<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 1998 Commission File No. 333-33081
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MERCANTILE BANK CORPORATION
(Name of small business issuer in its charter)
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MICHIGAN 38-3360865
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
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216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503
(Address of principal executive offices)
(616) 242-9000
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: NONE
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO ____
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenue for its most recent fiscal year was $10,656,000.
The aggregate market value of voting stock of the registrant held by
nonaffiliates was approximately $35,564,000 as of February 1, 1999; based on the
average of the closing bid and asked prices ($16.75) on that date.
As of March 1, 1999, 2,472,500 shares of Common Stock of the issuer
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III Portions of the Proxy Statement of the
issuer for its April 15, 1999 Annual
Meeting
Transitional Small Business Disclosure Format YES NO X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Mercantile Bank Corporation (the "Company") is a bank holding company
under the Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"). As a bank holding company, the Company is subject to regulation
by the Federal Reserve Board. The Company was organized on July 15, 1997, under
the laws of the State of Michigan, and formed Mercantile Bank of West Michigan
(the "Bank"), which commenced business on December 15, 1997. The Company exists
primarily for the purpose of holding all of the stock of the Bank, and of such
other subsidiaries as the Company may acquire or establish.
The expenses of the Company to date have generally been paid using the
proceeds from its initial public stock offering, in October 1997, and the
secondary public stock offering, in July 1998. The Company's principal source of
future operating funds is expected to be dividends from the Bank.
THE BANK
The Bank is a state banking Company which operates under the laws of
the State of Michigan, pursuant to a charter issued by the Financial
Institutions Bureau of the State of Michigan. The Bank's deposits are insured to
the maximum extent provided by the Federal Deposit Insurance Corporation. The
Bank's primary service area is the Kent and Ottawa County areas of West
Michigan, which includes the City of Grand Rapids, the second largest city in
the State of Michigan.
The Bank, through its office at 216 North Division Avenue, Grand
Rapids, Michigan provides a wide variety of commercial banking services to
individuals, businesses, governmental units, and other institutions. Its
services include accepting time, demand and savings deposits, including regular
checking accounts, NOW and money market accounts, and certificates of deposit.
In addition, the Bank makes secured and unsecured commercial, construction,
mortgage, and consumer loans, finances commercial transactions, and provides
safe deposit facilities. The Bank has an automated teller machine ("ATM") which
participates in the Magic Line system, a regional network, as well as other ATM
networks throughout the country. The Bank also enables customers to conduct
certain loan and deposit transactions by telephone and personal computer, and
makes courier service available to certain commercial customers. The Bank does
not have trust powers.
1.
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EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of the Company are affected by domestic economic
conditions and the monetary and fiscal policies of the United States
government, its agencies, and the Federal Reserve Board. The Federal Reserve
Board's monetary policies have had, and will likely continue to have, an
important impact on the operating results of commercial banks through its power
to implement national monetary policy in order to, among other things, curb
inflation or avoid a recession. The policies of the Federal Reserve Board have
a major effect upon the levels of bank loans, investments and deposits through
its open market operations in United States government securities, and through
its regulation of, among other things, the discount rate on borrowings of
member banks and the reserve requirements against member bank deposits. It is
not possible to predict the nature and impact of future changes in monetary and
fiscal policies. The Bank maintains reserves directly with the Federal Reserve
Bank of Chicago to the extent required by law.
REGULATION AND SUPERVISION
The Company, as a bank holding company under the Bank Holding Company
Act, is required to file an annual report with the Federal Reserve Board and
such additional information as the Federal Reserve Board may require pursuant to
the Bank Holding Company Act, and is subject to examination by the Federal
Reserve Board.
The Bank Holding Company Act limits the activities which may be engaged
in by the Company and its subsidiary to those of banking and the management of
banking organizations, and to certain non-banking activities, including those
activities which the Federal Reserve Board may find, by order or regulation, to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. The Federal Reserve Board is empowered to differentiate
between activities by a bank holding company, or a subsidiary thereof, and
activities commenced by acquisition of a going concern.
With respect to non-banking activities, the Federal Reserve Board has,
by regulation, determined that certain non-banking activities are closely
related to banking within the meaning of the Bank Holding Company Act. These
activities include, among other things, operating a mortgage company, finance
company, credit card company or factoring company, performing certain data
processing operations, providing certain investment and financial advice, acting
as an insurance agent for certain types of credit related insurance, leasing
property on a full-payout, nonoperating basis; and, subject to certain
limitations, providing discount securities brokerage services for customers.
The Bank is subject to certain restrictions imposed by federal law on
any extension of credit to the Company for investments in stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Federal law prevents the Company from borrowing from
the Bank unless the loans are secured in designated amounts.
2.
<PAGE> 4
With respect to the acquisition of banking organizations, the Company
is required to obtain the prior approval of the Federal Reserve Board before it
can acquire all or substantially all of the assets of any bank, or acquire
ownership or control of any voting shares of any bank, if, after such
acquisition, it will own or control more than 5% of the voting shares of such
bank. Acquisitions across state lines are subject to certain state and Federal
Reserve Board restrictions.
EMPLOYEES
As of December 31, 1998, the Company and the Bank employed 32 full-time
and 7 part-time persons. Management believes that the Bank's relations with its
employees are good.
LOAN POLICY
As a routine part of 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 businesses and
individuals who are 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
responsibility; purpose of the loan; knowledge of collateral and its value;
terms of repayment; source of repayment; payment history; and economic
conditions.
The 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 currently specifies
lending authority for certain officers up to $1.0 million, and $1.5 million for
the Bank's Chairman of the Board and its President and Chief Executive Officer.
Loan requests exceeding $1.5 million, up to the legal lending limit of
approximately $6.6 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.
3.
<PAGE> 5
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 Bank's market area. Commercial loans are
originated by seven lenders, including the Chairman of the Board and the
President and Chief Executive Officer. The lending group has over 100 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 a 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.
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 (i) limiting the amount of credit to any
one borrower to an amount less than the Bank's legal lending limit, and (ii)
avoiding certain types of commercial real estate financings.
4.
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The Bank has no material foreign or agricultural loans, and no material
loans to energy producing customers.
Single-Family Residential Real Estate Loans. The Bank originates
single-family 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.
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.
LOAN PORTFOLIO QUALITY
Loans are placed in a nonaccrual status when, in the opinion of
management, uncertainty exists as to the ultimate collection of principal and
interest. For the period ended December 31, 1998, no loans were placed in
nonaccrual status. At December 31, 1998, there were no significant loans where
known information about possible credit problems of borrowers causes management
to have serious doubts as to the ability of the borrower to comply with present
loan repayment terms and which, in management's judgment, may result in
disclosure of such loans. Furthermore, management is not aware of any potential
problem loans which could have a material effect on the Company's operating
results, liquidity, or capital resources. Management is not aware of any other
factors that would cause future net loan charge-offs, in total and by loan
category, to significantly differ from those experienced by institutions of
similar size.
Additional detail and information relative to the loan portfolio is
included in Management's Discussion and Analysis of Financial Condition and
Results of Operations ("Management's Discussion and Analysis") beginning at Page
F-4 and Note 3 to the Consolidated Financial Statements of the Company at Page
F-23 of this Annual Report.
5.
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ALLOWANCE FOR LOAN AND LEASE LOSSES
In each accounting period, the allowance for loan and lease losses is
adjusted by management to the amount management believes is necessary to
maintain the allowance at adequate levels. Through the Bank's credit department,
management will attempt to allocate specific portions of the allowance for loan
losses based on specifically identifiable problem loans. Management's 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 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 creditor's 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.
Additional detail regarding the allowance for loan and lease losses is
included in Management's Discussion and Analysis beginning at Page F-4 and Note
3 to the Consolidated Financial Statements of the Company at Page F-23 of this
Annual Report.
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, or greater than, the size of the allowance for loans
and lease losses.
INVESTMENTS
The principal investment of the Company is its investment in the common
stock of the Bank. Funds retained by the Company 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, banker's 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 the Company 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, the Company has no present plans to make any such equity
investment. The Company's Board of Directors may alter the Company's investment
policy without shareholder approval.
6.
<PAGE> 8
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.
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 make such an
investment. 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 Michigan Financial
Institutions Bureau 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 such real estate as is necessary for the convenient transaction of its
business. The Bank's Board of Directors may alter the Bank's investment policy
without shareholder approval.
Detail for the securities portfolio is included in Management's
Discussion and Analysis beginning at Page F-4 as well as in Note 2 to the
Consolidated Financial Statements of the Company at Page F-22 of this Annual
Report.
COMPETITION
All phases of the business of the Bank are highly competitive. The Bank
competes with numerous financial institutions, including other commercial banks
in Kent County, Michigan, including the City of Grand Rapids. The Bank, along
with other commercial banks, competes with respect to its lending activities,
and competes in attracting demand deposits, with savings banks, savings and loan
associations, insurance companies, small loan companies, credit unions and with
the issuers of commercial paper and other securities, such as various mutual
funds. Many of these institutions are substantially larger and have greater
financial resources than the Bank.
The competitive factors among financial institutions can be classified
into two categories; competitive rates and competitive services. Interest rates
are widely advertised and thus competitive, especially in the area of time
deposits. From a service standpoint, financial institutions compete against each
other in types and quality of services. The Bank is generally competitive with
other financial institutions in its area with respect to interest rates paid on
time and savings deposits, charges on deposit accounts, and interest rates
charged on loans. With respect to services, the Bank offers a customer service
oriented atmosphere which management believes is better suited to its customers
than that offered by other institutions in the local market.
SELECTED STATISTICAL INFORMATION
Management's Discussion and Analysis beginning at Page F-4 of this
Annual Report includes selected statistical information.
7.
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RETURN ON EQUITY AND ASSETS
Return on Equity and Asset information is included in Management's
Discussion and Analysis beginning at Page F-4 of this Annual Report.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank leases a one story building, with approximately 11,000 square
feet of usable space, in downtown Grand Rapids, Michigan for use as its main
office. The executive offices of the Company are located in the same building.
The building lease has an initial term of ten years, with four, five year
renewal options.
During 1998 the Bank purchased land in Alpine Township for the purpose
of constructing an additional facility, which is expected to have approximately
8,000 square feet of usable space. This new building is expected to contain a
full service branch with multiple drive-through lanes and house the Bank's
operations and accounting departments. Completion is scheduled for the summer of
1999.
ITEM 3. LEGAL PROCEEDINGS
As a depository of funds, the Bank could occasionally be named as a
defendant in lawsuits (such as garnishment proceedings) involving claims to the
ownership of funds in particular accounts. Such litigation is incidental to the
Bank's business.
No litigation is pending in which the Company, or the Bank, is likely
to experience loss or exposure which would materially affect the Company's
equity, financial position, or liquidity as presented herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Position Age
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Gerald R. Johnson, Jr. 52
Chairman of the Board and Chief
Executive Officer
Michael H. Price 42
President and Chief Operating
Officer
Robert B. Kaminski 37
Senior Vice President and
Secretary
Charles E. Christmas 33
Chief Financial Officer, Treasurer,
and Compliance Officer
Each of the persons named above has held the designated office with the Company
since 1997, except for Mr. Christmas, who joined the Company in 1998 and held
the position of Vice President of Finance, Treasurer and Compliance Officer
before being promoted to Chief Financial Officer, Treasurer and Compliance
Officer effective January 1, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock of Mercantile Bank Corporation is quoted on the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. ("OTC
Bulletin Board") under the ticker symbol "MBWM." At December 31, 1998, there
were approximately 87 record holders of the Company's Common Stock. The Company
has paid no 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 the Company's initial public stock offering (October
23, 1997) through December 31, 1998. The quotations reflect bid prices as
reported by the OTC Bulletin Board and do not include retail mark-up, mark-down
or commission.
9.
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BID PRICES
HIGH LOW
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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>
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATIONS
Management's Discussion and Analysis beginning at Page F-4 of this
Annual Report is incorporated here by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements beginning at Page F-14 of this
Annual Report are incorporated here by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information listed under the caption "Information about Directors,
Nominees and Executive Officers" in the Proxy Statement of the Company for its
April 15, 1999 Annual Meeting furnished to the Commission as Exhibit 20 to this
Annual Report is incorporated here by reference.
The Company does not have a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934 so information
regarding compliance with Section 16(a) is not applicable.
10.
<PAGE> 12
ITEM 10. EXECUTIVE COMPENSATION
The information presented under the captions "Summary Compensation
Table," "Options Granted in 1998," "Aggregated Stock Option Exercises in 1998
and Year End Option Values" and "Employment Agreements" in the Proxy Statement
of the Company for its April 15, 1999 Annual Meeting furnished to the Commission
as Exhibit 20 to this Annual Report is incorporated here by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information presented under the caption "Stock Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement of the Company for its
April 15, 1999 Annual Meeting furnished to the Commission as Exhibit 20 to this
Annual Report is incorporated here by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information listed under the caption "Certain Transactions" in the
Proxy Statement of the Company for its April 15, 1999 Annual Meeting furnished
to the Commission as Exhibit 20 to this Annual Report is incorporated here by
reference.
11.
<PAGE> 13
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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Exhibit No. EXHIBIT DESCRIPTION
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3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's
Registration Statement on Form SB-2 (Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's
Registration Statement on Form SB-2 (Commission File No. 333-33081) which became
effective on October 23, 1997
10.1 1997 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of the
Company's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became
effective on October 23, 1997 (Management contract or compensatory plan)
10.2 Lease Agreement between the Company and Division Avenue Partners, L.L.C. dated August
16, 1997, is incorporated by reference to exhibit 10.2 of the Company's Registration
Statement on Form SB-2 (Commission File No. 333-33081) which became effective October
23, 1997
10.3 Agreement between the Company and Visser Brothers Construction Inc. dated November
16,1998, on modified Standard Form of Agreement Between Owner and Construction Manager
where the Construction Manager is also the Constructor
10.4 Employment Agreement dated December 1, 1998 between the Company, the Bank and Gerald R.
Johnson, Jr., Chairman and Chief Executive Officer of the Company (Management contract
or compensatory plan)
10.5 Employment Agreement dated December 1, 1998 between the Company, the Bank and Michael
H. Price, President and Chief Operating Officer of the Company (Management contract or
compensatory plan)
20 Proxy Statement of the Company for its April 15, 1999 Annual Meeting. Except for the
portions of the Proxy Statement that are expressly incorporated by reference in this
Annual Report on Form 10-KSB, the Proxy Statement of the Company shall not be deemed
filed as a part thereof
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12.
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21 Subsidiaries of the Company is incorporated by reference to Exhibit 21 of the Companys
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (Commission
File No. 333-33081)
27 Financial Data Schedule
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(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the last
quarter of the period covered by this Report.
13.
<PAGE> 15
MERCANTILE BANK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
F-1
<PAGE> 16
MERCANTILE BANK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
CONTENTS
SELECTED FINANCIAL DATA.................................................. F-3
MANAGEMENT'S DISCUSSION AND ANALYSIS..................................... F-4
REPORT OF INDEPENDENT AUDITORS........................................... F-14
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS......................................... F-15
CONSOLIDATED STATEMENTS OF INCOME................................... F-16
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME..................... F-17
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY.......... F-18
CONSOLIDATED STATEMENTS OF CASH FLOWS............................... F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-20
F-2
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SELECTED FINANCIAL DATA
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1998 1997
---- ----
(In thousands except per share data)
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CONSOLIDATED RESULTS OF OPERATIONS:
Interest income 10,168 154
Interest expense 5,629 14
------ ---
Net interest income 4,539 140
Provision for loan losses 2,572 193
Noninterest income 488 0
Noninterest expense 3,564 351
------ ---
Income (loss) before income tax expense (1,109) (404)
Income tax expense 0 0
------ ----
Net income (loss) (1,109) (404)
CONSOLIDATED BALANCE SHEET DATA:
Total assets 216,237 24,109
Cash and cash equivalents 6,456 7,103
Securities available for sale 24,160 2,998
Loans, net of deferred loan fees 184,745 12,887
Allowance for loan losses 2,765 193
Deposits 171,998 9,688
Securities sold under agreements to repurchase 17,038 655
Shareholders' equity 26,701 13,473
CONSOLIDATED FINANCIAL RATIOS:
Return on average assets (0.86%) (21.8%)
Return on average shareholders' equity (6.40%) (30.9%)
Nonperforming loans to loans 0.00% 0.00%
Allowance for loan losses to loans 1.50% 1.50%
Tier 1 leverage capital 13.83% 69.72%
Tier 1 leverage risk-based capital 11.79% 77.04%
Total risk-based capital 13.01% 78.12%
PER SHARE DATA:
Net Income:
Basic (0.58) (0.27)
Diluted (0.58) (0.27)
Book value at end of period 10.80 9.01
Dividends declared NA NA
NA - Not Applicable
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F-3
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
This Management's Discussion and Analysis should be read in conjunction with the
consolidated financial statements contained herein. This discussion provides
information about the consolidated financial condition and results of operations
of Mercantile Bank Corporation ("Company") and its wholly-owned subsidiary,
Mercantile Bank of West Michigan ("Bank").
The Company 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 the Company and Bank, the Company sold 1,495,000 shares of common stock in an
underwritten, initial public offering. The Company 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 West Michigan, which includes the City of Grand
Rapids, the second largest city in the State of Michigan.
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that are based on
management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Company and Bank. Words such as "anticipates," "believes," "estimates,"
"expects," "forecasts," "intends," "is likely," "plans," "projects," variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update,
amend, or clarify forward-looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services: the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; and changes in the national and local economy. These are representative
of the Future Factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement.
FINANCIAL CONDITION
The Company experienced significant asset growth during 1998, its first full
year of operations. Assets of the Company 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 the Company expects continued asset
growth, it is anticipated that the growth will occur at a slower rate.
F-4
<PAGE> 19
EARNING ASSETS
The Company's loan portfolio, which equaled 84% of average earnings 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 the
Company's market area. 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 commercial
loans is in keeping with the Company's strategy of focusing a substantial amount
of its efforts on commercial banking. Business lending is an area of expertise
for all of the Company'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. As the significant rapid
growth of the commercial loan portfolio gradually slows, residential mortgage
and consumer loans are anticipated to increase as a percentage of total loans;
however, the Company's strategy for growth and profitability is expected to
result in the commercial sector of the lending efforts and resultant assets
continuing to be the dominant portfolio category.
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.
<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>
The Company's credit policies establish guidelines to manage credit risk and
asset quality. These guidelines include loan review and early identification of
problem loans to provide 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, the Company
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 "Watch List." Senior
management reviews this list regularly and adjusts for changing conditions.
Since inception of the Company 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 management believes is 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 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.
F-5
<PAGE> 20
The following table illustrates the breakdown of the allowance balance to loan
type (dollars in thousands).
<TABLE>
<CAPTION>
1998 1997
---- ----
Balance at End Percent of Loans Percent of Loans
of Period in each Category in each Category
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 .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 creditor's 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 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, or greater than, 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. The Company maintains the portfolio at levels to provide
adequate pledging for the repurchase agreement program and secondary liquidity
for the Company'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 the Company 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.
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
asset. This level is well within internal policy guidelines, and is not expected
to change significantly in the future.
SOURCE OF FUNDS
The Company'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 the Company experienced significant success in obtaining deposits from
customers located within the market area, the substantial asset growth
necessitated the acquisition of funds from depositors outside of the market
area. While the Company's business plan anticipated the reliance on out-of-area
deposits in the early stages of the Bank's development, the Company's longer
term strategy for funding the Bank is to lower its reliance on out-of-area
deposits and increase core deposits from local businesses and consumers.
F-6
<PAGE> 21
The Company 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, respectively.
