
CAPITAL RATIOS:
Shareholders' equity to total assets................... 9.27% 8.85%
Leverage ratio(1)(2)(3)(4)............................. 10.03 13.37
Risk-based capital ratios:(3)(4)
Tier 1 capital to risk-weighted assets.............. 9.52 12.57
Total risk-based capital to risk-weighted assets.... 10.77 15.48
</TABLE>
- -------------------------
(1) The leverage ratio is Tier 1 capital divided by average quarterly assets,
after deducting intangible assets and net deferred tax assets in excess of
regulatory maximum limits.
(2) The capital ratios, as adjusted, are computed including the total estimated
net proceeds from the sale of the preferred securities, in a manner
consistent with Federal Reserve guidelines.
(3) Federal Reserve guidelines for calculation of Tier 1 capital to
risk-weighted assets limits the amount of cumulative preferred securities
which can be included in Tier 1 capital to 25% of total Tier 1 capital.
(4) Unrealized gain (loss), net of tax, on available for sale securities is not
included in calculating regulatory capital ratios.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This Management's Discussion and Analysis should be read in conjunction
with the consolidated financial statements and related notes contained elsewhere
in this prospectus. This discussion provides information about the consolidated
financial condition and results of operations of Mercantile and its wholly-owned
subsidiary, the Bank.
Mercantile was incorporated on July 15, 1997 as a bank holding company to
establish and own the Bank. In October 1997, in connection with the organization
of Mercantile and Bank, Mercantile sold 1,495,000 shares of common stock in an
underwritten, initial public offering. Mercantile funded the capital of the Bank
and paid certain expenses from the net proceeds of the public offering.
The Bank, after receiving all necessary regulatory approvals, began
operations on December 15, 1997. The Bank has a strong commitment to community
banking and offers a wide range of financial products and services, primarily to
small- to medium-sized businesses, as well as individuals. The Bank's lending
strategy focuses on commercial lending, and, to a lesser extent, residential
mortgage and consumer lending. The Bank also offers a broad array of deposit
products, including checking, savings, money market, and certificates of
deposit, as well as security repurchase agreements. The Bank's primary market
area is the Kent and Ottawa County areas of western Michigan, which includes the
City of Grand Rapids, the second largest city in the State of Michigan.
FINANCIAL CONDITION AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
During the first six months of 1999, the assets of Mercantile increased
from $216.2 million on December 31, 1998, to $291.9 million on June 30, 1999.
This represents a total increase in assets of $75.7 million, or 35.0%. The asset
growth was comprised primarily of a $61.0 million increase in net loans, a $6.5
million increase in cash and cash equivalents, and an increase of $5.4 million
in investment securities. The increase in assets was primarily funded by a $73.8
million growth in deposits and an increase of $0.8 million in securities sold
under agreements to repurchase. The growth in deposits was in both local
deposits and out-of-area CD's. While management expects continuing asset growth,
it is anticipated to be at a slower rate.
Commercial loans increased by $56.7 million during the first six months of
1999, and at June 30, 1999 comprised 93% of the total loan portfolio. The
significant concentration in commercial loans and the rapid growth of this
portion of Mercantile's business is in keeping with a strategy of focusing a
substantial amount of effort on "wholesale" banking. Corporate and business
lending is an area of expertise for all of Mercantile's senior management team.
Commercial loans are also the assets most easily originated and managed by the
fewest number of staff, thus reducing overhead through necessitating fewer
full-time equivalents (FTE's)/$million in assets. The commercial sector of
Mercantile's business generates the greatest amount of local deposits, and is
virtually the only source of significant demand deposits.
Residential mortgage and consumer loans also increased by $4.9 million and
$0.4 million, respectively, during the first six months of 1999. However, the
commercial sector of the lending efforts and resultant assets have been and
continue to be Mercantile's
22
<PAGE> 25
primary strategy for growth and profitability, and Mercantile expects that the
current composition of the loan portfolio will remain relatively stable.
Deposits increased $73.8 million during the first six months of 1999,
totaling $245.8 million at June 30, 1999. Local deposits increased $21.5
million, while out-of-area deposits increased $52.3 million. Although the level
of local deposits has declined as a percent of total deposits from 43.4% as of
December 31, 1998, to 39.1% at June 30, 1999, due to the higher level of growth
in out-of-area deposits, there have been significant dollar volume increases in
all categories of the local deposits.
Out-of-area deposits totaled $149.6 million, or 60.9% of total deposits, as
of June 30, 1999. Out-of-area deposits consist primarily of certificates of
deposit obtained from depositors located outside Mercantile's 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 the asset growth of Mercantile, and are generally a lower cost source of
funds when compared to the interest rates that would have to be offered in the
local market to generate a commensurate level of funds. In addition, the
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 have been established
and as existing customers increase their deposit accounts, the high reliance on
out-of-area deposits will likely remain.
Securities sold under agreements to repurchase increased by $0.8 million
during the first six months of 1999. As part of Mercantile's 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, these repurchase agreements have characteristics very similar
to that of business checking deposit accounts.
RESULTS OF OPERATIONS FOR THE SIX MONTHS AND THREE MONTHS ENDED
JUNE 30, 1999 AND 1998
Net operating income for the second quarter of 1999 was $503,472 ($0.20 per
share), which compares favorably to the net loss of $294,624 (-$0.20 per share)
recorded during the second quarter of 1998. Net operating income for the first
six months of 1999 was $855,163 ($0.35 per share), which also compares favorably
to the net loss of $1,436,201 (-$0.96 per share) recorded during the first six
months of 1998. The improvement during both time periods is primarily the result
of an increase in net interest income, greater employee efficiency and a
reduction of provisions to the allowance for loan losses. The year-to-date 1999
net operating income includes a one-time $42,210 ($0.02 per share) charge
reflecting an accounting adjustment for organization costs. In accordance with
previous accounting guidelines, these costs were being amortized over a
five-year period; however, as required by AICPA Statement of Position 98-5, the
unamortized balance was written off effective January 1, 1999, and is reflected
in the Consolidated Financial Statements as a change in accounting principle.
Interest income during the second quarter of 1999 was $5,212,444, a
significant increase over the $2,204,973 earned during the second quarter of
1998. Interest income during the first six months of 1999 was $9,743,639, a
significant increase over the $3,383,678 earned during the first six months of
1998. The growth in interest income during both time periods is primarily
attributable to an increase in earning assets. During
23
<PAGE> 26
the second quarter of 1999, earning assets averaged $266.2 million, a level
substantially higher than the average earning assets of $107.5 million during
the second quarter of 1998. During the first six months of 1999, earning assets
averaged $250.3 million, a level substantially higher than the average earning
assets of $82.4 million during the same time period in 1998. Somewhat offsetting
the positive impact of the increase in earning assets is the decline in yield on
earning assets. During the second quarter of 1999 and 1998, earnings assets had
a weighted average rate of 7.85% and 8.23%, respectively. During the first six
months of 1999 and 1998 earning assets had a weighted average rate of 7.79% and
8.26%, respectively. This decline is primarily due to an overall decline of
market interest rates, in part evidenced by the 75 basis point drop in the prime
lending rate during the last six months of 1998.
Interest expense during the second quarter of 1999 was $2,947,730, a
significant increase over the $1,299,514 expensed during the second quarter of
1998. Interest expense during the first six months of 1999 was $5,549,147, a
significant increase over the $1,878,455 expensed during the first six months of
1998. The growth in interest expense is primarily attributable to the growth in
assets, which necessitated an increase in funding liabilities. During the second
quarter of 1999, interest-bearing liabilities averaged $230.1 million, a level
substantially higher than average interest-bearing funds of $92.3 million during
the second quarter of 1998. During the first six months of 1999,
interest-bearing liabilities averaged $215.1 million, a level substantially
higher than average interest-bearing funds of $66.4 million during the same time
period in 1998. Also adding to the increased level of interest expense is the
increase of interest-bearing liabilities as a percent of average assets. During
the second quarter of 1999, interest-bearing liabilities averaged 83.8% of
average assets, an increase from the 80.9% level of the second quarter of 1998.
During the first six months of 1999, interest-bearing liabilities averaged 83.3%
of average assets, a notable increase from the 76.3% level during the same time
period in 1998. The increase is primarily the result of the planned and expected
leveraging of shareholders' equity. During the second quarter of 1999,
shareholders' equity averaged 9.9% of average assets, a decline from the 10.7%
level during the second quarter of 1998. During the first six months of 1999,
shareholders' equity averaged 10.4% of average assets, a decline from the 14.4%
level during the first six months of 1998. Somewhat offsetting the increased
level of interest-bearing liabilities is the decline in the average rate paid on
interest-bearing liabilities. During the second quarter of 1999 and 1998,
interest-bearing liabilities had a weighted average rate of 5.14% and 5.65%,
respectively. During the first six months of 1999 and 1998, interest-bearing
liabilities had a weighted average rate of 5.17% and 5.76%, respectively. This
decline, as mentioned previously, is due in large part to the overall decline of
market interest rates during the last six months of 1998.
Net interest income during the second quarter of 1999 was $2,264,714, a
significant increase over the $905,459 earned during the second quarter of 1998.
Net interest income during the first six months of 1999 was $4,194,492, a
significant increase over the $1,505,223 earned during the same time period in
1998. As described above, the increase is primarily due to the substantial
growth experienced between the compared time periods. Additional factors
impacting net interest income included, but were not limited to, changes in
interest rates and a reduction of the capital level.
The following table sets forth certain information relating to Mercantile's
consolidated average interest earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
period indicated. Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities,
24
<PAGE> 27
respectively, for the period presented. During the period presented, there were
no nonaccrual loans.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1999
-------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Loans........................................... $230,483 $4,696 8.17%
Investment securities........................... 28,634 433 6.07
Federal funds sold.............................. 6,451 76 4.73
Short term investments.......................... 586 7 4.79
-------- ------ ----
Total interest-earning assets................ 266,154 5,212 7.85
Allowance for loan losses....................... (3,393)
Other assets.................................... 11,734
--------
Total assets................................. $274,495
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits....................... $213,432 $2,776 5.22%
Other borrowings................................ 16,674 172 4.14
-------- ------ ----
Total interest-bearing liabilities........... 230,106 2,948 5.14
Noninterest-bearing deposits.................... 16,235
Other liabilities............................... 1,026
Shareholders' equity............................ 27,128
--------
Total liability and shareholders' equity..... $274,495
========
Net interest income............................. $2,264
======
Net interest rate spread........................ 2.71%
====
Net interest margin on earning assets........... 3.41%
====
</TABLE>
Interest rate risk is the exposure of Mercantile's financial condition and
operating performance to adverse movements in interest rates. Mercantile derives
its income primarily from the excess of interest collected on its
interest-earning assets over the interest paid on its interest-bearing
liabilities. Since market rates are subject to change over time, Mercantile is
exposed to lower profitability if interest rate changes result in a reduction of
the Bank's net interest margin. Accordingly, effective risk management that
maintains interest rate risk at prudent levels is essential to Mercantile's
safety and soundness. The primary measurement method utilized by Mercantile to
assess interest rate risk is commonly referred to as net interest income
simulation analysis. This computer-based model measures the direction and
magnitude of variations in net interest income resulting from potential changes
in market interest rates. Although the assumptions used within the model are
inherently uncertain and subject to fluctuation and revision, and therefore
actual results will differ from the simulated results, management believes this
25
<PAGE> 28
methodology provides meaningful information to assist in managing the interest
rate risk of Mercantile.
Mercantile conducted multiple simulations as of June 30, 1999, whereby it
was assumed that a simultaneous, instant and sustained change in market interest
rates occurred. The following table illustrates the suggested impact on net
interest income over the next twelve months, which are well within Mercantile's
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....... $ 670,911 8.3%
Interest rates down 100 basis points....... 388,640 4.8
No change in interest rates................ 106,422 1.3
Interest rates up 100 basis points......... (132,375) (1.6)
Interest rates up 200 basis points......... (372,083) (4.6)
</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.
Provisions to the allowance for loan losses during the second quarter of
1999 were $480,900, a level similar to the $473,000 expensed during the same
time period in 1998. Provisions to the allowance for loan losses during the
first six months of 1999 were $935,900, a notable decline from the $1,471,800
expensed during the same time period in 1998. The reduction reflects the lower
level of loan growth during the first six months of 1999 when compared to the
first six months of 1998. The allowance for loan losses as a percentage of total
loans outstanding as of June 30, 1999 was 1.5%, which also represents the level
that has been maintained since inception of the Bank. The allowance for loan
losses is maintained at a level management feels is adequate to absorb losses
inherent in the loan portfolio. The evaluation is based upon a continuous review
of Mercantile's and the banking industry's historical loan loss experience,
known and inherent risks contained in the loan portfolio, composition and growth
of the loan portfolio, current and projected economic conditions and other
factors. Reflecting its focus on credit quality, Mercantile has not experienced
any loan charge-offs since its inception.
Noninterest income during the second quarter of 1999 was $205,835, a
significant increase over the $72,823 earned during the same time period in
1998. Noninterest income during the first six months of 1999 was $415,558, a
significant increase over the $87,263 earned during the same time period in
1998. Fees earned on referring residential mortgage loan applicants to various
third parties and commitment fees charged on issued standby letters of credit,
combined with an increase in fee income earned on deposit and repurchase
agreements resulting from an increase in deposit and repurchase accounts,
comprise a majority of the increase.
Noninterest expense during the second quarter of 1999 was $1,380,177, a
significant increase over the $799,906 expensed during the same time period in
1998. Noninterest expense during the first six months of 1999 was $2,642,777, a
significant increase over the $1,556,887 expensed during the same time period in
1998. An increase in all major
26
<PAGE> 29
overhead cost categories, including salaries and benefits, occupancy, and
furniture and equipment, was recorded. The increases primarily result from the
hiring of additional staff. All other noninterest costs have also increased,
reflecting additional expenses required to administer the significantly
increased loan and deposit base.
While the dollar volume of noninterest costs has increased, as a percent of
average assets the level has substantially declined as a result of Mercantile's
growth and realized operating efficiencies. During the second quarter of 1999
noninterest costs were 2.01% of average assets on an annualized basis, a
significant decline from the 2.80% level during the same time period in 1998.
During the first six months of 1999, noninterest costs were 2.05% of average
assets on an annualized basis, a significant decline from the 3.58% level during
the same time period in 1998. Monitoring and controlling noninterest costs,
while at the same time providing high quality service to customers, is of utmost
importance to Mercantile. The efficiency ratio, computed by dividing noninterest
expenses by net interest income plus noninterest income, was 55.9% and 57.3%
during the second quarter and first six months of 1999, respectively. This
compares favorably to the efficiency ratios of 81.8% and 97.8% during the second
quarter and first six months of 1998, respectively. This improved performance is
primarily due to the rapid asset growth that has translated into increased net
interest income, as well as Mercantile's lending philosophy of concentrating on
commercial lending that results in higher average loan balances compared to
residential mortgage and consumer loans which provides for a greater dollar
volume of loans with fewer people.
Federal income tax expense was $106,000 and $134,000 during the second
quarter and first six months of 1999, respectively. No tax expense was recorded
in 1998 due to Mercantile's operating loss; however, federal income tax expense
is being recorded in 1999 as it is expected that a portion of Mercantile's 1999
net operating income will be subject to federal income tax.
FINANCIAL CONDITION AS OF DECEMBER 31, 1998 AND 1997
Mercantile experienced significant asset growth during 1998, its first full
year of operations. Assets of Mercantile increased from $24.1 million on
December 31, 1997 to $216.2 million on December 31, 1998. This represents an
increase in total assets of $192.1 million, which was primarily comprised of a
$171.8 million increase in loans and a $21.2 million increase in investment
securities. The increase in assets was primarily funded by a $162.3 million
increase in deposits, a $16.4 million increase in securities sold under
agreements to repurchase (repurchase agreements), and an increase of $13.2
million in shareholders' equity. While Mercantile expects continued asset
growth, it is anticipated that the growth will occur at a slower rate.
EARNING ASSETS
Mercantile's loan portfolio, which equaled 84% of average earning assets
during 1998, is primarily comprised of commercial loans. Averaging over 93% of
average loans and growing by $159.3 million during 1998, the commercial loan
portfolio represents loans to business interests generally located within
Mercantile's market area. As of December 31, 1998, approximately two-thirds of
the commercial loans are primarily secured by real estate properties, with the
remaining generally secured by other business assets such as accounts
receivable, inventory, and equipment. There are no significant industry
concentrations within the commercial loan portfolio. The concentration and rapid
growth in
27
<PAGE> 30
commercial loans is in keeping with Mercantile's strategy of focusing a
substantial amount of its efforts on commercial banking. Business lending is an
area of expertise for all of Mercantile's senior management team and commercial
lending staff.
Residential mortgage and consumer lending, while averaging under 7% of
average loans during 1998, also experienced excellent growth. However, the
commercial sector of the lending efforts and resultant assets have been and
continue to be Mercantile's primary strategy for growth and profitability, and
it is expected that the current composition of the loan portfolio will remain
relatively stable.
The following table presents the maturity of total loans outstanding, other
than residential mortgages and personal loans, as of December 31, 1998,
according to scheduled repayments of principal. All figures are stated in
thousands of dollars.
<TABLE>
<CAPTION>
0-1 1-5 AFTER 5
YEAR YEARS YEARS TOTAL
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Construction and land
development -- fixed
rate....................... $ 2,387,606 $ 3,940,409 $4,780,688 $ 11,108,703
Construction and land
development -- variable
rate....................... 2,547,581 2,547,581
Real estate -- secured by
nonfarm nonresidential
properties -- fixed rate... 1,195,799 81,248,005 1,934,056 84,377,860
Real estate -- secured by
nonfarm nonresidential
properties -- variable
rate....................... 18,462,661 18,462,661
Commercial -- fixed rate..... 929,624 23,794,327 463,999 25,187,950
Commercial -- variable
rate....................... 29,883,397 29,883,397
----------- ------------ ---------- ------------
$55,406,668 $108,982,741 $7,178,743 $171,568,152
=========== ============ ========== ============
</TABLE>
Mercantile's credit policies establish guidelines to manage credit risk and
asset quality. These guidelines include loan review and early identification of
problem loans to ensure effective loan portfolio administration. The credit
policies and procedures are meant to minimize the risk and uncertainties
inherent in lending. In following these policies and procedures, Mercantile must
rely on estimates, appraisals and evaluations of loans and the possibility that
changes in these could occur quickly because of changing economic conditions.
Identified problem loans, which exhibit characteristics (financial or otherwise)
that could cause the loans to become nonperforming or require restructuring in
the future, are included on the internal loan "Watch List." Senior management
reviews this list regularly and adjusts for changing conditions. Since inception
of Mercantile no scheduled loan payments have been 90 days or more past due, and
no loans have been placed in nonaccrual status or charged-off.
In each accounting period, the allowance for loan and lease losses is
adjusted by management to the amount necessary to maintain the allowance at
adequate levels. Through its credit department, management will attempt to
allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. Management's
28
<PAGE> 31
evaluation of the allowance is further based on consideration of actual loss
experience, the present and prospective financial condition of borrowers,
industry concentrations within the portfolio and general economic conditions.
Management believes that the present allowance is adequate, based on the broad
range of considerations listed above.
The following table illustrates the breakdown of the allowance balance to
loan type.
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
PERCENT OF LOANS PERCENT OF LOANS
BALANCE TO END OF IN EACH CATEGORY IN EACH CATEGORY
PERIOD APPLICABLE TO AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
- -------------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural............. $2,612 84.3% $193 98.6%
Real
estate -- construction... 57 7.4
Real estate -- mortgage.... 57 7.2 1.3
Installment loans to
individuals.............. 39 1.1 0.1
Unallocated................ -- N/A -- N/A
------ ----- ---- -----
$2,765 100.0% $193 100.0%
====== ===== ==== =====
</TABLE>
The primary risk element considered by management with respect to each
installment and residential real estate loan is lack of timely payment.
Management has a reporting system that monitors past due loans and has adopted
policies to pursue its creditors' rights in order to preserve the Bank's
position. The primary risk elements with respect to commercial loans are the
financial condition of the borrower, the sufficiency of collateral, and lack of
timely payment. Management has a policy of requesting and reviewing periodic
financial statements from its commercial loan customers, and periodically
reviews existence of collateral and its value.
Although management believes that the allowance for loan and lease losses
is adequate to absorb losses as they arise, there can be no assurance that the
Bank will not sustain losses in any given period which could be substantial in
relation to the size of the allowance for loans and lease losses.
The investment securities portfolio also experienced significant growth
during 1998, increasing from $3.0 million on December 31, 1997 to $24.2 million
at December 31, 1998. Mercantile maintains the portfolio at levels to provide
adequate pledging for the repurchase agreement program and secondary liquidity
for Mercantile's daily operations. In addition, the portfolio serves a primary
interest rate risk management function. During 1998 the portfolio equaled 12% of
average earning assets. At December 31, 1998 the portfolio was comprised of high
credit quality U.S. Treasury notes (19%), U.S. Government Agency issued bonds
(50%), and U.S. Government issued and guaranteed mortgage-backed securities
(31%). Since the inception of Mercantile, all securities have been designated as
"available for sale" as defined in Financial Accounting Standards Board Standard
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Securities designated as available for sale are stated at fair value, with the
unrealized gains and losses, net of income tax, reported as a separate component
of shareholders' equity. The net unrealized gain recorded at December 31, 1998,
was $31,836, while the net unrealized loss recorded at December 31, 1997, was
$3,631.
29
<PAGE> 32
Federal funds sold, consisting of excess funds sold overnight to
correspondent banks, are used to manage daily liquidity needs and interest rate
sensitivity. During 1998 the average balance of these funds equaled 4% of
average earning assets. This level is well within internal policy guidelines,
and is not expected to change significantly in the future.
SOURCE OF FUNDS
Mercantile's major source of funds is from deposits. Total deposits
increased from $9.7 million at December 31, 1997, to $172.0 million on December
31, 1998. Although Mercantile experienced significant success in obtaining
deposits from customers located within the market area, the substantial asset
growth necessitated the acquisition of funds from depositors located outside of
the market area. Out-of-area deposits are utilized to support the asset growth
of Mercantile, and are generally a lower cost source of funds when compared to
the interest rates that would have to be offered in the local market to generate
a commensurate level of funds. In addition, the 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 have been established and as existing
customers increase their deposit accounts, the high reliance on out-of-area
deposits will likely remain.
Mercantile experienced significant growth in its noninterest-bearing
checking, interest-bearing checking, and savings accounts during 1998.
Noninterest-bearing checking accounts, comprised primarily of business loan
customers, grew $7.1 million and equaled 8% of average funding sources during
1998. Interest-bearing checking and savings accounts increased by $7.6 million
and $26.7 million and equaled 3% and 13% of average funding sources during 1998
and 1997, respectively. Business loan customers also comprise the majority of
these deposit types, although to a lesser extent than noninterest-bearing
checking accounts. Per banking regulations, incorporated businesses may not own
interest-bearing checking accounts and transactions from a savings account are
limited. Mercantile anticipates continued growth of its checking and savings
deposits as additional business loans are extended.
Mercantile introduced a new deposit account, a money market account, during
1998. The balance of this limited transaction checking account was $3.8 million
at December 31, 1998, and equaled 1% of average funding sources during 1998. A
majority of these accounts were opened and funded in the latter part of the
year, and Mercantile anticipates continued growth in the future.
Certificates of deposit increased by $117.1 million and represented 52% of
average funding sources during 1998. At December 31, 1998, this deposit type
totaled $117.3 million. Of this amount 17% of the balances were owned by
customers from within Mercantile's market area, primarily individuals and local
government municipalities. The remaining certificates of deposit were obtained
from depositors outside of Mercantile's market area. These out-of-area deposits
consist primarily of certificates of deposit 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 certificates of deposit are comprised mainly
of credit unions located throughout the United States, but include banks,
savings and loans, government municipalities, businesses, and individuals from
across the country as well.
30
<PAGE> 33
Repurchase agreements increased $16.4 million and equaled 8% of average
funding sources during 1998. As part of Mercantile's sweep account program,
collected funds from certain business noninterest-bearing checking accounts are
invested into over-night interest-bearing repurchase agreements. The securities
involved in the repurchase agreement program are recorded as assets of
Mercantile. Although not considered deposits, and therefore not afforded Federal
Deposit Insurance Corporation insurance, this product enables Mercantile to
provide the equivalent of an interest-bearing checking account to incorporated
businesses that are prohibited by banking regulations from owning such an
account. The sweep account program is designed for businesses that maintain
relatively large checking account balances.
Shareholders' equity increased $13.2 million and equaled 13% of average
funding sources during 1998. The increase is directly attributable to the
secondary stock offering completed during the year, whereby Mercantile received
$14.3 million in net proceeds from the sale of 977,500 shares of common stock.
Substantially all of the net proceeds were contributed to the Bank to provide
support for asset growth, fund investments in loans and securities, and for
general corporate purposes. Shareholders' equity was negatively impacted by the
net loss from operations of $1.1 million recorded for all of 1998. Mercantile
did record net income from operations during the third and fourth quarters of
1998, and believes that this performance will continue in the future.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
SUMMARY
As anticipated, Mercantile recorded a net operating loss during 1998, its
first full year of operations. The net operating loss was $1.1 million, or $0.58
per share, and was primarily the result of a non-cash charge of $2.6 million for
provision for loan losses. Although Mercantile did not record any loan
charge-offs during the year, significant provisions were required as the result
of the substantial loan growth. The loan loss provisions are made in the period
the loans are booked, and are an immediate reduction to earnings. Loan loss
provisions are expected to continue to reduce earnings, although more
moderately, as the anticipated rate of loan growth slows relative to the size of
Mercantile.
Although continued significant future asset growth is anticipated,
resulting in additional large loan loss provisions, management expects the
overall earnings performance of Mercantile to improve. Mercantile did not record
any tax benefit as a result of the losses incurred and will not record income
tax expense until the net operating losses are recovered. The asset growth of
Mercantile should result in an increased level of net interest income, which
when coupled with noninterest income, should exceed the growth and level of
noninterest expense plus provisions for loan losses. In fact, on a quarter-by-
quarter basis, Mercantile has already achieved profitable status. During the
third and fourth quarters of 1998 Mercantile recorded net income of $116,000 and
$212,000, respectively.
31
<PAGE> 34
The following table shows some of the key equity performance ratios for the
year ended December 31, 1998, and the period from July 15, 1997 (inception)
through December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
---- -----
<S> <C> <C>
Return on average total assets.............................. (0.9)% (21.8)%
Return on average equity.................................... (0.6) (30.9)
Dividend payout ratio....................................... N/A N/A
Average equity to average assets............................ 13.4 70.4
</TABLE>
NET INTEREST INCOME
Net interest income, the difference between revenue generated from earning
assets and the interest cost of funding those assets, is Mercantile's primary
source of earnings. Interest income and interest expense totaled $10.1 million
and $5.6 million during 1998, respectively, providing for net interest income of
$4.5 million. The net yield on average earning assets during 1998 was 3.62%. The
level of net interest income is primarily a function of asset size, as the
weighted average interest rate received on earning assets is greater than the
weighted average interest cost of funding sources; however, factors such as
types of assets and liabilities, interest rate risk, liquidity, and customer
behavior also impact net interest income as well as the net yield. The following
table depicts the average balance, interest earned and paid, and weighted
average rate of Mercantile's assets, liabilities and shareholders' equity during
1998 (in thousands):
<TABLE>
<CAPTION>
INTEREST AVERAGE
AVERAGE EARNED YIELD
BALANCE OR PAID OR COST
-------- ------- -------
<S> <C> <C> <C>
ASSETS:
Loans........................................... $104,838 $9,008 8.59%
Investment securities........................... 15,341 881 5.74
Federal funds sold.............................. 4,831 256 5.31
Short term investments.......................... 413 23 5.68
-------- ------ ----
Total interest-earning assets........... 125,423 10,168 8.11
Allowance for loan losses....................... (1,584)
Other assets.................................... 5,560
--------
Total assets............................ $129,399
========
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
INTEREST AVERAGE
AVERAGE EARNED YIELD
BALANCE OR PAID OR COST
-------- ------- -------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing checking....................... $ 4,015 171 4.25
Savings......................................... 17,455 904 5.18
Money market.................................... 1,330 58 4.39
Certificates of deposit......................... 67,817 4,008 5.91
Short term borrowings........................... 10,340 488 4.72
-------- ------ ----
Total interest-bearing liabilities...... 100,957 5,629 5.58
Noninterest-bearing checking.................... 10,798
Other liabilities............................... 319
Shareholder's equity............................ 17,325
--------
Total liabilities and shareholders'
equity............................... $129,399
========
Net Interest Income............................... $4,539
======
Net Yield on Interest-Earning Assets.............. 3.62%
====
</TABLE>
Interest income is primarily generated from the loan portfolio, which
comprised 81% of average total assets during 1998. The loan portfolio, with an
average yield of 8.59%, earned $9.0 million, or 89% of total interest income.
The investment securities portfolio and Federal funds sold equaled 12% and 4% of
average total assets during 1998, respectively. With an average yield of 5.74%
investment securities contributed $0.9 million, or 9% of total interest income,
while Federal funds sold ended 1998 with an average yield of 5.31%, and earned
$0.3 million, or 3% of total interest income.
Interest expense is primarily generated from certificates of deposit, which
equaled 52% of average total assets during 1998. Certificates of deposit, with
an average rate of 5.91%, cost $4.0 million, or 71% of total interest expense.
Savings deposits and interest-bearing checking accounts equaled 13% and 3% of
average total assets during 1998, respectively. With an average rate of 5.18%
savings deposits cost $0.9 million, or 16% of total interest expense, while
interest-bearing checking accounts ended 1998 with an average rate of 4.25%, and
cost $0.2 million, or 3% of total interest expense. Short term borrowings,
comprised primarily of repurchase agreements but also included Federal funds
purchased, had an average rate of 4.72% during 1998. Mercantile paid $0.5
million in short term interest expense, or 9% of total interest expense, during
1998.
PROVISION FOR LOAN LOSSES
Reflecting significant loan growth the provision for loan losses totaled
$2.6 million during 1998. The allowance for loan losses as a percentage of total
loans outstanding as of December 31, 1998 was 1.50%, which also represents the
average ratio for the entire year. Mercantile maintains the allowance for loan
losses at a level management feels is adequate to absorb losses inherent in the
loan portfolio. The evaluation is based upon a continuous
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<PAGE> 36
review of Mercantile's and the banking industry's historical loan loss
experience, known and inherent risks contained in the loan portfolio,
composition and growth of the loan portfolio, current and projected economic
conditions and other factors. Reflecting its focus on credit quality, Mercantile
has not experienced any loan charge-offs since its inception.
NONINTEREST INCOME
Other income was $488,000 during 1998. Fees earned on referring residential
mortgage loan applicants to various third parties was $210,000, commitment fees
charged on issued commercial standby letters of credit equaled $159,000, and
deposit and repurchase agreement service charges totaled $82,000.