Business loan customers also comprise the majority of these deposit types,
although to a lower 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. The
Company anticipates continued growth of its checking and savings deposits as
additional business loans are extended.
The Company 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 the Company 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 the market area, primarily individuals and local
government municipalities. The remaining certificates of deposit were obtained
from depositors outside of the market area. These out-of-area deposits consist
primarily of $99,000 certificates of deposit placed by deposit brokers for a
fee, but also include certificates of deposit for larger dollar amounts
(generally $100,000) and/or 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.
Repurchase agreements increased $16.4 million and equaled 8% of average funding
sources during 1998. Part of the Company'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 the Company.
Although not considered deposits, and therefore not afforded Federal Deposit
Insurance Corporation insurance, this product enables the Company 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 the Company 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. The Company
did record net income from operations during the third and fourth quarters of
1998, and expects net income from operations in 1999.
RESULTS OF OPERATIONS
SUMMARY
As anticipated, the Company 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 the company 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
the Company.
F-7
<PAGE> 22
Although continued significant future asset growth is anticipated, resulting in
additional large loan loss provisions, the overall earnings performance of the
Company is expected to improve. The Company 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. It is anticipated that the Company will be
in a taxable position in the future. The asset growth of the Company 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 the
Company has already achieved profitable status. During the third and fourth
quarters of 1998 the Company recorded net income of $116,000 and $212,000,
respectively.
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 (.9)% (21.8)%
Return on average equity (6.4) (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 the Company'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 the Company's assets, liabilities and shareholders' equity
during 1998:
<TABLE>
<CAPTION>
Interest Average
Average Earned Yield
Balance or Paid or Cost
------- ------- -------
<S> <C> <C> <C>
ASSETS:
Loans $104,838,366 $ 9,007,668 8.59%
Investment securities 15,340,648 880,639 5.74
Federal funds sold 4,831,066 256,422 5.31
Short term investments 413,209 23,487 5.68
------------ ----------- ----
Total interest-earning assets 125,423,289 10,168,216 8.11
Allowance for loan losses (1,583,625)
Other assets 5,559,749
Total assets $129,399,413
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing checking $ 4,015,056 170,594 4.25
Savings 17,454,843 903,881 5.18
Money market 1,329,349 58,321 4.39
Certificates of deposit 67,817,243 4,007,992 5.91
Short term borrowings 10,340,121 488,430 4.72
------------ ---------- ----
Total interest-bearing liabilities 100,956,612 5,629,218 5.58
Noninterest-bearing checking 10,797,858
Other liabilities 319,722
Shareholder's equity 17,325,221
------------
Total liabilities and shareholders' equity $129,399,413
============
Net Interest Income $ 4,538,998
===========
Net Yield on Interest-Earning Assets 3.62%
====
</TABLE>
F-8
<PAGE> 23
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. The Company paid $0.5
million in short term interest expense, or 9% of total interest expense.
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. The Company 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 review of the
Company's and 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, the Company 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
the Company 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 the Company.
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, the Company's efficiency ratio declined throughout 1998 and was
only 55.8% during the fourth quarter. In addition, the Company'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 the Company'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 the Company no provisions to
income tax expense were necessary during 1998. It is anticipated that the
Company will be in a taxable position in the future.
F-9
<PAGE> 24
1997 RESULTS OF OPERATIONS
The Company was incorporated on July 15, 1997 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
has 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 3 months to 60 months.
As of December 31, 1997, the Company 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 the Company would generate a net loss for 1998 as a
result of expenditures made to build the management team and open the main
office and provisions to the allowance for loan and lease losses. 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 $26.7 million and $13.5
million at December 31, 1998 and 1997, respectively. The increase during 1998 is
attributable to the secondary stock offering completed during the year, when
977,500 shares of common stock were sold. Net proceeds to the Company, 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. The Company's 1998 net operating loss of $1.1
million negatively impacted shareholders' equity.
The Company and 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 the Bank began operations, both the Company and Bank
have been categorized as "Well Capitalized," the highest classification
contained within the banking regulations. The capital ratios of the Company and
Bank as of December 31, 1998 and 1997 are disclosed under Note 13 of the Notes
to Consolidated Financial Statements.
The ability of the Company 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 were paid in 1998 or 1997.
LIQUIDITY
Liquidity is measured by the Company'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 the Company. 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.
F-10
<PAGE> 25
The Company'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 the Company regularly obtained deposits from customers outside of the
market area. These out-of-area deposits consist primarily of $99,000
certificates of deposit placed by deposit brokers for a fee, but also include
certificates of deposit for larger dollar amounts (generally $100,000) and/or
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. Reliance on out-of-area deposits is expected to be ongoing due to
the planned future growth; however, a modest decline in the out-of-area deposit
concentration level is expected as new business and retail relationships
continue to be established and as existing customers increase their fund
balances.
The Company 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 the Company's Federal funds sold position averaged $4.8
million.
In addition to normal loan funding and deposit flow, the Company also needs to
maintain liquidity to meet the demands of certain unfunded loan commitments and
standby letters of credit. As of December 31, 1998, the Company 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 months. The Company monitors
fluctuations in loan balances and commitment levels, and includes such data in
its overall liquidity management.
MARKET RISK ANALYSIS
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in U.S. dollars with no specific foreign exchange exposure. The Company has only
limited agricultural-related loan assets and therefore has no significant
exposure to changes in commodity prices. Any impact that changes in foreign
exchange rates and commodity prices would have on interest rates are assumed to
be insignificant.
Interest rate risk is the exposure of the Company's financial condition to
adverse movements in interest rates. The Company 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 the
Company 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, the Company is exposed to lower profitability if it cannot
adapt to interest rate changes. Accepting interest rate risk can be an important
source of profitability and shareholder value; however, excessive levels of
interest rate risk could pose a significant threat to the Company's earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to the Company'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. The Company'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 the Company assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity and asset quality.
F-11
<PAGE> 26
There are two interest rate risk measurement techniques used by the Company. 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 the Company's net interest
margin during periods of changing market interest rates. The following table
depicts the Company'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 asset (liability) GAP $ (27,917) $ (52,629) $ 100,321 $ (19,775)
========= ========= =========
Cumulative GAP $ (27,917) $ (80,546) $ 19,775
========= ========= =========
Percent of cumulative GAP to
total assets (13)% (37)% 9%
========= ========= =========
</TABLE>
(1) Mortgage-backed securities are categorized by expected maturities based upon
prepayment trends as of December 31, 1998.
The second interest rate risk measurement used is commonly referred to as net
interest income simulation analysis. The Company 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 the Company. 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 Company
strategies, among other factors.
F-12
<PAGE> 27
The Company 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 the Company'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 $ 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 ISSUE
The approach of the year 2000 presents potential problems to businesses that
utilize computers in their daily operations. Some computer systems may not be
able to properly interpret dates after December 31, 1999, because they use only
two digits to indicate the year in the date. Therefore, a date using "00" as the
year may recognize the year as 1900 rather than the year 2000.
The Company has formed a Year 2000 Working Group to address the potential
problems associated with the Year 2000 computer issue. The Year 2000 Working
Group, consisting of senior officers and employees, meets periodically and
provides regular reports to the Board of Directors detailing progress with the
Year 2000 issue.
As with any organization that depends on technology, particularly computer
systems and software, a Year 2000 related failure poses a significant threat to
continued business operations. While the Company has developed a plan to achieve
Year 2000 readiness, we recognize that the success of our third party providers
is vital to our success. Vendors of particular concern include, but are not
limited to, our computer service providers, electronic banking vendors,
correspondent banks, and utility and telecommunications companies. Additional
risks include the Bank's lending and deposit relationships, as well as security
and heating, ventilation, and air conditioning systems. No in-house programmed
software is used by the Company.
Management believes that all significant vendors have been identified and
contacted regarding their Year 2000 readiness. These vendors have indicated that
either their products are currently Year 2000 compliant or will be by December
31, 1999. For computer-based systems that are considered vital to operations,
such as data and transaction processing, actual testing has been or will be
conducted prior to December 31, 1999, to test Year 2000 readiness. In addition,
a Year 2000 questionnaire has been sent to all commercial loan customers
(comprising 92% of the loan portfolio) requesting information concerning their
Year 2000 readiness. Responses are currently being followed-up by the Year 2000
Working Group and lending staff.
Costs to the Company related to the Year 2000 issue are estimated to be between
$10,000 and $25,000. These costs include testing of the data processing
equipment and programs, equipment upgrades, and employee/customer education. It
is impossible to predict the exact expenses associated with the Year 2000 issue
and additional funds may be needed for unknown expenses relating to Year 2000
testing, training, and education, as well as system and software replacements.
F-13
<PAGE> 28
Despite careful planning by the Company, we recognize there may be circumstances
beyond our control that may prohibit us from operating "as usual" after December
31, 1999. The Year 2000 Working Group is currently in process of developing a
contingency plan to address potential Year 2000 problems.
F-14
<PAGE> 29
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 year 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 Company'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.
/s/ Crowe, Chizek and Company LLP
-----------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 20, 1999
F-15
<PAGE> 30
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,940,713 $ 153,300
Short term investments 515,283 3,250,000
Federal funds sold 0 3,700,000
------------- -------------
Total cash and cash equivalents 6,455,996 7,103,300
Securities available for sale 24,160,247 2,997,500
Total loans 184,744,602 12,886,763
Allowance for loan losses (2,765,100) (193,300)
------------- -------------
Total loans, net 181,979,502 12,693,463
Premises and equipment - net 1,857,805 953,982
Organizational costs - net 64,210 74,871
Accrued interest receivable 1,147,832 52,811
Other assets 571,265 233,258
------------- -------------
Total assets $ 216,236,857 $ 24,109,185
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 14,319,290 $ 7,207,482
Interest-bearing 157,678,729 2,480,782
------------- -------------
Total 171,998,019 9,688,264
Securities sold under agreements to repurchase 17,037,601 655,447
Accrued expenses and other liabilities 500,721 292,204
------------- -------------
Total liabilities 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 December 31, 1998, and 1,495,000 shares
outstanding at December 31, 1997 28,181,798 13,880,972
Retained earnings (deficit) (1,513,118) (404,071)
Net unrealized gain (loss) on securities
available for sale 31,836 (3,631)
------------- -------------
Total shareholders' equity 26,700,516 13,473,270
------------- -------------
Total liabilities and shareholders' equity $ 216,236,857 $ 24,109,185
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 31
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 1998 and period from July 15, 1997
(date of inception) through December 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income
Loans, including fees $ 9,007,668 $ 25,761
Investment securities 880,639 7,661
Federal funds sold 256,422 18,728
Interest-bearing balances 23,487 101,479
------------ ------------
Total interest income 10,168,216 153,629
Interest expense
Deposits 5,140,788 5,760
Short term borrowings 488,430 7,894
------------ ------------
Total interest expense 5,629,218 13,654
------------ ------------
NET INTEREST INCOME 4,538,998 139,975
Provision for loan losses 2,571,800 193,300
------------ ------------
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES 1,967,198 (53,325)
Noninterest income
Service charges on accounts 82,170
Gain on sale of securities 128
Mortgage loan referral fees 209,667
Letter of credit fees 159,064
Other income 37,149 45
------------ ------------
Total noninterest income 488,178 45
Noninterest expense
Salaries and benefits 1,891,264 254,771
Occupancy 304,231 39,101
Furniture and equipment 176,756 5,907
Data processing 170,990
Loan processing cost 153,835
Advertising 110,431
Other expense 756,916 51,012
------------ ------------
Total noninterest expenses 3,564,423 350,791
------------ ------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX (1,109,047) (404,071)
Federal income tax expense 0 0
------------ ------------
NET INCOME (LOSS) $ (1,109,047) $ (404,071)
============ ============
Basic income (loss) per share $ (0.58) $ (0.27)
============ ============
Diluted income (loss) per share $ (0.58) $ (0.27)
============ ============
Average shares outstanding 1,907,658 1,495,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 32
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, 1998 and period from July 15, 1997
(date of inception) through December 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET INCOME (LOSS) $(1,109,047) $ (404,071)
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on securities 35,467 (3,631)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $(1,073,580) $ (407,702)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 33
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year ended December 31, 1998 and period from July 15, 1997
(date of inception) through December 31, 1997
<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
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 1998 $ 28,181,798 $ (1,513,118) $ 31,836 $ 26,700,516
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 34
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 and period from July 15, 1997
(date of inception) through December 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,109,047) $ (404,071)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 274,364 119
Provision for loan losses 2,571,800 193,300
Gain on sale of securities (128)
Net change in
Accrued interest receivable (1,095,021) (74,871)
Other assets (432,695) (286,069)
Accrued expenses and other liabilities 208,517 292,204
------------- -------------
Net cash from operating activities 417,790 (279,388)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (171,857,839) (12,886,763)
Purchase of:
Securities available for sale (28,320,575) (3,001,250)
Premises and equipment, net (1,082,815) (953,982)
Proceeds from:
Sales of available for sale securities 1,000,313
Maturities and repayments of available for
sale securities 6,203,087
------------- -------------
Net cash from investing activities (194,057,829) (16,841,995)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 14,300,826 13,880,972
Net increase in deposits 162,309,755 9,688,264
Net increase in securities sold under
agreements to repurchase 16,382,154 655,447
------------- -------------
Net cash from financing activities 192,992,735 24,224,683
------------- -------------
Net change in cash and cash equivalents (647,304) 7,103,300
Cash and cash equivalents at beginning of period 7,103,300 0
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,455,996 $ 7,103,300
============= =============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 5,237,738 $ 1,391
Federal income tax 165,000 0
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 35
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 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 ("Company") was incorporated
on July 15, 1997 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 19.5% of the Bank's total loans at December 31, 1998. Commercial loans
to holding and other investment offices comprise 28.6% of the Bank's total loans
at 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.
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.
(Continued)
F-21
<PAGE> 36
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the 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.
Dividend Restriction: The Company and 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.
(Continued)
F-22
<PAGE> 37
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at year-end were as
follows:
AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
---- ----- ------ ------
1998
<S> <C> <C> <C> <C>
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 $ 34,851 $24,160,247
=========== =========== =========== ===========
1997
U.S. Treasury securities $ 3,001,131 $ 0 $ 3,631 $ 2,997,500
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair values of debt investment securities at year-end
1998, 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>
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 investment securities $24,112,412 $24,160,247
=========== ===========
</TABLE>
The sale of an investment security during 1998 resulted in a realized gain of
$128. There were no sales of securities in 1997.
The carrying value of investment securities that are pledged to secure
securities sold under agreements to repurchase and other deposits was
$24,160,247 and $2,997,500 at December 31, 1998 and 1997, respectively.
(Continued)
F-23
<PAGE> 38
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Year-end loans are as follows:
<TABLE>
<CAPTION>
Percent
December 31, 1998 December 31, 1997 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
<S> <C> <C> <C> <C>
Real Estate:
Construction and land
development $ 13,656,284 7.4% $ 0 0.0% NA%
Secured by 1 - 4
family properties 10,655,703 5.8 171,872 1.3 6,099.8
Secured by multi-
family properties 2,520,747 1.4 0 0.0 NA
Secured by nonfarm
nonresidential properties 100,742,487 54.5 5,421,302 42.1 1,758.3
Commercial 55,071,347 29.8 7,278,664 56.5 656.6
Consumer 2,098,034 1.1 14,925 0.1 13,957.2
--------------- ------ ------------- ------- -----------
Total Loans $ 184,744,602 100.0% $ 12,886,763 100.0% 1,333.6
=============== ====== ============= ======= ===========
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 193,300 $ 0
Provision charged to operating expense 2,571,800 193,300
----------- ---------
Ending balance $ 2,765,100 $ 193,300
=========== =========
</TABLE>
There were no loans classified as impaired at December 31, 1998 or 1997 or
during the periods then ended.
NOTE 4 - PREMISES AND EQUIPMENT - NET
Year-end premises and equipment are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and improvements $ 315,020 $ 0
Buildings and leasehold improvements 759,942 545,401
Construction in process 100,638 0
Furniture and equipment 869,195 408,581
---------- --------
2,044,795 953,982
Less: accumulated depreciation 186,990 0
---------- --------
$1,857,805 $953,982
========== ========
</TABLE>
(Continued)
F-24
<PAGE> 39
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 5 - DEPOSITS
Deposits at year-end are summarized as follows:
<TABLE>
<CAPTION>
Percent
December 31, 1998 December 31, 1997 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
demand $ 14,319,290 8.3% $ 7,207,482 74.4% 98.7%
Interest-bearing
checking 7,765,703 4.5 213,218 2.2 3,542.1
Money market 3,822,019 2.2 0 0.0 NA
Savings 28,796,603 16.8 2,089,539 21.6 1,278.1
Time, under $100,000 3,305,504 1.9 178,025 1.8 1,756.8
Time, $100,000 and
over 16,718,705 9.7 0 0.0 NA
-------------- -------- ------------- ------- -------------
74,727,824 43.4 9,688,264 100.0 671.3
Out-of-area time,
under $100,000 77,847,412 45.3 0 0.0 NA
Out-of-area time,
$100,000 and over 19,422,783 11.3 0 0.0 NA
-------------- -------- ------------- ------- -------------
97,270,195 56.6 0 0.0 NA
-------------- -------- ------------- ------- -------------
Total Deposits $ 171,998,019 100.0% $ 9,688,264 100.0% 1,675.3%
============== ======== ============= ======= =============
</TABLE>
Out-of-area certificates of deposit consist of certificates obtained from
depositors outside of the primary market area. As of December 31, 1998,
out-of-area certificates of deposit totaling $83,404,629 were obtained through
deposit brokers, with the remaining $13,865,566 obtained directly from the
depositors.
The following table depicts the maturity distribution for certificates of
deposit as of December 31, 1998.
<TABLE>
<S> <C>
1999 $ 89,659,963
2000 22,649,689
2001 4,194,752
2002 1,390,000
2003
==============
$ 117,294,404
</TABLE>
(Continued)
F-25
<PAGE> 40
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 6 - SHORT-TERM BORROWINGS
Information relating to short-term borrowings, comprised entirely of securities
sold under agreements to repurchase, at December 31 is summarized below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Outstanding balance at yearend $ 17,037,601 $ 655,447
Average interest rate at yearend 4.20% 4.70%
Average balance during the year 10,305,728 3,853
Average interest rate during the year 4.72% 4.70%
Maximum month end balance during the year 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.
NOTE 7 - FEDERAL INCOME TAXES
The Company recorded no current or deferred benefit for income taxes as a result
of recording the valuation allowance in the amount of net deferred tax assets.
As a result of the valuation allowance, the Company's effective tax rate was
reduced from the statutory rate of 34% to 0%.
The net deferred tax asset recorded includes the following amounts of deferred
tax assets and liabilities as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Provision for loan losses $ 787,422 $ 65,722
Start-up/pre-opening expenses 76,713 97,811
Deferred loan fees 52,273
Depreciation 8,146
--------- ---------
$ 924,554 $ 163,533
========= =========
Deferred tax liabilities
Unrealized gain on securities available for sale $ 16,400
Miscellaneous expenses 13,600
Accretion 2,176
--------- ---------
$ 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>
1998 1997
---- ----
<S> <C> <C>
Net deferred tax asset before valuation allowance $ 892,378 $ 163,533
Valuation allowance for deferred tax assets (892,378) (163,533)
---------- ----------
$ 0 $ 0
========== ==========
</TABLE>
(Continued)
F-26
<PAGE> 41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 8 - STOCK OPTION PLAN
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Stock options outstanding
Beginning 77,750 0
Granted 44,000 77,750
-------------- ---------------
Ending 121,750 77,750
============== ===============
Options exercisable at year-end 50,166 22,918
-------------- ---------------
Minimum exercise price $ 10.00 $ 10.00
Maximum exercise price 13.63 11.75
Average exercise price 11.50 10.75
Average remaining option term 9.0 Years 9.8 years
Estimated fair value of stock options granted: 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 (loss), assuming SFAS 123 fair value method was used for stock
options:
Net loss $ (1,299,991) $ (539,585)
Basic and diluted loss per share (0.68) (0.36)
</TABLE>
NOTE 9 - RELATED PARTIES
Certain directors and executive officers of the Company, including their
immediate families and companies in which they are principal owners, were loan
customers of the Bank. At year-end 1998 and 1997, the Bank had approximately
$12,815,000 and $5,940,000 in loan commitments to directors and executive
officers, of which approximately $9,095,000 and $2,147,000 were outstanding at
December 31, 1998 and 1997, respectively, as reflected in the following table.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 2,147,000 $ 0
New loans 7,222,000 2,147,000
Repayments (274,000) 0
-------------- ---------------
Ending balance $ 9,095,000 $ 2,147,000
============== ===============
</TABLE>
Related party deposits and repurchase agreements totaled approximately
$7,978,000 and $416,000 at year-end 1998 and 1997.
(Continued)
F-27
<PAGE> 42
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 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 December 31, 1998 and
1997, the rates on existing off-balance sheet instruments were substantially
equivalent to current market rates, considering the underlying credit standing
of the counterparties.
The Bank's maximum exposure to credit losses for loan commitments and standby
letters of credit outstanding at December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial unused lines of credit $ 61,600,909 $ 3,701,272
Unused lines of credit secured by 1 - 4 family
residential properties 3,434,290 64,356
Credit card unused lines of credit 2,251,329 0
Other consumer unused lines of credit 1,534,497 0
Commitments to make loans 21,751,900 7,198,584
Standby letters of credit 19,271,848 0
------------ -----------
$109,844,773 $10,964,212
============ ===========
</TABLE>
Management does not anticipate any significant losses as a result of these
commitments.
At year-end 1998, reserves of $185,000 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 and 1997 was $151,349 and $37,463.
Future minimum rentals under this lease as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 154,344
2000 154,344
2001 154,344
2002 154,344
2003 154,344
Thereafter 565,928
--------------
$ 1,337,648
==============
</TABLE>
(Continued)
F-28
<PAGE> 43
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company established a 401(k) plan effective January 1, 1998, covering
substantially all of its employees. The Company's 1998 matching 401(k)
contribution charged to expense was $59,705. The percent of the Company's
matching contributions to the 401(k) is determined annually by the Board of
Directors.
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year-end are as follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
Carrying Fair Carrying Fair
Values Values Values Values
------ ------ ------ ------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 6,455,996 $ 6,455,996 $ 7,103,300 $ 7,103,300
Securities available for sale 24,160,247 24,160,247 2,997,500 2,997,500
Loans, net 181,979,502 181,963,000 12,693,463 12,693,463
Accrued interest receivable 1,147,832 1,147,832 52,811 52,811
Financial liabilities
Deposits 171,998,019 173,664,615 9,688,264 9,688,264
Securities sold under agreements
to repurchase 17,037,601 17,037,601 655,447 655,447
Accrued interest payable 422,717 422,717 4,369 4,369
</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 year end 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 year end 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 the Company 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.
NOTE 14 - REGULATORY MATTERS
The Company 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.
(Continued)
F-29
<PAGE> 44
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 14 - REGULATORY MATTERS (Continued)
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>
At year end, actual capital levels (in thousands) and minimum required levels
for the Company 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>
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
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 1,382 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 74.5 691 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 year-end 1998 and 1997.
(Continued)
F-30
<PAGE> 45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 15 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements (1997 includes
the period from July 15, 1997 (date of inception) through December 31, 1997).
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 910,068 $ 536,824
Investment in subsidiary 25,720,043 12,862,806
Other assets 81,905 126,545
----------- -----------
Total assets $26,712,016 $13,526,175
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 11,500 $ 52,905
Shareholders' equity 26,700,516 13,473,270
----------- -----------
Total liabilities and shareholders' equity $26,712,016 $13,526,175
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income
Other $ 28,868 $ 32,781
----------- -----------
Total income 28,868 32,781
Expenses
Other operating expenses 187,797 303,289
----------- -----------
Total expenses 187,797 303,289
LOSS BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED
NET LOSS OF SUBSIDIARIES (158,929) (270,508)
Federal income tax expense 0 0
Equity in undistributed net loss of subsidiary (950,118) (133,563)
----------- -----------
NET LOSS $(1,109,047) $ (404,071)
=========== ===========
</TABLE>
(Continued)
F-31
<PAGE> 46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 15 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,109,047) $ (404,071)
Adjustments to reconcile net loss to net
cash from operating activities
Equity in undistributed loss of subsidiary 950,118 133,563
Change in other assets 44,640 (126,545)
Change in other liabilities (41,405) 52,905
------------ -------------
Net cash from operating activities (155,694) (344,148)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 14,300,826 13,880,972
Capital investment into Mercantile Bank of West Michigan (13,771,888) (13,000,000)
------------ -------------
Net cash from financing activities 528,938 880,972
------------ -------------
Net change in cash and cash equivalents 373,244 536,824
Cash and cash equivalents at beginning of period 536,824 0
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 910,068 $ 536,824
============ =============
</TABLE>
F-32
<PAGE> 47
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 8, 1999.
MERCANTILE BANK CORPORATION
/s/ Gerald R. Johnson, Jr.
--------------------------
Gerald R. Johnson, Jr.
Chairman of the Board and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant, and in the capacities
indicated on March 8, 1999.
<TABLE>
<S> <C>
/s/ Betty S. Burton /s/ Lawrence W. Larsen
- ------------------- ----------------------
Betty S. Burton, Director Lawrence W. Larsen, Director
/s/ Edward J. Clark /s/ Calvin D. Murdock
- ------------------- ---------------------
Edward J. Clark, Director Calvin D. Murdock, Director
/s/ Peter A. Cordes /s/ Michael H. Price
- ------------------- --------------------
Peter A. Cordes, Director Michael H. Price, President and Chief Operating Officer
/s/ C. John Gill /s/ Dale J. Visser
- ---------------- ------------------
C. John Gill, Director Dale J. Visser, Director
/s/ David M. Hecht /s/ Donald Williams
- ------------------ -------------------
David M. Hecht, Director Donald Williams, Director
/s/ Gerald R. Johnson, Jr. /s/ Robert M. Wynalda
- -------------------------- ---------------------
Gerald R. Johnson, Jr., Chairman of the Board and Chief Robert M. Wynalda, Director
Executive Officer (principal executive officer)
/s/ Susan K. Jones /s/ Charles E. Christmas
- ------------------ ------------------------
Susan K. Jones, Director Charles E. Christmas, Chief Financial Officer,
Treasurer and Compliance Officer (principal financial
and accounting officer)
</TABLE>
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's
Registration Statement on Form SB-2 (Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's
Registration Statement on Form SB-2 (Commission File No. 333-33081) which became
effective on October 23, 1997
10.1 1997 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of the
Company's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became
effective on October 23, 1997 (Management contract or compensatory plan)
10.2 Lease Agreement between the Company and Division Avenue Partners, L.L.C. dated August
16, 1997, is incorporated by reference to exhibit 10.2 of the Company's Registration
Statement on Form SB-2 (Commission File No. 333-33081) which became effective October
23, 1997
10.3 Agreement between the Company and Visser Brothers Construction Inc. dated November
16,1998, on modified Standard Form of Agreement Between Owner and Construction Manager
where the Construction Manager is also the Constructor
10.4 Employment Agreement dated December 1, 1998 between the Company, the Bank and Gerald R.
Johnson, Jr., Chairman and Chief Executive Officer of the Company (Management contract
or compensatory plan)
10.5 Employment Agreement dated December 1, 1998 between the Company, the Bank and Michael
H. Price, President and Chief Operating Officer of the Company (Management contract or
compensatory plan)
20 Proxy Statement of the Company for its April 15, 1999 Annual Meeting. Except for the
portions of the Proxy Statement that are expressly incorporated by reference in this
Annual Report on Form 10-KSB, the Proxy Statement of the Company shall not be deemed
filed as a part thereof
21 Subsidiaries of the Company is incorporated by reference to Exhibit 21 of the Companys
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (Commission
File No. 333-33081)
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.3
[LOGO]
STANDARD FORM OF AGREEMENT BETWEEN OWNER AND
CONSTRUCTION MANAGER WHERE THE CONSTRUCTION MANAGER
IS ALSO THE CONSTRUCTOR
AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 - ELECTRONIC FORMAT
- --------------------------------------------------------------------------------
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES: CONSULTATION WITH AN ATTORNEY IS
ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. AUTHENTICATION OF
THIS ELECTRONICALLY DRAFTED AIA DOCUMENT MAY BE MADE BY USING AIA DOCUMENT D401.
The 1987 Edition of AIA Document A201, General Conditions of the Contract for
Construction, is referred to herein. This Agreement requires modification if
other general conditions are utilized.
Portions of this document are derived from AIA Document Al11, Standard Form of
Agreement Between the Owner and Contractor where the Basis of Payment is the
Cost of the Work Plus a Fee, copyright 1920, 1925, 1951, 1958, 1961, 1963, 1967,
1974, 1978, copyright 1987 by The American Institute of Architects; other
portions are derived from AGC Document 500. Copyright 1980 by The Associated
General Contractors of American. Material in this document differing from that
found in AIA Document AIII and AGC Document 500 is copyrighted 1991 by The
American Institute of Architects and The Associated General Contractors of
America. Reproduction of the material herein or substantial quotation of its
provisions without written permission of AIA and AGC violates the copyright laws
of the United States and will subject the violator to legal prosecution.
- --------------------------------------------------------------------------------
AGREEMENT
made as of the Sixteenth day of November in the year of Nineteen Hundred and
Ninety-Eight
(In words, indicate day, month and year)
BETWEEN the Owner:
(Name and address)
Mercantile Bank of West Michigan
216 N. Division Avenue, NW
Grand Rapids, MI 49503
and the Construction Manager.
(Name and address)
Visser Brothers Construction
1946 Turner, NW
Grand Rapids, MI 49504
The Project is:
(Name, address and brief description)
Mercantile Bank of West Michigan
Alpine Avenue and Wheaton Drive
Alpine Township, MI
The Architect is:
(Name and address)
Concept Design Group
89 Monroe Center, NW
Grand Rapids, MI 49503
The Owner and Construction Manager agree as set forth below.
- --------------------------------------------------------------------------------
AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I GENERAL PROVISIONS
1.1 Relationship of Parties
1.2 General Conditions
ARTICLE 2 CONSTRUCTION MANAGER'S RESPONSIBILITIES
2.1 Preconstruction Phase
2.2 Guaranteed Maximum Price Proposal and Contract Time
2.3 Construction Phase
2.4 Professional Services
2.5 Unsafe Materials
ARTICLE 3 OWNER'S RESPONSIBILITIES
3.1 Information and Services
3.2 Owner's Designated Representative
3.3 Architect
3.4 Legal Requirements
ARTICLE 4 COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE SERVICES
4.1 Compensation
4.2 Payments
ARTICLE 5 COMPENSATION FOR CONSTRUCTION PHASE SERVICES
5.1 Compensation
5.2 Guaranteed Maximum Price
5.3 Changes in the Work
ARTICLE 6 COST OF THE WORK FOR CONSTRUCTION PHASE
6.1 Costs To Be Reimbursed
6.2 Costs Not To Be Reimbursed
6.3 Discounts, Rebates and Refunds
6.4 Accounting Records
ARTICLE 7 CONSTRUCTION PHASE
7.1 Progress Payments
7.2 Final Payment
ARTICLE 8 INSURANCE AND BONDS
8.1 Insurance Required of the Construction Manager
8.2 Insurance Required of the Owner
8.3 Performance Bond and Payment Bond
ARTICLE 9 MISCELLANEOUS PROVISIONS
9.1 Dispute Resolution for the Preconstruction Phase
9.2 Dispute Resolution for the Construction Phase
9.3 Other Provisions
ARTICLE 10 TERMINATION OR SUSPENSION
10.1 Termination Prior to Establishing Guaranteed Maximum Price
10.2 Termination Subsequent to Establishing Guaranteed Maximum Price
10.3 Suspension
ARTICLE 11 OTHER CONDITIONS AND SERVICES
ATTACHMENTS: AMENDMENT NO. 1 TO AGREEMENT BETWEEN OWNER AND CONSTRUCTION MANAGER
</TABLE>
- --------------------------------------------------------------------------------
AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #2
<PAGE> 3
Standard Form of Agreement Between Owner and Construction Manager
Where the Construction Manager is also the Constructor
ARTICLE 1
GENERAL PROVISIONS
1.1 RELATIONSHIP OF PARTIES
The Construction Manager accepts the relationship of trust and confidence
established with the Owner by this Agreement, and covenants with the Owner to
furnish the Construction Manager's reasonable skill and judgment and to
cooperate with the Architect in furthering the interests of the Owner. The
Construction Manager shall furnish construction administration and management
services and use the Construction Manager's best efforts to perform the Project
in an expeditious and economical manner consistent with the interests of the
Owner. The Owner shall endeavor to promote harmony and cooperation among the
Owner, Architect, Construction Manager and other persons or entities employed by
the Owner for the Project.
1.2 GENERAL CONDITIONS
For the Construction Phase, the General Conditions of the Contract shall be the
1987 Edition of AIA Document A201, General Conditions of the Contract for
Construction, which is incorporated herein by reference. For the Preconstruction
Phase, or in the event that the Preconstruction and Construction Phases proceed
concurrently, AIA Document A201 shall apply to the Preconstruction Phase only
as specifically provided in this Agreement. The term "Contractor" as used in
AIA Document A201 shall mean the Construction Manager.
ARTICLE 2
CONSTRUCTION MANAGER'S
RESPONSIBILITIES
The Construction Manager shall perform the services described in this Article.
The services to be provided under Paragraphs 2.1 and 2.2 constitute the
Preconstruction Phase services. If the Owner and Construction Manager agree,
after consultation with the Architect, the Construction Phase may commence
before the Preconstruction Phase is completed, in which case both phases shall
proceed concurrently.
2.1 PRECONSTRUCTION PHASE
2.1.1 PRELIMINARY EVALUATION
N/A
2.1.2 CONSULTATION
N/A
2.1.3 PRELIMINARY PROJECT SCHEDULE
N/A
2.1.4 PHASED CONSTRUCTION
N/A
- --------------------------------------------------------------------------------
AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #3
<PAGE> 4
2.1.5 PRELIMINARY COST ESTIMATES
2.1.5.1
N/A
2.1.5.2
N/A
2.1.5.3
N/A
2.1.5.4
N/A
2.1.6 SUBCONTRACTORS AND SUPPLIERS
The Construction Manager shall seek to develop subcontractor interest in the
Project and shall furnish to the Owner and Architect for their information a
list of possible subcontractors, including suppliers who are to furnish
materials or equipment fabricated to a special design, from whom proposals will
be requested for each principal portion of the Work. The Architect will promptly
reply in writing to the Construction Manager if the Architect or Owner know of
any objection to such subcontractor or supplier. The receipt of such list shall
not require the Owner or Architect to investigate the qualifications of proposed
subcontractors or supplier, nor shall it waive the right of the Owner or
Architect later to object to or reject any proposed subcontractor or supplier.
2.1.7 LONG-LEAD TIME ITEMS
The Construction Manager shall recommend to the Owner and Architect a schedule
for procurement of long-lead time items which will constitute part of the Work
as required to meet the Project schedule. If such long-lead time items are
procured by the Owner, they shall be procured on terms and conditions acceptable
to the Construction Manager. Upon the Owner's acceptance of the Construction
Manager's Guaranteed Maximum Price proposal, all contracts for such items shall
be assigned by the Owner to the Construction Manager, who shall accept
responsibility for such items as if procured by the Construction Manager. The
Construction Manager shall expedite the delivery of long-lead time items.
2.1.8 EXTENT OF RESPONSIBILITY
The Construction Manager does not warrant or guarantee estimates and schedules
except as may be included as part of the Guaranteed Maximum Price. The
recommendations and advice of the Construction Manager concerning design
alternatives shall be subject to the review and approval of the Owner and the
Owner's professional consultants. It is not the Construction Manager's
responsibility to ascertain that the Drawings and Specifications are in
accordance with applicable laws, statutes, ordinances, building codes, rules and
regulations. However, if the Construction Manager recognizes that portions of
the Drawings and Specifications are at variance therewith, the Construction
Manager shall promptly notify the Architect and Owner in writing.
2.1.9 EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION
The Construction Manager shall comply with applicable laws, regulations and
special requirements of the Contract Documents regarding equal employment
opportunity and affirmative action programs.
2.2 GUARANTEED MAXIMUM PRICE PROPOSAL AND CONTRACT TIME
2.2.1 When the Drawings and Specifications are sufficiently complete, the
Construction Manager shall propose a Guaranteed Maximum Price, which shall be
the sum of the estimated Cost of the Work and the Construction Manager's Fee.
2.2.2 As the Drawings and Specifications may not be finished at the time the
Guaranteed Maximum Price proposal is prepared, the Construction Manager shall
provide in the Guaranteed Maximum Price for further development of the Drawings
and Specifications by the Architect that is consistent with the Contract
Documents and reasonably inferable therefrom. Such further development does not
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced
without violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #4
<PAGE> 5
include such things as changes in scope, systems, kinds and quality of
materials, finishes or equipment, all of which, if required, shall be
incorporated by Change Order.
2.2.3 The estimated Cost of the Work shall include the Construction Manager's
contingency, a sum established by the Construction Manager for the Construction
Manager's exclusive use to cover costs arising under Subparagraph 2.2.2 and
other costs which are properly reimbursable as Costs of the Work but not the
basis for a Change Order.
2.2.4 BASIS OF GUARANTEED MAXIMUM PRICE
The Construction Manager shall include with the Guaranteed Maximum Price
proposal a written statement of its basis, which shall include:
.1 A list of the Drawings and Specifications, including all addenda
thereto and the Conditions of the Contract, which were used in
preparation of the Guaranteed Maximum Price proposal.
.2 A list of allowances and a statement of their basis.
.3 A list of the clarifications and assumptions made by the Construction
Manager in the preparation of the Guaranteed Maximum Price proposal to
supplement the information contained in the Drawings and
Specifications.
.4 The proposed Guaranteed Maximum Price, including a statement of the
estimated cost organized by trade categories, allowances, contingency,
and other items and the fee that comprise the Guaranteed Maximum Price.
.5 The Date of Substantial Completion upon which the proposed Guaranteed
Maximum Price is based, and a schedule of the Construction Documents
issuance dates upon which the date of Substantial Completion is based.
2.2.5 The Construction Manager shall meet with the Owner and Architect to review
the Guaranteed Maximum Price proposal and the written statement of its basis. In
the event that the Owner or Architect discovers any inconsistencies or
inaccuracies in the information presented, they shall promptly notify the
Construction Manager, who shall make appropriate adjustments to the Guaranteed
Maximum Price proposal, its basis or both.
2.2.6 Unless the Owner accepts the Guaranteed Maximum Price proposal in writing
on or before the date specified in the proposal for such acceptance and so
notifies the Construction Manager, the Guaranteed Maximum Price proposal shall
not be effective without written acceptance by the Construction Manager.