NONINTEREST EXPENSE
Noninterest expense totaled $3.6 million during 1998. Salary and benefit
costs were $1.9 million, while occupancy, furniture and equipment expenses
totaled another $0.5 million. Additional large overhead expenses include
computer data processing and software ($171,000), loan processing ($154,000),
and advertising ($110,000). While the future dollar volume of noninterest costs
are anticipated to increase, as a percent of average assets the level is
expected to decline as Mercantile continues to grow and operating efficiencies
are realized.
Monitoring and controlling overhead expenses, while at the same time
providing high quality of service to customers, is of utmost importance to
Mercantile. The efficiency ratio, computed by dividing noninterest expenses by
net interest income plus noninterest income, was 70.9% for all of 1998. However,
due primarily to the rapid asset growth that has translated into increased net
interest income, Mercantile's efficiency ratio declined throughout 1998 and was
only 55.8% during the fourth quarter. In addition, Mercantile's lending
philosophy of concentrating on commercial lending results in higher average loan
balances compared to residential mortgage or consumer loans, which provides for
a greater volume of loans with fewer people thereby improving its efficiency.
This point is demonstrated by Mercantile's total assets per employee ratio,
which as of December 31, 1998 was approximately $6.0 million. This level
compares very favorably to the $3.4 million level of Michigan community banks of
similar asset size.
INCOME TAX EXPENSE
Due to the net loss from operations recorded by Mercantile no provisions to
income tax expense were necessary during 1998. It is anticipated that Mercantile
will be in a taxable position in the future.
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<PAGE> 37
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
Mercantile was incorporated on July 15, 1997 as a bank holding company to
establish and own the Bank. The Bank received all necessary regulatory approvals
and began operations on December 15, 1997.
The Bank experienced significant growth in the loan portfolio during the
first 17 days of operations from December 11, 1997 to December 31, 1997. This
growth continued into 1998 and at a more rapid rate than deposit growth.
Management has chosen to fund this loan growth in 1998 in part by obtaining
brokered and out-of-state deposits to augment normal deposit growth and expects
to continue this practice until alternative funding sources become readily
available. Management has staggered the maturities of brokered and out-of-state
deposits with terms of 12 months to 60 months.
As of December 31, 1997, Mercantile had a retained deficit of $404,071.
This retained deficit was primarily the result of pre-opening fees and expenses
totaling approximately $178,000 as well as $193,300 in provision expense to
establish the allowance for loan losses at a level of 1.50% of total loans.
Management anticipated that Mercantile would generate a net loss for 1998 as a
result of expenditures made to build its management team and open the main
office. Significant ongoing additions to loan loss reserves were expected to
also contribute to this deficit due to the projected rapid increase in the loan
portfolio. Management further believes that the expenditures made in 1997 and
1998 will create the infrastructure and lay the foundation for growth in
subsequent years.
CAPITAL RESOURCES
Shareholders' equity is a noninterest-bearing source of funds which
provides support for asset growth. Shareholders' equity was $27.1 million, $26.7
million, and $13.5 million at June 30, 1999, December 31, 1998, and December 31,
1997. The increase during 1999 was due to net income recorded during the first
six months of 1999, net of the change in unrealized gains (losses) on securities
available for sale. The increase during 1998 is attributable to the secondary
common stock offering completed during the year, when 977,500 shares of common
stock were sold. Net proceeds to Mercantile, after deducting underwriting and
other related costs, was $14.3 million. Substantially all of the net proceeds
were contributed to the Bank, which were used to support anticipated growth in
assets, fund investments in loans and securities, and for general corporate
purposes. Mercantile's net operating loss of $1.1 million negatively impacted
shareholders' equity.
Mercantile and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Failure to meet the various capital
requirements can initiate regulatory action that could have a direct material
effect on the financial statements. Since inception, both Mercantile and the
Bank have been categorized as "Well Capitalized," the highest classification
rating contained within the banking regulations. It is Mercantile's strategy to
maintain the "Well Capitalized" rating for both Mercantile and the Bank;
however, if the rapid asset growth that Mercantile and the Bank have experienced
since inception continues, the acquisition of additional capital will be
required. This additional capital would likely be obtained through the sale of
common stock or trust preferred securities, or possibly a combination of both.
The sale of stock is, in large part, subject to
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<PAGE> 38
the capital markets environment. While Mercantile believes this environment is
currently favorable, this could change at any time, thereby significantly
impacting the ability of Mercantile to raise additional capital. The capital
ratios of Mercantile and the Bank as of June 30, 1999, December 31, 1998, and
December 31, 1997 are disclosed under Note 14 of the Notes to Consolidated
Financial Statements included elsewhere in this prospectus.
The ability of Mercantile to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. No cash or stock dividends have been paid since Mercantile's
inception.
LIQUIDITY
Liquidity is measured by Mercantile's 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,
maintain reserve requirements, fund loans and operate Mercantile. Liquidity is
primarily achieved through the growth of deposits (both local and out-of-area)
and liquid assets such as securities available for sale, matured securities, and
Federal funds sold. Asset and liability management is the process of managing
the balance sheet to achieve a mix of earning assets and liabilities that
maximizes profitability, while providing adequate liquidity.
Mercantile's liquidity strategy is to fund loan growth with deposits and
repurchase agreements and to maintain an adequate level of short- and
medium-term investments to meet typical daily loan and deposit activity.
Although deposit and repurchase agreement growth from depositors located in the
market area increased by $81.4 million during 1998, the growth was not
sufficient to meet the substantial loan growth of $171.8 million and provide
monies for additional investing activities. To provide the additional needed
funds Mercantile regularly obtained deposits from customers outside of the
market area. These out-of-area deposits consist primarily of certificates of
deposit placed by deposit brokers for a fee, but also include certificates of
deposit obtained from the deposit owners directly. As of December 31, 1998,
out-of-area deposits totaled approximately $97.3 million, or 51% of combined
deposits and repurchase agreements. Although local deposits are expected to
increase as new business, governmental and consumer deposit relationships have
been established and as existing customers increase their deposit accounts, the
high reliance on out-of-area deposits will likely remain.
Mercantile has the ability to borrow money on a daily basis through
correspondent banks (Federal funds purchased), which it did on several occasions
during 1998; however, this is viewed as only a secondary and temporary source of
funds. During 1998 Mercantile's Federal funds sold position averaged $4.8
million.
In addition to normal loan funding and deposit flow, Mercantile also needs
to maintain liquidity to meet the demands of certain unfunded loan commitments
and standby letters of credit. As of December 31, 1998, Mercantile had a total
of $90.5 million in unfunded loan commitments and $19.3 million in unfunded
standby letters of credit. Of the total unfunded loan commitments, $68.7 million
were commitments available as lines of credit to be drawn at any time as
customers' cash needs vary, and $21.8 million were for loan commitments
scheduled to close and become funded within the next three
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<PAGE> 39
months. Mercantile monitors fluctuations in loan balances and commitment levels,
and includes such data in its overall liquidity management.
MARKET RISK ANALYSIS
Mercantile's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of Mercantile's transactions are denominated
in U.S. dollars with no specific foreign exchange exposure. Mercantile has only
limited agricultural-related loan assets and therefore has no significant
exposure to changes in commodity prices. Any impacts 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 Mercantile's financial condition to
adverse movements in interest rates. Mercantile derives its income primarily
from the excess of interest collected on its interest-earning assets over the
interest paid on its interest-bearing liabilities. The rates of interest
Mercantile earns on its assets and owes on its liabilities generally are
established contractually for a period of time. Since market interest rates
change over time, Mercantile is exposed to lower profitability if interest rate
changes result in a reduction of the Bank's net interest margin. 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 Mercantile's earnings and capital base. Accordingly, effective risk
management that maintains interest rate risk at prudent levels is essential to
Mercantile's 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. Mercantile's 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 Mercantile assesses the existing and
potential future effects of changes in interest rates on its financial
condition, including capital adequacy, earnings, liquidity and asset quality.
There are two interest rate risk measurement techniques used by Mercantile.
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 Mercantile's net
interest margin during periods of changing market interest rates. The
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<PAGE> 40
following table depicts Mercantile's GAP position as of December 31, 1998
(dollars in thousands):
<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........ $ 53,211 $ 3,458 $107,586 $ 7,735 $171,990
Residential real estate
loans................ 2,609 1,400 5,376 1,271 10,656
Consumer loans.......... 796 25 1,076 201 2,098
Securities available for
sale(1).............. 1,500 3,023 13,916 5,721 24,160
Interest-bearing
deposits............. 515 0 0 0 515
Allowance for loan
losses............... 0 0 0 (2,765) (2,765)
Other assets............ 0 0 0 9,583 9,583
-------- -------- -------- -------- --------
Total Assets.............. 58,631 7,906 127,954 21,746 216,237
-------- -------- -------- -------- --------
Liabilities:
Interest-bearing
checking............. 7,766 0 0 0 7,766
Savings................. 28,796 0 0 0 28,796
Money market accounts... 3,822 0 0 0 3,822
Time deposits
<$100,000............ 15,310 46,987 18,856 0 81,153
Time deposits $100,000
and over............. 13,816 13,548 8,777 0 36,141
Other borrowings........ 17,038 0 0 0 17,038
Noninterest-bearing
checking............. 0 0 0 14,319 14,319
Other liabilities....... 0 0 0 501 501
-------- -------- -------- -------- --------
Total Liabilities......... 86,548 60,535 27,633 14,820 189,536
Shareholders' Equity...... 0 0 0 26,701 26,701
-------- -------- -------- -------- --------
Total Sources of Funds.... 86,548 60,535 27,633 41,521 $216,237
-------- -------- -------- -------- --------
Net GAP................... $(27,917) $(52,649) $100,321 $(19,775)
======== ======== ======== ========
Cumulative GAP............ $(27,917) $(80,546) $ 19,775 $ 0
======== ======== ======== ========
Percent of cumulative GAP
to total assets......... (13)% (37)% 9% 0%
======== ======== ======== ========
</TABLE>
- -------------------------
(1) Mortgage-backed securities are categorized by expected maturities based upon
prepayment trends as of December 31, 1998.
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<PAGE> 41
The second interest rate risk measurement used is commonly referred to as
net interest income simulation analysis. Mercantile believes that this
methodology provides a more accurate measurement of interest rate risk than the
GAP analysis, and therefore, serves as the primary interest rate risk
measurement technique used by Mercantile. 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 Mercantile's strategies, among other factors.
Mercantile conducted multiple simulations as of December 31, 1998, whereby
it was assumed that a simultaneous, instant and sustained change in market
interest rates occurred. The following table reflects the suggested impact on
net interest income over the next twelve months, which are well within
Mercantile's policy parameters established to manage and monitor interest rate
risk.
<TABLE>
<CAPTION>
DOLLAR CHANGE PERCENT CHANGE
IN NET IN NET
INTEREST RATE SCENARIO INTEREST INCOME INTEREST INCOME
- ---------------------- --------------- ---------------
<S> <C> <C>
Interest rates down 200 basis points............. $ 748,690 16.6%
Interest rates down 100 basis points............. 468,956 10.4
No change in interest rates...................... 191,660 4.3
Interest rates up 100 basis points............... (36,753) (0.8)
Interest rates up 200 basis points............... (267,532) (5.9)
</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.
YEAR 2000
The year 2000 issue confronting Mercantile and its suppliers, customers,
and competitors, centers on the inability of computer systems and embedded
technology to properly recognize dates near the end of and beyond the year 1999.
Mercantile has established a year 2000 working group consisting of senior
officers and other key employees and has been actively implementing a
comprehensive plan throughout 1998 and 1999, as required by bank regulatory
guidelines, to address the potential impact of the year 2000 problem on
Mercantile's information technology and non-information
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<PAGE> 42
technology systems. Mercantile's year 2000 plans are subject to modification and
are revised periodically as additional information is developed.
READINESS
Mercantile has completed the inventory, assessment and planning phases for
its mission-critical information technology and non-information technology
systems, which pose risks to Mercantile's ability to process data for its loans,
deposits and general ledger impacting revenues and operating results. Based on
testing that has been completed, management believes that all mission-critical
systems are year 2000 compliant.
Mercantile recognizes that its ability to be year 2000 compliant is
somewhat dependent upon the year 2000 efforts of its vendors. In 1998 and 1999,
Mercantile has requested year 2000 readiness information from its significant
vendors. All mission-critical vendors have represented that they are or will be
year 2000 compliant. Mercantile is continuing to monitor its non-mission
critical vendors to determine their level of year 2000 readiness as well.
Mercantile is also following bank regulatory requirements that require an
assessment of loan customers' year 2000 readiness. Letters and questionnaires
have been utilized to assess material loan customers' readiness based on the
size of their loan type. The number of existing customers that have not
responded to the letters and questionnaires is minimal. Follow-up letters or
phone calls are being made when necessary to obtain additional information from
these customers. Of those who have responded, all material customers represented
that they are year 2000 compliant or are working toward compliance. Of those
customers still working towards year 2000 compliance, in Mercantile's opinion,
their inability to become compliant will not have a material adverse effect on
Mercantile's business or operating results. The Bank requires business customers
applying for new loans to disclose the potential impact of the year 2000 problem
on their businesses.
WORST CASE SCENARIO AND CONTINGENCY PLANS
Mercantile has determined the most reasonably likely worst case scenario is
the possibility of the lack of power or communication services for a period of
time in excess of one day. If this scenario were to occur, Mercantile's
operations could be interrupted. Mercantile has developed plans and procedures
to address this scenario, ranging from producing complete printed reports from
the core banking systems prior to January 1, 2000, to ensure that a hard copy of
the data is available in the event of a failure, to preparations for failures of
voice and data communications through the use of manual posting and courier
services, use of generators, alternative customer service locations or reduced
lobby hours.
Contingency planning, including the type discussed above is an integral
part of Mercantile's year 2000 readiness plan. Mercantile's contingency plans
attempt to address alternative courses of action in the event that
mission-critical systems do not function properly with the date change.
Development of the contingency plans was recently completed. The year 2000
contingency plans have been tested and the effectiveness of contingent
procedures was validated by an independent accounting firm.
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<PAGE> 43
COSTS
The total costs associated with Mercantile's year 2000 compliance are
estimated at less than $75,000. These costs principally relate to the added
personnel costs, the employment of external consultants, and the purchase of
software upgrades. Mercantile expects to pay these costs from operating income.
Information technology staff and senior management have devoted significant
time and resources to year 2000 activities. While this has resulted in
allocating resources that would have otherwise been devoted to other information
technology projects, no projects have been delayed or postponed that would have
a material adverse impact on operations.
REGULATORY OVERSIGHT
Bank regulators have issued numerous statements and guidance on year 2000
compliance issues and the responsibilities of senior management and directors of
banks and bank holding companies. In addition, bank regulators have issued
safety and soundness guidelines to be followed by insured depository
institutions, such as the Bank, to ensure resolution of any year 2000 problems.
Periodic year 2000 reviews are performed by various bank regulatory agencies.
Most of the recent examinations have been performed by the FDIC and it is
expected that the FDIC will continue its frequent examinations throughout 1999.
The bank regulatory agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
examinations. Consequently, failure to address appropriately the year 2000 issue
could result in supervisory action, including the reduction of the Bank's
supervisory ratings, the denial of applications for examination, or the
imposition of civil money penalties.
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<PAGE> 44
BUSINESS
OVERVIEW
Mercantile was incorporated as a Michigan business corporation on July 15,
1997. Mercantile was formed to acquire all of the Bank's capital stock and to
engage in the business of a bank holding company under the federal Bank Holding
Company Act of 1956, as amended (the "BHCA"). The Bank is Mercantile's only bank
subsidiary, and Mercantile's only other subsidiary is MBWM Trust.
In October 1997, in connection with the organization of Mercantile and the
Bank, Mercantile sold 1,495,000 shares of its common stock in an underwritten,
initial public offering, at a price of $10 per share. Mercantile funded the
capital of the Bank and paid certain expenses from the net proceeds of the
public offering. In July of 1998, Mercantile sold an additional 997,500 shares
of its common stock in an underwritten public offering at a price of $15.75 per
share.
The Bank is a Michigan banking corporation that commenced business on
December 15, 1997. The Bank has a strong commitment to community banking and
offers a wide range of financial products and services, primarily to small- to
medium-sized businesses, as well as individuals. The Bank's lending strategy
focuses on commercial lending, and, to a lesser extent, residential and consumer
lending. The Bank also offers a broad array of deposit products, including
checking, savings, and money market accounts, business checking, direct deposits
and certificates of deposit.
MARKET AREA
Mercantile's market area is the Kent and Ottawa Counties of western
Michigan, which includes the city of Grand Rapids, the second largest city in
the State of Michigan. Kent County has a diverse economy based primarily on
manufacturing, retail and service businesses. According to available statistical
data, Kent County has approximately 547,000 people, 198,000 households and a
median household income that is estimated to have grown approximately 51% from
1990 to 1998.
Kent County is a significant banking market in the State of Michigan.
According to available industry data, as of June 30, 1998, total deposits in
Kent County, including those of banks, thrifts and credit unions, were
approximately $7.9 billion.
BUSINESS STRATEGY
Mercantile's business strategy revolves around the focused execution of the
following seven practices:
- RECRUIT AND RETAIN HIGHLY-QUALIFIED PERSONNEL. Mercantile's strategy
focuses on the recruitment of experienced community banking personnel and
empowering these employees to make decisions and resolve customer
problems as a means of providing outstanding customer service.
Mercantile's compensation structure is intended to reward its employees
for generating quality loans and maximizing long-standing customer
relationships. The lack of any non-performing assets since Mercantile's
inception, the consistent maintenance of a 1.50% reserves to total loans
ratio and the rapid growth of loans to $246.7 million at June 30, 1999,
provide evidence of the conservative credit culture Mercantile has
established. Mercantile
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<PAGE> 45
employs 53 people, most of whom have prior banking experience, and many
of whom have previously worked together. Mercantile's management team has
an average of 17 years in the banking industry.
- EMPHASIZE COMMERCIAL LENDING IN MERCANTILE'S PRIMARY
MARKET. Mercantile's lending philosophy concentrates on commercial
lending, which represented 93% of its loan portfolio as of June 30, 1999.
This emphasis on commercial lending results in higher average loan
balances compared to residential or consumer loans, which allows
Mercantile to generate a greater volume of loans with fewer people,
thereby improving Mercantile's efficiency. Also, Mercantile's commercial
loan customers contribute to core deposit growth through demand deposit
relationships, which totaled $16.3 million as of June 30, 1999, and
provide Mercantile with a cost-effective source of liquidity.
- USING A COMBINATION OF LOCAL DEPOSITS AND WHOLESALE FUNDING TO MEET LOAN
GROWTH. While local deposits have grown rapidly to $96.2 million since
opening, commercial loan originations have outpaced local deposit growth,
creating a need for additional funding. Management believes the lowest
"all-in" cost source of funding in excess of the local deposit base comes
from out-of-market certificates of deposit. Mercantile's experience
indicates that wholesale deposits can be obtained at a minimal cost
premium to local deposits and have a lower associated servicing cost than
traditional retail deposits. Funding from deposits acquired primarily
from loan customers supplemented with out-of-market deposits has
permitted Mercantile to operate with higher average assets per employee
($6.2 million for the three months ended June 30, 1999) than comparable
institutions by:
- operating only two offices;
- emphasizing commercial loans, which tend to be larger in size than
retail loans;
- employing an experienced staff of lending officers; and
- outsourcing services where possible.
- TAKE ADVANTAGE OF INDUSTRY CONSOLIDATION. Mercantile's marketplace has
experienced several bank mergers where a local bank has been merged into
a regional or super-regional bank. Management believes that these mergers
have resulted in certain customers becoming dissatisfied with the quality
of services being provided as well as certain customers being negatively
impacted by the merger integration process. Mercantile is in a position
to offer these disenfranchised customers a local banking alternative.
Additionally, these mergers have made available to Mercantile experienced
banking personnel. Management believes Mercantile is better able to
compete effectively in the marketplace because:
- industry consolidation has resulted in fewer independent banks and
fewer banks addressing Mercantile's target market niche;
- Mercantile's lending officers and senior management maintain close
working relationships with their commercial customers and their
businesses;
- Mercantile is often able to react more quickly to loan requests than
its larger competitors; and
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<PAGE> 46
- management and loan officers have significant experience within the
Grand Rapids community.
Management would attribute the majority of Mercantile's rapid loan growth
to the high level of service provided to customers rather than from
offering below market interest rates to attract new business.
- EMPHASIZE COMMUNITY BANKING. Mercantile strives to maintain a strong
commitment to community banking. Management encourages and expects all
employees to participate actively in local philanthropic activities and
to build relationships in the community. Through the development of such
relationships, Mercantile's goal is to attract small- to medium-sized
business owners and employees as customers who wish to conduct business
with a local community bank that demonstrates an active and knowledgeable
interest in their business and personal financial affairs. Management
believes that Mercantile is better able than many of its larger
competitors to deliver more timely decisions, provide customized
financial products and services, and offer customers the personal
attention of senior banking officers.
- UTILIZE ALTERNATIVE DELIVERY CHANNELS. Management believes that the
business of banking is rapidly evolving. One of the major changes taking
place is the way in which customers access their money. Rather than
construct and staff numerous branches, management has chosen to emphasize
less expensive delivery channels. Examples of these channels are courier
service, telephone and computer banking, ATM and other electronic access
points including direct deposit.
- EVALUATE ACQUISITION OPPORTUNITIES. Management intends to evaluate
merger and acquisition opportunities which may arise in western Michigan
to enhance or expand Mercantile's market position. The goals and
strategies of Mercantile's business plan make the acquisition of a
typical community bank which would serve primarily to expand Mercantile's
market area unappealing, however, management would consider acquisition
opportunities which would further Mercantile's growth consistent with the
objectives of its business plan. To date, management has not initiated
any bank or branch acquisition. Mercantile presently has no agreements,
commitments, understandings or arrangements to acquire any other banks or
branches and there is no assurance that Mercantile will be successful in
taking advantage of any such opportunities.
MARKETING PLAN
The Bank's marketing plan focuses on the concepts of corporate citizenship
and personal interaction within the communities the Bank serves through
promotion of, and active participation in, a number of civic organizations and
ongoing community activities. Management believes that these efforts establish
the identity and philosophy of the Bank within the communities it serves and
allow Bank officers and employees to personally interact with local business
leaders and members of the public. The marketing plan also emphasizes direct
customer interaction and relationships by Bank officers. Management believes
that the experience and expertise of its senior officers allow the Bank to
differentiate itself from its competition. Mercantile emphasizes the convenience
of alternative delivery systems such as courier service, electronic and
telephone banking, direct deposits and ATMs.
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<PAGE> 47
BUSINESS FINANCIAL SERVICES. The Bank's business development efforts are
directed by Mr. Price, the President and Chief Executive Officer of the Bank,
whose duties include administering and coordinating the business development
efforts of the Bank.
Each Bank officer is responsible for creating new business opportunities
for the Bank. The targeted list of new business customers represents a mix of
industrial, manufacturing, professional and retail clients with an emphasis on
businesses with credit needs of $8 million or less.
The Bank has an aggressive calling program based in part on an extensive
knowledge of its market area possessed by the officers contacting potential or
current customers. The Bank also relies on a strong referral system from
lawyers, accountants and other professionals, many of whom are well known to
officers of the Bank. The Bank regularly hosts "after hours" receptions for
accounting and law firms to develop or nurture business contacts and
relationships.
CONSUMER FINANCIAL SERVICES. The Bank originates residential real estate
loans through its main office. Bank officers and mortgage loan originators
develop new residential mortgage applications from several sources, including
real estate brokers, insurance agents, accountants, attorneys, existing
residential mortgage customers and other customers of the Bank. An extensive
selling effort generates potential customers as a result of these contacts.
The Bank, as a result of its secondary market operations, is able to offer
a variety of loan products that serve the needs of first-time home buyers by
providing five percent down payment loans and loans with no points. Customers
desiring to construct new homes are able to obtain financing as a result of the
Bank's construction loan program that is offered in addition to permanent loans.
The Bank has developed its own home equity loan, debit card and credit card
programs. Credit card transactions are processed for the Bank by an outside
service provider.
Management believes that cross-selling of the Bank's products and services
to its existing customers is vital to expanding account relationships,
generating additional opportunities and increasing fee income.
LOAN POLICY
As a routine part of the Bank's business, the Bank makes loans to
individuals and businesses located within the Bank's market area. The loan
policy of the Bank states that the function of the lending operation is twofold:
to provide a means for the investment of funds at a profitable rate of return
with an acceptable degree of risk, and to meet the credit needs of the
creditworthy business and individual customers of the Bank. However, the Board
of Directors of the Bank recognizes that in the normal business of lending, some
losses on loans will be inevitable and should be considered a part of the normal
cost of doing business.
The Bank's loan policy anticipates that priorities in extending loans will
change from time to time as interest rates, market conditions and competitive
factors change. The policy sets forth guidelines on a nondiscriminatory basis
for lending in accordance with applicable laws and regulations. The policy
describes various criteria in granting loans, including the ability to pay; the
character of the customer; evidence of financial
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<PAGE> 48
responsibility; purpose of the loan; knowledge of collateral and its value;
terms of repayment; source of repayment; payment history; and economic
conditions.
Mercantile's Board of Directors has delegated significant lending authority
to officers of the Bank. The Board of Directors believes this empowerment makes
the Bank more responsive to its customers. The loan policy specifies lending
authority for certain officers up to $1 million, and $1.5 million for the
Chairman of the Board and President. Loan requests exceeding $1.5 million, up to
the legal lending limit of approximately $6.70 million, require approval by the
Board of Directors. Generally, the Bank applies an in-house lending limit that
is less than the legal lending limit. Following the completion of the offering,
the Bank's legal lending limit will increase to approximately $10 million.
The loan policy also limits the amount of funds that may be loaned against
specified types of collateral. For certain loans secured by real estate, the
policy requires an appraisal of the property offered as collateral by a state
certified independent appraiser. The policy also provides general guidelines for
loan to value limits for other types of collateral. In addition, the loan policy
provides general guidelines as to collateral, provides for environmental policy
review, contains specific limitations with respect to loans to employees,
executive officers and directors, provides for problem loan identification,
establishes a policy for the maintenance of a loan loss reserve, provides for
loan reviews and sets forth policies for mortgage lending and other matters
relating to the Bank's lending practices.
LENDING ACTIVITY
COMMERCIAL LOANS. The Bank's commercial lending group originates
commercial loans primarily in the Kent and Ottawa County areas of western
Michigan. Commercial loans are originated by seven lenders, including the
President and the Chairman. The lending group has over 90 years of combined
commercial lending experience. Loans are originated for general business
purposes, including working capital, accounts receivable financing, machinery
and equipment acquisition, and commercial real estate financing including new
construction and land development.
Working capital loans are often structured as a line of credit and are
reviewed periodically in connection with the borrower's year end financial
reporting. These loans generally are secured by all of the assets of the
borrower, and have an interest rate tied to the national prime rate. Loans for
machinery and equipment purposes typically have a maturity of five to seven
years and are fully amortizing. Commercial real estate loans are usually written
with a five year maturity and amortized over a 15 year period.
Commercial real estate loans may have an interest rate that is fixed to
maturity or float with a margin over the prime rate or an U.S. Treasury Index.
The Bank evaluates many aspects of a commercial loan transaction in order
to minimize credit and interest rate risk. Underwriting includes an assessment
of management, products, markets, cash flow, capital, income and collateral. The
analysis includes a review of historical and projected financial results.
Appraisals are required by certified independent appraisers who are well known
to the Bank on certain transactions where real estate is the primary collateral,
and in some cases, where equipment is the primary collateral. In certain
situations, for creditworthy customers, the Bank may accept title reports
instead of requiring lenders' policies of title insurance.
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<PAGE> 49
Commercial real estate lending involves more risk than residential lending
because loan balances are greater and repayment is dependent upon the borrower's
operation. The Bank attempts to minimize risk associated with these transactions
by generally limiting its exposure to owner operated properties of well-known
customers or new customers with an established profitable history. In many
cases, risk is further reduced by (1) limiting the amount of credit to any one
borrower to an amount less than the Bank's legal lending limit, and (2) avoiding
certain types of commercial real estate financings.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank originates
residential real estate loans in its market area according to secondary market
underwriting standards. These loans provide borrowers with a fixed or adjustable
interest rate with terms up to 30 years. Loans are sold on a servicing released
basis in the secondary market with all interest rate risk and credit risk passed
to the purchaser. The Bank from time to time may elect to underwrite certain
residential real estate loans, generally with maturities of five years or less,
to be held in its own loan portfolio.
CONSUMER LOANS. The Bank originates consumer loans for a variety of
personal financial needs. Consumer loans include home equity lines of credit,
new and used automobiles, boat loans, credit cards and overdraft protection for
checking account customers.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and, except for home equity lines of credit, usually
involve more credit risk than mortgage loans because of the type and nature of
the collateral. While the Bank does not utilize a formal credit scoring system,
the Bank believes its loans are underwritten carefully, with a strong emphasis
on the amount of the down payment, credit quality, employment stability and
monthly income. These loans are generally repaid on a monthly repayment schedule
with the source of repayment tied to the borrower's periodic income. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and are thus likely to be adversely affected by
job loss, illness and personal bankruptcy. In many cases, repossessed collateral
for a defaulted consumer loan will not provide an adequate source of repayment
of the outstanding loan balance because of depreciation of the underlying
collateral. The Bank believes that the generally higher yields earned on
consumer loans compensate for the increased credit risk associated with such
loans and that consumer loans are important to its efforts to serve the credit
needs of the communities and customers that it serves.
INVESTMENTS
The principal investment of Mercantile is its investment in the common
stock of the Bank. Funds retained by Mercantile from time to time may be
invested in various debt instruments, including but not limited to obligations
of or guaranteed by the United States, general obligations of a state or
political subdivision or agency thereof, bankers' acceptances or certificates of
deposit of United States commercial banks, or commercial paper of United States
issuers rated in the highest category by a nationally-recognized investment
rating service. Although Mercantile is permitted to make limited portfolio
investments in equity securities and to make equity investments in subsidiary
corporations engaged in certain non-banking activities which may include real
estate-related activities, such as mortgage banking, community development, real
estate appraisals, arranging equity financing for commercial real estate, and
owning and operating real estate used substantially by the Bank or acquired for
its future use, Mercantile has no present plans to
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<PAGE> 50
do so. Mercantile's Board of Directors may alter Mercantile's investment policy
without shareholder approval.
The Bank may invest its funds in a wide variety of debt instruments and may
participate in the federal funds market with other depository institutions. At
June 30, 1999, the Bank's investment portfolio consisted of U.S. Government
Agency guaranteed mortgage-backed securities, U.S. Government Agency bonds, U.S.
Treasury Notes and municipal bonds. Subject to certain exceptions, the Bank is
prohibited from investing in equity securities. Under one such exception, in
certain circumstances and with the prior approval of the FDIC, the Bank could
invest up to 10% of its total assets in the equity securities of a subsidiary
corporation engaged in certain real estate related activities. The Bank has no
present plans to do this. Real estate acquired by the Bank in satisfaction of or
foreclosure upon loans may be held by the Bank, subject to a determination by a
majority of the Bank's Board of Directors at least annually of the advisability
of retaining the property, for a period not exceeding 60 months after the date
of acquisition, or such longer period as the Commissioner of the Financial
Institutions Bureau of the Michigan Department of Consumer & Industry Services
("FIB") may approve. The Bank is also permitted to invest an aggregate amount
not in excess of two-thirds of the capital and surplus of the Bank in real
estate that is necessary for the convenient transaction of its business. Other
than the Bank's recent investment in its Alpine Township branch and operations
facility, it has no present plans to make any investment of this type. The
Bank's Board of Directors may alter the Bank's investment policy without
shareholder approval.