2.2.7 Prior to the Owner's acceptance of the Construction Manager's Guaranteed
Maximum Price proposal and issuance of a Notice to Proceed, the Construction
Manager shall not incur any cost to be reimbursed as part of the Cost of the
Work, except as the Owner may specifically authorize in writing.
2.2.8 Upon acceptance by the Owner of the Guaranteed Maximum Price proposal, the
Guaranteed Maximum Price and its basis shall be set forth in Amendment No.1.
The Guaranteed Maximum Price shall be subject to additions and deductions by a
change in the Work as provided in the Contract Documents and the date of
Substantial Completion shall be subject to adjustment as provided in the
Contract Documents.
2.2.9 The Owner shall authorize and cause the Architect to revise the Drawings
and Specifications to the extent necessary to reflect the agreed-upon
assumptions and clarifications contained in Amendment No. 1. Such revised
Drawings and Specifications shall be furnished to the Construction Manager in
accordance with schedules agreed to by the Owner, Architect and Construction
Manager. The Construction Manager shall promptly notify the Architect and Owner
if such revised Drawings and Specifications are inconsistent with the
agreed-upon assumptions and clarifications.
2.2.10 The Guaranteed Maximum Price shall include in the Cost of the Work only
those taxes which are enacted at the time the Guaranteed Maximum Price is
established.
2.3 CONSTRUCTION PHASE
2.3.1 GENERAL
2.3.1.1 The Construction Phase shall commence on the earlier of:
(1) the Owner's acceptance of the Construction Manager's Guaranteed
Maximum Price proposal and issuance of a Notice to Proceed, or
(2) the Owner's first authorization to the Construction Manager to:
(a) award a subcontract, or
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced
without violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #5
<PAGE> 6
(b) undertake construction Work with the Construction Manager's own
forces, or
(c) issue a purchase order for materials or equipment required for the
Work.
2.3.2 ADMINISTRATION
2.3.2.1 Those portions of the Work that the Construction Manager does not
customarily perform with the Construction Manager's own personnel shall be
performed under subcontracts or by other appropriate agreements with the
Construction Manager. The Construction Manager shall obtain bids from
Subcontractors and from suppliers of materials or equipment fabricated to a
special design for the Work from the list previously reviewed and, after
analyzing such bids, shall deliver such bids to the Owner and Architect. The
Owner shall then determine, with the advice of the Construction Manager and
subject to the reasonable objection of the Architect, which bids will be
accepted. The Owner may designate specific persons or entities from whom the
Construction Manager shall obtain bids; however, if the Guaranteed Maximum Price
has been established, the Owner may not prohibit the Construction Manager from
obtaining bids from other qualified bidders. The Construction Manager shall not
be required to contract with anyone to whom the Construction Manager has
reasonable objection.
2.3.2.2 If the Guaranteed Maximum Price has been established and a specific
bidder among those whose bids are delivered by the Construction Manager to the
Owner and Architect (1) is recommended to the Owner by the Construction-Manager,
(2) is qualified to perform that portion of the Work; (3) has submitted a bid
which conforms to the requirements of the Contract Documents without
reservations or exceptions, but the Owner requires that another bid be accepted,
then the Construction Manager may require that a change in the Work be issued to
adjust the Contract Time and the Guaranteed Maximum Price by the difference
between the bid of the person or entity recommended to the Owner by the
Construction Manager and the amount of the subcontract or other agreement
actually signed with the person or entity designated by the Owner.
2.3.2.3 Subcontracts and agreements with suppliers furnishing materials or
equipment fabricated to a special design shall conform to the payment provisions
of Subparagraphs 7.1.8 and 7.1.9 and shall not be awarded on the basis of cost
plus a fee without the prior consent of the Owner.
2.3.2.4 The Construction Manager shall schedule and conduct meetings at which
the Owner, Architect, Construction Manager and appropriate Subcontractors can
discuss the status of the Work. The Construction Manager shall prepare and
promptly distribute meeting minutes.
2.3.2.5 Promptly after the Owner's acceptance of the Guaranteed Maximum Price
proposal, the Construction Manager shall prepare a schedule in accordance with
Paragraph 3.10 of AIA Document A201, including the Owner's occupancy
requirements.
2.3.2.6 The Construction Manager shall provide monthly written reports to the
Owner and Architect on the progress of the entire Work. The Construction Manager
shall maintain a daily log containing a record of weather, Subcontractors
working on the site, number of workers, Work accomplished, problems encountered
and other similar relevant data as the Owner may reasonably require. The log
shall be available to the Owner and Architect.
2.3.2.7 The Construction Manager shall develop a system of cost control for the
Work, including regular monitoring of actual costs for activities in progress
and estimates for uncompleted tasks and proposed changes. The Construction
Manager shall identify variances between actual and estimated costs and report
the variances to the Owner and Architect at regular intervals.
2.4 PROFESSIONAL SERVICES
The Construction Manager shall not be required to provide professional services
which constitute the practice of architecture or engineering, unless such
services are specifically required by the Contract Documents for a portion of
the Work or unless the Construction Manager has specifically agreed in writing
to provide such services. In such event, the Construction Manager shall cause
such services to be performed by appropriately licensed professionals.
2.5 UNSAFE MATERIALS
In addition to the provisions of Paragraph 10.1 in AIA Document A201, if
reasonable precautions will be inadequate to prevent foreseeable bodily injury
or death to persons resulting from a material or substance encountered but not
created on the site by the Construction Manager, the Construction Manager shall,
upon recognizing the condition, immediately stop Work in the affected area and
report the condition to the Owner and Architect in writing. The Owner,
Construction Manager and Architect shall then proceed in the same manner
described in Subparagraph 10.1.2 of AIA Document A201. The Owner shall be
responsible for obtaining the services of a licensed laboratory to verify the
presence or absence of the material or substance reported by the Construction
Manager and, in the event such material or
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced
without violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #6
<PAGE> 7
substance is found to be present, to verify that it has been rendered harmless.
Unless otherwise required by the Contract. Documents, the Owner shall furnish in
writing to the Construction Manager and Architect the names and qualifications
of persons or entities who are to perform tests verifying the presence or
absence of such material or substance or who are to perform the task of removal
or safe containment of such material or substance. The Construction Manager and
Architect will promptly reply to the Owner in writing stating whether or not
either has reasonable objection to the persons or entities proposed by the
Owner. If either the Construction Manager or Architect has an objection to a
person or entity proposed by the Owner, the Owner shall propose another to whom
the Construction Manager and Architect have no reasonable objection.
ARTICLE 3
OWNER'S RESPONSIBILITIES
3.1 INFORMATION AND SERVICES
3.1.1 The Owner shall provide full information in a timely manner regarding
the requirements of the Project, including a program which sets forth the
Owner's objectives, constraints and criteria, including space requirements and
relationships, flexibility and expandability requirements, special equipment and
systems, and site requirements.
3.1.2 The Owner, upon written request from the Construction Manager, shall
furnish evidence of Project financing prior to the start of the Construction
Phase and from time to time thereafter as the Construction Manager may request.
Furnishing of such evidence shall be a condition precedent to commencement or
continuation of the Work.
3.1.3 The Owner shall establish and update an overall budget for the Project,
based on consultation with the Construction Manager and Architect, which shall
include contingencies for changes in the Work and other costs which are the
responsibility of the Owner.
3.1.4 STRUCTURAL AND ENVIRONMENTAL TESTS, SURVEYS AND REPORTS
In the Preconstruction Phase, the Owner shall furnish the following with
reasonable promptness and at the Owner's expense, and the Construction Manager
shall be entitled to rely upon the accuracy of any such information, reports,
surveys, drawings and tests described in Clauses 3.1.4.1 through 3.1.4.4, except
to the extent that the Construction Manager knows of any inaccuracy:
3.1.4.1 Reports, surveys, drawings and tests concerning the conditions of the
site which are required by law.
3.1.4.2 Surveys describing physical characteristics, legal limitations and
utility locations for the site of the Project, and a written legal description
of the site. The surveys and legal information shall include, as applicable,
grades and lines of streets, alleys, pavements and adjoining property and
structures; adjacent drainage; rights-of-way, restrictions, easements,
encroachments, zoning, deed restrictions, boundaries and contours of the site;
locations, dimensions and necessary data pertaining to existing buildings, other
improvements and trees; and information concerning available utility services
and lines, both public and private, above and below grade, including inverts and
depths. All information on the survey shall be referenced to a project
benchmark.
3.1.4.3 The services of geotechnical engineers when such services are requested
by the Construction Manager. Such services may include but are not limited to
test borings, test pits, determinations of soil bearing values, percolation
tests, evaluations of hazardous materials, ground corrosion and resistivity
tests, including necessary operations for anticipating subsoil conditions, with
reports and appropriate professional recommendations.
3.1.4.4 Structural, mechanical, chemical, air and water pollution tests, tests
for hazardous materials, and other laboratory and environmental tests,
inspections and reports which are required by law.
3.1.4.5 The services of other consultants when such services are reasonably
required by the scope of the Project and are requested by the Construction
Manager.
3.2 OWNER'S DESIGNATED REPRESENTATIVE
The Owner shall designate in writing a representative who shall have express
authority to bind the Owner with respect to all matters requiring the Owner's
approval or authorization. This representative shall have the authority to make
decisions on behalf of the Owner concerning estimates and schedules,
construction budgets, and changes in the Work, and shall render such decisions
promptly and furnish information expeditiously, so as to avoid unreasonable
delay in the services or Work of the Construction Manager.
3.3 ARCHITECT
The Owner shall retain an Architect to provide the Basic Services, including
normal structural, mechanical and electrical engineering services, other than
cost estimating
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA 957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #9
<PAGE> 8
services, described in the edition OF AIA DOCUMENT B141 current as of the date
of this Agreement. The Owner shall authorize and cause the Architect to provide
those Additional Services described in AIA Document B141 requested by the
Construction Manager which must necessarily be provided by the Architect for the
Preconstruction and Construction Phases of the Work. Such services shall be
provided in accordance with time schedules agreed to by the Owner, Architect and
Construction Manager. Upon request of the Construction Manager, the Owner shall
furnish to the Construction Manager a copy of the Owner's Agreement with the
Architect, from which compensation provisions may be deleted.
3.4 LEGAL REQUIREMENTS
The Owner shall determine and advise the Architect and Construction Manager of
any special legal requirements relating specifically to the Project which differ
from those generally applicable to construction in the jurisdiction of the
Project. The Owner shall furnish such legal services as are necessary to provide
the information and services required under Paragraph 3.1.
ARTICLE 4
COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE SERVICES
The Owner shall compensate and make payments to the Construction Manager for
Preconstruction Phase services as follows:
4.1 COMPENSATION
4.1.1 For the services described in Paragraphs 2.1 and 2.2 the Construction
Manager's compensation shall be calculated as follows:
(State basis of compensation, whether a stipulated sum, multiple of Direct
Personnel Expense, actual cost, etc. Include a statement of reimbursable cost
items as applicable.)
No Preconstruction Services as stated in Paragraphs 2.1 to 2.1.5.4. are
required in this Contract.
Compensation for 2.1.6, 2.1.7, 2.1.8, 2.1.9 and 2.2 service shall be based under
Article 5.1.1 to 5.2.1.
4.1.2 Compensation for Preconstruction Phase services shall be equitably
adjusted if such services extend beyond from the date of this Agreement or if
the originally contemplated scope of services is significantly modified.
4.1.3 If compensation is based on a multiple of Direct Personnel Expense,
Direct Personnel Expense is defined as the direct salaries of the Construction
Manager's personnel engaged in the Project and the portion of the cost of their
mandatory and customary contributions and benefits related thereto, such as
employment taxes and other statutory employee benefits, insurance, sick leave,
holidays, vacations, pensions and similar contributions and benefits.
4.2 PAYMENTS
4.2.1 Payments shall be made monthly following presentation of the
Construction Manager's invoice and, where applicable, shall be in proportion to
services performed.
4.2.2 Payments are due and payable Thirty (30) days from the date the
Construction Manager's invoice is received by the Owner. Amounts unpaid after
the date on which payment is due shall bear interest at the rate entered below,
or in the absence thereof, at the legal rate prevailing from time to time at the
place where the Project is located. (Insert rate of interest agreed upon)
(Usury laws and requirements under the Federal Truth in Lending Act, similar
state and local consumer credit laws and other regulations at the Owner's and
Construction Manager's principal places of business, the location of the Project
and elsewhere may affect the validity of this provision. Legal advice should
be obtained with respect to deletions or modifications, and also regarding
requirements such as written disclosures or waivers.)
ARTICLE 5
COMPENSATION FOR CONSTRUCTION PHASE SERVICES
The Owner shall compensate the Construction Manager for Construction Phase
services as follows:
5.1 COMPENSATION
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #8
<PAGE> 9
5.1.1 For the Construction Manager's performance of the Work as described in
Paragraph 2.3, the Owner shall pay the Construction Manager in current funds the
Contract Sum consisting of the Cost of the Work as defined in Article 7 and the
Construction Manager's Fee determined as follows:
(State a lump sum, percentage of actual Cost of the Work or other provision for
determining the Construction Manager's Fee, and explain how the Construction
Manager's Fee is to be adjusted for changes in the Work.)
5% of the Cost of the Work as defined under Article 6.
5.2 GUARANTEED MAXIMUM PRICE
5.2.1 The sum of the Cost of the Work and the Construction Manager's Fee are
guaranteed by the Construction Manager not to exceed the amount provided in
Amendment No. 1, subject to additions and deductions by changes in the Work as
provided in the Contract Documents. Such maximum sum as adjusted by approved
changes in the Work is referred to in the Contract Documents as the Guaranteed
Maximum Price. Costs which would cause the Guaranteed Maximum Price to be
exceeded shall be paid by the Construction Manager without reimbursement by the
Owner.
(Insert specific provisions if the Construction Manager is to participate in any
savings.)
5.3 CHANGES IN THE WORK
5.3.1 Adjustments to the Guaranteed Maximum Price on account of changes in the
Work subsequent to the execution of Amendment No. 1 may be determined by any of
the methods listed in Subparagraph 7.3.3 of AIA Document A201.
5.3.2 In calculating adjustments to subcontracts (except those awarded with
the Owner's prior consent on the basis of cost plus a fee), the terms "cost" and
"fee" as used in Clause 7.3.3.3 of AIA Document A201 and the terms "costs" and
"a reasonable allowance for overhead and profit" as used in Subparagraph 7.3.6
of AIA Document A201 shall have the meanings assigned to them in that document
and shall not be modified by this Article 5. Adjustments to subcontracts awarded
with the Owner's prior consent on the basis of cost plus a fee shall be
calculated in accordance with the terms of those subcontracts.
5.3.3 In calculating adjustments to the Contract, the terms "cost" and "costs"
as used in the above-referenced provisions of AIA Document A201 shall mean the
Cost of the Work as defined in Article 6 of this Agreement and the terms "and a
reasonable allowance for overhead and profit" shall mean the Construction
Manager's Fee as defined in Subparagraph 5.1.1 of this Agreement.
5.3.4 If no specific provision is made in Subparagraph 5.1.1 for adjustment of
the Construction Manager's Fee in the case of changes in the Work, or if the
extent of such changes is such, in the aggregate, that application of the
adjustment provisions of Subparagraph 5.1.1 will cause substantial inequity to
the Owner or Construction Manager, the Construction Manager's Fee shall be
equitably adjusted on the basis of the fee established for the original Work.
ARTICLE 6
COST OF THE WORK FOR CONSTRUCTION PHASE
6.1 COSTS TO BE REIMBURSED
6.1.1 The term "Cost of the Work" shall mean costs necessarily incurred by the
Construction Manager in the proper performance of the Work. Such costs shall be
at rates not higher than those customarily paid at the place of the Project
except with prior consent of the Owner. The Cost of the Work shall include only
the items set forth in this Article 6.
6.1.2 LABOR COSTS
.1 Wages of construction workers directly employed by the Construction
Manager to perform the construction of the Work at the site or, with
the Owner's agreement, at off-site workshops.
.2 Wages or salaries of the Construction Manager's supervisory and
administrative personnel when stationed at the site with the Owner's
agreement.
(If it is intended that the wages or salaries of certain personnel
stationed at the Construction Manager's principal office or offices
other than the site office shall be included in the Cost of the Work,
such personnel shall be identified below.)
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #9
<PAGE> 10
.3 Wages and salaries of the Construction Manager's supervisory or
administrative personnel engaged, at factories, workshops or on the
road, in expediting the production or transportation of materials or
equipment required for the Work, but only for that portion of their
time required for the Work.
.4 Costs paid or incurred by the Construction Manager for taxes,
insurance, contributions, assessments and benefits required by law or
collective bargaining agreements, and, for personnel not covered by
such agreements, customary benefits such as sick leave, medical and
health benefits, holidays, vacations and pensions, provided that such
costs are based on wages and salaries included in the Cost of the
Work under Clauses 6.1.2.1 through 6.1.2.3.
6.1.3 SUBCONTRACT COSTS
Payments made by the Construction Manager to Subcontractors in accordance with
the requirements of the subcontracts.
6.1.4 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED
CONSTRUCTION
.1 Costs, including transportation, of materials and equipment
incorporated or to be incorporated in the completed construction.
.2 Costs of materials described in the preceding Clause 6.1.4.1 in
excess of those actually installed but required to provide reasonable
allowance for waste and for spoilage. Unused excess materials, if
any, shall be handed over to the Owner at the completion of the Work
or, at the Owner's option, shall be sold by the Construction
Manager; amounts realized, if any, from such sales shall be
credited to the Owner as a deduction from the Cost of the Work.
6.1.5 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITIES AND RELATED
ITEMS
.1 Costs, including transportation, installation, maintenance,
dismantling and removal of materials, supplies, temporary facilities,
machinery, equipment, and hand tools not customarily owned by the
construction workers, which are provided by the Construction Manager
at the site and fully consumed in the performance of the Work; and
cost less salvage value on such items if not fully consumed, whether
sold to others or retained by the Construction Manager. Cost for
items previously used by the Construction Manager shall mean fair
market value.
.2 Rental charges for temporary facilities, machinery, equipment, and
hand tools not customarily owned by the construction workers, which
are provided by the Construction Manager at the site, whether rented
from the Construction Manager or others, and costs of transportation,
installation, minor repairs and replacements, dismantling and removal
thereof. Rates and quantities of equipment rented shall be subject to
the Owner's prior approval.
.3 Costs of removal of debris from the site.
.4 Reproduction costs, costs of telegrams, facsimile transmissions and
long-distance telephone calls, postage and express delivery charges,
telephone service at the site and reasonable petty cash expenses of
the site office.
.5 That portion of the reasonable travel and subsistence expenses of the
Construction Manager's personnel incurred while traveling in
discharge of duties connected with the Work.
6.1.6 MISCELLANEOUS COSTS
.1 That portion directly attributable to this Contract of premiums for
insurance and bonds.
(If charges for self insurance are to be included, specify the basis
of reimbursement.)
.2 Sales, use or similar taxes imposed by a governmental authority which
are related to the Work and for which the Construction Manager is
liable.
.3 Fees and assessments for the building permit and for other permits,
licenses and inspections for which the Construction
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #10
<PAGE> 11
Manager is required by the Contract Documents to pay.
.4 Fees of testing laboratories for tests required by the Contract
Documents, except those related to nonconforming Work other than that
for which payment is permitted by Clause 6.1.8.2.
.5 Royalties and license fees paid for the use of a particular design,
process or product required by the Contract Documents; the cost of
defending suits or claims for infringement of patent or other
intellectual property rights arising from such requirement by the
Contract Documents; payments made in accordance with legal judgments
against the Construction Manager resulting from such suits or claims
and payments of settlements made with the Owner's consent; provided,
however, that such costs of legal defenses, judgments and
settlement shall not be included in the calculation of the
Construction Manager's Fee or the Guaranteed Maximum Price and
provided that such royalties, fees and costs are not excluded by the
last sentence of Subparagraph 3.17.1 of AIA Document A201 or other
provisions of the Contract Documents.
.6 Data processing costs related to the Work.
.7 Deposits lost for causes other than the Construction Manager's
negligence or failure to fulfill a specific responsibility to the
Owner set forth in this Agreement.
.8 Legal, mediation and arbitration costs, other than those arising from
disputes between the Owner and Construction Manager, reasonably
incurred by the Construction Manager in the performance of the Work
and with the Owners written permission, which permission shall not
be unreasonably withheld.
.9 Expenses incurred in accordance with the Construction Manager's
standard personnel policy for relocation and temporary living
allowances of personnel required for the Work, in case it is
necessary to relocate such personnel from distant locations.
6.1.7 OTHER COSTS
.1 Other costs incurred in the performance of the Work if and to the
extent approved in advance in writing by the Owner.
6.1.8 EMERGENCIES AND REPAIRS TO DAMAGED OR NONCONFORMING WORK
The Cost of the Work shall also include costs described in Subparagraph 6.1.1
which are incurred by the Construction Manager:
.1 In taking action to prevent threatened damage, injury or loss in case
of an emergency affecting the safety of persons and property, as
provided in Paragraph 10.3 of AIA Document A201.
.2 N/A
6.1.9 The costs described in Subparagraphs 6.1.1 through 6.1.8 shall be
included in the Cost of the Work notwithstanding any provision of AIA
Document A201 or other Conditions of the Contract which may require the
Construction Manager to pay such costs, unless such costs are excluded
by the provisions of Paragraph 6.2.
6.2 COSTS NOT TO BE REIMBURSED
6.2.1 The Cost of the Work shall not include:
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #11
<PAGE> 12
.1 Salaries and other compensation of the Construction Manager's
personnel stationed at the Construction Manager's principal office or
offices other than the site office, except as specifically provided
in Clauses 6.1.2.2 and 6.1.2.3.
.2 Expenses of the Construction Manager's principal office and offices
other than the site office except as specifically provided in
Paragraph 6.1.
.3 Overhead and general expenses, except as may be expressly included in
Paragraph 6.1.
.4 The Construction Manager's capital expenses, including interest on
the Construction Manager's capital employed for the Work.
.5 Rental costs of machinery and equipment, except as specifically
provided in Subparagraph 6.1.5.2.
.6 Except as provided in Clause 6.1.8.2, costs due to the negligence of
the Construction Manager or to the failure of the Construction
Manager to fulfill a specific responsibility to the Owner set forth
in this Agreement.
.7 Costs incurred in the performance of Preconstruction Phase Services.
.8 Except as provided in Clause 6.1.7.1, any cost not specifically and
expressly described in Paragraph 6.1.
.9 Costs which would cause the Guaranteed Maximum Price to be exceeded.
6.3 DISCOUNTS, REBATES AND REFUNDS
6.3.1 Cash discounts obtained on payments made by the Construction Manager
shall accrue to the Owner if (1) before making the payment, the Construction
Manager included them in an Application for Payment and received payment
therefor from the Owner, or (2) the Owner has deposited funds with the
Construction Manager with which to make payments; otherwise, cash discounts
shall accrue to the Construction Manager. Trade discounts, rebates, refunds and
amounts received from sales of surplus materials and equipment shall accrue to
the Owner, and the Construction Manager shall make provisions so that they can
be secured.
6.3.2 Amounts which accrue to the Owner in accordance with the provisions of
Subparagraph 6.3.1 shall be credited to the Owner as a deduction from the Cost
of the Work.
6.4 ACCOUNTING RECORDS
6.4.1 The Construction Manager shall keep full and detailed accounts and
exercise such controls as may be necessary for proper financial management
under this Contract; the accounting and control systems shall be satisfactory to
the Owner. The Owner and the Owner's accountants shall be afforded access to the
Construction Manager's records, books, correspondence, instructions, drawings,
receipts, subcontracts, purchase orders, vouchers, memoranda and other data
relating to this Project, and the Construction Manager shall preserve these for
a period of three years after final payment, or for such longer period as may be
required by law.
ARTICLE 7
CONSTRUCTION PHASE
7.1 PROGRESS PAYMENTS
7.1.1 Based upon Applications for Payment submitted to the Architect by the
Construction Manager and Certificates for Payment issued by the Architect, the
Owner shall make progress payments on account of the Contract Sum to the
Construction Manager as provided below and elsewhere in the Contract Documents.
7.1.2 The period covered by each Application for Payment shall be one calendar
month ending on the last day of the month, or as follows:
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 - 5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #12
<PAGE> 13
7.1.3 Provided an Application for Payment is received by the Architect not
later than the First day of a month, the Owner shall make payment to the
Construction Manager not later than the Fifteenth day of the Same month. If an
Application for Payment is received by the Architect after the application date
fixed above, payment shall be made by the Owner not later than Fifteen days
after the Architect receives the Application for Payment.
7.1.4 With each Application for Payment, the Construction Manager shall
submit payrolls, petty cash accounts, receipted invoices or invoices with check
vouchers attached, and any other evidence required by the Owner or Architect to
demonstrate that cash disbursements already made by the Construction Manager on
account of the Cost of the Work equal or exceed (1) progress payments already
received by the Construction Manager; less (2) that portion of those payments
attributable to the Construction Manager's Fee; plus (3) payrolls for the period
covered by the present Application for Payment.
7.1.5 Each Application for Payment shall be based upon the most recent
schedule of values submitted by the Construction Manager in accordance with the
Contract Documents. The schedule of values shall allocate the entire Guaranteed
Maximum Price among the various portions of the Work, except that the
Construction Manager's Fee shall be shown as a single separate item. The
schedule of values shall be prepared in such form and supported by such data to
substantiate its accuracy as the Architect may require. This schedule, unless
objected to by the Architect, shall be used as a basis for reviewing the
Construction Manager's Applications for Payment.
7.1.6 Applications for Payment shall show the percentage completion of each
portion of the Work as of the end of the period covered by the Application for
Payment. The percentage completion shall be the lesser of (1) the percentage of
that portion of the Work which has actually been completed or (2) the percentage
obtained by dividing (a) the expense which has actually been incurred by the
Construction Manager on account of that portion of the Work for which the
Construction Manager has made or intends to make actual payment prior to the
next Application for Payment by (b) the share of the Guaranteed Maximum Price
allocated to that portion of the Work in the schedule of values.
7.1.7 Subject to other provisions of the Contract Documents, the amount of
each progress payment shall be computed as follows:
.1 Take that portion of the Guaranteed Maximum Price properly
allocable to completed Work as determined by multiplying the
percentage completion of each portion of the Work by the share of
the Guaranteed Maximum Price allocated to that portion of the Work
in the schedule of values. Pending final determination of cost to
the Owner of changes in the Work, amounts not in dispute may be
included as provided in Subparagraph 7.3.7 of AIA Document A201,
even though the Guaranteed Maximum Price has not yet been adjusted
by Change Order.
.2 Add that portion of the Guaranteed Maximum Price properly
allocable to materials and equipment delivered and suitably stored
at the site for subsequent incorporation in the Work or, if
approved in advance by the Owner, suitably stored off the site at
a location agreed upon in writing.
.3 Add the Construction Manager's Fee, less retainage of Ten percent
(10%). The Construction Manager's Fee shall be computed upon the
Cost of the Work described in the two preceding Clauses at the
rate stated in Subparagraph 5.1.1 or, if the Construction
Manager's Fee is stated as a fixed sum in that Subparagraph, shall
be an amount which bears the same ratio to that fixed-sum Fee as
the Cost of the Work in the two preceding Clauses bears to a
reasonable estimate of the probable Cost of the Work upon its
completion.
.4 Subtract the aggregate of previous payments made by the Owner.
.5 Subtract the shortfall, if any, indicated by the Construction
Manager in the documentation required by Subparagraph 7.1.4 to
substantiate prior Applications for Payment, or resulting from
errors subsequently discovered by the Owner's accountants in such
documentation.
.6 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment as provided in
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA -COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 -AGC -
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C., 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC - 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 - Page #13
<PAGE> 14
Paragraph 9.5 of AIA Document A201.
7.1.8 Except with the Owner's prior approval, payments to Subcontractors
shall be subject to retention of not less than ten percent (10%). The Owner
and the Construction Manager shall agree upon a mutually acceptable procedure
for review and approval of payments and retention for subcontracts.
7.1.9 Except with the Owner's prior approval, the Construction Manager shall
not make advance payments to suppliers for materials or equipment which have not
been delivered and stored at the site.
7.1.10 In taking action on the Construction Manager's Applications for
Payment, the Architect shall be entitled to rely on the accuracy and
completeness of the information furnished by the Construction Manager and shall
not be deemed to represent that the Architect has made a detailed examination,
audit or arithmetic verification of the documentation submitted in accordance
with Subparagraph 7.1.4 or other supporting data; that the Architect has made
exhaustive or continuous on-site inspections or that the Architect has made
examinations to ascertain how or for what purposes the Construction Manager has
used amounts previously paid on account of the Contract. Such examinations,
audits and verifications, if required by the Owner, will be performed by the
Owner's accountants acting in the sole interest of the Owner.
7.2 FINAL PAYMENT
7.2.1 Final payment shall be made by the Owner to the Construction Manager
when (1) the Contract has been fully performed by the Construction Manager
except for the Construction Manager's responsibility to correct nonconforming
Work, as provided in Subparagraph 12.2.2 of AIA Document A201, and to satisfy
other requirements, if any, which necessarily survive final payment; (2) a
final Application for Payment and a final accounting for the Cost of the Work
have been submitted by the Construction Manager and reviewed by the Owner's
accountants; and (3) a final Certificate for Payment has then been issued by the
Architect; such final payment shall be made by the Owner not more than 30 days
after the issuance of the Architect's final Certificate for Payment, or as
follows:
7.2.2 The amount of the final payment shall be calculated as follows:
.1 Take the sum of the Cost of the Work substantiated by the
Construction Manager's final accounting and the Construction
Manager's Fee; but not more than the Guaranteed Maximum Price.
.2 Subtract amounts, if any, for which the Architect withholds, in
whole or in part, a final Certificate for Payment as provided in
Subparagraph 9.5.1 of AIA Document A201 or other provisions of the
Contract Documents.
.3 Subtract the aggregate of previous payments made by the Owner.
If the aggregate of previous payments made by the Owner exceeds the amount due
the Construction Manager, the Construction Manager shall reimburse the
difference to the Owner.
7.2.3 The Owner's accountants will review and report in writing on the
Construction Manager's final accounting within 30 days after delivery of the
final accounting to the Architect by the Construction Manager. Based upon such
Cost of the Work as the Owner's accountants report to be substantiated by the
Construction Manager's final accounting, and provided the other conditions of
Subparagraph 7.2.1 have been met, the Architect will, within seven days after
receipt of the written report of the Owner's accountants, either issue to the
Owner a final Certificate for Payment with a copy to the Construction Manager,
or notify the Construction Manager and Owner in writing of the Architect's
reasons for withholding a certificate as provided in Subparagraph 9.5.1 of AIA
Document A201. The time periods stated in this Paragraph 7.2 supersede those
stated in Subparagraph 9.4.1 of AIA Document A201.
7.2.4 If the Owner's accountants report the Cost of the Work as substantiated
by the Construction Manager's final accounting to be less than claimed by the
Construction Manager, the Construction Manager shall be entitled to proceed in
accordance with Article 9 without a further decision of the Architect. Unless
agreed to otherwise, a demand for mediation or arbitration of the disputed
amount shall be made by the Construction Manager within 60 days after the
Construction Manager's receipt of a copy of the Architect's final Certificate
for Payment. Failure to make such demand within this 60-day period shall result
in the substantiated amount reported by
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA -COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 -AGC -
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C., 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC - 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 - Page #14
<PAGE> 15
the Owner's accountants becoming binding on the Construction Manager. Pending a
final resolution of the disputed amount, the Owner shall pay the Construction
Manager the amount certified in the Architect's final Certificate for Payment.
7.2.5
N/A
ARTICLE 8
INSURANCE AND BONDS
8.1 INSURANCE REQUIRED OF THE CONSTRUCTION MANAGER
During both phases of the Project, the Construction Manager shall purchase and
maintain insurance as set forth in Paragraph 11.1 of AIA Document A201. Such
insurance shall be written for not less than the following limits, or greater if
required by law:
8.1.1 Workers' Compensation and Employers' Liability meeting statutory limits
mandated by State and Federal laws. If (1) limits in excess of those required by
statute are to be provided or (2) the employer is not statutorily bound to
obtain such insurance coverage or (3) additional coverages are required,
additional coverages and limits for such insurance shall be as follows:.
8.1.2 Commercial General Liability including coverage for
Premises-Operations, Independent Contractors' Protective, Products-Completed
Operations, Contractual Liability, Personal Injury, and Broad Form Property
Damage (including coverage for Explosion, Collapse and Underground hazards)
$1,000,000.00 Each Occurrence
$1,000,000.00 General Aggregate
$1,000,000.00 Personal and
Advertising Injury
$1,000,000.00 Products-Completed
Operations Aggregate
.1 The policy shall be endorsed to have the General Aggregate apply
to this Project only.
.2 Products and Completed Operations insurance shall be maintained
for a minimum period of at least year(s) after either 90 days
following Substantial Completion or final payment, whichever is
earlier.
.3 The Contractual Liability insurance shall include coverage
sufficient to meet the obligations in AIA Document A201 under
Paragraph 3.18.
8.1.3 Automobile Liability (owned, non-owned and hired vehicles) for bodily
injury and property damage:
$1,000,000.00 Each Accident
8.1.4 Other coverage:
(If Umbrella Excess Liability coverage is required over the primary insurance or
retention, insert the coverage limits. Commercial General Liability and
Automobile Liability limits may be attained by individual policies or by a
combination of primary policies and Umbrella and/or Excess Liability policies.)
8.2 INSURANCE REQUIRED OF THE OWNER
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA -COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 -AGC -
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C., 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC - 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 - Page #15
<PAGE> 16
During both phases of the Project, the Owner shall purchase and maintain
liability and property insurance, including waivers of subrogation, as set forth
in Paragraphs 11.2 and 11.3 of AIA Document A201. Such insurance shall be
written for not less than the following limits, or greater if required by law:
8.2.1 Builder Risk Insurance shall be written with a limit of the Contract
amount.
$ 1,000.00 Deductible Per Occurrence
$ No Limit On Aggregate Deductible
8.2.2 Boiler and Machinery insurance with a limit of: Owner's Boiler
Insurance will start on the day of Substantial Completion, upon acceptance by
the Owner for occupancy and operation of the Bank. (If not a blanket policy,
list the objects to be insured.)
8.3 PERFORMANCE BOND AND PAYMENT BOND
8.3.1 The Construction Manager shall not (Insert "shall" or "shall not")
furnish bonds covering faithful performance of the Contract and payment of
obligations arising thereunder. Bonds may be obtained through the Construction
Manager's usual source and the cost thereof shall be included in the Cost of the
Work. The amount of each bond shall be equal to percent ( ) of the Contract Sum.
8.3.2 The Construction Manager shall deliver the required bonds to the Owner
at least three days before the commencement of any Work at the Project site.
ARTICLE 9
MISCELLANEOUS PROVISIONS
9.1 DISPUTE RESOLUTION FOR THE PRECONSTRUCTION PHASE
9.1.1 Claims, disputes or other matters in question between the parties to
this Agreement which arise prior to the commencement of the Construction Phase
or which relate solely to the Preconstruction Phase services of the
Construction Manager or to the Owner's obligations to the Construction Manager
during the Preconstruction Phase, shall be resolved by mediation or by
arbitration.
9.1.2 Any mediation conducted pursuant to this Paragraph 9.1 shall be held in
accordance with the Construction Industry Mediation Rules of the American
Arbitration Association currently in effect, unless the parties mutually agree
otherwise. Demand for mediation shall be filed in writing with the other party
to this Agreement and with the American Arbitration Association. Any demand for
mediation shall be made within a reasonable time after the claim, dispute or
other matter in question has arisen. In no event shall the demand for mediation
be made after the date when institution of legal or equitable proceedings based
upon such claim, dispute or other matter in question would be barred by the
applicable statute of limitations.
9.1.3 Any claim, dispute or other matter in question not resolved by
mediation shall be decided by arbitration in accordance with the Construction
Industry Arbitration Rules of the American Arbitration Association currently in
effect unless the parties mutually agree otherwise.
9.1.4 Demand for arbitration shall be filed in writing with the other party
to this Agreement and with the American Arbitration Association. A demand for
arbitration may be made concurrently with a demand for mediation and shall be
made within a reasonable time after the claim, dispute or other matter in
question has arisen. In no event shall the demand for arbitration be made after
the date when institution of legal or equitable proceedings based upon such
claim, dispute or other matter in question would be barred by the applicable
statute of limitations.
9.1.5 No arbitration arising out of or relating to the Contract Documents
shall include, by consolidation or joinder or in any other manner, the
Architect, the Architect's employees or consultants, except by written consent
containing specific reference to the Agreement and signed by the Architect,
Owner, Construction Manager and any other person or entity sought to be joined.
No arbitration shall include, by consolidation or joinder or in any other
manner, parties other than the Owner, Construction Manager, a separate
contractor as described in Article 6 of AIA Document A201 and other persons
substantially involved in a common question of fact or law whose presence is
required if complete relief is to be accorded in arbitration. No person or
entity other than the Owner or Construction Manager or a separate contractor as
described in Article 6 of AIA.
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA -COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 -AGC -
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C., 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC - 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 - Page #16
<PAGE> 17
Document A201 shall be included as an original third party or additional third
party to an arbitration whose interest or responsibility is insubstantial.
Consent to arbitration involving an additional person or entity shall not
constitute agreement to arbitration of a dispute not described in such consent
or with a person or entity not named or described therein. The foregoing
agreement to arbitrate and other agreements to arbitrate with an additional
person or entity duly consented to by parties to this Agreement shall be
specifically enforceable under applicable law in any court having jurisdiction
thereof.
9.1.6 The award rendered by the arbitrator or arbitrators shall be final, and
judgment may be entered upon it in accordance with applicable law in any court
having jurisdiction thereof.
9.2 DISPUTE RESOLUTION FOR THE CONSTRUCTION PHASE
9.2.1 Any other claim, dispute or other matter in question arising out of or
related to this Agreement or breach thereof shall be settled in accordance with
Article 4 of AIA Document A201, except that in addition to and prior to
arbitration, the parties shall endeavor to settle disputes by mediation in
accordance with the Construction Industry Mediation Rules of the American
Arbitration Association currently in effect unless the parties mutually agree
otherwise. Any mediation arising under this Paragraph shall be conducted in
accordance with the provisions of Subparagraphs 9.1.2 and 9.1.3.
9.3 OTHER PROVISIONS
9.3.1 Unless otherwise noted, the terms used in this Agreement shall have the
same meaning as those in the 1987 Edition of AIA Document A201, General
Conditions of the Contract for Construction.
9.3.2 EXTENT OF CONTRACT
This Contract, which includes this Agreement and the other documents
incorporated herein by reference, represents the entire and integrated agreement
between the Owner and Construction Manager and supersedes all prior
negotiations, representations or agreements, either written or oral. This
Agreement may be amended only by written instrument signed by both the Owner
and Construction Manager. If anything in any document incorporated into this
Agreement is inconsistent with this Agreement, this Agreement shall govern.