COMPETITION
Mercantile and the Bank face strong competition for deposits, loans and
other financial services from numerous banks, savings banks, thrifts, credit
unions and other financial institutions as well as other entities which provide
financial services, including consumer finance companies, securities brokerage
firms, mortgage brokers, insurance companies, mutual funds, and other lending
sources and investment alternatives. Some of the financial institutions and
financial service organizations with which the Bank competes are not subject to
the same degree of regulation as the Bank. Many of the financial institutions
and financial service organizations aggressively compete for business in the
Bank's market area. Most of these competitors have been in business for many
years, have customer bases, deposits and lending limits that are substantially
larger than those of the Bank, and are able to offer certain services that the
Bank does not currently provide, including extensive branch networks, trust
services and international banking services. In addition, most of these entities
have greater capital resources than the Bank, which, among other things, may
allow them to price their services at levels more favorable to the customer and
to provide larger credit facilities than could the Bank. Additionally, recently
effective legislation regarding interstate branching and banking may increase
competition in the future from out-of-state banks.
LEGAL PROCEEDINGS
From time to time, Mercantile and the Bank may be involved in various legal
proceedings that are incidental to their business. In the opinion of management,
neither Mercantile nor the Bank is a party to any current legal proceedings that
are material to their financial condition, either individually or in the
aggregate.
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<PAGE> 51
EMPLOYEES
As of June 30, 1999, the Bank had 43 full-time and 10 part-time employees,
including 18 officers and 35 customer service, operations and other support
persons. Mercantile expects to add additional employees during the next year.
Management believes that the Bank's relations with its employees are good.
BANK PREMISES
The Bank leases a one story building in downtown Grand Rapids, Michigan for
use as the Bank's main office and Mercantile's headquarters. This building is of
masonry construction and has approximately 11,000 square feet of usable space
with on-site parking. The lease for the Bank's office, which commenced in 1997,
has an initial term of ten years and the Bank has four, five-year renewal
options.
The Bank designed and constructed a full service branch and operations
facility in Alpine Township, a suburb of Grand Rapids, that opened in July of
1999. The facility is one story, of masonry construction, and has approximately
8,000 square feet of usable space. The land and building is owned by the Bank.
The facility has multiple drive-through lanes and ample parking space.
The Bank's main office and Mercantile's headquarters are located at 216
North Division Avenue between Lyon Street and Michigan Street in downtown Grand
Rapids, Michigan. The Alpine Township branch and operations center is located at
4613 Alpine Avenue NW, Comstock Park, Michigan.
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<PAGE> 52
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Mercantile, their ages and
positions as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR WHEN
HAS SERVED TERM AS A
AS DIRECTOR DIRECTOR
NAME AGE POSITION SINCE EXPIRES
- ---- --- -------- ----------- ---------
<S> <C> <C> <C> <C>
Betty S. Burton......... 57 Director 1998 2002
Edward J. Clark......... 54 Director 1998 2001
Peter A. Cordes......... 58 Director 1997 2002
C. John Gill............ 65 Director 1997 2001
David M. Hecht.......... 62 Director 1997 2002
Gerald R. Johnson, 52 Chairman of the Board and 1997 2001
Jr.................... Chief Executive Officer
Susan K. Jones.......... 50 Director 1998 2000
Lawrence W. Larsen...... 59 Director 1997 2000
Calvin D. Murdock....... 60 Director 1997 2001
Michael H. Price........ 42 President, Chief 1997 2000
Operating Officer and
Director
Dale J. Visser.......... 63 Director 1997 2000
Donald Williams, Sr. ... 63 Director 1998 2001
Robert M. Wynalda....... 63 Director 1997 2002
Robert B. Kaminski...... 37 Senior Vice President and
Secretary
Charles E. Christmas.... 33 Chief Financial Officer,
Treasurer and Compliance
Officer
</TABLE>
The business experience of each of the directors and executive officers of
Mercantile for at least the past five years is summarized below:
BETTY S. BURTON (Director) Betty S. Burton is Director and Consultant of
Wonderland Business Forms, Inc. She was President and Chief Executive Officer of
Wonderland Business Forms from 1995 to 1999. She has held director positions at
First Michigan Bank-Grand Rapids and Butterworth Hospital. Prior to taking over
the family business in January of 1990, Mrs. Burton was a long time elementary
teacher in the public school system, from 1966 to 1989. She is a graduate of
Western Michigan University, Grand Valley State University, and Dartmouth
College of Minority Business Executive Program. Mrs. Burton sits on the National
Council of Steelcase Suppliers Board of Directors, and is a Trustee of both the
Grand Valley State University Foundation and the Western Michigan University
Foundation. Mrs. Burton is very involved in civic and community activities in
and around the Grand Rapids area.
EDWARD J. CLARK (Director) Mr. Clark is the President and Chief Executive
of The American Seating Company, and has held this position since 1986. American
Seating is
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headquartered in Grand Rapids, Michigan, and produces seating and furniture for
laboratories and offices, as well as seating for buses, rail cars, auditoriums,
stadiums and performing arts centers. Mr. Clark is a member of the Boards of
Directors of the Metropolitan YMCA and the Grand Rapids Employers' Association.
He is Vice President of the Foundation Board of Trustees and Chairman of the
Development Committee of Grand Valley State University. From 1988 through 1997
he was a member of the Board of Directors and Executive Committee of FMB-First
Michigan Bank-Grand Rapids ("FMB-Grand Rapids"). Mr. Clark has also previously
served on the Boards of Directors of the Grand Rapids Symphony Orchestra, Red
Cross of Kent County, St. Mary's Hospital and The Business and Institutional
Furniture Manufacturer's Association.
PETER A. CORDES (Director) Mr. Cordes has served as President and Chief
Executive Officer of GWI Engineering Inc. ("GWI") of Grand Rapids, Michigan
since 1991. GWI is engaged in the manufacturing of industrial automation systems
for customers in a variety of industries in the Midwest. Mr. Cordes purchased
GWI in 1991 and is now its sole owner. Mr. Cordes graduated from St. Louis
University with a degree in aeronautics. He is a native of Traverse City,
Michigan and has spent the last eighteen years in western Michigan.
C. JOHN GILL (Director) Mr. Gill is the retired Chairman of the Board and
one of the owners of Gill Industries of Grand Rapids, Michigan. Mr. Gill served
as Chairman of Gill Industries from 1994 through 1997, and served as President
of Gill Industries from 1983 through 1993. Gill Industries is a manufacturing
company involved with sheet metal stampings and assemblies for the automotive
and appliance industries.
DAVID M. HECHT (Director) Mr. Hecht has practiced law for 38 years,
including the past 26 years in Grand Rapids. Since 1993, he has been the
Chairman of the Grand Rapids law firm of Hecht & Lentz and is a founder of such
firm. Mr. Hecht is a native of Grand Rapids and a graduate of the University of
Michigan and the University of Wisconsin. He is the President of the Charles W.
Loosemore Foundation, a Trustee of the Grand Valley University Foundation and a
Director of Hospice Foundation of Greater Grand Rapids.
GERALD R. JOHNSON, JR. (Chairman of the Board, Chief Executive Officer and
Director of Mercantile and Chairman of the Board and Director of the Bank) Mr.
Johnson has over 27 years experience in the financial service industry,
including 24 years of commercial banking experience. Mr. Johnson was appointed
President and Chief Executive Officer of FMB-Grand Rapids in 1986, and served as
Chairman, President and Chief Executive Officer from 1988 to May of 1997, when
he resigned to organize Mercantile. Mr. Johnson served as Chairman of the Board
and Chief Executive Officer of Mercantile and the Bank from their inception
through 1998, and since the beginning of 1999 has served as Chairman of the
Board and Chief Executive Officer of Mercantile and Chairman of the Board of the
Bank. In the Grand Rapids market, prior to joining FMB-Grand Rapids, Mr. Johnson
was employed in various lending capacities by Union Bank (now part of Bank One
Corporation), Pacesetter Bank-Grand Rapids (now part of Old Kent) and
Manufacturers Bank (now part of Comerica Bank). He currently serves as Chairman
of the Board of the Downtown YMCA, Chairman of Residential Treatment of West
Michigan, Treasurer of Life Guidance Services and serves on the Boards of
Directors of the American Heart Association of Greater Grand Rapids, Michigan
Trails Girl Scout Council and The Recuperation Center. Mr. Johnson is also
affiliated with the Economic Development Foundation, Grand Rapids Rotary Club,
Junior League of Grand Rapids and
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<PAGE> 54
Project Rehab. Mr. Johnson has past affiliations with Hope Network, and the
Grand Rapids Area Chamber of Commerce where he was a Board member for six years.
SUSAN K. JONES (Director) Ms. Jones is both a partner of the Callahan
Group, LLC, a marketing consulting firm, and a tenured, fulltime Professor of
Marketing at Ferris State University in Big Rapids, Michigan. She began her own
marketing consulting firm, Susan K. Jones & Associates, in 1980, and joined
Ferris State in the fall of 1990. She enjoys an active volunteer career,
currently serving as corporate sponsorship representative of the American
Marketing Association of Western Michigan, as a member of the Northwestern
Alumni Association Board, and as the West Michigan Alumni Admissions Council
Chair for Northwestern University. She is a past-president of the Junior League
of Grand Rapids, a graduate of Leadership Grand Rapids, and currently serves as
a trustee of the Chicago Association of Direct Marketing Educational Foundation
and the Direct Marketing Education Foundation.
LAWRENCE W. LARSEN (Director) Mr. Larsen is Chief Executive Officer,
President, and owner of Central Industrial Corporation of Grand Rapids,
Michigan. He began his employment with the company in 1967, and purchased it in
1975. Central Industrial Corporation is a wholesale distributor of industrial
supplies. Mr. Larsen is also an owner and director of Jet Products, Inc. of West
Carrollton, Ohio. Jet Products, Inc. designs, manufactures and sells hose reels
and related hydraulic products. Mr. Larsen is a native of Wisconsin. He has
spent the last 31 years in the Grand Rapids area. Mr. Larsen served as a
director of FMB-Grand Rapids from 1980 until June of 1997, and was a member of
the Executive Loan Committee and the Audit Committee.
CALVIN D. MURDOCK (Director) Mr. Murdock is President of SF Supply ("SF")
of Grand Rapids, Michigan. He has held this position since 1994. From 1992 to
1994, he served as the General Manager of SF, and in 1991, served as SF's
Controller. SF is a wholesale distributor of commercial and industrial
electronic, electrical and automation parts, supplies and services. Mr. Murdock
is a Michigan native and a graduate of Ferris State University with a degree in
accounting. Prior to joining SF, Mr. Murdock owned and operated businesses in
the manufacturing and supply of automobile wash equipment.
MICHAEL H. PRICE (President, Chief Operating Officer and Director of
Mercantile and President, Chief Executive Officer and Director of the Bank) Mr.
Price has over 17 years of commercial banking experience, most of which was with
First Michigan Bank Corporation ("FMB") and its subsidiary FMB-Grand Rapids.
Spending most of his banking career in commercial lending, Mr. Price was the
Senior Lending Officer from 1992 to 1997, and President of FMB-Grand Rapids for
several months in 1997, before joining the Bank in late 1997. Mr. Price served
as President and Chief Operating Officer of Mercantile and the Bank from
December of 1997 through 1998, and has served as President and Chief Operating
Officer of Mercantile and President and Chief Executive Officer of the Bank
since January of 1999. Mr. Price has been and continues to be very active in the
Grand Rapids community. He currently serves on the Board of Directors of Kent
County Habitat for Humanity.
DALE J. VISSER (Director) Mr. Visser is Chairman and one of the owners of
Visser Brothers Inc. of Grand Rapids, Michigan. He has served this company in
various officer positions since 1960. Visser Brothers is a construction general
contractor specializing in commercial buildings. Mr. Visser also has an
ownership interest in several real estate projects in the Grand Rapids area
including Eastbrook Mall and Breton Village Shopping Center. Mr. Visser served
as a director of FMB-Grand Rapids from 1972 until June of 1997. He is a Grand
Rapids native and a graduate of the University of Michigan with a
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<PAGE> 55
degree in civil engineering. Mr. Visser is active in the community having served
on the boards for the Grand Rapids YMCA, Christian Rest Home and West Side
Christian School.
DONALD WILLIAMS, SR. (Director) Mr. Williams has over 30 years experience
in administration of educational programs with special emphasis on political
sensitivity and equality. He is currently Dean of Minority Affairs and Director
of the Multicultural Center of Grand Valley State University. Mr. Williams also
serves as President of the Coalition for Representative Government (CRG) and is
a member of the Rotary Club of Grand Rapids. Previously, he has served as a
member of the Board of Directors of FMB-Grand Rapids and the Grand Rapids
Advisory Board of Michigan National Bank, as Treasurer and President of the
Minority Affairs Council of Michigan Universities (MACMU), and as a member of
the Board of Directors of the Grand Rapids Area Chamber of Commerce. Mr.
Williams has been the recipient of numerous awards in the Grand Rapids and West
Michigan area for community services and job performance.
ROBERT M. WYNALDA (Director) Mr. Wynalda is the retired Chief Executive
Officer and former owner of Wynalda Litho Inc. of Rockford, Michigan. Mr.
Wynalda held the position of Chief Executive Officer from 1970 when he founded
the company until its sale in February of 1998. Wynalda Litho Inc. is a
commercial printing company serving customers from around the country. Mr.
Wynalda is a native of Grand Rapids and has spent 45 years in the printing
business. Mr. Wynalda serves on the Board of Trustees for Cornerstone University
of Grand Rapids, and formerly served as a director of a local financial
institution.
ROBERT B. KAMINSKI (Senior Vice President and Secretary) Mr. Kaminski
joined the bank in June 1997 and has over 14 years of commercial banking
experience. From 1984 to 1993, Mr. Kaminski worked for FMB-Grand Rapids in
various capacities in the areas of credit administration and bank compliance. In
1993, Mr. Kaminski was appointed Vice President in charge of loan review and
served as Vice President and Manager of the commercial credit department for
three of FMB's subsidiaries. He has served as Senior Vice President and
Secretary of Mercantile and the Bank since their inception in 1997. Mr. Kaminski
serves on the Leadership Committee for the National Kidney Foundation of
Michigan in Grand Rapids, the Board of Directors for HELP Pregnancy Crisis Aid,
Inc. and is a career mentor for Aquinas College of Grand Rapids.
CHARLES E. CHRISTMAS (Chief Financial Officer, Treasurer and Compliance
Officer) Mr. Christmas joined the Bank in April 1998 and served as Vice
President of Finance, Treasurer and Compliance Officer of Mercantile and the
Bank in 1998, and in 1999 was elected Chief Financial Officer, Treasurer and
Compliance Officer. Prior to joining Mercantile, he examined various financial
institutions for over ten years while serving as a bank examiner with the FDIC.
He began his tenure with the FDIC upon his graduation from Ferris State
University. Mr. Christmas holds a Bachelors of Science degree in Accountancy.
KEY EMPLOYEES
In addition to the directors and executive officers named above, Mercantile
has many experienced employees who assist the Bank in servicing its customers
and pursuing its business opportunities. These employees include, among others,
the key employees described below.
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<PAGE> 56
MARK S. AUGUSTYN (Senior Vice President, Commercial Loan Officer), joined
the Bank in December 1997 and has over eight years of commercial banking
experience, primarily in the commercial lending area. He began his career with
FMB-Grand Rapids as Credit Analyst, and was promoted to Senior Analyst, Credit
Manager, Assistant Vice President of Commercial Lending, and finally Vice
President of Commercial Lending before joining the Bank. Mr. Augustyn is active
in the Grand Rapids/western Michigan community. He serves as a Board Member and
Chairman of the Finance Committee of Residential Treatment, and is a volunteer
for the West Side Food Drive.
HAROLD L. DRENTEN (Senior Vice President, Business Development Officer),
joined the Bank in January 1998 and has over 28 years of commercial banking
experience, all with FMB and its subsidiary, FMB-Grand Rapids. Mr. Drenten held
numerous positions at FMB-Grand Rapids, including Branch Manager, Mortgage
Department head, Commercial Loan Officer, and finally, Vice President of
Business Development before joining the Bank. Mr. Drenten is an active member of
the local community, serving 15 years as a Teaching Consultant with Junior
Achievement Project Business and serving seven years as an Ambassador for the
Grand Rapids Area Chamber of Commerce. He further participates in various
charity events in both Kent and Ottawa Counties.
MARK R. HOFFHINES (Senior Vice President, Commercial Loan Officer), joined
the Bank in January 1998 and has over 17 years of commercial banking experience,
beginning with his tenure as a Commercial Lender at Comerica Bank in 1981. In
1986, he joined Bank One as an Assistant Vice President of Commercial Loans, and
in 1988 left to take a position as Vice President of Commercial Loans at Great
Lakes National Bank. In 1991, Mr. Hoffhines accepted a position at FMB-Grand
Rapids as Vice President, Commercial Loan Department head, where he continued to
work until joining the Bank. He serves as Chairman of the Board of the Kent
County American Cancer Society and on the Parent Advisory Council of Forest
Hills Northern Schools.
GORDON L. OOSTING (Senior Vice President, Branch Administrator), joined the
Bank in December 1997 and has over 16 years of commercial banking experience,
primarily in the commercial lending area. Before working in the banking
business, he held the position of Vice President of Finance for a local
manufacturing company with annual sales of approximately $20 million. After
leaving that position in 1982, Mr. Oosting served as Vice President of
Commercial Lending at NBD Bank until 1992, when he began work with FMB-Grand
Rapids, serving as Vice President of Commercial Lending.
DEBORAH A. PARRENT (Vice President, Branch Administrator), joined the Bank
in September 1997 and has over 16 years of commercial banking experience, having
begun her career in 1981 at Great Lakes National Bank as a Residential Loan
Officer, Business Development Officer, and finally Branch District Manager. In
1994, she moved to FMB-Grand Rapids, where she was a Branch Manager until her
employment with the Bank. She holds offices in such organizations as the Junior
League of Grand Rapids and Habitat for Humanity, and serves as an Ambassador for
the Grand Rapids Area Chamber of Commerce. She has worked with many other
community organizations including: United Way, Family Services, YMCA, American
Heart Association and Kent County District Library. Ms. Parrent has also
participated in the Economic Club of Grand Rapids and Professional Women's
Network events.
LONNA L. WIERSMA (Vice President, Human Resource Director), joined the Bank
in March 1999, and has over 17 years of Human Resource experience, beginning her
career at Old Kent Bank of Holland in February of 1982. In July of 1991, she
joined FMB as Assistant Vice President, Employee Relations/Employment Manager,
then in 1993
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<PAGE> 57
accepted the position of Vice President, Human Resource Manager for FMB-Grand
Rapids. In 1995, she was appointed to the position of Affiliate Human Resource
Manager, responsible for servicing five affiliate banks. In 1998, at the time of
the Huntington merger, she accepted the position of Vice President, Senior Human
Resource Generalist where she continued to work until joining the Bank.
SUMMARY COMPENSATION TABLE
The following table details the compensation received by the named
executive officers for the period July 15, 1997 (inception) to December 31, 1997
and during 1998:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ---- -------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Gerald R. Johnson, Jr......... 1998 $164,231 $0 7,000 $8,655(1)
Chairman of the Board and 1997 $ 83,654 $0 40,000 $ 0
Chief Executive Officer
Michael H. Price.............. 1998 $135,307 $0 7,000 $6,919(2)
President and Chief
Operating 1997 $ 14,112 $0 21,000 $ 0
Officer
</TABLE>
- -------------------------
(1) Includes a matching contribution by the Bank to Mr. Johnson's 401(k) plan
account of $6,338, and life and disability insurance premiums paid by the
Bank on policies insuring Mr. Johnson of $488 and $1,829, which policies are
in addition to the Bank's group insurance plans that are generally available
to salaried employees.
(2) Includes a matching contribution by the Bank to Mr. Price's 401(k) plan
account of $5,220, and life and disability insurance premiums paid by the
Bank on policies insuring Mr. Price of $995 and $704, which policies are in
addition to the Bank's group insurance plans that are generally available to
salaried employees.
OPTIONS GRANTED IN 1998
Under Mercantile's 1997 Employee Stock Option Plan, stock options are
granted to Mercantile's and the Bank's senior management and other key
employees. The Board of Directors of Mercantile is responsible for awarding the
stock options. These options are awarded to give senior management and key
employees an additional interest in Mercantile from a shareholder's perspective,
and enable them to participate in the future growth and profitability of
Mercantile. In making awards, the Board may consider the position and
responsibilities of the employee, the nature and value of his or her services
and accomplishments, the present and potential contribution of the employee to
the success of Mercantile, and such other factors as the Board may deem
relevant. Options for up to 130,000 shares may be issued under the Plan. As of
July 1, 1999, options for 121,750 shares had been issued.
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<PAGE> 58
The following table summarizes certain information about the options
granted in 1998 to each named executive officer:
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED(1) 1998 PER SHARE EXPIRATION DATE
- ---- ---------- ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Gerald R. Johnson,
Jr................... 7,000 22.6% $13.63 October 21, 2008
Michael H. Price....... 7,000 22.6% $13.63 October 21, 2008
</TABLE>
- -------------------------
(1) The option granted to Mr. Johnson becomes exercisable on July 22, 2001. The
option granted to Mr. Price becomes exercisable on December 1, 2000.
AGGREGATED STOCK OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
The following table provides information on the exercise of stock options
during the year ended December 31, 1998 by the named executive officers and the
value of unexercised options at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED 12/31/98 AT 12/31/98
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- -------- ------------- --------------------
<S> <C> <C> <C> <C>
Gerald R. Johnson, Jr. .... None N/A 20,000/27,000 $125,000/$143,340
Michael H. Price........... None N/A 14,000/14,000 $ 80,500/ $58,590
</TABLE>
- -------------------------
(1) Values are calculated by subtracting the exercise price from the fair market
value of the underlying common stock. For purposes of this table, fair
market value is deemed to be $16.25 per share, the average of the closing
bid and ask prices reported on the OTC Bulletin Board on December 31, 1998.
EMPLOYMENT AGREEMENTS
Effective December 1, 1998, the Bank and Mercantile entered into Employment
Agreements with Mr. Johnson and Mr. Price providing for their employment from
December 1, 1998 through December 31, 2001 (the, "Employment Period"), and
certain severance, confidentiality and non-compete arrangements that may
continue after the Employment Period. The Employment Agreement with Mr. Johnson
establishes an annual base salary of $180,000 for the period from December 1,
1998 through June 30, 1999, of $200,000 for the period from July 1, 1999 through
December 31, 1999, and of an amount not less than $200,000 to be determined by
the Board of Directors of the Bank for the period of January 1, 2000 through
December 31, 2001. The Employment Agreement with Mr. Price establishes an annual
base salary of $150,000 for the period from December 1, 1998 through June 30,
1999, of $170,000 for the period from July 1, 1999 through December 31, 1999,
and of an amount not less than $170,000 to be determined by the Board of
Directors of the Bank for the period of January 1, 2000 through December 31,
2001. In addition, the Employment Agreements provide for a one-time payment of
$5,000 to each of Mr. Johnson and Mr. Price to augment the salary amounts that
they received in
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<PAGE> 59
October and November of 1998, prior to the execution of the Employment
Agreements. In addition to the annual base salary, the Employment Agreements
provide that Mr. Johnson and Mr. Price are entitled to participate in any
employee benefit and incentive compensation plans of Mercantile and the Bank,
including health insurance, life and disability insurance, stock option, profit
sharing and retirement plans. In the event that either of the officers becomes
disabled or dies during the Employment Period, he is entitled to certain
benefits under his Employment Agreement. In the event of disability, the officer
is entitled to continue to receive his then current annual base salary through
the end of the Employment Period, and any disability benefits payable under
disability plans provided by the Bank or Mercantile. The officer also is
entitled to continue to participate in life, disability, and health insurance
plans of the Bank or Mercantile, through age 65, to the extent permitted under
such plans. If the officer dies during the Employment Period, the Bank is
obligated to pay the officer's legal representative a death benefit of $250,000,
and if the Bank or Mercantile owns any life insurance insuring the life of the
officer, the proceeds of the policies are payable to the named beneficiaries.
The Employment Agreements provide severance benefits in the event that the
officer's employment is terminated by Mercantile and the Bank without "Cause" or
the officer elects to terminate his employment for "Good Reason" during the
Employment Period. In such event, the officer is entitled to receive the greater
of (1) his annual base salary through the end of the Employment Period or (2) in
the case of Mr. Johnson, $500,000, and in the case of Mr. Price $425,000; in
either case payable over 18 months in equal monthly installments. In addition,
in the case of such a termination of employment, the officer is entitled to
continue his participation in life, disability and health insurance plans
provided by the Bank or Mercantile for 18 months, to the extent permitted under
such plans, to an assignment of any assignable life insurance policies owned by
the Bank or Mercantile insuring his life, and $10,000 for out-placement, interim
office and related expenses. The Employment Agreements also provide severance
benefits in the event that after the Employment Period the officer's employment
is terminated by the Bank and Mercantile without "Cause" or the officer's annual
base salary is reduced without "Cause." In such event, the officer is entitled
to receive the same benefits as are described above for a termination during the
Employment Period, except that when determining the cash severance payable to
him over the 18 months following his termination, the alternative of receiving
his annual base salary through the end of the Employment Period does not apply,
and instead he is entitled to receive the stated dollar amount of $500,000 in
the case of Mr. Johnson, or $425,000 in the case of Mr. Price. In the event that
an officer's employment is terminated for "Cause" during the Employment Period,
the officer is not entitled to any accrued rights that he may then have under
any stock option plan of Mercantile.
Under the Employment Agreements, Mr. Johnson and Mr. Price agree not to
disclose, except as required by law, any confidential information relating to
the business or customers of the Bank or Mercantile, or use any such information
in any manner adverse to the Bank or Mercantile. In addition, each has agreed
that for 18 months following his employment with the Bank and Mercantile, he
will not be employed by, or act as a director or officer of, any business
engaged in banking within a 50 mile radius of Grand Rapids, Michigan that
solicits customers of the Bank.
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<PAGE> 60
DIRECTORS COMPENSATION
During 1998, no compensation was paid to any directors of Mercantile or the
Bank for their services in such capacities. In January of 1999, the Board of
Directors of the Bank approved the payment of an annual retainer to each
non-employee director of the Bank in the amount of $1,200, payable on each May
1, beginning May 1, 1999. The Board of Directors of the Bank also approved a
deferred compensation plan for non-employee directors of the Bank under which
such directors may elect to defer the receipt of their annual retainer until
they are no longer serving on the Board.
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<PAGE> 61
SECURITY OWNERSHIP
The following table presents information regarding the beneficial ownership
of Mercantile's common stock as of July 1, 1999, by Mercantile's directors and
named executive officers, and all directors and executive officers of Mercantile
as a group. To the best of Mercantile's knowledge, no person owns more than 5%
of Mercantile's outstanding common stock.
<TABLE>
<CAPTION>
AMOUNT PERCENT OF CLASS
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) OWNED(6)
- ------------------------ ------------ ----------------
<S> <C> <C>
Betty S. Burton..................................... 1,016 *
Edward J. Clark..................................... 1,600 *
Peter A. Cordes..................................... 25,000 1.0%
C. John Gill........................................ 42,000(2) 1.7%
David M. Hecht...................................... 50,000 2.0%
Gerald R. Johnson, Jr. ............................. 81,509(3) 3.3%
Susan K. Jones...................................... 850 *
Lawrence W. Larsen.................................. 13,500 *
Calvin D. Murdock................................... 15,875 *
Michael H. Price.................................... 16,095(4) *
Dale J. Visser...................................... 90,000 3.6%
Donald Williams, Sr. ............................... 730 *
Robert M. Wynalda................................... 50,000 2.0%
All directors and executive officers as a group (15
persons).......................................... 388,175(5) 15.6%
</TABLE>
- -------------------------
* Less than one percent.
(1) Some or all of the common stock listed may be held jointly with, or for the
benefit of, spouses and children or grandchildren of, or various trusts
established by, the person indicated.
(2) Includes 14,000 shares held by Mr. Gill's spouse.
(3) Includes 30,000 shares that Mr. Johnson has the right to acquire within 60
days of July 1, 1999 pursuant to Mercantile's 1997 Employee Stock Option
Plan and 1,509 shares that Mr. Johnson owns under the Bank's 401(k) Plan.
Mr. Johnson also holds options under the Employee Stock Option Plan to
purchase an additional 17,000 shares, which have not yet vested.
(4) Includes 14,000 shares that Mr. Price has the right to acquire within 60
days of July 1, 1999, pursuant to Mercantile's 1997 Employee Stock Option
Plan and 1,395 shares that Mr. Price owns under the Bank's 401(k) Plan. Mr.
Price also holds options under the Employee Stock Option Plan to purchase an
additional 14,000 shares, which have not yet vested.
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<PAGE> 62
(5) Includes 49,000 shares that such persons have the right to acquire within 60
days of July 1, 1999 pursuant to Mercantile's 1997 Employee Stock Option
Plan and 6,615 shares that such persons own under the Bank's 401(k) Plan.
(6) The percentages shown are based on the 2,472,500 shares of Mercantile's
common stock outstanding as of July 1, 1999, plus the number of shares that
the named person or group has the right to acquire within 60 days of July 1,
1999.
60
<PAGE> 63
RELATED PARTY TRANSACTIONS
BANK TRANSACTIONS
The Bank has had, and expects in the future to have, loan and other
financial transactions in the ordinary course of business with Mercantile's
directors, executive officers, and principal shareholders (and their associates)
on substantially the same terms as those prevailing for comparable transactions
with others. All such transactions (1) were made in the ordinary course of
business, (2) were made on substantially the same terms, including interest
rates and collateral on loans, as those prevailing at the time for comparable
transactions with other persons, and (3) in the opinion of management did not
involve more than the normal risk of collectibility or present other unfavorable
features.
As of December 31, 1998, the Bank had outstanding 44 loans to directors or
executive officers of Mercantile totaling approximately $9.1 million in
aggregate amount under commitments totaling approximately $12.8 million. As of
June 30, 1999, the Bank had outstanding 55 loans to directors or executive
officers of Mercantile totaling approximately $8.8 million in aggregate amount
under commitments totaling approximately $12.5 million.