9.3.3 OWNERSHIP AND USE OF DOCUMENTS
The Drawings, Specifications and other documents prepared by the Architect, and
copies thereof furnished to the Construction Manager, are for use solely with
respect to this Project. They are not to be used by the Construction Manager,
Subcontractors, Sub-subcontractors or suppliers on other projects, or for
additions to this Project outside the scope of the Work, without the specific
written consent of the Owner and Architect. The Construction Manager,
Subcontractors, Sub-subcontractors and suppliers are granted a limited license
to use and reproduce applicable portions of the Drawings, Specifications and
other documents prepared by the Architect appropriate to and for use in the
execution of their Work under the Contract Documents.
9.3.4 GOVERNING LAW
The Contract shall be governed by the law of the place where the Project is
located.
9.3.5 ASSIGNMENT
The Owner and Construction Manager respectively bind themselves, their
partners, successors, assigns and legal representatives to the other party
hereto and to partners, successors, assigns and legal representatives of such
other party in respect to covenants, agreements and obligations contained in the
Contract Documents. Neither party to the Contract shall assign the Contract as a
whole without written consent of the other. If either party attempts to make
such an assignment without such consent, that party shall nevertheless remain
legally responsible for all obligations under the Contract.
ARTICLE 10
TERMINATION OR SUSPENSION
10.1 TERMINATION PRIOR TO ESTABLISHING, GUARANTEED MAXIMUM PRICE
10.1.1 Prior to execution by both parties of Amendment No. 1 establishing the
Guaranteed Maximum Price, the Owner may terminate this Contract at any time
without cause, and the Construction Manager may terminate this Contract for any
of the reasons described in Subparagraph 14.1.1 of AIA Document A201.
10.1.2 If the Owner or Construction Manager terminates this Contract pursuant to
this Paragraph 10.1 prior to commencement of the Construction Phase, the
Construction Manager shall be equitably compensated for Preconstruction Phase
services performed prior to receipt of notice of termination; provided, however,
that the compensation for such services shall not exceed the compensation set
forth in Subparagraph 4.1.1.
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AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #17
<PAGE> 18
10.1.3 If the Owner or Construction Manager terminates this Contract pursuant to
this Paragraph 10.1 after commencement of the Construction Phase, the
Construction Manager shall, in addition to the compensation provided in
Subparagraph 10.1.2, be paid an amount calculated as follows:
.1 Take the Cost of the Work incurred by the Construction Manager.
.2 Add the Construction Manager's Fee computed upon the Cost of the Work
to the date of termination at the rate stated in Paragraph 5.1 or, if
the Construction Manager's Fee is stated as a fixed sum in that
Paragraph, an amount which bears the same ratio to that fixed-sum Fee
as the Cost of Work at the time of termination bears to a reasonable
estimate of the probable Cost of the Work upon its completion.
.3 Subtract the aggregate of previous payments made by the Owner on
account of the Construction Phase.
The Owner shall also pay the Construction Manager fair compensation, either by
purchase or rental at the election of the Owner, for any equipment owned by the
Construction Manager which the Owner elects to retain and which is not otherwise
included in the Cost of the Work under Clause 10.1.3.1. To the extent that the
Owner elects to take legal assignment of subcontracts and purchase orders
(including rental agreements), the Construction Manager shall, as a condition of
receiving the payments referred to in this Article 10, execute and deliver all
such papers and take all such steps, including the legal assignment of such
subcontracts and other contractual rights of the Construction Manager, as the
Owner may require for the purpose of fully vesting in the Owner the rights and
benefits of the Construction Manager under such subcontracts or purchase orders.
Subcontracts, purchase orders and rental agreements entered into by the
Construction Manager with the Owner's written approval prior to the execution of
Amendment No. 1 shall contain provisions permitting assignment to the Owner as
described above. If the Owner accepts such assignment, the owner shall reimburse
or indemnify the Construction Manager with respect to all costs arising under
the subcontract, purchase order or rental agreement except those which would not
have been reimbursable as Cost of the Work if the contract had not been
terminated. If the Owner elects not to accept the assignment of any subcontract,
purchase order or rental agreement which would have constituted a Cost of the
Work had this agreement not been terminated, the Construction Manager shall
terminate such subcontract, purchase order or rental agreement and the Owner
shall pay the Construction Manager the costs necessarily incurred by the
Construction Manager by reason of such termination.
10.2 TERMINATION SUBSEQUENT TO ESTABLISHING GUARANTEED MAXIMUM PRICE
Subsequent to execution by both parties of Amendment No. 1, the Contract may be
terminated as provided in Article 14 of AIA Document A201.
10.2.1 In the event of such termination by the Owner, the amount payable to the
Construction Manager pursuant to Subparagraph 14.1.2 of AIA Document A201 shall
not exceed the amount the Construction Manager would have been entitled to
receive pursuant to Subparagraphs 10.1.2 and 10.1.3 of this Agreement.
10.2.2 In the event of such termination by the Construction Manager, the
amount to be paid to the Construction Manager under Subparagraph 14.1.2 of AIA
Document A201 shall not exceed the amount the Construction Manager would be
entitled to receive under Subparagraphs 10.1.2 or 10.1.3 above, except that the
Construction Manager's Fee shall be calculated as if the Work had been fully
completed by the Construction Manager, including a reasonable estimate of the
Cost of the Work for Work not actually completed.
10.3 SUSPENSION
The Work may be suspended by the Owner as provided in Article 14 of AIA
Document A201; in such case, the Guaranteed Maximum Price, if established, shall
be increased as provided in Subparagraph 14.3.2 of AIA Document A201 except that
the term "cost of performance of the Contract" in that Subparagraph shall be
understood to mean the Cost of the Work and the term "profit" shall be
understood to mean the Construction Manager's Fee as described in
Subparagraphs 5.1.1 and 5.3.4 of this Agreement.
ARTICLE 11
OTHER CONDITIONS AND SERVICES
Construction Manager shall bid out all portions of work required under this
Contract to complete all Work as shown on the Construction Documents. Due to
the limited time schedule, drawings will be produced in phases, each phase is as
follows:
I Structural Steel
Foundations
Site Work
- --------------------------------------------------------------------------------
AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #18
<PAGE> 19
Building Exterior
Masonry
Glazing, Windows and Storefront
Exterior Light Gauge Metal Framing
Roofing
Sheet Metal and Flashing
Caulking
II. Building Interior
Finishes
Doors and Interior Windows and Cabinetry
Carpentry Finish and Rough
Drywall
Ceiling
Insulation
III. Mechanical
Electrical
Construction Manager shall submit a minimum of three bids on each subcontract
and/or his bid if wishes to do any portion of the Work. All bids are to be
submitted to Visser Brothers at a predetermined time.
Article 6.1.8.2 should be modified as follows:
In repairing damaged Work, provided that such damaged Work is not caused by the
negligence or failure to fulfill a specific responsibility to the Owner set
forth in this Agreement of the Construction Manager or the Construction
Manager's foremen, engineers or superintendents, or other supervisory
administrative or managerial personnel of the Construction Manager, or the
failure of the Construction Manager's personnel to supervise adequately the Work
of the Subcontractors or suppliers, and only to the extent that the cost of
repair is not recoverable by the Construction Manager from insurance,
Subcontractors or suppliers.
Article 7.2.5 shall be deleted.
If the provisions of this Agreement conflict with the General Conditions, the
provisions of this Agreement shall control.
Date of project completion shall be 150 days after first day of start of
construction as stipulated in Section 2.3.1.1 (1).
All Subcontractors shall be required to carry and submit their insurance for
this Project as required in Article 8.
Guaranteed Maximum Price
Total Budget $ 987,105.00
Additional Cost of Sloping Metal Roof $ 67,745.00
Owner's Contingency $ 50,000.00
Total: $1,104,850.00
One Million One Hundred Four Thousand Eight Hundred Fifty & 00/100.
This Agreement entered into as of the day and year first written above.
OWNER CONSTRUCTION MANAGER
(Signature) (Signature)
Mercantile Bank of West Michigan Visser Brothers Construction, Inc.
Robert Kaminski, Vice President Bruce Visser President
(Printed Name and Title) (Printed Name and Title)
- --------------------------------------------------------------------------------
AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER
AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE
ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC
COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET,
N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates
U.S. copyright laws and is subject to legal prosecution. This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
Electronic Format A121/CMc-1991
User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which
expires on 2/28/1999 -- Page #19
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made this 1st Day of
December, 1998, by and between Mercantile Bank Corporation, a Michigan
corporation (the "Company"), Mercantile Bank of West Michigan, a Michigan
banking corporation (the "Bank", and collectively with the Company, the
"Employers", and each an "Employer"), and Gerald R. Johnson, Jr. (the
"Employee").
RECITALS
A. The Employee has served as the Chairman of the Board and Chief
Executive Officer of the Company and the Bank since their formation under his
direction in 1997.
B. The Employers and the Employee expect that the Employee will
continue as the Chairman of the Board and Chief Executive Officer of the Company
and the Bank and wish to describe the terms of such employment in this
Agreement.
C The Employers believe that entering into this Agreement is in the
best interest of their respective shareholders.
D The Employee believes that entering into this Agreement is in his
best interest.
TERMS OF AGREEMENT
In consideration of the mutual covenants and obligations set forth in
this Agreement, to induce the Employee to remain in the employment of the
Employers, and for other good and valuable consideration, the Employers and the
Employee agree as follows:
1. Employment , Term, and Acceptance: The Company and the Bank each
agree to employ the Employee as its Chairman of the Board of Directors and Chief
Executive Officer for the period from December 1, 1998 through December 31, 2001
(the "Employment Period"), unless such employment is terminated earlier pursuant
to Section 7 or 8 of this Agreement. The Employee hereby accepts such
employment.
2. Duties and Authority:
2.1 Promotion of Employers' Interest. While employed as the
Chairman of the Board and Chief Executive Officer of the Company and the Bank,
the Employee shall devote his business time and attention to the business and
affairs of the Employers, and shall use his efforts and abilities to promote the
interests of the Employers.
2.2 Performance of Duties. The Employee shall perform such services
and duties necessary or appropriate for the management of the Employers as are
normally expected of persons appointed to chairmanship and chief executive
positions in the businesses in which the
<PAGE> 2
Employers are engaged.
3. Cash Compensation. For all services to be performed by the Employee
under this Agreement (including services as an officer, employee, director, or
member of any board committee), the Bank shall pay the Employee an annual base
salary (prorated for any partial year) of (a) One Hundred Eighty Thousand
Dollars ($180,000) for the period from December 1, 1998 through June 30, 1999,
(b) Two Hundred Thousand Dollars ($200,000) for the period from July 1, 1999
through December 31, 1999, and (c) for the periods from January 1, 2000 through
December 31, 2000, and January 1, 2001 through December 31, 2001, amounts not
less than Two Hundred Thousand Dollars ($200,000) as are determined by the Board
of Directors of the Bank, such determination to be made for each period prior to
the beginning of such period ("Base Cash Compensation"); payable in each case in
accordance with the then prevailing payroll practices of the Bank. To the extent
that the date of any change in rate of compensation provided for clause (a), (b)
or (c) above does not coincide with the first day of a payroll period of the
Bank, such change in rate of compensation shall become effective as of the first
day of the payroll period that includes such date. As a one time adjustment, the
Bank shall also pay the Employee within twenty (20) days after the execution of
this Agreement a one time payment of $5,000, which is an amount equal to the
difference between the compensation paid to the Employee for October and
November of 1998, and the amount he would have been paid if his annual base
salary had been increased to One Hundred and Eighty Thousand Dollars ($180,000)
effective October 1, 1998. In addition to the Base Cash Compensation and one
time adjustment described above, the Employee will be entitled to such bonuses
and other discretionary compensation as may be awarded to him from time to time
by the Board of Directors of either of the Employers.
4. Participation in Employee Benefit Plans. In addition to the cash
compensation payable to the Employee under this Agreement, the Employee shall be
entitled to participate in such employee benefit plans, whether contributory or
non-contributory, such as group life and disability insurance plans, hospital,
surgical, vision and dental benefit plans or other bonus incentive, profit
sharing, stock option, retirement or other employee benefit plans of the
Employers as may now or hereafter exist to the extent that the Employee meets
the eligibility requirements of any such plans. All such group life and
disability insurance plans, and hospital, surgical, vision and dental benefit
plans are hereafter referred to as ("Life, Disability and Medical Plans"). It is
specifically agreed that the Employee shall be entitled to participate in the
incentive compensation plan described in Exhibit A to this Agreement.
5. Out of Pocket Expenses. The Employee will be reimbursed by the Bank
or the Company, as the case may be, for all reasonable expenses incurred in
promoting their respective businesses; including expenses for entertainment,
travel and similar items upon the presentation by Employee, from time to time,
of an itemized account of such expenditures in a form and manner as determined
by the Board of Directors or the chief financial or accounting officer of the
Employer for whose account the expenditures are made.
6. Vacations. The Employee shall be entitled each year to four (4)
weeks paid
2
<PAGE> 3
vacation time. The Employee will not be entitled to additional compensation for
vacation time not utilized in any year nor will the Employee be permitted to
carry over unused vacation time to a succeeding year.
7. Termination of Employment Upon Disability or Death.
7.1 Disability. In the event the Employee shall become
mentally or physically disabled during the Employment Period and unable to
perform the material duties of his employment for ninety (90) days or more
because of illness, accident, or any other cause ("Disability"), the Bank or the
Company may terminate the Employee's employment under this Agreement by giving
him written notice of such termination ("Disability Termination Notice"). In the
event of any such termination during the Employment Period, the Bank shall
continue to pay the employee his Base Cash Compensation, at the rate in effect
immediately prior to the giving of the Disability Termination Notice, through
the end of the Employment Period (through December 31, 2001). In addition, the
Employers shall cover the Employee under their disability plans, if any, in
effect from time to time under the terms and conditions that such coverage is
made available to other employees of the respective Employers, and the Employee
shall be entitled to any benefits payable to him under such disability plans.
While disabled, the Bank shall continue to provide the Employee and his
dependents with coverage under its Life, Disability and Medical Plans until the
Employee reaches the age of sixty-five (65) years old to the extent that it may
do so under the provisions of such plans, with the Employee's contribution to
the premiums under such plans being no more than the amounts he paid for such
premiums prior to his disability, adjusted from time to time for normal periodic
increases in such premiums applied in general to employees of the Bank.
7.2 Death. In the event of the death of the Employee, his
employment with the Employers shall terminate as of the date of his death.
Promptly following his death, the Bank shall pay to his legal representative a
death benefit of $250,000. In addition, any life insurance policies owned by the
Bank or the Company, and insuring the life of the Employee shall be payable to
the beneficiaries of such policies in accordance with the terms of such
policies.
7.3 Extent of Obligations. The provisions of Sections 7.1 and
7.2 apply only to Disability or death occurring during the Employment Period
while the Employee is employed by the Bank and the Company. Other than as set
forth in Section 7.1 or 7.2, neither of the Employers shall have any obligation
or liability to the Employee upon the employee's death or Disability except that
the Employee shall be entitled to all of his accrued rights under stock option,
retirement and other employee benefit plans of the Company and the Bank, and the
Bank shall promptly pay the Employee (or his personal representative) his Base
Cash Compensation due through the effective date of the termination of his
employment, the cash equivalent of any accrued vacation days not taken as of
such effective date (calculated based on the Employee's annual base salary
attributable to each vacation day), and any out-of -pocket expenses for which
the Employee is entitled to be reimbursed, and for which reimbursement has not
yet been made.
8. Termination of Employment for Cause, Without Cause, Good Reason, or
Without
3
<PAGE> 4
Good Reason.
8.1 Termination by an Employer for Cause. Each of the
Employers shall have the right, at any time, to terminate the Employee's
employment for Cause (as defined herein), within 90 days of the Employer's
learning of such Cause. For purposes of this Agreement, the term "Cause" means
(a) an act or acts of dishonesty committed by the Employee and intended by the
Employee to result in the Employee's substantial personal enrichment at the
expense of the Company or the Bank, (b) continuing intentional gross neglect by
the Employee of his duties under Section 2 of this Agreement which cause or are
expected to cause material harm to the Company or the Bank, and which is not
remedied after receipt of notice from the applicable Employer, (c) the
Employee's conviction of a felony, or (d) the Employee's intentional breach of
his obligations under Section 10 or 11 which causes or may be expected to cause
material harm to the Company or the Bank. Any termination for Cause shall be
effective upon an Employer giving the Employee written notice that the
Employee's employment is terminated, and setting forth in reasonable detail the
basis for such termination, and that such termination is for Cause. Any such
notice shall terminate the Employee's employment with both Employers.
8.2 Termination by an Employer Without Cause. Each of the
Employers shall have the right at any time to terminate the Employee's
employment without Cause by giving the Employee written notice that the
Employee's employment is terminated, and setting forth in reasonable detail the
basis, if any, for such termination. Any such termination shall be effective
upon the giving of such notice by the Employer.
8.3 Termination by Employee for Good Reason. The Employee
shall have the right at any time to terminate his employment under this
Agreement for Good Reason (as defined herein) within ninety (90) days of
learning of such Good Reason. For purposes of this Agreement, the term "Good
Reason" means (a) any assignment to the Employee of any title or duties that are
materially inconsistent with the Employee's present positions, titles, duties,
or responsibilities, other than an insubstantial or inadvertent action which is
remedied by the applicable Employer promptly after receipt of written notice
from the Employee, or which is approved of by the Employee in writing; (b) any
failure by an Employer to comply in a material respect with any provision of
Section 3, 4, 5, or 6, other than a insubstantial or inadvertent failure which
is remedied by the applicable Employer promptly after receipt of written notice
from the Employee. Any termination for Good Reason shall be effective upon the
Employee giving the Employers written notice that the Employee is terminating
his employment, and setting forth in reasonable detail the basis for such
termination, and that such termination is for Good Reason. Any such termination
shall be effective upon the giving of such notice by the Employee; and any such
notice shall terminate his employment with both Employers. Notwithstanding the
above, the failure of the Employee to hold the position of Chairman of the Board
of the Company arising from any failure of the shareholders of the Company to
re-elect the Employee to the Board of Directors of the Company, provided that
the Board of Directors of the Company has included the Employee on its slate of
nominees as a director, shall not be sufficient to constitute Good Reason for
termination of employment by the Employee.
4
<PAGE> 5
8.4 Termination by Employee Without Good Reason. The Employee
shall have the right at any time to terminate the Employee's employment with
both Employers without Good Reason by giving the Employers written notice that
the Employee is terminating his employment. Any such termination shall apply to
the Employee's employment with both Employers and be effective ninety (90) days
after the giving of such notice by the Employee.
8.5 Obligation of Employers upon Termination without Cause or
Employee's Termination with Good Reason. In the event that during the Employment
Period, an Employer terminates the Employee's employment without Cause under
Section 8.2, or the Employee terminates his employment for Good Reason under
Section 8.3; or the Employee's employment is terminated for any other reason
except (i) for Cause under Section 8.1, (ii) without Good Reason under Section
8.4, or (iii) for Disability or death pursuant to Section 7; the Bank shall pay
and provide (and to the extent the insurance referred to in Section 8.5(d) is
owned by the Company, the Company shall provide) to the Employee the following:
(a) to the extent not previously paid, the Employee's Base
Cash Compensation due through the effective date of the termination of
employment, the cash equivalent of any accrued vacation days not taken as of
such effective date (calculated based on the Employee's annual base salary
attributable to each vacation day), and any out-of -pocket expenses for which
the Employee is entitled to be reimbursed, and for which reimbursement has not
yet been made; payable within ten (10) days of such effective date, plus
(b) an amount equal to the greater of (i) the Base Cash
Compensation payable to the Employee for the remainder of the Employment Period
(i.e. through December 31, 2001), or (ii) $500,000; in either case, payable in
eighteen (18) substantially equal monthly installments commencing within thirty
(30) days after the effective date of the termination of employment; plus
(c) coverage for the Employee and his dependents under the
Bank's Life, Disability, and Medical Plans for the eighteen (18) month period
commencing on the effective date of the termination of employment to the extent
that the Bank may do so under the provisions of such plans, and to the extent
that it is not permitted to do so shall pay the Employee an amount that will
permit him to obtain and pay for substantially equivalent coverage; plus
(d) any life insurance policies owned by the Bank or the
Company insuring the life of the Employee, to the extent that they may be
practically assigned or transferred to the Employee; plus
(e) $10,000 for out-placement, interim office, and related
expenses.