CONTRACTS WITH COMPANY CONTROLLED BY A DIRECTOR
In November of 1998, the Bank entered into a contract with Visser Brothers,
Inc. for it to act as construction manager and perform portions of the
construction for the Bank's new operations facility and branch located in Alpine
Township, a suburb of Grand Rapids, Michigan. Dale Visser and Bruce Visser, who
are brothers, are owners of a substantial majority of Visser Brothers. Dale
Visser is a member of the Board of Directors of Mercantile and the Bank, and
both were organizers of the Bank. The contract estimated the construction costs
for the facility at not more than approximately $1.3 million. Visser Brothers
was to receive approximately 5% of this amount for its construction management
services, and be reimbursed for the wages, salaries, and related taxes and
benefits of construction workers and supervisory and administrative personnel
that it employed in connection with the construction. The payments for the
percentage amount and reimbursements totaled approximately $60,000 for the
project. In addition, when deemed appropriate by the Bank, the architect for the
project, and Visser Brothers, the Bank permitted Visser Brothers to bid as a
subcontractor for portions of the work that were to be performed on the project.
In several instances, Visser Brothers was hired as a subcontractor where its bid
was determined to be the most favorable. The Bank paid a total of approximately
$511,000 to Visser Brothers for serving as a subcontractor for the project.
In 1999, the Bank purchased from American Seating Company office furniture
for its new Alpine Township branch and operations center and paid American
Seating Company approximately $93,000 for the office furniture. Edward Clark is
a member of the Board of Directors of Mercantile and the Bank, and the
President, Chief Executive Officer, and majority shareholder of American Seating
Company.
In 1997, the Bank contracted with Visser Brothers Inc. to renovate the
building that the Bank is leasing for its main office. The contract provided for
the payment of approximately $450,000 to Visser Brothers for renovation work
that it performed under its base bid, and an additional approximately $150,000
for work that was specified in the contract to be performed by a separate
supplier. The contract was awarded to Visser Brothers after being submitted for
bids. The renovations were completed in December 1997 pursuant to specifications
provided by the Bank's architect.
61
<PAGE> 64
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law and regulations. Such provisions
applicable to banks and their holding companies regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, lending activities and practices, nature and amount of
collateral for loans, establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to Mercantile and
the Bank establishes a comprehensive framework for their respective operations
and is intended primarily for the protection of the FDIC deposit insurance
funds, the depositors of the Bank, and the public, rather than shareholders of
the Bank or Mercantile. Any change in government regulation may have a material
effect on the business of Mercantile and the Bank.
There has been significant legislative and regulatory change relating to
the financial services industry in recent years. Non-bank financial
institutions, such as securities brokerage firms, insurance companies and money
market funds, have been permitted to engage in activities that directly compete
with traditional bank business. The services that banks are permitted to provide
and the types of accounts banks may offer to depositors have been expanded.
Geographic constraints on the operations of financial institutions and their
holding companies have been relaxed.
MERCANTILE
GENERAL. Mercantile is a registered bank holding company, subject to
supervision and examination by the Federal Reserve. Mercantile is required to
make periodic reports to the Federal Reserve and to furnish such other
information as the Federal Reserve may require under the BHCA.
Federal Reserve policy requires a bank holding company such as Mercantile
to serve as a source of financial and managerial strength to its banking
subsidiaries. Under this policy, a bank holding company must use available
resources to provide adequate capital funds to a troubled banking subsidiary,
even if it is not otherwise obligated to do so. In addition, in certain
circumstances a Michigan state bank having impaired capital may be required by
the Commissioner of the FIB either to restore the bank's capital by a special
assessment upon its shareholders, or to initiate the liquidation of the bank.
INVESTMENTS AND ACTIVITIES. In general, the BHCA requires a bank holding
company to obtain prior approval of the Federal Reserve before it may merge with
or consolidate into another bank holding company, acquire substantially all the
assets of any bank or bank holding company, or acquire ownership or control of
any voting shares of any bank or bank holding company, if after such
acquisition, it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank holding company or bank. In acting on such
applications, the Federal Reserve considers statutory factors, including the
financial and managerial condition of the parties, their record of performance
under the Community Reinvestment Act, and the impact upon competition in
relevant geographic and product markets.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of
62
<PAGE> 65
any company that is not a bank, and from engaging in any business other than
that of banking, managing and controlling banks or furnishing services to banks
and other permitted subsidiaries. Upon notice to the Federal Reserve, bank
holding companies may engage in, and may own shares of companies engaged in,
certain businesses found by the Federal Reserve to be so closely related to
banking or the management or control of banks as to be a proper incident
thereto. Under current Federal Reserve regulations, a holding company and its
non-bank subsidiaries are permitted to engage in financial and investment
advisory, sales and consumer finance, equipment leasing, data processing,
discount securities brokerage, mortgage banking and brokerage, and other
activities. These activities are subject to certain limitations imposed by the
regulations.
CAPITAL REQUIREMENTS. The Federal Reserve's capital guidelines establish
the following minimum regulatory capital requirements for bank holding
companies: (a) a leverage capital requirement expressed as a percentage of total
assets, (b) a qualifying capital requirement expressed as a percentage of
risk-weighted assets, (c) a Tier 1 leverage requirement expressed as a
percentage of total assets, and (d) for bank holding companies having defined
trading activities equal to 10% or more of total assets (or $1 billion,
whichever is less), a risk-based capital ratio adjusted for market risk. The
leverage capital requirement consists of a minimum ratio of total capital to
total assets of 6%, with an expressed expectation that banking organizations
generally should operate above such minimum level. The qualifying capital
requirement consists of a minimum ratio of total qualifying capital to total
risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.
Tier 1 capital consists principally of shareholders' equity, other than goodwill
and certain amounts of other intangibles, but also includes certain amounts
attributable to minority interests in the equity account of consolidated
subsidiaries. The Tier 1 leverage requirement consists of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly rated companies, with a
minimum requirement of 4% for all others. Mercantile is not currently subject to
the capital ratio requirement relative to market risk.
Each of the capital guidelines currently used by the Federal Reserve is a
minimum requirement, and higher capital levels will be required if warranted by
the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization, such as Mercantile,
experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions (i.e., Tier 1 capital less
all intangible assets), well above the minimum levels. The Federal Reserve's
regulations provide that the capital guidelines will generally be applied on a
consolidated basis in the case of a bank holding company, such as Mercantile,
with more than $150 million in total consolidated assets.
THE BANK
GENERAL. The Bank is a Michigan-chartered bank, subject to supervision and
examination by the FIB. Deposit accounts with the Bank are insured by the FDIC
pursuant to the Federal Deposit Insurance Act ("FDIA") and regulations issued by
the FDIC. Federal Reserve and FDIC regulations affect many activities of the
Bank, including the permissible types and amounts of loans, investments, capital
adequacy, branching, interest payable on deposits, required reserves, and the
safety and soundness of the Bank's practices. The regulations are intended
primarily for the protection of the Bank's depositors and customers, and not the
shareholders of the Bank or Mercantile. The Bank is regulated and examined by
the FDIC, and is not a member of the Federal Reserve System.
63
<PAGE> 66
The Bank is subject to certain restrictions imposed by the Federal Reserve
Act on any extensions of credit to Mercantile or its subsidiaries, on
investments in the stock or other securities of Mercantile or its subsidiaries,
and the acceptance of the stock or other securities of Mercantile or its
subsidiaries as collateral for loans to any person. Federal law places
restrictions on the amount and nature of loans to executive officers, directors
and controlling persons of banks insured by the FDIC and holding companies
controlling such banks.
CAPITAL REQUIREMENTS. The FDIC's capital guidelines for a state chartered,
FDIC-insured non-member bank, like the Bank, include (a) a leverage measure,
consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks and a minimum requirement of not less than 4% for all
others, and (b) a risk-based capital measure consisting of a minimum ratio of
qualifying total capital to risk-weighted assets of 8%, at least one-half of
which must be Tier 1 capital. Tier 1 capital consists principally of
shareholders' equity. In addition, the FDIC has adopted requirements for each
such bank having defined trading activities as shown on its most recent
Consolidated Report of Condition and Income ("Call Report") in an amount equal
to 10% or more of its total assets (or $1 billion, whichever is less) (1) to
measure its market risk using an internal value-at-risk model conforming to the
FDIC's capital guidelines, and (2) to maintain a commensurate amount of
additional capital to reflect the risk. The FDIC's capital guidelines establish
minimum requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual institutions.
In addition to the foregoing, under the terms of the FDIC Order granting
the Bank deposit insurance coverage, the Bank is required to maintain a ratio of
Tier 1 capital to total assets of not less than 8% until December 15, 2000. The
regulatory capital ratios of Mercantile and the Bank, respectively, at June 30,
1999, and December 31, 1998, are set forth in Note 14 of the Notes to
Consolidated Financial Statements of Mercantile elsewhere in this Prospectus.
PROMPT CORRECTIVE ACTION. Among other things, the FDIA requires the
federal depository institution regulators to take prompt corrective action in
respect of depository institutions that do not meet minimum capital
requirements. The scope and degree of regulatory intervention is linked to the
capital category in which a depository institution falls. The FDIA and the
implementing regulations of the Federal depository institution regulators
establish five capital categories, ranging from "well capitalized" to
"critically undercapitalized", based upon an institution's qualifying capital to
risk-based assets, Tier 1 capital to risk-based assets, and Tier 1 capital to
total assets ratios. Each depository institution is periodically assigned to a
capital category, generally on the basis of its most recent Call Report.
Depending upon the capital category in which an institution falls, the
regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
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<PAGE> 67
BROKERED DEPOSITS. In order to fund its rapid asset growth to date,
Mercantile has relied significantly on wholesale funding sources during its
first 18 months of operations. This wholesale funding consists primarily of
short-term certificates of deposit obtained from depositors located outside
Mercantile's local market area, including varying amounts of "brokered deposits"
placed by deposit brokers for a fee. Well-capitalized institutions are not
subject to limitations on brokered deposits, while an adequately capitalized
institution is able to accept, renew or rollover brokered deposits only with a
waiver from the FDIC and subject to certain restrictions on the yield paid on
such deposits. Undercapitalized institutions are not permitted to accept
brokered deposits. The Bank is currently well-capitalized and, therefore, is
eligible under the statutory standard to accept brokered deposits without
restriction. Mercantile anticipates that as the Bank matures, it will continue
to use a combination of local deposits and wholesale funding, including such
amounts of brokered deposits as management deems appropriate from an
asset/liability management perspective.
DIVIDENDS
Mercantile is a corporation separate and distinct from the Bank. The
ability of Mercantile to obtain funds for the payment of dividends and for other
cash requirements will be dependent on the amount of dividends that may be
declared by its subsidiary, the Bank. The Bank is subject to limitations on the
dividends it may pay to Mercantile.
As a banking corporation organized under Michigan law, the Bank will be
restricted as to the maximum amount of dividends it may pay on its common stock.
The Bank may not pay dividends except out of net profits after deducting its
losses and bad debts. The Bank may not declare or pay a dividend unless it will
have a surplus amounting to at least 20% of its capital after the payment of the
dividend. If the Bank has a surplus less than the amount of its capital it may
not declare or pay any dividend until an amount equal to at least 10% of net
profits for the preceding half year (in the case of quarterly or semiannual
dividends) or full year (in the case of annual dividends) has been transferred
to surplus. The Bank may, with the approval of the Commissioner of the FIB, by
vote of shareholders owning two-thirds of the stock eligible to vote increase
its capital stock by a declaration of a stock dividend, provided that after the
increase its surplus equals at least 20% of its capital stock, as increased. The
Bank may not declare or pay any dividend on its common stock until the
cumulative dividends on preferred stock (should any such stock be issued and
outstanding) have been paid in full. The Bank has no present plans to issue
preferred stock.
The FDIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, payment of dividends by a bank may be prevented by the applicable
federal regulatory authority if such payment is determined, by reason of the
financial condition of such bank, to be an unsafe and unsound banking practice.
Further, in order to comply with the FDIC order granting it deposit insurance,
the Bank may not, prior to December 15, 2000, pay a dividend in an amount which
would cause the Bank's Tier 1 leverage ratio to be less than 8%. See, "-- The
Bank" and "Capital Requirements."
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<PAGE> 68
It is the policy of the Federal Reserve that a bank holding company should
not pay cash dividends unless (a) the organization's net income available to
common equity for the past year is sufficient to fully fund the dividends, and
(b) the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
For small bank holding companies (those with less than $150 million in assets),
the Federal Reserve's position is that such companies should not pay dividends
so long as they have a debt-to-equity ratio of 1:1 or greater. The Federal
Reserve has also expressed the view that a bank holding company should not pay
cash dividends that can only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing.
Additionally, the Federal Reserve possesses enforcement powers over bank
holding companies and their nonbank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability in appropriate cases to
proscribe the payment of dividends by banks and bank holding companies. Similar
enforcement powers over the Bank are possessed by the FDIC. The "prompt
corrective action" provisions of the FDIA impose further restrictions on the
payment of dividends by insured banks which fail to meet specified capital
levels and, in some cases, their parent bank holding companies. In addition to
the restrictions on dividends imposed by the Federal Reserve, the Michigan
Business Corporation Act imposes certain restrictions on the declaration and
payment of dividends by Michigan corporations such as Mercantile. Under Michigan
law, dividends may be legally declared or paid by Mercantile only if after the
distribution Mercantile can pay its debts as they come due in the usual course
of business and Mercantile's total assets equal or exceed the sum of its
liabilities plus the amount that would be needed to satisfy the preferential
rights upon dissolution of any holders of preferred stock then outstanding whose
preferential rights are superior to those receiving the distribution.
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<PAGE> 69
DESCRIPTION OF THE PREFERRED SECURITIES
The preferred securities and the common securities will be issued under the
terms of the trust agreement of MBWM Trust. The trust agreement will be
qualified as an indenture under the Trust Indenture Act. Initially, Wilmington
Trust Company will be the property trustee and will act as trustee for the
purpose of complying with the Trust Indenture Act. The terms of the preferred
securities will include those stated in the trust agreement of MBWM Trust and
those made part of the trust agreement by the Trust Indenture Act. The following
is a summary of the material terms and provisions of the preferred securities
and the trust agreement. Prospective investors in the preferred securities are
urged to read all the provisions of the trust agreement, including the
definitions in the trust agreement, and the Trust Indenture Act. The form of the
trust agreement has been filed as an exhibit to the Registration Statement of
which this prospectus is a part.
GENERAL OVERVIEW
Under the terms of the trust agreement of MBWM Trust, the administrative
trustees will issue the preferred securities and the common securities,
collectively, the trust securities. The preferred securities will represent
preferred undivided beneficial interests in the assets of MBWM Trust and the
holders of the preferred securities will be entitled to a preference in most
circumstances regarding distributions and amounts payable on redemption or
liquidation over the common securities of MBWM Trust, as well as other benefits
as described in the trust agreement.
The preferred securities will rank pari passu, and payments will be made
thereon pro rata, with the common securities of MBWM Trust except as described
under "Subordination of Common Securities of MBWM Trust Held by Mercantile"
below.
Legal title to the junior subordinated debentures will be held by the
property trustee in trust for the benefit of the holders of the trust
securities. The preferred securities guarantee executed by Mercantile for the
benefit of the holders of the preferred securities will be a guarantee on a
subordinated basis and will not guarantee payment of distributions or amounts
payable on redemption or liquidation of the preferred securities if MBWM Trust
does not have funds on hand available to make the payments. See "Description of
Preferred Securities Guarantee." If an event of default under the indenture has
occurred and is continuing and the default is attributable to Mercantile's
failure to pay interest or principal on the junior subordinated debentures on
the due date, a holder of preferred securities may institute a legal proceeding
directly against Mercantile for payment of principal and interest on the junior
subordinated debentures having a principal amount equal to the aggregate
liquidation amount of the preferred securities of the holder. This action is
referred to in this discussion as a direct action. See "Description of Junior
Subordinated Debentures -- Enforcement of Rights by Holders of Preferred
Securities" and "Relationship Among the Preferred Securities, the Junior
Subordinated Debentures and the Preferred Securities Guarantee."
QUARTERLY DISTRIBUTION PAYMENTS AND EXTENSIONS ON DISTRIBUTION PAYMENTS
PAYMENT OF DISTRIBUTIONS. Distributions on the preferred securities will
be payable at the annual rate of 9.60% of the stated liquidation amount of $10,
payable quarterly in arrears on the 15th day of October, January, April and July
in each year, beginning
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October 15, 1999. The amount of each distribution due will include amounts
accrued and unpaid through the date the distribution is due. Distributions on
the preferred securities will be payable to the holders as they appear on the
register of MBWM Trust on the relevant record date. Until the preferred
securities do not remain in book-entry form, the relevant record date will be
one business day prior to the relevant distribution date and, in the event the
preferred securities are not in book-entry form, the relevant record date will
be the first day of the month in which the relevant distribution date occurs.
The right to receive distributions will be cumulative from the date of original
issuance of the preferred securities.
The amount of distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any payment
date is not a business day, the distribution will be made on the next business
day, and without any interest or other payment regarding any delay. As used in
this prospectus, a business day means any day other than a Saturday or a Sunday,
or a day on which banking institutions in Michigan are authorized or required by
law or executive order to remain closed or a day on which the corporate trust
office of the property trustee or the indenture trustee is closed for business.
The only funds of MBWM Trust available for distribution to its preferred
securities holders will be payments by Mercantile under the junior subordinated
debentures. See "Description of Junior Subordinated Debentures." If Mercantile
does not make interest payments on the junior subordinated debentures, the
property trustee will not have funds available to pay distributions on the
preferred securities. The payment of distributions, if and to the extent MBWM
Trust has legally available funds and cash sufficient to make payments, is
guaranteed by Mercantile. For further information, see "Description of Preferred
Securities Guarantee."
EXTENSION PERIOD. Unless a debenture event of default has occurred and is
continuing, Mercantile has the right under the indenture to defer interest
payments on the junior subordinated debentures at any time for a period not
exceeding 20 consecutive quarters regarding each extension period. However, no
extension period may extend beyond the stated maturity of the junior
subordinated debentures. As a consequence of any extension election by
Mercantile, quarterly distributions on the preferred securities will be deferred
by MBWM Trust during any extension period. Distributions to which holders of
preferred securities are entitled will accumulate additional amounts at the rate
per year of 9.60% thereof, compounded quarterly from the relevant distribution
date. The term distributions as used in this prospectus includes any additional
accumulated amounts.
During any extension period, Mercantile may not (1) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment regarding, any of its capital stock which includes common
and preferred stock, or (2) make any payment of principal, interest or premium,
if any, on or repay, repurchase or redeem any debt securities of Mercantile that
rank pari passu with or junior in interest to the junior subordinated debentures
or make any preferred securities guarantee payments regarding any preferred
securities guarantee by Mercantile of the debt securities of any subsidiary of
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Mercantile if the preferred securities guarantee ranks pari passu with or junior
in interest to the junior subordinated debentures. These restrictions do not
apply to:
- dividends or distributions in common stock of Mercantile;
- any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any plan of
this type in the future, or the redemption or repurchase of any rights
pursuant to this type of plan;
- payments under the preferred securities guarantee of Mercantile; or
- purchases of common stock for issuance under any future benefit plans for
its directors, officers or employees.
Prior to the termination of any extension period, Mercantile may further
extend the extension period, provided that the extension does not cause the
extension period to exceed 20 consecutive quarters or extend beyond the stated
maturity of the junior subordinated debentures. Upon the termination of any
extension period and the payment of all amounts then due, and subject to the
above limitations, Mercantile may elect to begin a new extension period. There
is no limitation on the number of times that Mercantile may elect to begin an
extension period.
Mercantile has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the junior
subordinated debentures.
REDEMPTION -- MANDATORY AND OPTIONAL RIGHTS OF MERCANTILE
MANDATORY REDEMPTION OF PREFERRED SECURITIES. Upon the repayment or
redemption at any time, in whole or in part, of any junior subordinated
debentures, the proceeds from the repayment or redemption will be applied by the
property trustee to redeem a like amount of the trust securities at the
redemption price, as defined below. For more information, see "Description of
Junior Subordinated Debentures -- Redemption." If less than all of the junior
subordinated debentures are to be repaid or redeemed on a redemption date, then
the proceeds will be allocated to the redemption of the preferred securities and
common securities pro rata.
OPTIONAL REDEMPTION OF JUNIOR SUBORDINATED DEBENTURES. Mercantile will
have the right to redeem the junior subordinated debentures (1) beginning on
September 17, 2004, in whole at any time or in part from time to time at a
redemption price equal to the accrued and unpaid interest on the junior
subordinated debentures redeemed to the date fixed for redemption, plus 100% of
the principal amount of the junior subordinated debentures, or (2) at any time,
in whole, but not in part, upon a tax event, an investment company event or a
capital treatment event as defined in the following paragraph. The redemption
price will be equal to the accrued and unpaid interest on the redeemed junior
subordinated debentures, plus 100% of the principal amount. These payments will
be subject to receipt of prior approval by the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal Reserve. See
"Description of Junior Subordinated Debentures -- Redemption."
TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION, CAPITAL
TREATMENT EVENT REDEMPTION OR DISTRIBUTION OF JUNIOR SUBORDINATED
DEBENTURES. If a tax event, an investment company event or a capital treatment
event occurs after original issuance of the preferred securities and is
continuing, Mercantile has the right to redeem the junior
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subordinated debentures in whole. If a redemption of the junior subordinated
debentures occurs, Mercantile would also cause a mandatory redemption of the
preferred securities and common securities in whole at the redemption price, as
defined below, within 90 days following the occurrence of any of these events.
In each case the redemption would be subject to receipt of prior approval by the
Federal Reserve if then required under its applicable capital guidelines or
policies. If any of these events has occurred and is continuing, and Mercantile
does not elect to redeem the junior subordinated debentures and cause a
mandatory redemption of the trust securities or to liquidate MBWM Trust and
cause the junior subordinated debentures to be distributed to holders of the
trust securities in liquidation of MBWM Trust, the trust securities will remain
outstanding. Also, additional sums, as defined below, may be payable on the
junior subordinated debentures.
A tax event requires the receipt by Mercantile and MBWM Trust of a legal
opinion to the effect that, as a result of any amendment to, including any
announced prospective change in, the laws or regulations of the United States or
any political subdivision or taxing authority of the United States, or as a
result of any official administrative pronouncement or judicial decision
interpreting or applying the tax laws or regulations, there is more than an
insubstantial risk that:
- MBWM Trust is, or will be within 90 days of the date of the opinion,
subject to United States federal income tax regarding income received or
accrued on the junior subordinated debentures;
- interest payable by Mercantile on the junior subordinated debentures is
not, or within 90 days of the opinion, will not be, deductible by
Mercantile, in whole or in part, for United States federal income tax
purposes; or
- MBWM Trust is, or will be within 90 days of the date of the opinion,
subject to more than a de minimis amount of other taxes, duties,
assessments or other governmental charges.
An investment company event requires the receipt by Mercantile and MBWM
Trust of a legal opinion to the effect that, as a result of any change in law or
regulation or a change in interpretation or application of law or regulation by
any legislative body, court, governmental agency or regulatory authority, MBWM
Trust is or will be considered an investment company required to be registered
under the Investment Company Act.
A capital treatment event requires the receipt by Mercantile and MBWM Trust
of a legal opinion to the effect that, as a result of any amendment to,
including any proposed change in, the laws or regulations of the United States
or any of its political subdivisions, or as a result of any official action or
judicial decision interpreting the laws or regulations, there is more than an
insubstantial risk that Mercantile's ability to treat the preferred securities
as core capital or its equivalent for purposes of the Federal Reserve capital
adequacy guidelines, is impaired.
Additional sums means the additional amounts as may be necessary to be paid
by Mercantile on the junior subordinated debentures so that the amount of
distributions payable by MBWM Trust on the outstanding trust securities will not
be reduced as a result of any additional taxes, duties, assessments and other
governmental charges to which MBWM Trust has become subject.
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Like amount means (1) regarding a redemption of trust securities, trust
securities having a liquidation amount, as defined below, equal to that portion
of the principal amount of junior subordinated debentures to be
contemporaneously redeemed in accordance with the indenture, allocated to the
common securities and to the preferred securities based upon the relative
liquidation amounts of these classes and the proceeds of which will be used to
pay the redemption price of the trust securities, and (2) regarding a
distribution of junior subordinated debentures to holders of trust securities in
connection with a dissolution or liquidation of MBWM Trust, junior subordinated
debentures having a principal amount equal to the liquidation amount of the
trust securities of the holder to whom the junior subordinated debentures are
distributed.
Liquidation amount means the stated amount of $10 per trust security.
Redemption price means, regarding any trust security, the liquidation
amount of the trust security, plus accumulated and unpaid distributions to the
redemption date, allocated on a pro rata basis, based on liquidation amounts,
among the trust securities.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
Subject to Mercantile's having received prior approval of the Federal
Reserve, Mercantile will have the right at any time to liquidate MBWM Trust and,
after satisfaction of the liabilities of creditors of MBWM Trust as provided by
applicable law, cause the junior subordinated debentures to be distributed to
the holders of trust securities in liquidation of MBWM Trust. After the
liquidation date fixed for any distribution of junior subordinated debentures
for preferred securities:
- the preferred securities will no longer be deemed to be outstanding;
- the depositary or its nominee, as the record holder of the preferred
securities, will receive a registered global certificate or certificates
representing the junior subordinated debentures to be delivered upon the
distribution; and
- any certificates representing preferred securities not held by the
depositary or its nominee will be deemed to represent the junior
subordinated debentures having a principal amount equal to the
liquidation amount of the preferred securities, and bearing interest
equal to the accrued and unpaid distributions on the preferred
securities, until the certificates are presented to the administrative
trustees or their agent for reissuance.
There can be no assurance as to the market prices for the preferred
securities or the junior subordinated debentures that may be distributed in
exchange for the preferred securities if a dissolution and liquidation of MBWM
Trust were to occur. Accordingly, the preferred securities that an investor may
purchase, or the junior subordinated debentures that the investor may receive on
dissolution and liquidation of MBWM Trust, may trade at a discount to the price
that the investor paid to purchase the preferred securities. If the junior
subordinated debentures are distributed, Mercantile will use reasonable efforts
to list them on a national securities exchange or quotation system.
REDEMPTION PROCEDURES
Preferred securities redeemed on each redemption date will be redeemed at
the redemption price with the proceeds from the contemporaneous redemption of
the junior subordinated debentures. Redemptions of the preferred securities will
be made and the
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redemption price will be payable on each redemption date only to the extent that
MBWM Trust has funds on hand available for the payment of the redemption price.
See "-- Subordination of Common Securities of MBWM Trust Held by Mercantile" and
"Description of Preferred Securities Guarantee."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of trust securities at the
holder's registered address. Unless MBWM Trust defaults in payment of the
applicable redemption price, on and after the redemption date, distributions
will cease to accrue on the preferred securities called for redemption.
If MBWM Trust gives a notice of redemption regarding the preferred
securities, then, by 12:00 noon, Detroit, Michigan time, on the redemption date,
the property trustee will pay the redemption price to the depositary, as the
record holder of the preferred securities. The depositary thereafter will credit
the redemption price to the participants for whom it holds the preferred
securities. See "Book-Entry Issuance." If the preferred securities are no longer
in book-entry form, the property trustee, to the extent funds are available,
will deposit with the paying agent for the preferred securities funds sufficient
to pay the aggregate redemption price. The property trustee will give the paying
agent irrevocable instructions and authority to pay the redemption price upon
surrender of certificates evidencing the preferred securities. Notwithstanding
the foregoing, distributions payable on or prior to the redemption date will be
payable to the holders of the preferred securities on the relevant record dates
for the related distribution dates. If notice of redemption has been given and
funds deposited as required, then upon the date of the deposit, all rights of
the holders of the preferred securities will cease, except the right of the
holders of the preferred securities to receive the redemption price, but without
interest on the redemption price, and the preferred securities will cease to be
outstanding. If any date fixed for redemption of the preferred securities is not
a business day, then payment of the redemption price payable on the date will be
made on the next business day and without any interest or other payment for the
delay. If, however, the business day falls in the next calendar year, the
payment will be made on the immediately preceding business day. If payment of
the redemption price in respect of preferred securities called for redemption is
improperly withheld or refused and not paid either by MBWM Trust or by
Mercantile under the preferred securities guarantee, distributions on the
preferred securities will continue to accrue at the then applicable rate, from
the redemption date originally established by MBWM Trust for the preferred
securities to the date the redemption price is actually paid. In this case the
actual payment date will be the date fixed for redemption for purposes of
calculating the redemption price. See "Description of Preferred Securities
Guarantee."
Subject to applicable law, including, without limitation, federal
securities laws, Mercantile may at any time and from time to time purchase
outstanding preferred securities by tender, in the open market or by private
agreement.
Payment of the redemption price on the preferred securities and any
distribution of junior subordinated debentures to holders of preferred
securities will be made to the applicable record holders as they appear on the
register of the preferred securities on the relevant record date, which date
will be one business day prior to the relevant redemption date; provided,
however, that if any preferred securities are not in book-entry form, the
relevant record date for them will be a date at least 15 days prior to the
redemption date. In the case of a liquidation, the record date will be
established by the property trustee and be no more than 45 days before the
liquidation date.
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If less than all of the trust securities are to be redeemed on a redemption
date, then the aggregate redemption price for the trust securities to be
redeemed will be allocated pro rata to the preferred securities and common
securities based upon the relative liquidation amounts of these classes. The
particular outstanding preferred securities to be redeemed will be selected by
any method as the property trustee deems fair and appropriate. This method may
provide for the selection for redemption of portions equal to $10 or an integral
multiple of $10 of the liquidation amount of preferred securities. The property
trustee will promptly notify the trust securities registrar in writing of the
preferred securities selected for redemption and, in the case of any preferred
securities selected for partial redemption, the liquidation amount thereof to be
redeemed. For all purposes of the trust agreement, unless the context otherwise
requires, all provisions relating to the redemption of preferred securities will
relate to the portion of the aggregate liquidation amount of preferred
securities which has been or is to be redeemed.
SUBORDINATION OF COMMON SECURITIES OF MBWM TRUST HELD BY MERCANTILE
Payment of distributions on, and the redemption price of, the preferred
securities and common securities will be made pro rata based on the liquidation
amounts of these securities. However, if on any distribution date or redemption
date a debenture event of default has occurred and is continuing, no
distributions on or redemption of the common securities will be made. Further,
no other payment on account of the redemption, liquidation or other acquisition
of the common securities will be made unless payment in full in cash of all
distributions payable on all of the outstanding preferred securities are made,
or in the case of redemption the full redemption price on all of the outstanding
preferred securities then called for redemption, has been made or provided for.
All funds available to the property trustee will first be applied to the payment
in full in cash of all distributions on, or redemption price of, the preferred
securities then due and payable.
In the case of any event of default under the trust agreement resulting
from a debenture event of default, Mercantile as holder of the common securities
will be deemed to have waived any right to act regarding any event of default
until the effects of all events of default have been cured, waived or otherwise
eliminated. Until any events of default have been so cured, waived or otherwise
eliminated, the property trustee will act solely on behalf of the holders of the
preferred securities and not on behalf of Mercantile as holder of the common
securities, and only the holders of the preferred securities will have the right
to direct the property trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
Mercantile will have the right at any time to terminate MBWM Trust and
cause the junior subordinated debentures to be distributed to the holders of the
preferred securities. This right is subject to Mercantile having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Distribution of Junior
Subordinated Debentures" above.