In addition, the Employee shall be entitled to all of his accrued rights under
stock option, retirement, and other employee benefit plans of the Company and
the Bank,
5
<PAGE> 6
8.6 Obligation of Employers upon Termination for Cause or by Employee
without Good Reason. In the event that during the Employment Period, an
Employer terminates the Employee's employment for Cause as provided for in
Section 8.1, or the Employee terminates his employment without Good Reason as
permitted in Section 8.4; the Bank shall pay and provide to the Employee, to the
extent not previously paid, the Employee's Base Cash Compensation due through
the effective date of the termination of employment, plus the cash equivalent of
any accrued vacation days not taken as of such effective date (calculated based
on the Employee's annual base salary attributable to each vacation day), within
ten (10) days of such effective date. In addition, the Employee shall be
entitled to all of his accrued rights under stock option (except with respect to
stock option plans, in the event of termination for Cause), retirement, and
other employee benefit plans of the Company and the Bank,
8.7 No Other Obligations of Employers upon Termination. Upon
termination of the Employee's employment, the Employers shall have no
obligations to the Employee except as set forth in this Agreement, or accrued
rights under stock option, retirement, or other employee benefit plans of either
Employer.
9 Severance Payments on Termination after the Employment Period. If at
any time after the Employment Period, (a) the Employee's employment with the
Bank is terminated by the Bank without Cause, or (b) the Employee's annual base
salary from the Bank is reduced without his consent and without Cause, and in
the case of either (a) or (b) the Employee, within ninety (90) days thereafter,
terminates his employment with the Bank; then unless the termination of
employment or reduction in annual base salary resulted from the death or
Disability of the Employee, the Bank shall pay and provide (and to the extent
the insurance referred to in Section 8.5(d) is owned by the Company, the Company
shall provide) to the Employee the following: (a) the amounts, coverage,
benefits and life insurance provided for in Section 8.5 (a), (c), (d) and (e),
plus (b) $500,000, payable in eighteen (18) substantially equal monthly
installments commencing within thirty (30) days after the effective date of the
termination of employment. In addition, the Employee shall be entitled to all of
his accrued rights under stock option (except with respect to stock option
plans, in the event of termination for Cause), retirement, and other employee
benefit plans of the Company and the Bank,
10. Confidential Information. Employee agrees that he will not at any
time (whether during his employment or at any time thereafter) disclose to any
person, corporation, firm, partnership or other entity, except as required by
law, any secret or confidential information concerning the business, clients or
affairs of the Company or the Bank, or any of their affiliates, for any reason
or purpose whatsoever other than in furtherance of the Employee's work for the
Company or the Bank, nor shall the Employee make use of any of such secret or
confidential information in any manner adverse to the Company or the Bank.
11. Noncompetition Covenant. For a period of eighteen (18) months
following the termination of Employee's employment with the Employers, Employee
will not be employed by or
6
<PAGE> 7
act as a director or officer of any business involving or engaged in the
business of banking within a 50-mile radius of the City of Grand Rapids,
Michigan, where such business engages in soliciting, directly or indirectly,
customers of the Bank.
12. Remedies under Section 10 and 11. The Employee acknowledges and
agrees that his obligations under Sections 10 and 11 are of a special and unique
nature and that a failure to perform any such obligation or a violation of any
such obligation would cause irreparable harm to the Employers, the amount of
which cannot be accurately compensated for in damages by an action at law. In
the event of a breach by the Employee of any of the provisions of Section 10 or
11, the Company and the Bank shall be entitled to an injunction restraining the
Employee from such breach. Nothing in this Section shall be construed as
prohibiting the Company or the Bank from pursuing any other remedies available
for any breach of this Agreement.
13. Deduction of Taxes. Each Employer may deduct from any amounts
required to be paid to the Employee under this Agreement any amounts required to
be withheld by the Employer pursuant to federal, state, or local law relating to
taxes or related payroll deductions.
14. Objection to Termination and Legal Fees. The termination of the
Employee's employment pursuant to this Agreement shall not preclude any Employer
or the Employee from objecting to the basis asserted by the terminating party
for such termination. The Employers agree to pay all reasonable legal fees and
expenses incurred by the Employee in enforcing his rights under this Agreement,
except with respect to claims made by the Employee that are rejected by a court
(or any arbitrator sitting by agreement of the parties) to which such claims are
presented; provided that the Employers' obligation to pay legal fees and
expenses under this Section shall not exceed $10,000 in aggregate amount.
15. Adjustment between the Company and the Bank. The Company and the
Bank acknowledge that although the Employee is generally paid solely by the
Bank, he also performs some services for the Company, and the Company pays the
Bank periodically an amount necessary to reimburse the Bank for amounts paid to
the Employee by the Bank for services actually rendered to the Company.
16. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if personally delivered or sent
by registered or certified United States mail or by a nationally recognized
overnight courier service, to his residence or the last address he has provided
in writing to the Employers, in the case of the Employee, or to its principal
office in the case of an Employer. For purposes of this Agreement, notices shall
be deemed given when received at the address or office specified in the
preceding sentence.
17. Waiver of Breach. No waiver by either party of any breach or
non-performance of any provision or obligation of this Agreement shall be deemed
to be a waiver of any preceding or succeeding breach of the same or any other
provision of this Agreement.
7
<PAGE> 8
18. Assignment. The rights and obligations of each Employer under this
Agreement shall inure to the benefit of and shall be binding upon them and their
respective successors and assigns. As used in this Agreement, the term
"successor" shall include any person, firm, corporation, or other business
entity which at any time whether by merger, purchase or otherwise acquires all
or substantially all of the assets or business of an Employer.
19. Entire Agreement. This instrument contains the entire Agreement of
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements or understandings between the parties hereto relating to the
subject matter hereof. This Agreement may not be changed orally but only by an
agreement in writing signed by the Employee and the Employers.
20. Severability. If a court of competent jurisdiction determines that
any one or more of the provisions of this Agreement is invalid, illegal or
unenforceable in any respect, such determination shall not affect the validity,
legality or enforceability of any other provision of this Agreement.
21. Governing Law. This Agreement and the legal relations between the
parties shall be subject to and governed by the internal laws (and not the law
of conflicts) of the State of Michigan.
The parties have executed this Agreement as of the day and year first
above written.
MERCANTILE BANK CORPORATION
By: /s/ Michael H. Price
----------------------------------------
Name: Michael H. Price
---------------------------------
Its: President
----------------------------------
MERCANTILE BANK OF WEST MICHIGAN
By: /s/ Michael H. Price
----------------------------------------
Name: Michael H. Price
---------------------------------
Its: President
----------------------------------
EMPLOYEE
/s/ Gerald R. Johnson, Jr.
---------------------------------------------
Gerald R. Johnson, Jr.
8
<PAGE> 9
EXHIBIT A
TO: MERCANTILE BANK CORPORATION/MERCANTILE BANK OF WEST
MICHIGAN BOARDS OF DIRECTORS
FROM: GERALD R. JOHNSON, JR.
SUBJECT: PROPOSED 1998 BONUS PLAN
DATE: FEBRUARY 17, 1998
- --------------------------------------------------------------------------------
The 1998 Bonus Plan is designed to reflect the fact that the directors and
management of Mercantile Bank of West Michigan and Mercantile Bank Corporation
believe that the company's shareholders are willing to share financially in
operating results that are superior to those forecast by the company and
approved by the Board of Directors. Consequently, the following bonus plan is
proposed for 1998. It should be noted that the non-lender portion of the plan
will probably not be utilized, because payout under the plan requires positive
earnings results.
PROPOSED 1998 EMPLOYEE BONUS PLAN
Lenders receive $500/$MM in increase in outstandings from computation
period to computation period.
Lenders also receive 5% of fees generated.
Increases in outstandings do not include any Reg. O loans.
Total payout is reduced by 3% of chargeoffs in the lender's portfolio.
Payout is on a quarterly basis and is contingent on the resolution of all
major collateral and file exceptions.
EXAMPLE:
<TABLE>
<CAPTION>
<S> <C>
Outstandings: 20,000,000
Fees: 25,000
$500/$MM: 10,000
5% of fees: 1,250
--------------
Payout 11,250 (No charge-off's reported)
</TABLE>
Non-lenders receive $0.33 for every $1.00 over budgeted net operating
income.
Maximum payouts are calculated as a percentage of salary as follows:
<TABLE>
<CAPTION>
<S> <C>
Chairman, President, Senior Vice President(s): 25.0% of salary
Vice Presidents 20.0% of salary
Assistant Vice Presidents 10.0% of salary
Officers 7.5% of salary
Non-officer employees: 5.0% of salary
</TABLE>
<PAGE> 10
PROPOSED 1998 BONUS PLAN PAGE 2
The following example illustrates the payout percentages and monetary
awards a non-lender bonus plan participant would receive from a $40,000
bonus pool based on salary level at time of award:
<TABLE>
<CAPTION>
SALARY MAX. BONUS MAX. BONUS % OF BONUS $ BONUS FROM $ BONUS AS
% $ $ POOL $40,000 POOL % OF SALARY
<C> <C> <C> <C> <C> <C>
150,000 25.0% 37,500 73.9% 29,557 19.7$
55,000 20.0% 11,000 21.7% 8,670 15.8%
30,000 7.5% 2,250 4.4% 1,773 5.9%
---------- ---------- ---------
50,750 100.0% 40,000
</TABLE>
Payouts under both the lender and non-lender bonus plans are contingent
upon the recipient's employment status at the time of award. If an employee
terminates his or her association with Mercantile Bank of West Michigan,
any accrued but unpaid bonus award is cancelled.
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made this 1st Day of
December, 1998, by and between Mercantile Bank Corporation, a Michigan
corporation (the "Company"), Mercantile Bank of West Michigan, a Michigan
banking corporation (the "Bank", and collectively with the Company, the
"Employers", and each an "Employer"), and Michael H. Price (the "Employee").
RECITALS
A. The Employee has served as the President and Chief Operating
Officer of the Company and the Bank.
B. The Employers and the Employee expect that the Employee will
continue as the President and Chief Operating Officer of the Company and the
Bank and wish to describe the terms of such employment in this Agreement.
C The Employers believe that entering into this Agreement is in the
best interest of their respective shareholders.
D The Employee believes that entering into this Agreement is in his
best interest.
TERMS OF AGREEMENT
In consideration of the mutual covenants and obligations set forth in
this Agreement, to induce the Employee to remain in the employment of the
Employers, and for other good and valuable consideration, the Employers and the
Employee agree as follows:
1. Employment , Term, and Acceptance: The Company and the Bank each
agree to employ the Employee as its President and Chief Operating Officer for
the period from December 1, 1998 through December 31, 2001 (the "Employment
Period"), unless such employment is terminated earlier pursuant to Section 7 or
8 of this Agreement.
The Employee hereby accepts such employment.
2. Duties and Authority:
2.1 Promotion of Employers' Interest. While employed as the
President and Chief Operating Officer of the Company and the Bank, the Employee
shall devote his business time and attention to the business and affairs of the
Employers, and shall use his efforts and abilities to promote the interests of
the Employers.
2.2 Performance of Duties. The Employee shall perform such
services and duties necessary or appropriate for the management of the Employers
as are normally expected of persons appointed to president and chief operating
officer positions in the businesses in which the Employers are engaged.
<PAGE> 2
3. Cash Compensation. For all services to be performed by the Employee
under this Agreement (including services as an officer, employee, director, or
member of any board committee), the Bank shall pay the Employee an annual base
salary (prorated for any partial year) of (a) One Hundred Fifty Thousand Dollars
($150,000) for the period from December 1, 1998 through June 30, 1999, (b) One
Hundred Seventy Thousand Dollars ($170,000) for the period from July 1, 1999
through December 31, 1999 , and (c) for the periods from January 1, 2000 through
December 31, 2000, and January 1, 2001 through December 31, 2001, amounts not
less than One Hundred Seventy Thousand Dollars ($170,000) as are determined by
the Board of Directors of the Bank, such determination to be made for each
period prior to the beginning of such period ("Base Cash Compensation"); payable
in each case in accordance with the then prevailing payroll practices of the
Bank. To the extent that the date of any change in rate of compensation provided
for clause (a), (b) or (c) above does not coincide with the first day of a
payroll period of the Bank, such change in rate of compensation shall become
effective as of the first day of the payroll period that includes such date. As
a one time adjustment, the Bank shall also pay the Employee within twenty (20)
days after the execution of this Agreement a one time payment of $5,000, which
is an amount equal to the difference between the compensation paid to the
Employee for October and November of 1998, and the amount he would have been
paid if his annual base salary had been increased to One Hundred and Fifty
Thousand Dollars ($150,000) effective October 1, 1998. In addition to the Base
Cash Compensation and one time adjustment described above, the Employee will be
entitled to such bonuses and other discretionary compensation as may be awarded
to him from time to time by the Board of Directors of either of the Employers.
4. Participation in Employee Benefit Plans. In addition to the cash
compensation payable to the Employee under this Agreement, the Employee shall be
entitled to participate in such employee benefit plans, whether contributory or
non-contributory, such as group life and disability insurance plans, hospital,
surgical, vision and dental benefit plans or other bonus incentive, profit
sharing, stock option, retirement or other employee benefit plans of the
Employers as may now or hereafter exist to the extent that the Employee meets
the eligibility requirements of any such plans. All such group life and
disability insurance plans, and hospital, surgical, vision and dental benefit
plans are hereafter referred to as ("Life, Disability and Medical Plans"). It is
specifically agreed that the Employee shall be entitled to participate in the
incentive compensation plan described in Exhibit A to this Agreement.
5. Out of Pocket Expenses. The Employee will be reimbursed by the Bank
or the Company, as the case may be, for all reasonable expenses incurred in
promoting their respective businesses; including expenses for entertainment,
travel and similar items upon the presentation by Employee, from time to time,
of an itemized account of such expenditures in a form and manner as determined
by the Board of Directors or the chief financial or accounting officer of the
Employer for whose account the expenditures are made.
6. Vacations. The Employee shall be entitled each year to four (4)
weeks paid vacation time. The Employee will not be entitled to additional
compensation for vacation time not
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<PAGE> 3
utilized in any year nor will the Employee be permitted to carry over unused
vacation time to a succeeding year.
7. Termination of Employment Upon Disability or Death
7.1 Disability. In the event the Employee shall become mentally
or physically disabled during the Employment Period and unable to perform the
material duties of his employment for ninety (90) days or more because of
illness, accident, or any other cause ("Disability"), the Bank or the Company
may terminate the Employee's employment under this Agreement by giving him
written notice of such termination ("Disability Termination Notice"). In the
event of any such termination during the Employment Period, the Bank shall
continue to pay the employee his Base Cash Compensation, at the rate in effect
immediately prior to the giving of the Disability Termination Notice, through
the end of the Employment Period (through December 31, 2001). In addition, the
Employers shall cover the Employee under their disability plans, if any, in
effect from time to time under the terms and conditions that such coverage is
made available to other employees of the respective Employers, and the Employee
shall be entitled to any benefits payable to him under such disability plans.
While disabled, the Bank shall continue to provide the Employee and his
dependents with coverage under its Life, Disability and Medical Plans until the
Employee reaches the age of sixty-five (65) years old to the extent that it may
do so under the provisions of such plans, with the Employee's contribution to
the premiums under such plans being no more than the amounts he paid for such
premiums prior to his disability, adjusted from time to time for normal periodic
increases in such premiums applied in general to employees of the Bank.
7.2 Death. In the event of the death of the Employee, his
employment with the Employers shall terminate as of the date of his death.
Promptly following his death, the Bank shall pay to his legal representative a
death benefit of $250,000. In addition, any life insurance policies owned by the
Bank or the Company, and insuring the life of the Employee shall be payable to
the beneficiaries of such policies in accordance with the terms of such
policies.
7.3 Extent of Obligations. The provisions of Sections 7.1 and
7.2 apply only to Disability or death occurring during the Employment Period
while the Employee is employed by the Bank and the Company. Other than as set
forth in Section 7.1 or 7.2, neither of the Employers shall have any obligation
or liability to the Employee upon the employee's death or Disability except that
the Employee shall be entitled to all of his accrued rights under stock option,
retirement and other employee benefit plans of the Company and the Bank, and the
Bank shall promptly pay the Employee (or his personal representative) his Base
Cash Compensation due through the effective date of the termination of his
employment, the cash equivalent of any accrued vacation days not taken as of
such effective date (calculated based on the Employee's annual base salary
attributable to each vacation day), and any out-of -pocket expenses for which
the Employee is entitled to be reimbursed, and for which reimbursement has not
yet been made.
8. Termination of Employment for Cause, Without Cause, Good Reason,
or Without Good Reason.
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<PAGE> 4
8.1 Termination by an Employer for Cause. Each of the
Employers shall have the right, at any time, to terminate the Employee's
employment for Cause (as defined herein), within 90 days of the Employer's
learning of such Cause. For purposes of this Agreement, the term "Cause" means
(a) an act or acts of dishonesty committed by the Employee and intended by the
Employee to result in the Employee's substantial personal enrichment at the
expense of the Company or the Bank, (b) continuing intentional gross neglect by
the Employee of his duties under Section 2 of this Agreement which cause or are
expected to cause material harm to the Company or the Bank, and which is not
remedied after receipt of notice from the applicable Employer, (c) the
Employee's conviction of a felony, or (d) the Employee's intentional breach of
his obligations under Section 10 or 11 which causes or may be expected to cause
material harm to the Company or the Bank. Any termination for Cause shall be
effective upon an Employer giving the Employee written notice that the
Employee's employment is terminated, and setting forth in reasonable detail the
basis for such termination, and that such termination is for Cause. Any such
notice shall terminate the Employee's employment with both Employers.
8.2 Termination by an Employer Without Cause. Each of the
Employers shall have the right at any time to terminate the Employee's
employment without Cause by giving the Employee written notice that the
Employee's employment is terminated, and setting forth in reasonable detail the
basis, if any, for such termination. Any such termination shall be effective
upon the giving of such notice by the Employer.
8.3 Termination by Employee for Good Reason. The Employee
shall have the right at any time to terminate his employment under this
Agreement for Good Reason (as defined herein) within ninety (90) days of
learning of such Good Reason. For purposes of this Agreement, the term "Good
Reason" means (a) any assignment to the Employee of any title or duties that are
materially inconsistent with the Employee's present positions, titles, duties,
or responsibilities, other than an insubstantial or inadvertent action which is
remedied by the applicable Employer promptly after receipt of written notice
from the Employee, or which is approved of by the Employee in writing; (b) any
failure by an Employer to comply in a material respect with any provision of
Section 3, 4, 5, or 6, other than a insubstantial or inadvertent failure which
is remedied by the applicable Employer promptly after receipt of written notice
from the Employee. Any termination for Good Reason shall be effective upon the
Employee giving the Employers written notice that the Employee is terminating
his employment, and setting forth in reasonable detail the basis for such
termination, and that such termination is for Good Reason. Any such termination
shall be effective upon the giving of such notice by the Employee; and any such
notice shall terminate his employment with both Employers.