In addition, under the trust agreement, MBWM Trust will automatically
terminate upon expiration of its term and will earlier terminate on the first to
occur of: (1) events of bankruptcy, dissolution or liquidation of Mercantile;
(2) delivery by Mercantile of written direction to the property trustee to
terminate MBWM Trust, which direction is optional and wholly within the
discretion of Mercantile; (3) redemption of all of the preferred securities as
described under "-- Redemption -- Mandatory and Optional Rights of
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Mercantile;" and (4) the entry of an order for the dissolution of MBWM Trust by
a court of competent jurisdiction.
If an early termination occurs as described in clause (1), (2) or (4) above
or upon the expiration of the term of MBWM Trust, it will be liquidated by the
trustees as expeditiously as the trustees determine to be possible. The
liquidation will be made after satisfaction of liabilities to creditors of MBWM
Trust as provided by applicable law. In the liquidation, holders of the trust
securities will receive a like amount of the junior subordinated debentures,
unless this distribution is determined by the property trustee not to be
practical. If the property trustee determines that a distribution of the junior
subordinated debentures is not practical, then the holders of preferred
securities will be entitled to receive an amount equal to the liquidation amount
of $10 per trust security plus accrued and unpaid distributions thereon to the
date of payment. This amount, payable out of the assets of MBWM Trust available
for distribution, is referred to as the liquidation distribution. If the
liquidation distribution can be paid only in part because MBWM Trust has
insufficient assets available to pay the full aggregate liquidation
distribution, then the amounts payable directly by MBWM Trust on the preferred
securities will be paid on a pro rata basis. The holders of the common
securities will be entitled to receive distributions upon a liquidation pro rata
with the holders of the preferred securities, except that if a debenture event
of default has occurred and is continuing, the preferred securities will have a
priority over the common securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, MBWM Trust is treated as a grantor trust, a distribution
of the junior subordinated debentures should not be a taxable event to holders
of the preferred securities. Should there be a change in law, a change in legal
interpretation, a tax event or other circumstances, however, the distribution
could be a taxable event to holders of the preferred securities. See "Material
Federal Income Tax Consequences." If Mercantile elects neither to redeem the
junior subordinated debentures prior to maturity nor to liquidate MBWM Trust and
distribute the junior subordinated debentures to holders of the preferred
securities, the preferred securities will remain outstanding until the repayment
of the junior subordinated debentures.
If Mercantile elects to liquidate MBWM Trust and cause the junior
subordinated debentures to be distributed to holders of the preferred securities
in liquidation of MBWM Trust, Mercantile will continue to have the right to
shorten the maturity of the junior subordinated debentures under most
circumstances. See "Description of Junior Subordinated Debentures -- General
Overview."
EVENTS OF DEFAULT; NOTICE
Any one of the following events that has occurred and is continuing
constitutes an event of default under the trust agreement:
- the occurrence of a debenture event of default under the indenture, see
"Description of Junior Subordinated Debentures -- Indenture Events of
Default"; or
- default by MBWM Trust in the payment of any distribution when it becomes
due and payable, and continuation of the default for a period of 30 days;
or
- default by MBWM Trust in the payment of any redemption price of any trust
security when it becomes due and payable; or
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- default in the performance, or breach, in any material respect, of any
covenant or warranty of the property trustee in the trust agreement,
other than a default or breach in the performance of a covenant or
warranty which is addressed in the previous two points above, and
continuation of the default or breach, for a period of 60 days after
there has been given, by registered or certified mail, to the property
trustee by the holders of at least 25% in aggregate liquidation amount of
the outstanding preferred securities, a written notice specifying the
default or breach and requiring it to be remedied and stating that the
notice is a "Notice of Default" under the trust agreement; or
- the occurrence of events of bankruptcy or insolvency regarding the
property trustee and the failure by Mercantile to appoint a successor
property trustee within 60 days thereof.
Within five business days after the occurrence of any event of default
actually known to the property trustee, the property trustee is required to
transmit notice of the event of default to the holders of the preferred
securities, the administrative trustees and Mercantile, unless the event of
default has been cured or waived. Mercantile and the administrative trustees are
required to file annually with the property trustee a certificate as to whether
they are in compliance with all the conditions and covenants applicable to them
under the trust agreement.
If a debenture event of default has occurred and is continuing, the
preferred securities will have a preference over the common securities upon
termination of MBWM Trust as described above. See "-- Liquidation Distribution
Upon Termination." Upon a debenture event of default, unless the principal of
all the junior subordinated debentures has already become due and payable,
either the property trustee or the holders of not less than 25% in aggregate
principal amount of outstanding junior subordinated debentures may declare all
of the junior subordinated debentures to be due and payable immediately. Written
notice must be given to Mercantile, and to the property trustee, if given by
holders of the junior subordinated debentures. If the property trustee or the
holders of the junior subordinated debentures fail to declare the principal of
all of the junior subordinated debentures due and payable upon a debenture event
of default, the holders of at least 25% in liquidation amount of the preferred
securities then outstanding will have the right to declare the junior
subordinated debentures immediately due and payable. In either event, payment of
principal and interest on the junior subordinated debentures will remain
subordinated to the extent provided in the indenture. In addition, holders of
the preferred securities have to bring a direct action as discussed below. See
"Description of Junior Subordinated Debentures -- Enforcement of Rights by
Holders of Preferred Securities."
REMOVAL OF TRUSTEES
Unless a debenture event of default has occurred and is continuing, any
trustee may be removed at any time by the holder of the common securities of
MBWM Trust. If a debenture event of default has occurred and is continuing, the
property trustee, Delaware trustee or both may be removed by the holders of a
majority in liquidation amount of the outstanding preferred securities. In no
event will the holders of the preferred securities have the right to vote to
appoint, remove or replace the administrative trustees, which voting rights are
vested exclusively in Mercantile as the holder of the common securities. No
resignation or removal of a trustee and no appointment of a successor trustee
will be
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effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default has occurred and is continuing, at any time, for
the purpose of meeting the legal requirements of the Trust Indenture Act or of
any jurisdiction in which any part of trust property may at the time be located,
the holders of the common securities and the administrative trustees have power
to appoint one or more persons either to act as (1) a co-trustee, jointly with
the property trustee, of all or any part of the trust property, or (2) to act as
separate trustee of any such property. In either case these trustees will have
the powers which may be provided in the instrument of appointment, and will have
vested in them any property, title, right or power deemed necessary or
desirable, subject to the provisions of the trust agreement. In case a debenture
event of default has occurred and is continuing, the property trustee alone will
have power to make the appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Generally, any person or successor to any of the trustees of MBWM Trust may
be a successor trustee to any of the trustees, including a successor resulting
from a merger or consolidation. However, any successor trustee must meet all of
the qualifications and eligibility standards to act as a trustee to MBWM Trust.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF MBWM TRUST
MBWM Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any trust or other person, except as described
below. MBWM Trust may, at the request of Mercantile, with the consent of the
administrative trustees and without the consent of the holders of the preferred
securities, the property trustee or the Delaware trustee, undertake the
transactions described above; provided, that:
- the successor entity either (a) expressly assumes all of the obligations
of MBWM Trust regarding the preferred securities or (b) substitutes for
the preferred securities other securities having substantially the same
terms as the preferred securities, so long as the successor securities
rank the same as the preferred securities rank in priority regarding
distributions and payments upon liquidation, redemption and otherwise;
- Mercantile expressly appoints a trustee of the successor entity
possessing substantially the same powers and duties as the property
trustee as the holder of the junior subordinated debentures;
- any transaction of this kind does not adversely affect the rights,
preferences and privileges of the holders of the preferred securities,
including any successor securities, in any material respect;
- the successor entity has a purpose identical to that of MBWM Trust;
- the successor securities will be listed or traded on any national
securities exchange or other organization on which the preferred
securities may then be listed;
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- prior to the transaction, Mercantile has received a legal opinion from
independent counsel to MBWM Trust experienced in such matters to the
effect that (a) the transaction does not adversely affect the rights,
preferences and privileges of the holders of the preferred securities,
including any successor securities, in any material respect, and (b)
following any transaction of this kind, neither MBWM Trust nor the
successor entity will be required to register as an investment company
under the Investment Company Act; and
- Mercantile or any permitted successor or designee owns all of the common
securities of the successor entity and guarantees the obligations of the
successor entity under the successor securities at least to the extent
provided by the preferred securities guarantee. Notwithstanding the
foregoing, MBWM Trust will not, except with the consent of holders of
100% in liquidation amount of the preferred securities, enter into any
transaction of this kind, or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it, if the transaction would
cause MBWM Trust or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except in certain limited circumstance described below and under
"Description of Preferred Securities Guarantee -- Amendments and Assignment", in
general, the holders of the preferred securities will have no voting rights.
The trust agreement may be amended from time to time by Mercantile and the
trustees, without the consent of the holders of the trust securities:
- to cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to make
any other provisions regarding matters or questions arising under the
trust agreement, which are not inconsistent with the other provisions of
the trust agreement; or
- to modify, eliminate or add to any provisions of the trust agreement to
the extent that is necessary to ensure that MBWM Trust will be classified
for United States federal income tax purposes as a grantor trust at all
times that any trust securities are outstanding or to ensure that MBWM
Trust will not be required to register as an investment company under the
Investment Company Act.
Provided, however, that in the case of the first point above, this action
will not adversely affect in any material respect the interests of any holder of
trust securities, and any amendments of the trust agreement will become
effective when notice is given to the holders of the trust securities.
The trust agreement may be amended by the trustees and Mercantile (1) with
the consent of holders representing not less than a majority of the aggregate
liquidation amount of the outstanding trust securities, and (2) upon receipt by
the trustees of an opinion of counsel to the effect that the amendment or the
exercise of any power granted to the trustees in accordance with the amendment
will not affect MBWM Trust's status as a grantor trust for United States federal
income tax purposes or MBWM Trust's exemption from status as an investment
company under the Investment Company Act. However, without the consent of each
holder of trust securities, the trust agreement may not be amended to (1) change
the amount or timing of any distribution on the trust securities or otherwise
adversely affect the amount of any distribution required to be made
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in respect of the trust securities as of a specified date or (2) restrict the
right of a holder of trust securities to institute suit for the enforcement of
any payment of distributions afterwards.
For the time that any junior subordinated debentures are held by the
property trustee, the trustees will not:
- direct the time, method and place of conducting any proceeding for any
remedy available to the indenture trustee, or executing any trust or
power conferred on the indenture trustee regarding the junior
subordinated debentures;
- waive any past default that is waivable under the indenture;
- exercise any right to rescind or annul a declaration that the principal
of all the junior subordinated debentures will be due and payable; or
- consent to any amendment, modification or termination of the indenture or
the junior subordinated debentures, where this consent is required,
without, in each case, obtaining the prior approval of the holders of a
majority in aggregate liquidation amount of all outstanding preferred
securities. However, where a consent under the indenture would require
the consent of each affected holder of junior subordinated debentures,
this consent may not be given by the property trustee without the prior
consent of each holder of the preferred securities. The trustees will not
revoke any action previously authorized or approved by a vote of the
holders of the preferred securities except by subsequent vote of the
holders of the preferred securities. The property trustee will notify
each holder of the preferred securities of any notice of default
regarding the junior subordinated debentures. In addition to obtaining
these approvals of the holders of the preferred securities, prior to
taking any of the above actions, the trustees will obtain an opinion of
counsel stating that MBWM Trust will not, as a consequence of the
proposed action by the property trustee, cease to be classified as a
grantor trust and will not be classified as an association taxable as a
corporation for United States federal income tax purposes on account of
the action.
Any required approval of holders of the preferred securities may be given
at a meeting of holders of preferred securities convened for this purpose or
under written consent. The property trustee will cause a notice of any meeting
at which holders of the preferred securities are entitled to vote, or of any
matter upon which action by written consent of the holders is to be taken, to be
given to each holder of record of the preferred securities in the manner set
forth in the trust agreement.
No vote or consent of the holders of the preferred securities will be
required for MBWM Trust to redeem and cancel the preferred securities in
accordance with the trust agreement.
Any of the preferred securities that are owned by Mercantile, the trustees
or any affiliate of Mercantile or any trustees, will, for purposes of the vote
or consent, be treated as if they were not outstanding.
GLOBAL PREFERRED SECURITIES
The preferred securities will be represented by one or more global
certificates registered in the name of the depositary or its nominee. Beneficial
interests in the preferred
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securities will be shown on, and transfers will be effected only through,
records maintained by participants in the depositary. Except as described below,
preferred securities in certificated form will not be issued in exchange for the
global certificates. See "Book-Entry Issuance."
A global security will be exchangeable for preferred securities registered
in the names of persons other than the depositary or its nominee only if:
- the depositary notifies Mercantile that it is unwilling or unable to
continue as a depositary for the global security and no successor
depositary has been appointed, or if at any time the depositary ceases to
be a clearing agency registered under the Securities Exchange Act of
1934, at a time when the depositary is required to be so registered to
act as a depositary;
- Mercantile in its sole discretion determines that the global security
will be so exchangeable; or
- there has occurred and is continuing an event of default under the
indenture. Any global security that is exchangeable under the preceding
sentence will be exchangeable for definitive certificates registered in
the names which the depositary directs. It is expected that the
instructions will be based upon directions received by the depositary
regarding ownership of beneficial interests in the global security. In
the event that preferred securities are issued in certificated form, they
will be in denominations of $10 or integral multiples of $10 and may be
transferred or exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
preferred securities, the global preferred security may not be transferred
except (1) as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or (2) another nominee of the
depositary or (3) by the depositary or any nominee to a successor depositary or
any nominee of the successor.
Payments on preferred securities represented by a global security will be
made to the depositary, as the depositary for the preferred securities. In the
event the preferred securities are issued in certificated form, distributions
will be payable, the transfer of the preferred securities will be registrable,
and preferred securities will be exchangeable for preferred securities of other
denominations of a like aggregate liquidation amount, at the corporate office of
the property trustee, or at the offices of any paying agent or transfer agent
appointed by the administrative trustees. However, payment of any distribution
may be made at the option of the administrative trustees by check mailed to the
address of the persons entitled to payments or by wire transfer. In addition, if
the preferred securities are issued in definitive form, the record dates for
payment of distributions will be the first day of the month in which the
relevant distribution date occurs. For a description of the terms of the
depositary arrangements relating to payments, transfers, voting rights,
redemptions and other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of a global preferred security, and the deposit of the
global preferred security with or on behalf of the depositary, the depositary
will credit, on its book-entry registration and transfer system, the respective
aggregate liquidation amounts of the individual preferred securities represented
by the global preferred security to persons that have accounts with the
depositary. The accounts will be designated by the dealers, underwriters or
agents regarding the preferred securities. Ownership of beneficial interests in
a global preferred security will be limited to participants or persons that may
hold
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interests through participants. Ownership of beneficial interests in the global
preferred security will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the depositary or its nominee and
the records of participants regarding interests of persons who hold through
participants. The laws of some states require that some purchasers of securities
in those states take physical delivery of the securities in certificated form.
The limits, under these laws, may impair the ability to transfer beneficial
interests in a global preferred security.
For the time that the depositary for a global preferred security, or its
nominee, is the registered owner of the global preferred security, this
registered owner will be considered the sole owner or holder of the preferred
securities represented by the global preferred security for all purposes under
the trust agreement of MBWM Trust. Except as provided below, owners of
beneficial interests in a global preferred security will not be entitled to have
any of the individual preferred securities represented by the global preferred
security registered in their names, will not receive or be entitled to receive
physical delivery of any the preferred securities in certificated form and will
not be considered the owners or holders thereof.
None of Mercantile, the property trustee, any paying agent, or the
securities registrar for the preferred securities will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the global preferred security or
for maintaining, supervising or reviewing any records relating to the beneficial
ownership interests.
Mercantile expects that the depositary, upon receipt of any payment of the
liquidation amount or distributions in respect of a permanent global preferred
security, immediately will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the aggregate
liquidation amount of the global preferred security as shown on the records of
the depositary or its nominee. Mercantile also expects that payments by
participants to owners of beneficial interests in the global preferred security
held through the participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in street name. The payments will be the
responsibility of the participants.
If the depositary for the preferred securities is at any time unwilling,
unable or ineligible to continue as depositary and a successor depositary is not
appointed by Mercantile within 90 days, MBWM Trust will issue individual
preferred securities in exchange for the global preferred security. In addition,
MBWM Trust may at any time in its sole discretion, subject to any limitations
described in this prospectus relating to the preferred securities, determine not
to have any preferred securities represented by one or more global preferred
securities. In this event, Mercantile will issue individual preferred securities
in exchange for the global preferred security or securities representing the
preferred securities. Further, if MBWM Trust specifies, an owner of a beneficial
interest in a global preferred security representing preferred securities may
receive individual preferred securities in exchange for the beneficial
interests, subject to any limitations described in this prospectus. In any such
instance, a beneficial interest owner in a global preferred security will be
entitled to physical delivery of individual preferred securities represented by
the global preferred security equal in liquidation amount to the beneficial
interest, and to have the preferred securities registered in its name.
Individual preferred securities issued will be issued in denominations, unless
otherwise specified by MBWM Trust, of $10 and integral multiples of $10.
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PAYMENT AND PAYING AGENCY
Payments in respect of the preferred securities will be made to the
depositary, which will credit the relevant accounts at the depositary on the
applicable distribution dates. However, if any of the preferred securities are
not held by the depositary, the payments will be made by check mailed to the
address of the holder as the address appears on the register. The paying agent
will initially be the property trustee and any co-paying agent chosen by the
property trustee and acceptable to the administrative trustees and Mercantile.
The paying agent will be permitted to resign as paying agent upon 30 days'
written notice to the property trustee and Mercantile. In the event that the
property trustee is no longer the paying agent, the administrative trustees will
appoint a successor paying agent, which will be a bank or trust company
acceptable to the administrative trustees and Mercantile.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as registrar and transfer agent for the
preferred securities. Registration of transfers of the preferred securities will
be effected without charge by or on behalf of MBWM Trust, but the registrar may
require payment to cover any tax or other governmental charges that may be
imposed in connection with any transfer or exchange. MBWM Trust will not be
required to register or cause to be registered the transfer of the preferred
securities after the preferred securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee, other than upon the occurrence and during the
continuance of an event of default, undertakes to perform only the duties which
are specifically set forth in the trust agreement. After an event of default,
the property trustee must exercise the same degree of care and skill as a
prudent person would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the property trustee is under no obligation to
exercise any of the powers vested in it by the trust agreement at the request of
any holder of preferred securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred. If no event
of default has occurred and is continuing and the property trustee is required
to decide between alternative causes of action, construe ambiguous provisions in
the trust agreement or is unsure of the application of any provision of the
trust agreement, and the matter is not one on which holders of the preferred
securities are entitled under the trust agreement to vote, then the property
trustee will take action as directed by Mercantile. If the property trustee is
not so directed, it will take action as it deems advisable and in the best
interests of the holders of the trust securities and will have no liability
under the trust agreement except for its own bad faith, negligence or willful
misconduct.
MISCELLANEOUS
The administrative trustees are authorized and directed to conduct the
affairs of and to operate MBWM Trust in such a way that MBWM Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the junior
subordinated debentures will be treated as indebtedness of Mercantile for United
States federal income tax purposes. In this regard, Mercantile and the
administrative trustees are authorized to take any lawful action not
inconsistent with
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the certificate of trust of MBWM Trust or the trust agreement, that they
determine in their discretion to be necessary or desirable for these purposes,
as long as the action does not materially adversely affect the interests of the
holders of the related preferred securities. Holders of the preferred securities
have no preemptive or similar rights.
MBWM Trust may not borrow money or issue debt or mortgage or pledge any of
its assets.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures will be issued under a subordinated
indenture, dated as of September 17, 1999, between Mercantile and Wilmington
Trust Company, as the indenture trustee. The following is a summary of the
material terms and provisions of the junior subordinated debentures and the
indenture. Prospective investors are urged to read the indenture, which has been
filed as an exhibit to the Registration Statement of which this prospectus forms
a part. Wherever particular defined terms of the indenture are referred to but
not defined herein, such defined terms have the same meaning as that in the
indenture. The indenture is qualified under the Trust Indenture Act.
Concurrently with the issuance of the preferred securities, MBWM Trust will
invest the proceeds from the sale of the preferred securities, together with the
consideration paid by Mercantile for the common securities, in junior
subordinated debentures issued by Mercantile. The junior subordinated debentures
will be issued as unsecured debt under the indenture.
GENERAL OVERVIEW
The junior subordinated debentures will bear interest at the rate of 9.60%
per year of their principal amount, payable quarterly in arrears on the 15th day
of October, January, April and July of each year, beginning October 15, 1999, to
the person in whose name each junior subordinated debenture is registered,
subject to minor exceptions, at the close of business on the business day next
preceding the interest payment date. Notwithstanding the above, in the event
that either (1) the junior subordinated debentures are held by the property
trustee and the preferred securities are no longer in book-entry only form or
(2) the junior subordinated debentures are not represented by a global
subordinated debenture, the record date for the interest payment will be the
first day of the month in which the payment is made. The amount of each interest
payment due regarding the junior subordinated debentures will include amounts
accrued and unpaid through the date the interest payment is due. It is
anticipated that, until the liquidation, if any, of MBWM Trust, each junior
subordinated debenture will be held in the name of the property trustee in trust
for the benefit of the holders of the preferred securities. The amount of
interest payable for any period will be computed on the basis of a 360-day year
of twelve 30-day months. In the event that any date on which interest is payable
on the junior subordinated debentures is not a business day, then payment of the
interest payable on that date will be made on the next business day. Accrued
interest that is not paid on the applicable interest payment date will bear
additional interest at the rate per year of 9.60% compounded quarterly. The term
interest as used in this prospectus includes quarterly interest payments,
interest on quarterly interest payments not paid on the applicable interest
payment date and additional sums, as defined below, as applicable.
The junior subordinated debentures will mature on September 16, 2029. This
date, as it may be shortened as described below, is the stated maturity. This
date may be shortened once at any time by Mercantile before the day which is 90
days before the scheduled maturity date to any date not earlier than September
17, 2004, subject to Mercantile having received prior approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve. In the event that Mercantile elects to shorten the stated
maturity of the junior subordinated debentures, it will give at least 90 days
prior notice to the registered holders of the junior subordinated debentures,
the property trustee and the indenture trustee. The property trustee must give
notice to the holders of the trust securities of the shortening of the stated
maturity.
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The junior subordinated debentures will be unsecured and will rank junior
and be subordinate in right of payment to all senior and subordinated debt (as
defined in the indenture) of Mercantile. Because Mercantile is a holding
company, the right of Mercantile to participate in any distribution of assets of
Bank, or upon the Bank's liquidation or reorganization or otherwise, and thus
the ability of holders of the junior subordinated debentures to benefit
indirectly from the distribution, is subject to the prior claims of creditors of
that subsidiary, except to the extent that Mercantile may itself be recognized
as a creditor of that subsidiary. Accordingly, the junior subordinated
debentures will be effectively subordinated to all existing and future
liabilities of Mercantile's subsidiaries, and holders of junior subordinated
debentures should look only to the assets of Mercantile for payments on the
junior subordinated debentures. The indenture does not limit the incurrence or
issuance of other secured or unsecured debt of Mercantile, including senior and
subordinated debt, whether under the indenture or any existing or other
indenture that Mercantile may enter into in the future or otherwise. See
"Subordination" below.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
If no debenture event of default has occurred and is continuing, Mercantile
has the right under the indenture at any time during the term of the junior
subordinated debentures to defer interest payments at any time for a period not
exceeding 20 consecutive quarters. However, no extension period may extend
beyond the stated maturity of the junior subordinated debentures. At the end of
an extension period, Mercantile must pay all interest then accrued and unpaid,
together with interest at the rate of 9.60% per year, compounded quarterly.
During an extension period, interest will continue to accrue and holders of
junior subordinated debentures will be required to accrue interest income for
United States federal income tax purposes. See "Material Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
During any extension period, Mercantile may not (1) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment regarding, any of Mercantile's capital stock or (2) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities of Mercantile, including other junior subordinated
debentures, that rank pari passu with or junior in interest to the junior
subordinated debentures or make any preferred securities guarantee payments
regarding any preferred securities guarantee by Mercantile of the debt
securities of any subsidiary of Mercantile if the preferred securities guarantee
ranks pari passu with or junior in interest to the junior subordinated
debentures. These restrictions do not apply to:
- dividends or distributions in common stock of Mercantile;
- any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any plan in the
future, or the redemption or repurchase of any rights pursuant to this
type of plan;
- payments under the preferred securities guarantee; or
- purchases of common stock related to the issuance of common stock or
rights under any of Mercantile's benefit plans for its directors,
officers or employees.
Prior to the termination of any extension period, Mercantile may further extend
the extension period, provided that the extension does not cause the extension
period to exceed
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20 consecutive quarters or extend beyond the stated maturity of the junior
subordinated debentures. Upon the termination of any extension period and the
payment of all amounts then due on any interest payment date, Mercantile may
elect to begin a new extension period subject to the above requirements. No
interest will be due and payable during an extension period, except at the end
of the extension period.
If the property trustee is the only registered holder of the junior
subordinated debentures, Mercantile must give the property trustee, the
administrative trustees and the indenture trustee notice of its election of any
extension period at least one business day prior to the earlier of (1) the date
the distributions on the preferred securities would have been payable except for
the election to begin or extend the extension period or (2) the date the
administrative trustees are required to give notice to the holders of the
preferred securities of the record date or the date the distributions are
payable, but in any event not less than one business day prior to the record
date. The indenture trustee will give notice of Mercantile's election to begin
or extend a new extension period to the administrative trustees who, in turn,
will give notice to the holders of the preferred securities. There is no
limitation on the number of times that Mercantile may elect to begin an
extension period.
ADDITIONAL SUMS TO BE PAID AS A RESULT OF ADDITIONAL TAXES
If MBWM Trust or the property trustee is required to pay any additional
taxes, duties, assessments or other governmental charges as a result of a tax
event, Mercantile will pay as additional amounts on the junior subordinated
debentures any amounts which will be required so that the distributions payable
by MBWM Trust will not be reduced as a result of any additional taxes, duties or
other governmental charges. See "Description of the Preferred
Securities -- Redemption -- Mandatory and Optional Rights of Mercantile" for a
definition of tax event.
REDEMPTION
Subject to Mercantile's having received prior approval of the Federal
Reserve, if then required under applicable capital guidelines or policies of the
Federal Reserve the junior subordinated debentures are redeemable prior to
maturity at the option of Mercantile (1) beginning September 17, 2004, in whole
at any time or in part from time to time, or (2) at any time in whole, but not
in part, upon the occurrence and during the continuance of a tax event, an
investment company event or a capital treatment event, in each case at a
redemption price equal to the accrued and unpaid interest on the junior
subordinated debentures redeemed to the date fixed for redemption, plus 100% of
the principal amount of the junior subordinated debentures. See "Description of
the Preferred Securities -- Redemption -- Mandatory and Optional Rights of
Mercantile" for definitions of tax event, investment company event and capital
treatment event.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of junior subordinated
debentures to be redeemed at the holder's registered address. Unless Mercantile
defaults in payment of the redemption price, on and after the redemption date
interest will cease to accrue on the junior subordinated debentures or portions
of the junior subordinated debentures called for redemption.
The junior subordinated debentures will not be subject to any sinking fund.
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DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities -- Liquidation
Distribution Upon Termination," under circumstances involving the termination of
MBWM Trust, the junior subordinated debentures may be distributed to the holders
of the preferred securities and common securities in liquidation of MBWM Trust
after satisfaction of liabilities to creditors of MBWM Trust. If distributed to
holders of the preferred securities in liquidation, the junior subordinated
debentures will initially be issued in the form of one or more global securities
and the depositary, or any successor depositary for the preferred securities,
will act as depositary for the junior subordinated debentures. It is anticipated
that the depositary arrangements for the junior subordinated debentures would be
substantially identical to those in effect for the preferred securities. If the
junior subordinated debentures are distributed to the holders of preferred
securities upon the liquidation of MBWM Trust, there can be no assurance as to
the market price of any junior subordinated debentures that may be distributed
to the holders of preferred securities. If the junior subordinated debentures
are distributed, Mercantile will use reasonable efforts to list them on a
national securities exchange or quotation system.
RESTRICTIONS ON PAYMENTS
Mercantile has restrictions on paying dividends or making payments
regarding pari passu or junior debt if:
- there has occurred any event of which Mercantile has actual knowledge
that (a) with the giving of notice or the lapse of time, or both, would
constitute a debenture event of default and (b) in respect of which
Mercantile shall not have taken reasonable steps to cure;
- Mercantile has given notice of its election of an extension period as
provided in the indenture regarding the junior subordinated debentures
and has not rescinded the notice, or the extension period, or any
extension thereof, is continuing; or
- while the junior subordinated debentures are held by MBWM Trust,
Mercantile is in default regarding its payment of any obligation under
the preferred securities guarantee.
If any of the events above have occurred, Mercantile will not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment regarding, any of Mercantile's
capital stock; or
- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of Mercantile, including other
junior subordinated debt, that rank pari passu with or junior in interest
to the junior subordinated debentures or make any preferred securities
guarantee payments regarding any preferred securities guarantee by
Mercantile of the debt securities of any subsidiary of Mercantile if the
preferred securities guarantee ranks pari passu or junior in interest to
the junior subordinated debentures.
Provided, however, Mercantile may (a) declare and pay dividends or
distributions in common stock, (b) make any declaration of a dividend in
connection with the implementation of a stockholders' rights plan, or the
issuance of stock under this type of plan in the future or the redemption or
repurchase of any rights under such plan,
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(c) make payments under the preferred securities guarantee and (d) make
purchases of common stock related to the issuance of common stock or rights
under any of Mercantile's benefit plans for its directors, officers or
employees.
SUBORDINATION OF JUNIOR SUBORDINATED DEBENTURES TO SENIOR AND SUBORDINATED DEBT
OF MERCANTILE
In the indenture, Mercantile has agreed that any junior subordinated
debentures will be subordinate and junior in right of payment to all senior and
subordinated debt to the extent provided in the indenture. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, reorganization or any bankruptcy, or similar proceedings in connection with
any insolvency or bankruptcy proceeding of Mercantile, the holders of senior and
subordinated debt will first be entitled to receive payment in full of
principal, interest and premium, if any, on the senior and subordinated debt
before the holders of junior subordinated debentures will be entitled to receive
principal or interest payments on the junior subordinated debentures.
In the event of the acceleration of the maturity of any junior subordinated
debentures, the holders of all senior and subordinated debt outstanding upon
acceleration will first be entitled to receive payment in full of all amounts
due to them, including any amounts due upon acceleration, before the holders of
junior subordinated debentures will be entitled to receive any principal or
interest payments on the junior subordinated debentures. However, holders of
subordinated debt will not be entitled to receive payment of any of these
amounts to the extent that the subordinated debt is by its terms subordinated to
trade creditors.
No principal or interest payments on the junior subordinated debentures may
be made if there has occurred and is continuing a default in any payment
regarding senior and subordinated debt or an event of default regarding any
senior and subordinated debt resulting in the acceleration of the maturity of
senior and subordinated debt, or if any judicial proceeding is pending regarding
any of this type of default.
Debt as used in this discussion means regarding any person, whether
recourse is to all or a portion of the assets of the person and whether or not
contingent:
- every obligation of the person for money borrowed;
- every obligation of the person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
- every reimbursement obligation of the person regarding letters of credit,
bankers' acceptances or similar facilities issued for the account of the
person;
- every obligation of the person issued or assumed as the deferred purchase
price of property or services, but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business;
- every capital lease obligation of the person; and
- every obligation of the type referred to in all of the points immediately
above of another person and all dividends of another person the payment
of which, in either case, the person has guaranteed or is responsible or
liable, directly or indirectly, as obligor or otherwise.
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Senior and subordinated debt means the principal of and premium, if any,
and interest, if any, on debt of Mercantile, including interest accruing at the
time of the filing of any petition in bankruptcy or for reorganization relating
to Mercantile, whether incurred on or prior to the date of the indenture or
thereafter incurred, unless, in the instrument creating or evidencing the debt
or under which the debt is outstanding, it is provided that the obligations are
not superior in right of payment to the junior subordinated debentures or to
other debt which is pari passu with, or subordinated to, the junior subordinated
debentures.
However, senior and subordinated debt will not be deemed to include:
- any debt of Mercantile which when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code was
without recourse to Mercantile;
- any debt of Mercantile to any of its subsidiaries;
- any debt to any employee of Mercantile;
- any debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of the debt by the holders of
the junior subordinated debentures as a result of the subordination
provisions of the indenture would be greater than they otherwise would
have been as a result of any obligation of the holders to pay amounts
over to the obligees on the trade accounts payable or accrued liabilities
arising in the ordinary course of business as a result of subordination
provisions to which the debt is subject;
- the preferred securities guarantee; and
- any other debt securities issued under the indenture.
The indenture places no limitation on the amount of additional senior and
subordinated debt that may be incurred by Mercantile. Mercantile expects from
time to time to incur additional indebtedness constituting senior and
subordinated debt.
DENOMINATIONS, REGISTRATION AND TRANSFER
It is anticipated that, until the liquidation, if any, of MBWM Trust, each
junior subordinated debenture will be held in the name of the property trustee
in trust for the benefit of the holders of the preferred securities. However, in
the event of either a tax event, investment company event or capital treatment
event, the junior subordinated debentures in certificated form may be exchanged
and represented by global certificates registered in the name of the depositary
or its nominee. In the event of such an exchange, beneficial interests in the
junior subordinated debentures will be shown on, and transfers thereof will be
effected only through, records maintained by the depositary. Except as described
below, junior subordinated debentures in certificated form will not be issued in
exchange for the global certificates. See "Book-Entry Issuance."
Unless and until a global subordinated debenture is exchanged in whole or
in part for the individual junior subordinated debentures, it may not be
transferred except (1) as a whole by the depositary for the global subordinated
debenture to a nominee of the depositary or (2) by the depositary to a successor
depositary selected or approved by Mercantile or (3) to any nominee of the
successor.
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A global security will be exchangeable for junior subordinated debentures
registered in the names of persons other than the depositary or its nominee only
if (1) the depositary notifies Mercantile that it is unwilling or unable to
continue as a depositary for the global security and no successor depositary has
been appointed, or if at any time the depositary ceases to be a clearing agency
registered under the Securities Exchange Act of 1934
at a time when the depositary is required to be so registered to act as a
depositary or (2) Mercantile in its sole discretion determines that the global
security will be so exchangeable. Any global security that is exchangeable under
the preceding sentence will be exchangeable for definitive certificates
registered in the names which the depositary directs. It is expected that the
instructions will be based upon directions received by the depositary from its
participants regarding ownership of beneficial interests in the global security.
In the event that junior subordinated debentures are issued in definitive form,
the junior subordinated debentures will be in denominations of $10 and integral
multiples of $10 and may be transferred or exchanged at the offices described
below.
Payments on junior subordinated debentures represented by a global security
will be made to the depositary for the junior subordinated debentures. In the
event junior subordinated debentures are issued in definitive form, principal
and interest will be payable, the transfer of the junior subordinated debentures
will be registrable, and junior subordinated debentures will be exchangeable for
junior subordinated debentures of other denominations of a like aggregate
principal amount, at the corporate office of the indenture trustee, or at the
offices of any paying agent or transfer agent appointed by Mercantile. However,
interest payments may be made at the option of Mercantile by check mailed to the
address of the persons entitled to payments or by wire transfer. In addition, if
the junior subordinated debentures are issued in certificated form, the record
dates for interest payments will be the first day of the month in which the
payment is to be made. For a description of the depositary and the terms of the
depositary arrangements relating to payments, transfers, voting rights,
redemptions and other notices and other matters, see "Book-Entry Issuance."
Mercantile will appoint the indenture trustee as securities registrar under
the indenture. Junior subordinated debentures may be presented for exchange as
provided above, and may be presented for registration of transfer with the form
of transfer endorsed, or a satisfactory written instrument of transfer, duly
executed, at the office of the securities registrar. Mercantile may at any time
rescind the designation of any registrar or approve a change in the location
through which any registrar acts, provided that Mercantile maintains a registrar
in the place of payment. Mercantile may at any time designate additional
registrars regarding the junior subordinated debentures.
In the event of any redemption of less than all of the junior subordinated
debentures, neither Mercantile nor the indenture trustee will be required to
issue, exchange or register the transfer of less than all of the junior
subordinated debentures during a period beginning at the opening of business 15
days before the day of mailing of a notice of redemption selecting for
redemption less than all of the junior subordinated debentures and ending at the
close of business on the day of mailing of the relevant notice of redemption.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the junior subordinated
debentures will be made at the office of the indenture trustee, except that at
the option of Mercantile payment of any interest may be made, except in the case
of a global subordinated
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debenture, by check mailed to the address of the person entitled to payment as
the person's address appears in the securities register. Payment of any interest
on junior subordinated debentures will be made to the person in whose name the
junior subordinated debenture is registered at the close of business on the
regular record date for the interest payment. Mercantile may at any time
designate additional paying agents or rescind the designation of any paying
agent; however, Mercantile will at all times be required to maintain a paying
agent in each place of payment for the junior subordinated debentures.
Any moneys deposited with the indenture trustee or any paying agent, or
then held by Mercantile in trust, for the payment of the principal of or
interest on the junior subordinated debentures that are not applied and remain
unclaimed for two years after the principal or interest has become due and
payable will, at the request of Mercantile, be repaid to Mercantile. Thereafter,
the holder of the junior subordinated debenture will look, as a general
unsecured creditor, only to Mercantile for payment.
MODIFICATION OF INDENTURE
From time to time Mercantile and the indenture trustee may, without the
consent of the holders of the junior subordinated debentures, amend, waive or
supplement the indenture for specified purposes. These purposes may include,
among other things, curing ambiguities, defects or inconsistencies, provided
that this action does not materially adversely affect the interests of the
holders of the junior subordinated debentures or the preferred securities while
they remain outstanding, and qualifying, or maintaining the qualification of,
the indenture under the Trust Indenture Act. The indenture contains provisions
permitting Mercantile and the indenture trustee, with the consent of the holders
of not less than a majority in aggregate principal amount of the outstanding
junior subordinated debentures, to modify the indenture in a manner affecting
the rights of the holders of the junior subordinated debentures; provided, that,
the modification may not, without the consent of the holder of each outstanding
junior subordinated debenture:
- change the stated maturity of the junior subordinated debentures or
extend the time of payment of interest on them, except as described under
"Description of Junior Subordinated Debentures -- General Overview" and
"-- Option to Extend Interest Payment Period," or reduce the principal
amount thereof or the rate of interest thereon; or
- reduce the percentage of principal amount of junior subordinated
debentures, the holders of which are required to consent to any such
modification of the indenture. However, while any of the preferred
securities remain outstanding, (1) no modification may be made that
adversely affects the holders of the preferred securities in any material
respect, (2) no termination of the indenture may occur, and (3) no waiver
of any debenture event of default or compliance with any covenant under
the indenture may be effective, without the prior consent of the holders
of at least a majority of the aggregate liquidation amount of the
preferred securities, until the principal and interest of the junior
subordinated debentures have been paid in full and other conditions are
satisfied.
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INDENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following described
events regarding the junior subordinated debentures that has occurred and is
continuing constitutes a debenture event of default:
- failure for 30 days to pay any interest on the junior subordinated
debentures, when due, subject to the deferral of any due date in the case
of an extension period;
- failure to pay any principal on the junior subordinated debentures when
due whether at maturity, upon redemption, by declaration or otherwise,
provided however that a valid extension of any interest payment period by
Mercantile according to the terms of the indenture shall not constitute a
debenture event of default;
- failure by Mercantile to observe or perform in any material respect any
of its other covenants or agreements contained in the indenture for 90
days after written notice to Mercantile from the indenture trustee or to
Mercantile and the indenture trustee by the holders of at least 25% in
aggregate outstanding principal amount of the junior subordinated
debentures; or
- events in bankruptcy, insolvency or reorganization of Mercantile,
including the voluntary commencement of bankruptcy proceedings, entry of
an order for relief against Mercantile in a bankruptcy proceeding,
appointment of a custodian over substantially all of Mercantile's
property, a general assignment for the benefit of creditors, or a court
order for liquidation of Mercantile.
The holders of a majority in aggregate outstanding principal amount of the
junior subordinated debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the indenture
trustee. The indenture trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the junior subordinated debentures may declare
the principal due and payable immediately upon a debenture event of default. The
holders of a majority in aggregate outstanding principal amount of the junior
subordinated debentures may rescind and annul the declaration and waive the
default if the default, other than the non-payment of the principal of the
junior subordinated debentures which has become due solely by the acceleration,
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
indenture trustee. Should the holders of the junior subordinated debentures fail
to annul the declaration and waive the default, the holders of a majority in
aggregate liquidation amount of the preferred securities will have the right to
do so. In case a debenture event of default occurs and is continuing, the
property trustee will have the right to declare the principal of and the
interest on the junior subordinated debentures, and any other amounts payable
under the indenture, to be due and payable and to enforce its other rights as a
creditor.
Mercantile is required to file annually with the indenture trustee a
certificate as to whether Mercantile is in compliance with all the conditions
and covenants applicable to it under the indenture.
ENFORCEMENT OF RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If an event of default under the indenture has occurred and is continuing
and the default is attributable to Mercantile's failure to pay interest or
principal on the junior
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subordinated debentures on the due date, a holder of preferred securities may
institute a legal proceeding directly against Mercantile for payment of
principal and interest on the junior subordinated debentures having a principal
amount equal to the aggregate liquidation amount of the preferred securities of
the holder. This action is referred to in this discussion as a direct action. If
the right to bring a direct action is removed, MBWM Trust may become subject to
the reporting obligations under the Securities Exchange Act of 1934. Mercantile
will have the right under the indenture to set-off any payment made to the
holder of preferred securities by Mercantile in connection with a direct action.
The holders of the preferred securities would not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the junior subordinated debentures unless there has
been an event of default under the trust agreement. See "Description of the
Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The indenture provides that Mercantile will not consolidate with or merge
into any other person or convey, transfer or lease its properties and assets
substantially as an entirety to any person, and no person will consolidate with
or merge into Mercantile or convey, transfer or lease its properties and assets
substantially as an entirety to Mercantile, unless:
- in case Mercantile consolidates with or merges into another person or
conveys or transfers its properties and assets substantially as an
entirety to any person, the successor person is organized under the laws
of the United States or any state or the District of Columbia, and the
successor person expressly assumes Mercantile's obligations on the junior
subordinated debentures issued under the indenture;
- immediately after giving effect to this type of transaction, no debenture
event of default, and no event which, after notice or lapse of time or
both, would become a debenture event of default, has occurred and is
continuing; and
- other conditions as prescribed in the indenture are met.
The provisions of the indenture do not afford holders of the junior
subordinated debentures protection in the event of a highly leveraged or other
transaction involving Mercantile that may adversely affect holders of the junior
subordinated debentures.
SATISFACTION AND DISCHARGE
Under the indenture, Mercantile will have satisfied and discharged the
indenture when all junior subordinated debentures not previously delivered to
the indenture trustee for cancellation (1) have become due and payable or (2)
will become due and payable at their stated maturity within one year, and
Mercantile deposits in trust with the indenture trustee sufficient funds to pay
and discharge the entire indebtedness on the junior subordinated debentures to
the deposit date or to the stated maturity, as the case may be. This
satisfaction and discharge will not apply to Mercantile's obligations to pay all
other sums due under the indenture and to provide the officers' certificates and
opinions of counsel described in the indenture.
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GOVERNING LAW
The indenture and the junior subordinated debentures will be governed by
and construed in accordance with the laws of the State of Michigan.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee will have and be subject to all the duties and
responsibilities specified for an indenture trustee under the Trust Indenture
Act. Subject to these provisions, the indenture trustee is under no obligation
to exercise any of the powers vested in it by the indenture at the request of
any holder of junior subordinated debentures, unless offered reasonable
indemnity by the holder against the costs, expenses and liabilities which might
be incurred. The indenture trustee is not required to expend or risk its own
funds or otherwise incur personal financial liability in the performance of its
duties if the indenture trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
COVENANTS OF MERCANTILE
Mercantile will covenant in the indenture, as to the junior subordinated
debentures, that during the time that (1) MBWM Trust is the holder of all junior
subordinated debentures, (2) a tax event in respect of MBWM Trust has occurred
and is continuing and (3) Mercantile has elected, and has not revoked the
election, to pay additional sums, as defined under "Description of the Preferred
Securities -- Redemption -- Mandatory and Optional Rights of Mercantile," in
respect of the preferred securities, Mercantile will pay to MBWM Trust these
additional sums. Mercantile will also covenant, as to the junior subordinated
debentures:
- to maintain directly or indirectly 100% ownership of the common
securities of MBWM Trust to which junior subordinated debentures have
been issued, provided that successors which are permitted under the
indenture may succeed to Mercantile's ownership of the common securities;
- to not voluntarily terminate, wind up or liquidate MBWM Trust, except
upon approval of the Federal Reserve if then so required, and to use its
reasonable efforts to cause MBWM Trust to remain a business trust, except
(a) in connection with a distribution of junior subordinated debentures
to the holders of the preferred securities in liquidation of MBWM Trust,
(b) the redemption of all of the trust securities or (c) in connection
with mergers, consolidations, or amalgamations permitted by the trust
agreement; and
- to use its reasonable efforts to cause each holder of trust securities to
be treated as owning an individual beneficial interest in the junior
subordinated debentures.
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BOOK-ENTRY ISSUANCE
Depository Trust Company ("DTC") will act as securities depositary for all
of the preferred securities and, in the event of the distribution of the junior
subordinated debentures to holders of the preferred securities, may act as
securities depositary for all of the junior subordinated debentures. The
preferred securities and the junior subordinated debentures will be issued only
as fully-registered securities registered in the name of Cede & Co., DTC's
nominee. One or more fully-registered global certificates will be issued for the
preferred securities and deposited with DTC. In the event of the distribution of
the junior subordinated debentures to holders of the preferred securities, one
or more fully-registered global certificates may be issued for the junior
subordinated debentures and may be deposited with DTC.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act of
1934. DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations. DTC is owned by a number of its direct
participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the depositary system is also available to others such as securities brokers
and dealers, banks and trust companies that clear through or maintain custodial
relationships with direct participants, either directly or indirectly. The rules
applicable to DTC and its participants are on file with the Securities and
Exchange Commission.
Purchases of preferred securities or junior subordinated debentures within
the depositary system must be made by or through direct participants, which will
receive a credit for the preferred securities or junior subordinated debentures
on DTC's records. The ownership interest of each actual purchaser of each
preferred security or junior subordinated debenture is in turn to be recorded on
the direct and indirect participants' records. Beneficial owners will not
receive written confirmation from the DTC of their purchases, but beneficial
owners are expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the direct
or indirect participants through which the beneficial owners purchased preferred
securities or junior subordinated debentures. Transfers of ownership interests
in the preferred securities or junior subordinated debentures are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interests in preferred securities or junior subordinated
debentures, except in the event that use of the book-entry system for the
preferred securities or junior subordinated debentures is discontinued.
DTC has no knowledge of the actual beneficial owners of the preferred
securities or the junior subordinated debentures. DTC's records reflect only the
identity of the direct participants to whose accounts the preferred securities
or junior subordinated debentures are credited, which may or may not be the
beneficial owners. The participants will remain responsible for keeping account
of their holdings on behalf of their customers.
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Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners and the voting
rights of direct participants, indirect participants and beneficial owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the preferred securities or junior subordinated debentures. If less than all of
the preferred securities or the junior subordinated debentures are being
redeemed, DTC will determine the amount to be redeemed, in accordance with the
terms of the trust agreement.
Although voting regarding the preferred securities or the junior
subordinated debentures is limited to the holders of record of the preferred
securities or the junior subordinated debentures, in those instances in which a
vote is required, neither DTC nor Cede & Co. will itself consent or vote
regarding preferred securities or the junior subordinated debentures. Under its
usual procedures, DTC would mail an omnibus proxy to the property trustee as
soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
preferred securities or junior subordinated debentures are credited on the
record date and which are used and identified in a listing attached to the
omnibus proxy.
Distribution payments on the preferred securities or the junior
subordinated debentures will be made by the property trustee to DTC. DTC's
practice is to credit direct participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on the payment date.
Payments by participants to beneficial owners will be governed by standing
instructions and customary practices. Payments will be the responsibility of the
participant and not of DTC, the relevant trustee, MBWM Trust or Mercantile,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of distributions to DTC is the responsibility of the
property trustee, disbursement of the payments to direct participants is the
responsibility of DTC, and disbursements of the payments to the beneficial
owners is the responsibility of direct and indirect participants.
DTC may discontinue providing its services as securities depositary
regarding any of the preferred securities or the junior subordinated debentures
at any time by giving reasonable notice to the property trustee and Mercantile.
In the event that a successor securities depositary is not obtained, definitive
preferred securities or subordinated debenture certificates representing the
preferred securities or junior subordinated debentures are required to be
printed and delivered. Mercantile, at its option, may, at any time, decide to
discontinue use of the system of book-entry transfers through DTC, or any
successor depositary. After a debenture event of default, the holders of a
majority in liquidation preference of preferred securities or aggregate
principal amount of junior subordinated debentures may determine to discontinue
the system of book-entry transfers through DTC. In this event, definitive
certificates for the preferred securities or junior subordinated debentures will
be printed and delivered.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that MBWM Trust and Mercantile believe to be
accurate, but MBWM Trust and Mercantile assume no responsibility for the
accuracy thereof. Neither MBWM Trust nor Mercantile has any responsibility for
the performance by DTC or its participants of their respective obligations as
described in this prospectus or under the rules and procedures governing their
respective operations.
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DESCRIPTION OF PREFERRED SECURITIES GUARANTEE
The preferred securities guarantee agreement will be executed and delivered
by Mercantile and Wilmington Trust Company concurrently with the issuance of the
preferred securities. The preferred securities guarantee will be for the benefit
of the holders of the preferred securities. Wilmington Trust Company will act as
trustee under the preferred securities guarantee for the purposes of compliance
with the Trust Indenture Act, and the preferred securities guarantee will be
qualified under the Trust Indenture Act. The following is a summary of the
material provisions of the preferred securities guarantee. Prospective investors
are urged to read the form of the preferred securities guarantee which has been
filed as an exhibit to the registration statement of which this prospectus forms
a part. The guarantee trustee will hold the preferred securities guarantee for
the benefit of the holders of the preferred securities.
GENERAL OVERVIEW
The preferred securities guarantee is an irrevocable guarantee on a
subordinated basis of all of MBWM Trust's obligations to make payments under the
preferred securities, but will apply only to the extent that MBWM Trust has
funds sufficient to make the payments, and is not a guarantee of collection.
Mercantile will irrevocably and unconditionally agree to pay in full on a
subordinated basis, to the extent set forth in this prospectus, the preferred
securities guarantee payments, as defined below, to the holders of the preferred
securities, as and when due, regardless of any defense, right of set-off or
counterclaim that MBWM Trust may have or assert other than the defense of
payment. The following payments regarding the preferred securities, to the
extent not paid by or on behalf of MBWM Trust, will be subject to the preferred
securities guarantee of Mercantile:
- any accrued and unpaid distributions required to be paid on the preferred
securities, to the extent that MBWM Trust has available funds on hand at
the time;
- the redemption price regarding any preferred securities called for
redemption to the extent that MBWM Trust has available funds on hand at
the time; and
- upon a voluntary or involuntary dissolution, winding up or liquidation of
MBWM Trust, unless the junior subordinated debentures are distributed to
holders of the preferred securities.
The amount of the preferred securities guarantee will be the lesser of (a)
the liquidation distribution and (b) the amount of assets of MBWM Trust
remaining available for distribution to holders of preferred securities.
Mercantile's obligation to make a preferred securities guarantee payment may be
satisfied by direct payment of the required amounts by Mercantile to the holders
of the preferred securities or by causing MBWM Trust to pay these amounts to the
holders.
If Mercantile does not make interest payments on the junior subordinated
debentures held by MBWM Trust, MBWM Trust will not be able to pay distributions
on the preferred securities and will not have funds legally available to pay
distributions. The preferred securities guarantee will rank subordinate and
junior in right of payment to all senior and subordinated debt of Mercantile.
See "Status of the Preferred Securities Guarantee" below. Because Mercantile is
a holding company, the right of Mercantile to participate in any distribution of
assets of any subsidiary upon the subsidiary's liquidation
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or reorganization or otherwise, is subject to the prior claims of creditors of
that subsidiary, except to the extent Mercantile may itself be recognized as a
creditor of that subsidiary. Accordingly, Mercantile's obligations under the
preferred securities guarantee will be effectively subordinated to all existing
and future liabilities of Mercantile's subsidiaries, and claimants should look
only to the assets of Mercantile for payments under the preferred securities
guarantee. Except as otherwise described in this prospectus, the preferred
securities guarantee does not limit the incurrence or issuance of other secured
or unsecured debt of Mercantile, including senior and subordinated debt whether
under the indenture, any other indenture that Mercantile may enter into in the
future, or otherwise.
Mercantile has, through the preferred securities guarantee, the trust
agreement, the junior subordinated debentures, the indenture and the expense
agreement relating to MBWM Trust, taken together, fully, irrevocably and
unconditionally guaranteed on a subordinated basis all of MBWM Trust's
obligations under the preferred securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
this preferred securities guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and unconditional
guarantee on a subordinated basis of all of MBWM Trust's obligations under the
preferred securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures and the Preferred Securities Guarantee."
STATUS OF THE PREFERRED SECURITIES GUARANTEE
The preferred securities guarantee will constitute an unsecured obligation
of Mercantile and will rank subordinate and junior in right of payment to all
senior and subordinated debt in the same manner as the junior subordinated
debentures.
The preferred securities guarantee will constitute a guarantee of payment
and not of collection. The guaranteed party may institute a legal proceeding
directly against Mercantile to enforce its rights under the preferred securities
guarantee without first instituting a legal proceeding against any other person
or entity. The preferred securities guarantee will be held for the benefit of
the holders of the preferred securities. The preferred securities guarantee does
not place a limitation on the amount of additional senior and subordinated debt
that may be incurred by Mercantile. Mercantile expects from time to time to
incur additional indebtedness constituting senior and subordinated debt.
AMENDMENTS AND ASSIGNMENT
Except regarding any changes which do not adversely affect the rights of
holders of the preferred securities in a material manner, in which case no
consent will be required, the preferred securities guarantee may not be amended
without the prior approval of the holders of not less than a majority of the
aggregate liquidation amount of the outstanding preferred securities. See
"Description of the Preferred Securities -- Voting Rights; Amendment of the
Trust Agreement." All guarantees and agreements contained in the preferred
securities guarantee will bind the successors, assigns, receivers, trustees and
representatives of Mercantile and will inure to the benefit of the holders of
the preferred securities then outstanding.
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EVENTS OF DEFAULT
An event of default under the preferred securities guarantee will occur
upon the failure of Mercantile to perform any of its payment or other
obligations under the preferred securities guarantee. The holders of not less
than a majority in aggregate liquidation amount of the preferred securities have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the guarantee trustee regarding the preferred securities
guarantee or to direct the exercise of any trust or power conferred upon the
guarantee trustee under the preferred securities guarantee.
Any holder of preferred securities may institute a legal proceeding
directly against Mercantile to enforce the holder's rights under the preferred
securities guarantee without first instituting a legal proceeding against MBWM
Trust, the guarantee trustee or any other person or entity.
Mercantile, as guarantor, is required to file annually with the guarantee
trustee a certificate as to whether Mercantile is in compliance with all the
conditions and covenants applicable to it under the preferred securities
guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and continuance of
a default by Mercantile in performance of the preferred securities guarantee,
undertakes to perform only the duties which are specifically set forth in the
preferred securities guarantee. After default regarding the preferred securities
guarantee, the guarantee trustee must exercise the same degree of care and skill
as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the guarantee trustee is under no obligation
to exercise any of the rights or powers vested in it by the preferred securities
guarantee at the request or direction of any holder of the preferred securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred.
TERMINATION OF THE PREFERRED SECURITIES GUARANTEE
The preferred securities guarantee will terminate and be of no further
force and effect upon full payment of the redemption price of the preferred
securities, upon full payment of the amounts payable upon liquidation of MBWM
Trust or upon distribution of junior subordinated debentures to the holders of
the preferred securities. The preferred securities guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the preferred securities must restore payment of any sums paid under the
preferred securities or the preferred securities guarantee.
GOVERNING LAW
The preferred securities guarantee will be governed by and construed in
accordance with the laws of the State of Michigan.
THE EXPENSE AGREEMENT
Under the agreement as to expenses and liabilities entered into by
Mercantile under the trust agreement, Mercantile will irrevocably and
unconditionally guarantee to each person or entity to whom MBWM Trust becomes
indebted or liable, the full payment of
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any costs, expenses or liabilities of MBWM Trust, other than obligations of MBWM
Trust to pay to the holders of the preferred securities or other similar
interests in MBWM Trust of the amounts due the holders under the terms of the
preferred securities or the other similar interests, as the case may be.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE
FULL AND UNCONDITIONAL PREFERRED SECURITIES GUARANTEE ON A SUBORDINATED BASIS
Payments of distributions and other amounts due on the preferred
securities, to the extent MBWM Trust has funds available for the payment of the
distributions, are irrevocably guaranteed by Mercantile as and to the extent set
forth under "Description of Preferred Securities Guarantee." Taken together,
Mercantile's obligations under the junior subordinated debentures, the
indenture, the trust agreement, the expense agreement and the preferred
securities guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee on a subordinated basis of payments of distributions and
other amounts due on the preferred securities. No single document standing alone
or operating in conjunction with fewer than all of the other documents
constitutes the preferred securities guarantee. It is only the combined
operation of those documents that has the effect of providing a full,
irrevocable and unconditional guarantee on a subordinated basis of MBWM Trust's
obligations under the preferred securities. If and to the extent that Mercantile
does not make payments on the junior subordinated debentures, MBWM Trust will
not pay distributions or other amounts due on the preferred securities. The
preferred securities guarantee does not cover payment of distributions when MBWM
Trust does not have sufficient funds to pay the distributions. In this event,
the remedy of a holder of the preferred securities is to institute a legal
proceeding directly against Mercantile for enforcement of payment of the
distributions to the holder. The obligations of Mercantile under the preferred
securities guarantee are subordinate and junior in right of payment to all
senior and subordinated debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
junior subordinated debentures, the payments will be sufficient to cover
distributions and other payments due on the preferred securities, primarily
because: (1) the aggregate principal amount of the junior subordinated
debentures will be equal to the sum of the aggregate liquidation amount of the
preferred securities and common securities; (2) the interest rate and interest
and other payment dates on the junior subordinated debentures will match the
distribution rate and distribution and other payment dates for the preferred
securities; (3) Mercantile will pay for any and all costs, expenses and
liabilities of MBWM Trust except MBWM Trust's obligations to holders of
preferred securities; and (4) the trust agreement further provides that MBWM
Trust will not engage in any activity that is not consistent with the limited
purposes of MBWM Trust.
Notwithstanding anything to the contrary in the indenture, Mercantile may
satisfy any payment it is otherwise required to make to the trust under the
indenture, by and to the extent that it has made, or is concurrently on the date
of the payment required by the indenture making, a payment under the preferred
securities guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES UNDER THE PREFERRED
SECURITIES GUARANTEE
A holder of any of the preferred securities may institute a legal
proceeding directly against Mercantile to enforce its rights under the preferred
securities guarantee without
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first instituting a legal proceeding against the guarantee trustee, MBWM Trust
or any other person or entity.
A default or event of default under any senior and subordinated debt would
not constitute an event of default. However, in the event of payment defaults
under, or acceleration of, senior and subordinated debt, the subordination
provisions of the indenture provide that no payments may be made in respect of
the junior subordinated debentures until the senior and subordinated debt has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on junior subordinated debentures would
constitute an event of default.
LIMITED PURPOSE OF MBWM TRUST
The preferred securities evidence a beneficial interest in MBWM Trust, and
MBWM Trust exists for the sole purpose of issuing the trust securities and
investing the proceeds from the sale of the trust securities in the junior
subordinated debentures. A principal difference between the rights of a holder
of the preferred securities and a holder of a junior subordinated debenture is
that a holder of a junior subordinated debenture is entitled to receive from
Mercantile the principal amount of and interest accrued on junior subordinated
debentures held, while a holder of the preferred securities is entitled to
receive distributions from MBWM Trust, or from Mercantile under the preferred
securities guarantee, if and to the extent MBWM Trust has funds available for
the payment of the distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
MBWM Trust involving the liquidation of the junior subordinated debentures, the
holders of preferred securities will be entitled to receive, out of assets held
by MBWM Trust, the liquidation distribution in cash. See "Description of the
Preferred Securities -- Liquidation Distribution Upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of Mercantile, the property
trustee, as holder of the junior subordinated debentures, would be a
subordinated creditor of Mercantile, subordinated in right of payment to all
senior and subordinated debt as set forth in the indenture, but entitled to
receive payment in full of principal and interest, before any shareholders of
Mercantile receive payments or distributions. Since Mercantile is the guarantor
under the preferred securities guarantee and has agreed to pay for all costs,
expenses and liabilities of MBWM Trust, other than MBWM Trust's obligations to
the holders of its preferred securities, the positions of a holder of the
preferred securities and a holder of junior subordinated debentures relative to
other creditors and to shareholders of Mercantile in the event of liquidation or
bankruptcy of Mercantile are expected to be substantially the same.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Dickinson Wright PLLC, special counsel to Mercantile, the
following are the material United States federal income tax consequences to the
purchase, ownership and disposition of preferred securities. Unless otherwise
stated, this discussion deals only with preferred securities held as capital
assets by United States persons, defined below, who are the beneficial holders
of the preferred securities upon original issuance at their original offering
price. As used in this prospectus, a United States person means a person that is
(1) a citizen or resident of the United States, (2) a corporation, partnership
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof, (3) an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(4) any trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
The tax treatment of holders may vary depending on their particular situation.
This discussion does not address all the tax consequences that may be relevant
to a particular holder or to holders who may be subject to special tax
treatment, such as financial institutions, banks, real estate investment trusts,
regulated investment companies, insurance companies, dealers in securities or
currencies, tax-exempt investors, individual retirement and certain tax deferred
accounts, foreign investors, persons that will hold the preferred securities as
part of a position in a "straddle" or as part of a "hedging" or other integrated
transaction, or persons whose functional currency is not the United States
dollar. In addition, this discussion does not include any description of any
alternative minimum tax consequences or other collateral tax consequences under
United States federal income tax laws, or the tax laws of any state, local or
foreign government that may be applicable to a holder of preferred securities.
This discussion is based on the Internal Revenue Code of 1986, as amended, the
Treasury regulations promulgated thereunder and administrative and judicial
interpretations of those authorities, as of the date hereof, all of which are
subject to change, possibly on a retroactive basis. Any change of this nature
could cause the tax consequences to vary substantially from the consequences
described below, possibly adversely affecting an owner of preferred securities.
The following discussion does not discuss the tax consequences that might
be relevant to persons that are not United States persons. Non-United States
persons should consult their own tax advisors as to the specific United States
federal income tax consequences of the purchase, ownership and disposition of
preferred securities.
The authorities on which this discussion is based are subject to various
interpretations and the opinions of counsel are not binding on the Internal
Revenue Service ("IRS") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the IRS
regarding the transactions described in this prospectus. Accordingly, there can
be no assurance that the IRS will not challenge the opinions expressed in this
discussion or that a court would not sustain this type of challenge. It is
therefore possible that the federal income tax treatment of the purchase,
ownership and disposition of preferred securities may differ from the treatment
described below.
SECURITYHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
PARTICULAR PERSONAL TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
UNITED STATES FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE
REDEMPTION OF THE PREFERRED SECURITIES IF A TAX EVENT
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OCCURS, SEE "DESCRIPTION OF THE PREFERRED SECURITIES -- REDEMPTION -- MANDATORY
AND OPTIONAL RIGHTS OF MERCANTILE."
CLASSIFICATION OF MBWM TRUST
In connection with the issuance of the preferred securities, counsel is of
the opinion that, under current law and assuming full compliance with the terms
of the trust agreement, and based on the facts and assumptions contained in the
opinion, MBWM Trust will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes. As a result, each beneficial owner of the preferred securities, a
securityholder, will be treated as owning an undivided beneficial interest in
the junior subordinated debentures. Accordingly, each securityholder will be
required to include in its gross income its pro rata share of the interest
income or original issue discount that is paid or accrued on the junior
subordinated debentures. See "-- Interest Income and Original Issue Discount."
No amount included in income regarding the preferred securities will be eligible
for the dividends received deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
Under current law, the junior subordinated debentures are expected to be
classified for United States federal income tax purposes as indebtedness of
Mercantile and, by acceptance of a preferred security, each holder covenants to
treat the junior subordinated debentures (if distributed) as indebtedness and
the preferred securities as evidence of an indirect beneficial ownership
interest in the junior subordinated debentures. No assurance can be given,
however, that this classification will not be challenged by the IRS or, if
challenged, that such a challenge will not be successful. The remainder of this
discussion assumes that the junior subordinated debentures will be classified
for United States federal income tax purposes as indebtedness of Mercantile. See
"Risk Factors -- You are subject to prepayment risk because possible tax law
changes could result in a redemption of the preferred securities."
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as set forth below, stated interest on the junior subordinated
debentures generally will be included in income by a securityholder at the time
the interest income is paid or accrued in accordance with the securityholder's
regular method of tax accounting.
If Mercantile exercises its right to defer payments of interest on the
junior subordinated debentures, the junior subordinated debentures will become
original issue discount instruments, and the amount of original issue discount
would be equal to the aggregate of all future payments of interest on the junior
subordinated debentures. In this event, all securityholders would be required to
include those amounts treated as original issue discount on the junior
subordinated debentures as a consequence of such reclassification in income on a
daily economic accrual basis during the extension period, even though Mercantile
would not be expected to pay the interest until the end of the extension period,
and even though some securityholders may use the cash method of tax accounting.
Moreover, thereafter the junior subordinated debentures would continue to be
taxed as original issue discount instruments for as long as they remained
outstanding. Thus, even after the end of the extension period, all
securityholders would be required to continue to include those amounts treated
as original issue discount on the junior subordinated debentures in income on a
daily economic accrual basis, regardless of their
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method of tax accounting and in advance of receipt of the cash attributable to
this interest income. In this event, actual cash payments of interest on the
junior subordinated debentures would not be reported separately as taxable
income.
In addition, Mercantile's option to defer the payment of interest on the
junior subordinated debentures during an extension period might cause the junior
subordinated debentures to be considered initially issued with original issue
discount or treated as contingent payment debt instruments. Mercantile believes,
and will take the position, that this result will not arise because of an
exception in the treasury regulations that applies when there is only a remote
likelihood that a contingency, such as election to defer, will occur. However,
the Treasury regulations described above have not yet been addressed in any
rulings or other definitive interpretations by the IRS. It is possible that the
IRS could take a contrary position. If the IRS were to assert successfully that
the junior subordinated debentures were issued with original issue discount
regardless of whether Mercantile exercises its right to defer payments of
interest on the debentures, all securityholders, including those utilizing the
cash method of accounting, would be required to include the stated interest
thereon in income on a daily economic accrual basis as described above.
Mercantile does not anticipate that additional sums, as defined in the
indenture, will be paid. However, if additional sums are paid, they will be
taxable to the securityholder as ordinary income, generally as interest income.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED
SECURITIES
Under current law, a distribution by MBWM Trust of the junior subordinated
debentures as described under the caption "Description of the Preferred
Securities -- Liquidation and Distribution Upon Termination" will be non-taxable
and will result in the securityholder receiving directly its pro rata share of
the junior subordinated debentures previously held indirectly through MBWM
Trust, with a holding period and aggregate tax basis equal to the holding period
and aggregate tax basis the securityholder had in its preferred securities
before the distribution. If, however, the liquidation of MBWM Trust were to
occur because MBWM Trust is subject to United States federal income tax
regarding income accrued or received on the junior subordinated debentures as a
result of a tax event or otherwise, the distribution of junior subordinated
debentures to securityholders by MBWM Trust would be a taxable event to MBWM
Trust and each securityholder, and a securityholder would recognize gain or loss
as if the securityholder had sold or exchanged its preferred securities for the
junior subordinated debentures it received upon the liquidation of MBWM Trust.
See "-- Sales or Redemption of Preferred Securities." A securityholder would
recognize interest income in respect of junior subordinated debentures received
from MBWM Trust in the manner described above under "-- Interest Income and
Original Issue Discount."
SALES OR REDEMPTION OF PREFERRED SECURITIES
Gain or loss will be recognized by a securityholder on a sale or other
taxable disposition of preferred securities, including a redemption for cash, in
an amount equal to the difference between the amount realized, which for this
purpose will exclude amounts attributable to accrued interest or original issue
discount not previously included in income, and the securityholder's adjusted
tax basis in the preferred securities sold or so redeemed. A securityholder's
adjusted tax basis will be its initial purchase price, increased by any accrued
original issue discount previously included in the securityholder's gross income
to
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the date of disposition, and decreased by payments, other than stated interest
on the junior subordinated debentures that does not constitute original issue
discount, received on the preferred securities. Any gain or loss on the sale,
exchange or retirement of the preferred securities generally will be treated as
capital gain or loss. In general, amounts attributable to accrued interest
regarding a securityholder's pro rata share of the junior subordinated
debentures not previously included in income and which are excluded from the
amount realized on a sale of preferred securities and therefore not part of the
calculation of gain or loss, will be taxable as ordinary income. However,
because there is conflicting authority regarding whether or not a cash basis
taxpayer is required to include in income accrued interest in the event the
preferred securities are sold for less than their principal amount, investors
are advised to consult their own tax advisors in such circumstances. For
taxpayers other than corporations, net capital gain, which is defined as net
long-term capital gain over net short-term capital loss for the taxable year,
realized from property, with limited exceptions, is subject to a maximum
marginal stated tax rate of 20%, or 10% in the case of taxpayers in the lowest
tax bracket. Capital gain or loss is long-term if the holding period for the
asset is more than one year, and is short-term if the holding period for the
asset is one year or less. Capital gains realized from assets held for one year
or less are taxed at the same rates as ordinary income. Subject to limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
Should Mercantile exercise its option to defer any payment of interest on
the junior subordinated debentures, the preferred securities may trade at a
price that does not fully reflect the value of accrued but unpaid interest on
the underlying junior subordinated debentures. In the event of a deferral under
the option, a securityholder that disposes of its preferred securities between
record dates for payments of distributions, and consequently does not receive a
distribution from MBWM Trust for the period prior to the disposition, will
nevertheless be required to include in income accrued original issue discount on
the junior subordinated debentures through the date of disposition and will add
this amount to its adjusted tax basis in its preferred securities. The
securityholder will recognize a capital loss on the disposition of its preferred
securities to the extent the selling price, which may not fully reflect the
value of accrued but unpaid original issue discount, is less than the
securityholder's adjusted tax basis in the preferred securities, which will
include accrued but unpaid original issue discount that has been included in
income. As stated previously, subject to limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of interest paid or original issue discount accrued, if any, on
the junior subordinated debentures, beneficial ownership of which is reflected
in the preferred securities held of record by United States persons, other than
corporations and other exempt securityholders, will be reported to the Service.
Generally, income on the preferred securities will be reported to
securityholders on Form 1099, which form should be mailed to securityholders by
January 31 following each calendar year. Backup withholding at a rate of 31%
will apply to payments of interest to non-exempt United States persons unless
the securityholder furnishes its taxpayer identification number in the manner
prescribed in applicable Treasury regulations, certifies that the number is
correct, certifies as to no loss of exemption from backup withholding and meets
other conditions. Any amounts withheld from a securityholder under the backup
withholding rules will be allowed as a refund or a credit against the
securityholder's United States federal income tax liability, provided the
required information is furnished to the Service. Payment of the proceeds from
the
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disposition of preferred securities to or through the United States office of a
broker is subject to information reporting and backup withholding unless the
securityholder or beneficial owner establishes an exemption from information
reporting and backup withholding.
TAX LAW UNCERTAINTIES AND POSSIBLE TAX LAW CHANGES AFFECTING PREFERRED
SECURITIES
The combined tax effects of the trust's purchase of debt instruments such
as the Junior Subordinated Debentures and simultaneous issuance of equity
interests such as the Preferred Securities has not been addressed in any
Treasury Regulations or court decision and has not been approved or disapproved
by the IRS in any published ruling or notice. The IRS proposed disallowance in a
recent audit of the deduction of the interest expense claimed by a corporation
on subordinated debt instruments issued by such corporation and sold to a
related trust. Although the IRS agreed to dismissal of the relevant adjustments
in that case prior to litigation, it is not precluded from asserting similar
adjustments against other taxpayers. A variation of the structure described in
this Prospectus involving an intermediate limited life company rather than a
trust was accepted by the IRS as creating debt giving rise to deductible
interest in Private Letter Ruling 1999-10046. However, taxpayers (other than the
taxpayer to whom a Private Letter Ruling is addressed) are not entitled to rely
on IRS holdings in Private Letter Rulings.
Legislative proposals have previously been made by the current
administration, which if enacted, could have adversely affected the ability of
Mercantile to deduct interest paid on the junior subordinated debentures.
Although these proposals were not enacted, there can be no assurance that future
legislative proposals or final legislation will not affect the ability of
Mercantile to deduct interest on the junior subordinated debentures or otherwise
adversely affect the tax treatment of the transactions described in this
prospectus. Although the IRS agreed to dismissal of the adjustments in the
litigation described above, it could assert similar adjustments against other
taxpayers. It if were to do so and the issue was litigated to a conclusion in
which the IRS's position on this matter was sustained, such a judicial
determination could constitute a tax event which could result in an early
redemption of the preferred securities. Similarly, if legislative proposals of
the type described above were to be enacted, a change of this nature could give
rise to a tax event, which may permit Mercantile to cause a redemption of the
Trust preferred securities. See "Risk Factors -- You are subject to prepayment
risk because possible tax law changes could result in a redemption of the
preferred securities," "Description of the Preferred
Securities -- Redemption -- Mandatory and Optional Rights of Mercantile" and
"Description of Junior Subordinated Debentures -- Redemption."
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended (ERISA), or Section 4975 of the Code, generally
may purchase preferred securities subject to the investing fiduciary's
determination that the investment in preferred securities satisfies ERISA's
fiduciary standards and other requirements applicable to investments by the
Plan.
However, Mercantile and any of its affiliates may be considered a party in
interest, within the meaning of Section 3(14) of ERISA, or a disqualified
person, within the meaning of Section 4975 of the Code, regarding plans
maintained or sponsored by, or
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contributed to by, Mercantile or an affiliate, or regarding which Mercantile or
an affiliate is a fiduciary, or plans for which Mercantile or an affiliate
provide services. The acquisition and ownership of preferred securities by an
individual retirement arrangement or other Plan described in Section 4975(e)(1)
of the Code, regarding which Mercantile or any of its affiliates is considered a
party in interest or a disqualified person, may constitute or result in a
prohibited transaction under ERISA or Section 4975 of the Code, which could give
rise to the imposition of substantial taxes unless the preferred securities are
acquired under and in accordance with an applicable exemption.
As a result, plans regarding which Mercantile and/or any of its affiliates
is a party in interest or a disqualified person should not acquire preferred
securities unless the preferred securities are acquired under and in accordance
with an applicable exemption. Any plans or entities whose assets include Plan
assets subject to ERISA or Section 4975 of the Code proposing to acquire
preferred securities should consult with their own counsel.
INDEMNIFICATION
Mercantile's Articles of Incorporation provide that Mercantile shall
indemnify its present and past directors, officers, and such other persons as
the Board of Directors may authorize, to the fullest extent permitted by law.
Mercantile's Bylaws contain indemnification provisions concerning third
party actions as well as actions in the right of Mercantile. The Bylaws provide
that Mercantile shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of Mercantile) by reason of the fact
that he or she is or was a director or officer of Mercantile, or while serving
as such a director or officer, is or was serving at the request of Mercantile as
a director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, against expenses (including attorney's fees),
judgments, penalties, fees and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of Mercantile or its
shareholders, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by Mercantile or the Bank to their
respective directors or officers otherwise permitted under the Michigan Business
Corporation Act or the Michigan Banking Code, respectively.
With respect to derivative actions, the Bylaws provide that Mercantile
shall indemnify any person who was or is a party to or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of Mercantile to procure a judgment in its favor by reason of the fact
that he or she is or was a director or officer of Mercantile, or, while serving
as such a director or officer, is or was serving at the request of Mercantile as
a director, officer, partner, trustee, employee or agent of another foreign or
domestic company, partnership, joint venture, trust or other enterprise, whether
for profit or not, against expenses (including attorney's fees) and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
the action or suit if he or she acted
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in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of Mercantile or its shareholders. No
indemnification is provided in the Bylaws in respect of any claim, issue or
matter in which such person has been found liable to Mercantile except to the
extent that a court of competent jurisdiction determines upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
The Trust Agreement provides that Mercantile shall indemnify each of the
Trustees or any predecessor Trustee for, and hold the Trustees harmless against,
any loss, damage, claim, liability, penalty or expense incurred without
negligence or bad faith on its part, arising out of or in connection with the
acceptance or administration of the trust agreement, including the cost and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of its powers or duties, except any cost or
expense as may be attributable to the trustee's negligence, bad faith or willful
misconduct.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Mercantile or MBWM Trust pursuant to the provisions discussed above or
otherwise, Mercantile and MBWM Trust have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
Mercantile has purchased directors' and officers' liability insurance for
directors and officers of Mercantile and the Bank.
LIMITATION OF DIRECTOR LIABILITY
The Michigan Business Corporation Act permits corporations to limit the
personal liability of their directors in certain circumstances. Mercantile's
Articles of Incorporation provide that a director of Mercantile shall not be
personally liable to Mercantile or its shareholders for monetary damages for
breach of the director's fiduciary duty. However, they do not eliminate or limit
the liability of a director for any breach of a duty, act or omission for which
the elimination or limitation of liability is not permitted by the Michigan
Business Corporation Act, currently including, without limitation, the
following: (1) breach of the director's duty of loyalty to Mercantile or its
shareholders; (2) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (3) illegal loans,
distributions of dividends or assets, or stock purchases as described in Section
551(1) of the Michigan Business Corporation Act; and (4) transactions from which
the director derived an improper personal benefit.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among
Mercantile, MBWM Trust and Stifel, Nicolaus & Company, Incorporated and Tucker
Anthony Cleary Gull, the underwriters have severally agreed to purchase from
MBWM Trust, and MBWM Trust has agreed to sell to them, an aggregate of 1,400,000
preferred securities in the amounts set forth below opposite their respective
names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS PREFERRED SECURITIES
- ------------ --------------------
<S> <C>
Stifel, Nicolaus & Company, Incorporated.............. 1,050,000
Tucker Anthony Cleary Gull............................ 350,000
---------
Total............................................ 1,400,000
=========
</TABLE>
In the underwriting agreement, the obligations of the underwriters are
subject to approval of certain legal matters by their counsel and to various
other conditions. Under the terms and conditions of the underwriting agreement,
the underwriters are committed to accept and pay for all of the preferred
securities, if any are taken.
The underwriters propose to offer the preferred securities directly to the
public at the public offering price set forth on the cover page of this
prospectus, and to certain securities dealers (who may include the underwriters)
at this price, less a concession not in excess of $0.20 per preferred security.
The underwriters may allow, and the selected dealers may reallow, a concession
not in excess of $0.10 per preferred security to certain brokers and dealers.
After the preferred securities are released for sale to the public, the offering
price and other selling terms may from time to time be changed by the
underwriters.
MBWM Trust has granted to the underwriters an option, exercisable within 30
days after the date of this prospectus, to purchase up to 200,000 additional
preferred securities at the same price per preferred security to be paid by the
underwriters for the other preferred securities being offered. If the
underwriters purchase any of the additional preferred securities under this
option, each underwriter will be committed to purchase the additional shares in
approximately the same proportion allocated to them in the table above. The
underwriters may exercise the option only for the purpose of covering over-
allotments, if any, made in connection with the distribution of the preferred
securities being offered.
If the underwriters exercise their option to purchase additional preferred
securities, MBWM Trust will issue and sell to Mercantile additional common
securities and Mercantile will issue and sell to MBWM Trust junior subordinated
debentures in an aggregate principal amount equal to the total aggregate
liquidation amount of the additional preferred securities being purchased under
the option and the additional common securities sold to Mercantile.
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The table below shows the price and proceeds on a per security and
aggregate basis. The proceeds to be received by MBWM Trust as shown in the table
below do not reflect estimated expenses of $280,000 payable by Mercantile.
<TABLE>
<CAPTION>
PER PREFERRED
SECURITY TOTAL
---------------------- -----------
<S> <C> <C>
Public Offering Price................... $10.00 $14,000,000
Proceeds to MBWM Trust.................. $10.00 $14,000,000
</TABLE>
In view of the fact that the proceeds of the sale of the preferred
securities will be used by MBWM Trust to purchase the junior subordinated
debentures from Mercantile, Mercantile has agreed to pay the underwriters $0.40
per preferred security, or a total of $560,000, as compensation for arranging
the investment in the junior subordinated debentures. Should the underwriters
exercise the over-allotment option, an aggregate of $640,000 will be paid to the
underwriters for arranging the investment in the junior subordinated debentures.
During a period of 30 days from the date of this prospectus, neither MBWM
Trust nor Mercantile will, subject to certain exceptions, without the prior
written consent of the underwriters, directly or indirectly, sell, offer to
sell, grant any option for sale of, or otherwise dispose of, any preferred
securities, any security convertible into or exchangeable for preferred
securities or junior subordinated debentures or any debt securities
substantially similar to the junior subordinated debentures or equity securities
substantially similar to the preferred securities (except for junior
subordinated debentures and the preferred securities being offered).
The offering of the preferred securities is made for delivery when, as and
if accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject any order for the purchase of the preferred
securities.
Mercantile and MBWM Trust have agreed to indemnify the underwriters against
several liabilities, including liabilities under the Securities Act of 1933.
The preferred securities have been approved for quotation on the Nasdaq
National Market. The underwriters have advised MBWM Trust that they presently
intend to make a market in the preferred securities after the commencement of
trading on Nasdaq, but no assurances can be made as to the liquidity of the
preferred securities or that an active and liquid market will develop or, if
developed, that the market will continue. The offering price and distribution
rate have been determined by negotiations among representatives of Mercantile
and the underwriters, and the offering price of the preferred securities may not
be indicative of the market price following the offering. The underwriters will
have no obligation to make a market in the preferred securities, however, and
may cease market-making activities, if commenced, at any time.
In connection with the offering, the underwriters may engage in
transactions that are intended to stabilize, maintain or otherwise affect the
price of the preferred securities during and after the offering, such as the
following:
- the underwriters may over-allot or otherwise create a short position in
the preferred securities for their own account by selling more preferred
securities than have been sold to them;
110
<PAGE> 113
- the underwriters may elect to cover any short position by purchasing
preferred securities in the open market or by exercising the
over-allotment option;
- the underwriters may stabilize or maintain the price of the preferred
securities by bidding;
- the underwriters may engage in passive market making transactions; and
- the underwriters may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in
this offering are reclaimed if preferred securities previously
distributed in the offering are repurchased in connection with
stabilization transactions or otherwise.
The effect of these transactions may be to stabilize or maintain the market
price at a level above that which might otherwise prevail in the open market.
The imposition of a penalty bid may also affect the price of the preferred
securities to the extent that it discourages resales. No representation is made
as to the magnitude or effect of any such stabilization or other transactions.
Such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
Because the NASD may view the preferred securities as interests in a direct
participation program, the offer and sale of the preferred securities is being
made in compliance with the provisions of Rule 2810 under the NASD Conduct
Rules.
WHERE YOU CAN FIND MORE INFORMATION
Mercantile is a reporting company under the Securities Exchange Act of 1934
and files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy,
upon payment of a fee set by the Commission, any document that Mercantile files
with the Commission at its public reference rooms at 450 Fifth Street, N.W.,
Washington, D.C. 20549; Seven World Trade Center, 13th Floor, Suite 1300, New
York, New York 10048; and Citicorp Center, 500 West Madison Street, 14th Floor,
Suite 1400, Chicago, Illinois 60661. You may also call the Commission at
1-800-SEC-0330 for more information on the public reference rooms. Mercantile's
filings are also available to the public on the Internet, through the
Commission's EDGAR database. You may access the EDGAR database at the
Commission's web site at http://www.sec.gov.
You may also obtain a copy of these filings from Mercantile at no cost upon
your written or oral request. Please direct your requests to Mercantile's
Secretary, Robert Kaminski, Mercantile Bank Corporation, 216 North Division
Avenue, Grand Rapids, Michigan 49503, or by calling 616-242-9000. To obtain
timely delivery, you must request the information no later than five business
days prior to the date you decide to invest in the preferred securities.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the preferred
securities, the enforceability of the trust agreement and the formation of MBWM
Trust will be passed upon by Richards, Layton & Finger, P.A., Wilmington,
Delaware, special Delaware counsel to Mercantile and MBWM Trust. The validity of
the preferred securities guarantee and the junior subordinated debentures will
be passed upon for Mercantile by Dickinson Wright PLLC, Detroit, Michigan,
counsel to Mercantile and MBWM Trust. Certain legal
111
<PAGE> 114
matters in connection with this offering will be passed upon for the
underwriters by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois. Dickinson
Wright PLLC and Vedder, Price, Kaufman & Kammholz will rely on the opinions of
Richards, Layton & Finger, P.A., as to matters of Delaware law. Certain matters
relating to United States federal income tax consequences will be passed upon
for Mercantile and MBWM Trust by Dickinson Wright PLLC. As of July 1, 1999,
members of Dickinson Wright PLLC who perform services for Mercantile owned
approximately 7,300 shares of Mercantile's common stock.
EXPERTS
The consolidated financial statements of Mercantile as of December 31, 1998
and for each of the years in the two-year period ended December 31, 1998 have
been included in this prospectus in reliance upon the report of Crowe, Chizek &
Company LLP, independent certified public accountants, appearing elsewhere in
this prospectus, and upon their authority as experts in accounting and auditing.
112
<PAGE> 115
MERCANTILE BANK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED), DECEMBER 31, 1998 AND
DECEMBER 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Comprehensive Income............. F-5
Consolidated Statements of Changes in Shareholders'
Equity.................................................... F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 116
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Mercantile
Bank Corporation as of December 31, 1998 and 1997 and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for the years ended December 31, 1998 and the period from July 15,
1997 (date of inception) through December 31, 1997. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercantile
Bank Corporation as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the year ended December 31, 1998, and the
period from July 15, 1997 (date of inception) through December 31, 1997 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 20, 1999
F-2
<PAGE> 117
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks................................... $ 7,304,576 $ 5,940,713 $ 153,300
Short term investments.................................... 536,285 515,283 3,250,000
Federal funds sold........................................ 5,100,000 0 3,700,000
------------ ------------ -----------
Total cash and cash equivalents......................... 12,940,861 6,455,996 7,103,300
Securities available for sale............................. 28,387,567 24,160,247 2,997,500
Securities held to maturity............................... 433,248 0 0
Federal Home Loan Bank stock.............................. 784,900
Total loans............................................... 246,724,786 184,744,602 12,886,763
Allowance for loan losses................................. (3,701,000) (2,765,100) (193,300)
------------ ------------ -----------
Total loans, net........................................ 243,023,786 181,979,502 12,693,463
Premises and equipment -- net............................. 3,214,138 1,857,805 953,982
Organizational costs -- net............................... 0 64,210 74,871
Accrued interest receivable............................... 1,437,276 1,147,832 52,811
Other assets.............................................. 1,713,118 571,265 233,258
------------ ------------ -----------
Total assets............................................ $291,934,894 $216,236,857 $24,109,185
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing..................................... $ 16,331,118 $ 14,319,290 $ 7,207,482
Interest-bearing........................................ 229,480,131 157,678,729 2,480,782
------------ ------------ -----------
Total.............................................. 245,811,249 171,998,019 9,688,264
Securities sold under agreements to repurchase............ 17,865,592 17,037,601 655,447
Other borrowed money...................................... 13,325 0 0
Accrued expenses and other liabilities.................... 1,184,289 500,721 292,204
------------ ------------ -----------
Total liabilities....................................... 264,874,455 189,536,341 10,635,915
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares
authorized, none issued
Common stock, no par value; 9,000,000 shares authorized;
2,472,500 shares outstanding at June 30, 1999 and
December 31, 1998, and 1,495,000 shares outstanding at
December 31, 1997....................................... 28,181,798 28,181,798 13,880,972
Retained earnings (deficit)............................... (657,955) (1,513,118) (404,071)
Accumulated other comprehensive income.................... (463,404) 31,836 (3,631)
------------ ------------ -----------
Total shareholders' equity.............................. 27,060,439 26,700,516 13,473,270
------------ ------------ -----------
Total liabilities and shareholders' equity.............. $291,934,894 $216,236,857 $24,109,185
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 118
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
------------------------- ---------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees............................. $8,757,526 $ 3,000,610 $ 9,007,668 $ 25,761
Investment securities............................. 811,697 256,363 880,639 7,661
Federal funds sold................................ 161,492 116,791 256,422 18,728
Interest-bearing balances......................... 12,924 9,914 23,487 101,479
---------- ----------- ----------- ---------
Total interest income.......................... 9,743,639 3,383,678 10,168,216 153,629
Interest expense
Deposits.......................................... 5,196,684 1,746,196 5,140,788 5,760
Short term borrowings............................. 352,463 132,259 488,430 7,894
---------- ----------- ----------- ---------
Total interest expense......................... 5,549,147 1,878,455 5,629,218 13,654
Net interest income................................. 4,194,492 1,505,223 4,538,998 139,975
Provision for loan losses........................... 935,900 1,471,800 2,571,800 193,300
---------- ----------- ----------- ---------
Net interest income (loss) after provision for loan
losses............................................ 3,258,592 33,423 1,967,198 (53,325)
Noninterest income
Service charges on accounts....................... 89,666 8,540 82,170 45
Gain on sale of securities........................ 0 0 128 0
Mortgage loan referral fees....................... 112,404 42,247 209,667 0
Letter of credit fees............................. 125,895 32,862 159,064 0
Other income...................................... 87,593 3,614 37,149 0
---------- ----------- ----------- ---------
Total noninterest income....................... 415,558 87,263 488,178 45
Noninterest expense
Salaries and benefits............................. 1,435,369 818,267 1,891,264 254,771
Occupancy......................................... 182,280 138,925 304,231 39,101
Furniture and equipment........................... 131,970 71,741 176,756 5,907
Data processing................................... 144,464 64,800 170,990 0
Loan processing cost.............................. 38,482 105,428 153,835 421
Advertising....................................... 94,000 38,457 110,431 0
Other expense..................................... 616,212 319,269 756,916 50,591
---------- ----------- ----------- ---------
Total noninterest expenses..................... 2,642,777 1,556,887 3,564,423 350,791
Income (loss) before federal income tax............. 1,031,373 (1,436,201) (1,109,047) (404,071)
Federal income tax expense.......................... 134,000 0 0 0
---------- ----------- ----------- ---------
Income (loss) before cumulative effect of change in
accounting principle.............................. 897,373 (1,436,201) (1,109,047) (404,071)
Cumulative effect of change in accounting principle
(net of applicable income taxes).................. 42,210 0 0 0
---------- ----------- ----------- ---------
Net income (loss)................................... $ 855,163 $(1,436,201) $(1,109,047) $(404,071)
========== =========== =========== =========
Basic and diluted income (loss) per share........... $ 0.35 $ (0.96) $ (0.58) $ (0.27)
========== =========== =========== =========
Average shares outstanding.......................... 2,472,500 1,495,000 1,907,658 1,495,000
========== =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 119
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
-------------------------- ----------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss)......... $ 855,163 $(1,436,201) $(1,109,047) $(404,071)
Other comprehensive income
(loss), net of tax:
Change in unrealized
gains (losses) on
securities available
for sale............. (495,240) 1,259 35,467 (3,631)
--------- ----------- ----------- ---------
Comprehensive income
(loss).................. $ 359,923 $(1,434,942) $(1,073,580) $(407,702)
========= =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 120
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
RETAINED SECURITIES TOTAL
COMMON EARNINGS AVAILABLE SHAREHOLDERS'
STOCK (DEFICIT) FOR SALE EQUITY
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, JULY 15, 1997 (DATE
OF INCEPTION).............. $ 0 $ 0 $ 0 $ 0
Common stock sale, October
23, 1997................... 13,880,972 13,880,972
Net income (loss) for the
period from July 15, 1997
(date of inception) through
December 31, 1997.......... (404,071) (404,071)
Net unrealized gain (loss) on
securities available for
sale, net of tax effect.... (3,631) (3,631)
----------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1997... 13,880,972 (404,071) (3,631) 13,473,270
Common stock sale, July 31,
1998....................... 14,300,826 14,300,826
Net income (loss)............ (1,109,047) (1,109,047)
Change in net unrealized gain
(loss) on securities
available for sale, net of
tax effect................. 35,467 35,467
----------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1998... 28,181,798 (1,513,118) 31,836 26,700,516
Net income (Unaudited)....... 855,163 855,163
Change in net unrealized gain
(loss) on securities
available for sale, net of
tax effect (Unaudited)..... (495,240) (495,240)
----------- ----------- --------- -----------
BALANCE, JUNE 30, 1999
(UNAUDITED)................ $28,181,798 $ (657,955) $(463,404) $27,060,439
=========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 121
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
------------ ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ 855,163 $ (1,436,201) $ (1,109,047) $ (404,071)
Adjustments to reconcile net income (loss)to net cash
from operating activities
Depreciation and amortization......................... 200,128 111,105 274,374 119
Provision for loan losses............................. 935,900 1,471,800 2,571,800 193,300
Gain on sale of securities............................ 0 0 (128) 0
Net change in:
Accrued interest receivable......................... (289,444) (668,239) (1,095,021) (74,871)
Other assets........................................ (886,730) (224,922) (432,695) (286,069)
Accrued expenses and other liabilities.............. 683,568 15,564 208,517 292,204
------------ ------------- ------------- ------------
Net cash from operating activities............... 1,498,585 (730,893) 417,790 (279,388)
Cash flows from investing activities
Net increase in loans................................... (61,980,184) (100,519,645) (171,857,839) (12,886,763)
Purchase of:
Federal Home Loan Bank stock.......................... (784,900) 0 0 0
Securities available for sale......................... (7,904,574) (13,528,853) (28,320,575) (3,001,250)
Securities held to maturity........................... (433,227) 0 0 0
Premises and equipment, net........................... (1,479,818) (513,267) (1,082,815) (953,982)
Proceeds from:
Sales of available for sale securities................ 0 0 1,000,313 0
Maturities and repayments of available for sale
securities.......................................... 2,914,437 2,000,000 6,203,087 0
------------ ------------- ------------- ------------
Net cash from investing activities.................. (69,668,266) (112,561,765) (194,057,829) (16,841,995)
Cash flows from financing activities
Proceeds from sale of common stock...................... 0 0 14,300,826 13,880,972
Net increase in deposits................................ 73,813,230 107,002,922 162,309,755 9,688,264
Net increase in other borrowed money.................... 13,325 0 0 0
Net increase in securities sold under agreements to
repurchase............................................ 827,991 9,899,848 16,382,154 655,447
------------ ------------- ------------- ------------
Net cash from financing activities.................. 74,654,546 116,902,770 192,992,735 24,224,683
------------ ------------- ------------- ------------
Net change in cash and cash equivalents................... 6,484,865 3,610,112 (647,304) 7,103,300
Cash and cash equivalents at beginning of period.......... 6,455,996 7,103,300 7,103,300 0
------------ ------------- ------------- ------------
Cash and cash equivalents at end of period................ $ 12,940,861 $ 10,713,412 $ 6,455,996 $ 7,103,300
============ ============= ============= ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest.............................................. $ 5,248,375 $ 1,616,566 $ 5,237,738 $ 1,391
Federal income tax.................................... 730,773 0 165,000 0
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 122
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED), DECEMBER 31, 1998 AND
DECEMBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Mercantile Bank Corporation and its wholly-owned subsidiary,
Mercantile Bank of West Michigan, after elimination of significant intercompany
transactions and accounts.
NATURE OF OPERATIONS: Mercantile Bank Corporation ("Mercantile") was
incorporated on July 15, 1997 as a bank holding company to establish and own
Mercantile Bank of West Michigan ("Bank") based in Grand Rapids, Michigan. The
Bank is a community-based financial institution. The Bank's primary deposit
products are checking, savings, and term certificate accounts, and its primary
lending products are commercial, residential mortgage, and installment loans.
Substantially all loans are secured by specific items of collateral including
business assets, consumer assets and real estate. Commercial loans are expected
to be repaid from cash flow from operations of businesses. Real estate loans are
secured by both residential and commercial real estate. The Bank's loan accounts
are primarily with customers located in western Michigan, within Kent County.
The Bank's retail deposits are also to customers located in western Michigan. As
an alternative source of funds, the Bank has also issued certificates to
depositors outside of the Bank's primary market area. Commercial real estate
loans to lessors of real property comprise 13.7% and 19.5% of the Bank's total
loans at June 30, 1999 (Unaudited) and December 31, 1998. Commercial loans to
holding and other investment offices comprise 18.8% and 28.6% of the Bank's
total loans at June 30, 1999 (Unaudited) and December 31, 1998. The Bank began
operations on December 15, 1997, after several months of work by incorporators
and employees in preparing applications with the various regulatory agencies and
obtaining insurance and building space.
USE OF ESTIMATES: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses and the
fair values of financial instruments are particularly subject to change.
CASH FLOW REPORTING: Cash and cash equivalents include cash on hand,
demand deposits with other financial institutions, short-term investments
(securities with daily put provisions) and federal funds sold. Cash flows are
reported net for customer loan and deposit transactions, interest-bearing time
deposits with other financial institutions and short-term borrowings with
maturities of 90 days or less.
SECURITIES: Securities available for sale consist of those securities
which might be sold prior to maturity due to changes in interest rates,
prepayment risks, yield and availability of alternative investments, liquidity
needs or other factors. Securities classified as available for sale are reported
at their fair value and the related unrealized holding gain or loss is reported,
net of related income tax effects, as a separate component of shareholders'
equity, until realized.
F-8
<PAGE> 123
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Premiums and discounts on securities are recognized in interest income
using the interest method over the estimated life of the security. Gains and
losses on the sale of securities available for sale are determined based upon
amortized cost of the specific security sold.
LOANS: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs. Interest income is reported on the interest method
and includes amortization of net deferred loan fees and costs over the loan
term.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and recoveries, and
decreased by charge-offs. Management estimates the allowance balance required
based on past industry loan loss experience, known and inherent risks in similar
portfolios, and economic conditions. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan 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 is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when the internal grading system indicates a doubtful classification.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both straight-line and
accelerated methods over the estimated useful lives of the respective assets.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. These assets are
reviewed for impairment under SFAS No. 121 when events indicate the carrying
amount may not be recoverable.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: In 1998, the
Accounting Standards Executive Committee (AcSEC) of the American Institute of
Certified Public Accountants promulgated Statement of Position (SOP) 98-5. This
SOP provides guidance on the financial reporting of start-up costs and
organization costs. It requires cost of start-up activities and organization
costs to be expensed as incurred. Initial application of this SOP should be
reported as a cumulative effect of a change in accounting principle. Mercantile
elected to adopt the provisions of SOP 98-5 on January 1, 1999. Included in the
June 30, 1999 Consolidated Statement of Income is a charge to operations of
$42,210 reported as a cumulative effect of change in accounting principle.
STOCK OPTIONS: No expense for stock options is recorded, as the grant
price equals the market price of the stock at grant date. Pro-forma disclosures
show the effect on income and earnings per share had the options' fair value
been recorded using an option pricing model. The pro-forma effect is expected to
increase in the future as more options are granted.
INCOME TAXES: Income tax expense is the sum of the current or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the
F-9
<PAGE> 124
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, computed using enacted tax
rates. A valuation allowance has been established to the extent of net deferred
tax assets due to a lack of operating performance to ensure that it is more
likely than not it would be recovered.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on-and
off-balance sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
SEGMENTS. Mercantile and the Bank, provide a broad range of financial
services to individuals and companies in western Michigan. These services
include demand, time and savings deposits; lending; and cash management. While
Mercantile's chief decision makers monitor the revenue streams of its various
products and services, operations are managed and financial performance is
evaluated on a company-wide basis. Accordingly, all of Mercantile's banking
operations are considered by management to be aggregated in one reportable
operating segment.
DIVIDEND RESTRICTION: Mercantile and the Bank are subject to banking
regulations which require the maintenance of certain capital levels and positive
retained earnings, which will prevent payment of dividends until positive
retained earnings are achieved and may limit the amount of dividends thereafter.
EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share is based on
weighted average common shares outstanding. Diluted earnings (loss) per share
further assumes issue of any dilutive potential common shares.
F-10
<PAGE> 125
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTMENT SECURITIES
The amortized cost and fair values of investment securities were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
June 30, 1999 (Unaudited)
U.S. Treasury
securities................ $ 3,001,181 $ 3,349 $ 0 $ 3,004,530
U.S. Government agency
debt obligations....... 12,003,093 0 256,223 11,746,870
Mortgage-backed
securities............. 14,081,697 0 445,530 13,636,167
----------- ------- -------- -----------
Totals................. $29,085,971 $ 3,349 $701,753 $28,387,567
=========== ======= ======== ===========
December 31, 1998
U.S. Treasury
securities............. $ 4,506,744 $16,376 $ 0 $ 4,523,120
U.S. Government agency
debt obligations....... 12,015,020 45,207 29,437 12,030,790
Mortgage-backed
securities............. 7,590,648 21,104 5,415 7,606,337
----------- ------- -------- -----------
Totals................. $24,112,412 $82,687 $ 34,852 $24,160,247
=========== ======= ======== ===========
December 31, 1997
U.S. Treasury
securities............. $ 3,001,131 $ 0 $ 3,631 $ 2,997,500
=========== ======= ======== ===========
HELD TO MATURITY
June 30, 1999 (Unaudited)
Municipal general
obligation bonds....... $ 224,540 $ 0 $ 1 $ 224,539
Municipal revenue bonds... 208,708 0 11,728 196,980
----------- ------- -------- -----------
Totals................. $ 433,248 $ 0 $ 11,729 $ 421,519
=========== ======= ======== ===========
</TABLE>
F-11
<PAGE> 126
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair values of debt investment securities by
contractual maturity, are shown below. The contractual maturity is utilized
below for U.S. Treasury and U.S. Government agency debt obligations. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Securities not due at a single maturity date, mortgage backed
securities, are shown separately.
<TABLE>
<CAPTION>
WEIGHTED AMORTIZED FAIR
AVERAGE YIELD COST VALUES
------------- ----------- -----------
<S> <C> <C> <C>
June 30, 1999 (Unaudited)
Debt securities, excluding
mortgage-backed securities:
Due in one year or less............. 5.49% $ 3,001,181 $ 3,004,530
Due after one year through five
years............................ 6.03 9,988,469 9,826,090
Due after five years through 15
years............................ 5.42 2,447,872 2,342,299
----------- -----------
15,437,522 15,172,919
Mortgage-backed securities............ 6.08 14,081,697 13,636,167
----------- -----------
Total debt investment securities.... $29,519,219 $28,809,086
=========== ===========
December 31, 1998
Debt securities, excluding
mortgage-backed securities:
Due in one year or less............. 5.61% $ 4,506,744 $ 4,523,120
Due after one year through five
years............................ 6.07 9,987,547 10,028,140
Due after five years through 15
years............................ 6.13 2,027,473 2,002,650
----------- -----------
16,521,764 16,553,910
Mortgage-backed securities............ 6.29 7,590,648 7,606,337
----------- -----------
Total debt investment securities.... $24,112,412 $24,160,247
=========== ===========
</TABLE>
The sale of an investment security for the year ended December 31, 1998
resulted in a realized gain of $128. There were no sales of securities during
1997 or during the first six months of 1999.
The carrying value of investment securities that are pledged to secure
securities sold under agreements to repurchase and other deposits was
$24,058,947, $24,160,247, and $2,997,500 at June 30, 1999 (Unaudited), December
31, 1998, and December 31, 1997, respectively.
F-12
<PAGE> 127
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED) DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- -------------------- -------------------
BALANCE % BALANCE % BALANCE %
------------ ----- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
Construction and
land
development...... $ 22,466,493 9.1% $ 13,656,284 7.4% $ 0 0.0%
Secured by 1-4
family
properties....... 15,577,437 6.3 10,655,703 5.8 171,872 1.3
Secured by multi-
family
properties....... 2,547,966 1.0 2,520,747 1.4 0 0.0
Secured by nonfarm
nonresidential
properties....... 139,199,347 56.4 100,742,487 54.5 5,421,302 42.1
Commercial............ 64,437,050 26.1 55,071,347 29.8 7,278,664 56.5
Consumer.............. 2,496,493 1.1 2,098,034 1.1 14,925 0.1
------------ ----- ------------ ----- ----------- -----
Total Loans........... $246,724,786 100.0% $184,744,602 100.0% $12,886,763 100.0%
============ ===== ============ ===== =========== =====
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1999 1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Beginning balance......... $2,765,100 $ 193,300 $ 193,300 $ 0
Provision charged to
operating expense....... 935,900 1,471,800 2,571,800 193,300
---------- ---------- ---------- --------
Ending balance....... $3,701,000 $1,665,100 $2,765,100 $193,300
========== ========== ========== ========
</TABLE>
There were no loans classified as impaired at June 30, 1999, December 31,
1998, or December 31, 1997 or during the periods then ended.
F-13
<PAGE> 128
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- PREMISES AND EQUIPMENT -- NET
Premises and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements.................. $ 315,020 $ 315,020 $ 0
Buildings and leasehold improvements... 1,992,790 759,942 545,401
Construction in process................ 0 100,638 0
Furniture and equipment................ 1,216,803 869,195 408,581
---------- ---------- --------
3,524,613 2,044,795 953,982
Less: accumulated depreciation......... 310,475 186,990 0
---------- ---------- --------
$3,214,138 $1,857,805 $953,982
========== ========== ========
</TABLE>
F-14
<PAGE> 129
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED) DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- -------------------- ------------------
BALANCE % BALANCE % BALANCE %
------------ ----- ------------ ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand............. $ 16,331,118 6.6% $ 14,319,290 8.3% $7,207,482 74.4%
Interest-bearing
checking........... 9,415,224 3.8 7,765,703 4.5 213,218 2.2
Money market......... 4,813,760 2.0 3,822,019 2.2 0 0.0
Savings.............. 41,798,368 17.0 28,796,603 16.8 2,089,539 21.6
Time, under
$100,000........... 4,047,872 1.6 3,305,504 1.9 178,025 1.8
Time, $100,000 and
over............... 19,832,561 8.2 16,718,705 9.7 0 0.0
------------ ----- ------------ ----- ---------- -----
96,238,903 39.2 74,727,824 43.4 9,688,264 100.0
Out-of-area time,
under $100,000..... 97,045,443 39.4 77,847,412 45.3 0 0.0
Out-of-area time,
$100,000 and
over............... 52,526,903 21.4 19,422,783 11.3 0 0.0
------------ ----- ------------ ----- ---------- -----
149,572,346 60.8 97,270,195 56.6 0 0.0
------------ ----- ------------ ----- ---------- -----
Total Deposits....... $245,811,249 100.0% $171,998,019 100.0% $9,688,264 100.0%
============ ===== ============ ===== ========== =====
</TABLE>
Out-of-area certificates of deposit consist of certificates obtained from
depositors outside of the primary market area. As of June 30, 1999 (Unaudited)
and December 31, 1998, out-of-area certificates of deposit totaling $130,539,074
and $83,404,629 were obtained through deposit brokers, with the remaining
$19,033,272 and $13,865,566 obtained directly from the depositors, respectively.
F-15
<PAGE> 130
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table depicts the maturity distribution for certificates of
deposit.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
1999...................................... $154,023,757 $ 89,659,963
2000...................................... 16,247,964 22,649,689
2001...................................... 1,691,058 4,194,752
2002 and thereafter....................... 1,490,000 1,390,000
------------ ------------
$173,452,779 $117,294,404
============ ============
</TABLE>
NOTE 6 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information relating to securities sold under agreements to repurchase, is
summarized below:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Outstanding balance at end of
period.............................. $17,865,592 $17,037,601 $655,447
Average interest rate at end of
period.............................. 4.12% 4.20% 4.70%
Average balance during the period..... 17,230,642 10,305,728 3,853
Average interest rate during the
period.............................. 4.12% 4.72% 4.70%
Maximum month end balance during the
period.............................. 17,865,592 18,498,833 655,447
</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 repurchase agreements are
recorded as assets of the Bank and are primarily held in safekeeping by
correspondent banks. Repurchase agreements are offered principally to certain
large deposit customers as deposit equivalent investments.
F-16
<PAGE> 131
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- FEDERAL INCOME TAXES
The provision (benefit) for federal taxes consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999
-----------
(UNAUDITED)
<S> <C>
Current income tax........................................ $ 694,203
Deferred income tax....................................... (353,216)
Change in valuation allowance for deferred tax assets..... (206,987)
$ 134,000
</TABLE>
The net deferred tax asset recorded includes the following amounts of
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets
Provision for loan losses.............. $1,105,628 $787,422 $ 65,722
Start-up/pre-opening expenses.......... 86,258 76,713 97,811
Deferred loan fees..................... 62,360 52,273
Depreciation........................... 11,248 8,146
---------- -------- --------
$1,504,217 $924,554 $163,533
========== ======== ========
Deferred tax liabilities
Unrealized gain on securities available
for sale............................ $ 16,400
Miscellaneous expenses................. 13,600
Accretion.............................. $ 3,500 2,176
---------- -------- --------
$ 3,500 $ 32,176 $163,533
========== ======== ========
</TABLE>
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits related to such
assets will not be realized. Management has determined that an allowance of
$892,378 and $163,533 is required for 1998 and 1997.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Net deferred tax asset before valuation
allowance.............................. $1,500,717 $892,378 $163,533
Valuation allowance for deferred tax
assets................................. (685,391) (892,378) (163,533)
---------- -------- --------
$ 815,326 $ 0 $ 0
========== ======== ========
</TABLE>
F-17
<PAGE> 132
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- STOCK OPTION PLAN
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Stock options outstanding
Beginning................................ 121,750 77,750 0
Granted.................................. 0 44,000 77,750
--------- ----------- ---------
Ending................................ 121,750 121,750 77,750
========= =========== =========
Options exercisable at end of period..... 54,500 50,166 22,918
--------- ----------- ---------
Minimum exercise price................... $ 10.00 $ 10.00 $ 10.00
Maximum exercise price................... 13.63 13.63 11.75
Average exercise price................... 11.50 11.50 10.75
Average remaining option term............ 8.9 years 9.0 years 9.8 years
Estimated fair value of stock options
granted.................................. $ 0 $ 172,510 $ 340,863
Assumptions used:
Risk-free interest rate............... -- 4.56% 6.01%
Expected option life.................. -- 7 years 7 years
Expected stock volatility............. -- 11% 25%
Expected dividends.................... -- 0% 0%
Pro-forma income (loss), assuming SFAS 123
fair value method was used for stock
options:
Net income (loss)........................ $ 778,187 $(1,299,991) $(539,585)
Basic and diluted income (loss) per
share................................. 0.31 (0.68) (0.36)
</TABLE>
NOTE 9 -- RELATED PARTIES
Certain directors and executive officers of Mercantile, including their
immediate families and companies in which they are principal owners, were loan
customers of the Bank. At June 30, 1999 (Unaudited), December 31, 1998, and
December 31, 1997, the Bank had approximately $12,516,000, $12,815,000 and
$5,940,000 in loan commitments to directors and executive officers, of which
approximately $8,753,000, $9,095,000 and
F-18
<PAGE> 133
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,147,000 were outstanding at June 30, 1999 (Unaudited), December 31, 1998 and
December 31, 1997, respectively, as reflected in the following table.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Beginning balance..................... $9,095,000 $2,147,000 $ 0
New loans............................. 0 7,222,000 2,147,000
Repayments............................ (342,000) (274,000) 0
---------- ---------- ----------
Ending balance................... $8,753,000 $9,095,000 $2,147,000
========== ========== ==========
</TABLE>
Related party deposits and repurchase agreements totaled approximately
$10,252,000, $7,978,000 and $416,000 at June 30, 1999 (Unaudited), December 31,
1998 and December 31, 1997.
NOTE 10 -- COMMITMENTS AND OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its 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 the
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. The 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. The 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.
Fair value of the Bank's off-balance sheet instruments (commitments to
extend credit and standby letters of credit) is based on rates currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. At June 30, 1999 and
December 31, 1998, the rates on existing off-balance sheet instruments were
substantially equivalent to current market rates, considering the underlying
credit standing of the counterparties.
F-19
<PAGE> 134
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank's maximum exposure to credit losses for loan commitments and
standby letters of credit outstanding was as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Commercial unused lines of credit....... $ 65,154,486 $ 61,600,909 $ 3,701,272
Unused lines of credit secured by 1 - 4
family residential properties......... 6,242,134 3,434,290 64,356
Credit card unused lines of credit...... 2,850,696 2,251,329 0
Other consumer unused lines of credit... 3,517,546 1,534,497 0
Commitments to make loans............... 29,065,700 21,751,900 7,198,584
Standby letters of credit............... 24,876,358 19,271,848 0
------------ ------------ -----------
$131,706,920 $109,844,773 $10,964,212
============ ============ ===========
</TABLE>
Management does not anticipate any significant losses as a result of these
commitments.
At June 30, 1999 (Unaudited), December 31, 1998 and December 31, 1997,
reserves of $216,000, $185,000 and $0 were required as deposits with the Federal
Reserve Bank of Chicago. These reserves do not earn interest.
The Bank leases the main office facility under an operating lease
agreement. Total rental expense for the lease for 1998 was $151,349. Rental
expense through June 30, 1999 (Unaudited) was $77,173. Future minimum rentals
under this lease as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
1999................................................. $ 77,172 $ 154,344
2000................................................. 154,344 154,344
2001................................................. 154,344 154,344
2002................................................. 154,344 154,344
2003................................................. 154,344 154,344
Thereafter........................................... 565,928 565,928
---------- ----------
$1,337,648 $1,337,648
========== ==========
</TABLE>
NOTE 11 -- EMPLOYEE BENEFIT PLANS
Mercantile established a 401(k) plan effective January 1, 1998, covering
substantially all of its employees. Mercantile's matching 401(k) contribution
charged to expense was $34,945, $27,167, $59,705, and $0 for each of the periods
ending June 30, 1999 (Unaudited), June 30, 1998, (Unaudited) December 31, 1998
and December 31, 1997. The percent of Mercantile's matching contributions to the
401(k) is determined annually by the Board of Directors.
F-20
<PAGE> 135
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------------- ------------------- ------------------
(UNAUDITED)
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUES VALUES VALUES VALUES VALUES VALUES
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash and cash
equivalents....... $ 12,941 $ 12,941 $ 6,456 $ 6,456 $ 7,103 $ 7,103
Securities........... 29,606 29,594 24,160 24,160 2,998 2,998
Loans, net........... 243,024 242,289 181,980 181,963 12,693 12,693
Accrued interest
receivable........ 1,437 1,437 1,148 1,148 53 53
Financial liabilities
Deposits............. 245,811 244,464 171,998 173,665 9,688 9,688
Securities sold under
agreements to
repurchase........... 17,866 17,866 17,038 17,038 655 655
Accrued interest
payable........... 740 740 423 423 4 4
</TABLE>
The estimated fair value approximates carrying amount for all items except
those described below. Estimated fair value for securities is based on quoted
market values for the individual securities or for equivalent securities.
Estimated fair value for loans is based on the rates charged at the end of the
period for new loans with similar maturities, applied until the loan is assumed
to reprice or be paid. Estimated fair value for IRAs, time CDs, and agreements
to repurchase is based on the rates paid at the end of the year for new deposits
or borrowings, applied until maturity. Estimated fair value for other financial
instruments and off-balance-sheet loan commitments are considered to approximate
carrying value.
NOTE 13 -- SALE OF COMMON STOCK
During 1998 Mercantile completed a secondary stock offering, selling
977,500 shares. Net of issuance expenses the common stock sale raised $14.3
million. Substantially all of the net proceeds were contributed to the Bank,
which were used to support the anticipated growth in assets, fund investments in
loans and securities, and for general corporate purposes.
F-21
<PAGE> 136
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- REGULATORY MATTERS
Mercantile and Bank 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 the 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 adequately
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. The minimum
requirements are:
<TABLE>
<CAPTION>
CAPITAL TO RISK-
WEIGHTED ASSETS
----------------- TIER 1 CAPITAL
TOTAL TIER 1 TO AVERAGE ASSETS
------ ------- -----------------
<S> <C> <C> <C>
Well capitalized............................... 10% 6% 5%
Adequately capitalized......................... 8 4 4
Undercapitalized............................... <8 <4 <4
</TABLE>
F-22
<PAGE> 137
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1999, (Unaudited) December 31, 1998 and December 31, 1997,
actual capital levels (in thousands) and minimum required levels for Mercantile
and the Bank were:
<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>
June 30, 1999 (Unaudited)
Total capital (to risk
weighted assets)
Consolidated........ $31,138 10.8% $23,124 8.0% $28,905 10.0%
Bank................ 30,311 10.5 23,120 8.0 28,900 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated........ 27,524 9.5 11,566 4.0 17,348 6.0
Bank................ 26,698 9.2 11,564 4.0 17,345 6.0
Tier 1 capital (to
average assets)
Consolidated........ 27,524 10.0 10,980 4.0 13,725 5.0
Bank................ 26,698 9.7 10,974 4.0 13,717 5.0
December 31, 1998
Total capital (to risk
weighted assets)
Consolidated........ $29,434 13.0% $18,100 8.0% $22,625 10.0%
Bank................ 28,453 12.6 18,093 8.0 22,616 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated........ 26,669 11.8 9,050 4.0 13,575 6.0
Bank................ 25,688 11.4 9,047 4.0 13,570 6.0
Tier 1 capital (to
average assets)
Consolidated........ 26,669 13.8 7,711 4.0 9,639 5.0
Bank................ 25,688 13.3 7,707 4.0 9,634 5.0
</TABLE>
F-23
<PAGE> 138
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
---------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total capital (to risk
weighted assets)
Consolidated........ $13,595 78.1% $ 1,392 8.0% $ 1,740 10.0%
Bank................ 13,056 75.6 1,392 8.0 1,728 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated........ 13,402 77.0 696 4.0 1,044 6.0
Bank................ 12,863 74.5 696 4.0 1,037 6.0
Tier 1 capital (to
average assets)
Consolidated........ 13,402 69.7 769 4.0 961 5.0
Bank................ 12,863 69.3 743 4.0 928 5.0
</TABLE>
The Bank was categorized as well capitalized at June 30, 1999 (Unaudited),
and December 31, 1998 and 1997.
F-24
<PAGE> 139
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 773,728 $ 910,068 $ 536,824
Investment in subsidiary................ 26,234,514 25,720,043 12,862,806
Other assets............................ 52,197 81,905 126,545
----------- ----------- -----------
Total assets......................... $27,060,439 $26,712,016 $13,526,175
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities............................. $ 0 $ 11,500 $ 52,905
Shareholders' equity.................... 27,060,439 26,700,516 13,473,270
----------- ----------- -----------
Total liabilities and shareholders'
equity............................. $27,060,439 $26,712,016 $13,526,175
=========== =========== ===========
</TABLE>
F-25
<PAGE> 140
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Income
Other.................. $ 16,802 $ 7,400 $ 28,868 $ 32,781
---------- ----------- ----------- ---------
Total income........ 16,802 7,400 28,868 32,781
Expenses
Other operating
expenses............ 193,350 48,267 187,797 303,289
---------- ----------- ----------- ---------
Total expenses...... 193,350 48,267 187,797 303,289
Income (loss) before
income tax and equity
in undistributed net
loss of subsidiaries... (176,548) (40,867) (158,929) (270,508)
Federal income tax
expense................ (22,000) 0 0 0
Equity in undistributed
net income (loss) of
subsidiary............. 1,009,711 (1,395,334) (950,118) (133,563)
---------- ----------- ----------- ---------
Net income (loss)........ $ 855,163 $(1,436,201) $(1,109,047) $(404,071)
========== =========== =========== =========
</TABLE>
F-26
<PAGE> 141
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss).... $ 855,163 $(1,436,201) $(1,109,047) $ (404,071)
Adjustments to
reconcile net
income (loss) to
net cash from
operating
activities
Equity in
undistributed
(income) loss of
subsidiary...... (1,009,711) 1,395,334 950,118 133,563
Change in other
assets.......... 29,708 (39,188) 44,640 (126,545)
Change in other
liabilities..... (11,500) (52,905) (41,405) 52,905
----------- ----------- ----------- ------------
Net cash from
operating
activities... (136,340) (132,960) (155,694) (344,148)
Cash flows from
financing activities
Proceeds from sale of
common stock...... 0 0 14,300,826 13,880,972
Capital investment
into Mercantile
Bank of West
Michigan.......... 0 0 (13,771,888) (13,000,000)
----------- ----------- ----------- ------------
Net cash from
financing
activities...... 0 0 528,938 880,972
----------- ----------- ----------- ------------
Net change in cash and
cash equivalents..... (136,340) (132,960) 373,244 536,824
Cash and cash
equivalents at
beginning of
period............... 910,068 536,824 536,824 0
----------- ----------- ----------- ------------
Cash and cash
equivalents at end of
period............... $ 773,728 $ 403,864 $ 910,068 $ 536,824
=========== =========== =========== ============
</TABLE>
F-27
<PAGE> 142
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Special Note Regarding
Forward-Looking Statements......... i
Prospectus Summary................... 1
Risk Factors......................... 9
Use of Proceeds...................... 18
Accounting Treatment................. 20
Capitalization....................... 21
Management's Discussion and Analysis
of
Financial Condition and Results of
Operations......................... 22
Business............................. 42
Management........................... 50
Security Ownership................... 59
Related Party Transactions........... 61
Supervision and Regulation........... 62
Description of the Preferred
Securities......................... 67
Description of Junior Subordinated
Debentures......................... 83
Book-Entry Issuance.................. 94
Description of Preferred Securities
Guarantee.......................... 96
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures and the Preferred
Securities
Guarantee.......................... 100
Material Federal Income Tax
Consequences....................... 102
ERISA Considerations................. 106
Indemnification...................... 107
Underwriting......................... 109
Where You Can Find More
Information........................ 111
Legal Matters........................ 111
Experts.............................. 112
Index to Financial Statements........ F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THE
INFORMATION CONTAINED IN THIS DOCUMENT MAY HAVE CHANGED SINCE THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL AND IS NOT SOLICITING AN
OFFER TO BUY THE SECURITIES IN ANY STATE WHERE OFFERS OR SALES ARE NOT
PERMITTED.
================================================================================
================================================================================
1,400,000 PREFERRED SECURITIES
MBWM CAPITAL TRUST I
9.60% CUMULATIVE PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER
PREFERRED SECURITY)
FULLY, IRREVOCABLY AND
UNCONDITIONALLY GUARANTEED ON A
SUBORDINATED BASIS,
AS DESCRIBED IN THIS PROSPECTUS, BY
MERCANTILE BANK
CORPORATION
MERCANTILE LOGO
-------------------------
$14,000,000
9.60% SUBORDINATED DEBENTURES
OF
MERCANTILE BANK
CORPORATION
-------------------------
Prospectus
September 13, 1999
-------------------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
TUCKER ANTHONY CLEARY GULL
================================================================================