8.4 Termination by Employee Without Good Reason. The Employee
shall have the right at any time to terminate the Employee's employment with
both Employers without Good Reason by giving the Employers written notice that
the Employee is terminating his employment. Any such termination shall apply to
the Employee's employment with both Employers and be effective ninety (90) days
after the giving of such notice by the Employee.
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8.5 Obligation of Employers upon Termination without Cause or
Employee's Termination with Good Reason. In the event that during the Employment
Period, an Employer terminates the Employee's employment without Cause under
Section 8.2, or the Employee terminates his employment for Good Reason under
Section 8.3; or the Employee's employment is terminated for any other reason
except (i) for Cause under Section 8.1, (ii) without Good Reason under Section
8.4, or (iii) for Disability or death pursuant to Section 7; the Bank shall pay
and provide (and to the extent the insurance referred to in Section 8.5(d) is
owned by the Company, the Company shall provide) to the Employee the following:
(a) to the extent not previously paid, the Employee's Base
Cash Compensation due through the effective date of the termination of
employment, the cash equivalent of any accrued vacation days not taken as of
such effective date (calculated based on the Employee's annual base salary
attributable to each vacation day), and any out-of -pocket expenses for which
the Employee is entitled to be reimbursed, and for which reimbursement has not
yet been made; payable within ten (10) days of such effective date, plus
(b) an amount equal to the greater of (i) the Base Cash
Compensation payable to the Employee for the remainder of the Employment Period
(i.e. through December 31, 2001), or (ii) $425,000; in either case, payable in
eighteen (18) substantially equal monthly installments commencing within thirty
(30) days after the effective date of the termination of employment; plus
(c) coverage for the Employee and his dependents under the
Bank's Life, Disability, and Medical Plans for the eighteen (18) month period
commencing on the effective date of the termination of employment to the extent
that the Bank may do so under the provisions of such plans, and to the extent
that it is not permitted to do so shall pay the Employee an amount that will
permit him to obtain and pay for substantially equivalent coverage; plus
(d) any life insurance policies owned by the Bank or the
Company insuring the life of the Employee, to the extent that they may be
practically assigned or transferred to the Employee; plus
(e) $10,000 for out-placement, interim office, and related
expenses.
In addition, the Employee shall be entitled to all of his accrued rights under
stock option, retirement, and other employee benefit plans of the Company and
the Bank,
8.6 Obligation of Employers upon Termination for Cause or by
Employee without Good Reason. In the event that during the Employment Period, an
Employer terminates the Employee's employment for Cause as provided for in
Section 8.1, or the Employee terminates his employment without Good Reason as
permitted in Section 8.4; the Bank shall pay and provide to the Employee, to the
extent not previously paid, the Employee's Base Cash Compensation due through
the effective date of the termination of employment, plus the cash equivalent of
any
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<PAGE> 6
accrued vacation days not taken as of such effective date (calculated based
on the Employee's annual base salary attributable to each vacation day), within
ten (10) days of such effective date. In addition, the Employee shall be
entitled to all of his accrued rights under stock option (except with respect to
stock option plans, in the event of termination for Cause), retirement, and
other employee benefit plans of the Company and the Bank,
8.7 No Other Obligations of Employers upon Termination. Upon
termination of the Employee's employment, the Employers shall have no
obligations to the Employee except as set forth in this Agreement, or accrued
rights under stock option, retirement, or other employee benefit plans of either
Employer.
9 Severance Payments on Termination after the Employment Period. If
at any time after the Employment Period, (a) the Employee's employment with the
Bank is terminated by the Bank without Cause, or (b) the Employee's annual base
salary from the Bank is reduced without his consent and without Cause, and in
the case of either (a) or (b) the Employee, within ninety (90) days thereafter,
terminates his employment with the Bank; then unless the termination of
employment or reduction in annual base salary resulted from the death or
Disability of the Employee, the Bank shall pay and provide (and to the extent
the insurance referred to in Section 8.5(d) is owned by the Company, the Company
shall provide) to the Employee the following: (a) the amounts, coverage,
benefits and life insurance provided for in Section 8.5 (a), (c), (d) and (e),
plus (b) $425,000, payable in eighteen (18) substantially equal monthly
installments commencing within thirty (30) days after the effective date of the
termination of employment. In addition, the Employee shall be entitled to all of
his accrued rights under stock option (except with respect to stock option
plans, in the event of termination for Cause), retirement, and other employee
benefit plans of the Company and the Bank,
10. Confidential Information. Employee agrees that he will not at any
time (whether during his employment or at any time thereafter) disclose to any
person, corporation, firm, partnership or other entity, except as required by
law, any secret or confidential information concerning the business, clients or
affairs of the Company or the Bank, or any of their affiliates, for any reason
or purpose whatsoever other than in furtherance of the Employee's work for the
Company or the Bank, nor shall the Employee make use of any of such secret or
confidential information in any manner adverse to the Company or the Bank.
11. Noncompetition Covenant. For a period of eighteen (18) months
following the termination of Employee's employment with the Employers, Employee
will not be employed by or act as a director or officer of any business
involving or engaged in the business of banking within a 50-mile radius of the
City of Grand Rapids, Michigan, where such business engages in soliciting,
directly or indirectly, customers of the Bank.
12. Remedies under Section 10 and 11. The Employee acknowledges and
agrees that his obligations under Sections 10 and 11 are of a special and unique
nature and that a failure to
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perform any such obligation or a violation of any such obligation would cause
irreparable harm to the Employers, the amount of which cannot be accurately
compensated for in damages by an action at law. In the event of a breach by the
Employee of any of the provisions of Section 10 or 11, the Company and the Bank
shall be entitled to an injunction restraining the Employee from such breach.
Nothing in this Section shall be construed as prohibiting the Company or the
Bank from pursuing any other remedies available for any breach of this
Agreement.
13. Deduction of Taxes. Each Employer may deduct from any amounts
required to be paid to the Employee under this Agreement any amounts required to
be withheld by the Employer pursuant to federal, state, or local law relating to
taxes or related payroll deductions.
14. Objection to Termination and Legal Fees. The termination of the
Employee's employment pursuant to this Agreement shall not preclude any Employer
or the Employee from objecting to the basis asserted by the terminating party
for such termination. The Employers agree to pay all reasonable legal fees and
expenses incurred by the Employee in enforcing his rights under this Agreement,
except with respect to claims made by the Employee that are rejected by a court
(or any arbitrator sitting by agreement of the parties) to which such claims are
presented; provided that the Employers' obligation to pay legal fees and
expenses under this Section shall not exceed $10,000 in aggregate amount.
15. Adjustment between the Company and the Bank. The Company and the
Bank acknowledge that although the Employee is generally paid solely by the
Bank, he also performs some services for the Company, and the Company pays the
Bank periodically an amount necessary to reimburse the Bank for amounts paid to
the Employee by the Bank for services actually rendered to the Company.
16. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if personally delivered or sent
by registered or certified United States mail or by a nationally recognized
overnight courier service, to his residence or the last address he has provided
in writing to the Employers, in the case of the Employee, or to its principal
office in the case of an Employer. For purposes of this Agreement, notices shall
be deemed given when received at the address or office specified in the
preceding sentence.
17. Waiver of Breach. No waiver by either party of any breach or
non-performance of any provision or obligation of this Agreement shall be deemed
to be a waiver of any preceding or succeeding breach of the same or any other
provision of this Agreement.
18. Assignment. The rights and obligations of each Employer under this
Agreement shall inure to the benefit of and shall be binding upon them and their
respective successors and assigns. As used in this Agreement, the term
"successor" shall include any person, firm, corporation, or other business
entity which at any time whether by merger, purchase or otherwise acquires all
or substantially all of the assets or business of an Employer.
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<PAGE> 8
19. Entire Agreement. This instrument contains the entire Agreement of
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements or understandings between the parties hereto relating to the
subject matter hereof. This Agreement may not be changed orally but only by an
agreement in writing signed by the Employee and the Employers.
20. Severability. If a court of competent jurisdiction determines that
any one or more of the provisions of this Agreement is invalid, illegal or
unenforceable in any respect, such determination shall not affect the validity,
legality or enforceability of any other provision of this Agreement.
21. Governing Law. This Agreement and the legal relations between the
parties shall be subject to and governed by the internal laws (and not the law
of conflicts) of the State of Michigan.
The parties have executed this Agreement as of the day and year first
above written.
MERCANTILE BANK CORPORATION
By: /s/ Gerald R. Johnson, Jr.
----------------------------------------
Name: Gerald R. Johnson, Jr.
---------------------------------
Its: Chairman
----------------------------------
MERCANTILE BANK OF WEST MICHIGAN
By: /s/ Gerald R. Johnson, Jr.
----------------------------------------
Name: Gerald R. Johnson, Jr.
---------------------------------
Its: Chairman
----------------------------------
EMPLOYEE
/s/ Michael H. Price
--------------------------------------------
Michael H. Price
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EXHIBIT A
TO: MERCANTILE BANK CORPORATION/MERCANTILE BANK OF WEST
MICHIGAN BOARDS OF DIRECTORS
FROM: GERALD R. JOHNSON, JR.
SUBJECT: PROPOSED 1998 BONUS PLAN
DATE: FEBRUARY 17, 1998
- --------------------------------------------------------------------------------
The 1998 Bonus Plan is designed to reflect the fact that the directors and
management of Mercantile Bank of West Michigan and Mercantile Bank Corporation
believe that the company's shareholders are willing to share financially in
operating results that are superior to those forecast by the company and
approved by the Board of Directors. Consequently, the following bonus plan is
proposed for 1998. It should be noted that the non-lender portion of the plan
will probably not be utilized, because payout under the plan requires positive
earnings results.
PROPOSED 1998 EMPLOYEE BONUS PLAN
Lenders receive $500/$MM in increase in outstandings from computation
period to computation period.
Lenders also receive 5% of fees generated.
Increases in outstandings do not include any Reg. O loans.
Total payout is reduced by 3% of chargeoffs in the lender's portfolio.
Payout is on a quarterly basis and is contingent on the resolution of all
major collateral and file exceptions.
EXAMPLE:
<TABLE>
<CAPTION>
<S> <C>
Outstandings: 20,000,000
Fees: 25,000
$500/$MM: 10,000
5% of fees: 1,250
--------------
Payout 11,250 (No charge-off's reported)
</TABLE>
Non-lenders receive $0.33 for every $1.00 over budgeted net operating
income.
Maximum payouts are calculated as a percentage of salary as follows:
<TABLE>
<CAPTION>
<S> <C>
Chairman, President, Senior Vice President(s): 25.0% of salary
Vice Presidents 20.0% of salary
Assistant Vice Presidents 10.0% of salary
Officers 7.5% of salary
Non-officer employees: 5.0% of salary
</TABLE>
<PAGE> 10
PROPOSED 1998 BONUS PLAN PAGE 2
The following example illustrates the payout percentages and monetary
awards a non-lender bonus plan participant would receive from a $40,000
bonus pool based on salary level at time of award:
<TABLE>
<CAPTION>
SALARY MAX. BONUS MAX. BONUS % OF BONUS $ BONUS FROM $ BONUS AS
% $ $ POOL $40,000 POOL % OF SALARY
<C> <C> <C> <C> <C> <C>
150,000 25.0% 37,500 73.9% 29,557 19.7$
55,000 20.0% 11,000 21.7% 8,670 15.8%
30,000 7.5% 2,250 4.4% 1,773 5.9%
---------- ---------- ---------
50,750 100.0% 40,000
</TABLE>
Payouts under both the lender and non-lender bonus plans are contingent
upon the recipient's employment status at the time of award. If an employee
terminates his or her association with Mercantile Bank of West Michigan,
any accrued but unpaid bonus award is cancelled.
<PAGE> 1
MERCANTILE BANK CORPORATION
216 NORTH DIVISION AVENUE
GRAND RAPIDS, MICHIGAN 49503
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 15, 1999
TO THE HOLDERS OF SHARES OF COMMON STOCK OF
MERCANTILE BANK CORPORATION
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
MERCANTILE BANK CORPORATION will be held at the Peninsular Club, Second Floor,
120 Ottawa Avenue, N.W., Grand Rapids, Michigan on Thursday, April 15, 1999, at
9:00 a.m., for the purpose of considering and voting upon the following matters:
1. ELECTION OF DIRECTORS. To elect four Class II directors for a three year
term, as detailed in the accompanying Proxy Statement.
2. OTHER BUSINESS. To transact such other business as may properly be
brought before the meeting or any adjournment or adjournments thereof.
Only those shareholders of record at the close of business on Monday, March
1, 1999, shall be entitled to notice of and to vote at the meeting.
We urge you to sign and return the enclosed proxy as promptly as possible,
whether or not you plan to attend the meeting in person. If you plan to attend
the meeting, please let us know by checking the box provided for this purpose on
the enclosed proxy. We would appreciate receiving your proxy by Monday, April 5,
1999.
By Order of the Board of Directors,
/s/ Gerald R Johnson Jr
Gerald R. Johnson, Jr.
Chairman of the Board &
Chief Executive Officer
Dated: March 12, 1999
<PAGE> 2
MERCANTILE BANK CORPORATION
216 NORTH DIVISION AVENUE
GRAND RAPIDS, MICHIGAN 49503
MARCH 12, 1999
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished to shareholders of Mercantile Bank
Corporation (the "Corporation") in connection with the solicitation of proxies
by the Board of Directors of the Corporation, for use at the Annual Meeting of
shareholders of the Corporation to be held on Thursday, April 15, 1999, at 9:00
a.m., at the Peninsular Club, Second Floor, 120 Ottawa Avenue, N.W., Grand
Rapids, Michigan, and at any and all adjournments thereof. It is expected that
the proxy materials will be mailed to shareholders on or about March 12, 1999.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its exercise. Unless the proxy is revoked, the
shares represented thereby will be voted at the Annual Meeting or any
adjournment thereof.
The entire cost of soliciting proxies will be borne by the Corporation.
Proxies may be solicited by mail, facsimile or telegraph, or by directors,
officers, or regular employees of the Corporation or its subsidiary, in person
or by telephone. The Corporation will reimburse brokerage houses and other
custodians, nominees and fiduciaries for their out-of-pocket expenses for
forwarding soliciting material to the beneficial owners of Common Stock of the
Corporation.
The Board of Directors, in accordance with the By-Laws of the Corporation,
has fixed the close of business on March 1, 1999 as the record date for
determining shareholders entitled to notice of and to vote at the Annual Meeting
and at any and all adjournments thereof.
At the close of business on such record date, the outstanding number of
voting securities of the Corporation was 2,472,500 shares of Common Stock, each
of which is entitled to one vote.
ELECTION OF DIRECTORS
The Corporation's Certificate of Incorporation and By-Laws provide that the
number of directors, as determined from time to time by the Board of Directors,
shall be no less than six and no more than fifteen. The Board of Directors has
presently fixed the number of directors at thirteen. The Certificate of
Incorporation and By-Laws further provide that the directors shall be divided
into three classes, Class I, Class II and Class III, with each class serving a
staggered three year term and with the number of directors in each class being
as nearly equal as possible.
The Board of Directors has nominated Betty S. Burton, Peter A. Cordes,
David M. Hecht and Robert M. Wynalda as Class II directors for three year terms
expiring at the 2002 Annual Meeting and upon election and qualification of their
successors. Each of the nominees is presently a Class II director of the
Corporation whose term expires at the April 15, 1999 Annual Meeting of the
shareholders. The other members of the Board, who are Class I and Class III
directors, will continue in office in accordance with their previous elections
until the expiration of their terms at the 2001 or 2000 Annual Meetings, as the
case may be.
It is the intention of the persons named in the enclosed proxy to vote such
proxy for the election of the four nominees listed herein. The proposed nominees
for election as director are willing to be elected and serve; but in the event
that any nominee at the time of election is unable to serve or is otherwise
unavailable for election, the Board of Directors may select a substitute
nominee, and in that event the persons named in the enclosed proxy intend to
vote such proxy for the person so selected. If a substitute nominee is not so
selected, such proxy will be voted for the election of the remaining nominees.
The affirmative vote of a plurality of the votes cast at the meeting is required
for the nominees to be elected.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information regarding the beneficial ownership
of the Corporation's Common Stock as of February 1, 1999, by the nominees for
election as directors of the Corporation, the directors of the Corporation whose
terms of office will continue after the Annual Meeting, the executive officers
named in the Summary Compensation Table, and all directors and executive
officers of the Corporation as a group.
<TABLE>
<CAPTION>
AMOUNT PERCENT OF CLASS
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) OWNED(6)
------------------------ ------------ ----------------
<S> <C> <C>
Betty S. Burton............................................. 2,000 *
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. ..................................... 71,101(3) 2.9%
Susan K. Jones.............................................. 850 *
Lawrence W. Larsen.......................................... 13,500 *
Calvin D. Murdock........................................... 15,875 *
Michael H. Price............................................ 15,708(4) *
Dale J. Visser.............................................. 90,000 3.6%
Donald Williams, Sr. ....................................... 650 *
Robert M. Wynalda........................................... 50,000 2.0%
All directors and executive officers of the Corporation as a
group (15 Persons)........................................ 387,290(5) 15.4%
</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 20,000 shares that Mr. Johnson has the right to acquire within 60
days of February 1, 1999 pursuant to the Corporation's 1997 Employee Stock
Option Plan and 1,101 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 27,000 shares, which have not yet vested.
(4) Includes 14,000 shares that Mr. Price has the right to acquire within 60
days of February 1, 1999, pursuant to the Corporation's 1997 Employee Stock
Option Plan and 1,008 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.
(5) Includes 38,000 shares that such persons have the right to acquire within 60
days of February 1, 1999 pursuant to the Corporation'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 the Corporation's
Common Stock outstanding as of February 1, 1999, plus the number of shares
that the named person or group has the right to acquire within 60 days of
February 1, 1999.
To the best of the Corporation's knowledge, no person owns more than 5% of
the Corporation's outstanding Common Stock.
INFORMATION ABOUT DIRECTORS, NOMINEES, AND EXECUTIVE OFFICERS
The following information is furnished with respect to each continuing
director, nominee as a director, and executive officer of the Corporation. Each
of the continuing directors and nominees is currently a director
2
<PAGE> 4
of the Corporation as well as a director of Mercantile Bank of West Michigan
(the "Bank") which is the Corporation's subsidiary.
<TABLE>
<CAPTION>
HAS SERVED
NAME, AGE, AND POSITION WITH AS YEAR WHEN TERM AS A
THE CORPORATION AND THE BANK DIRECTOR SINCE DIRECTOR EXPIRES
---------------------------- -------------- -------------------
<S> <C> <C>
Betty S. Burton, 57, Director............................... 1998 1999
Edward J. Clark, 54, Director............................... 1998 2001
Peter A. Cordes, 58, Director............................... 1997 1999
C. John Gill, 65, Director.................................. 1997 2001
David M. Hecht, 61, Director................................ 1997 1999
Gerald R. Johnson, Jr., 52, Chairman of the Board and Chief
Executive Officer of the Corporation, Chairman of the
Board of the Bank; and Director........................... 1997 2001
Susan K. Jones, 49, Director................................ 1998 2000
Lawrence W. Larsen, 59, Director............................ 1997 2000
Calvin D. Murdock, 59, Director............................. 1997 2001
Michael H. Price, 42, President and
Chief Operating Officer of the Corporation, President and
Chief Executive Officer of the Bank; and Director...... 1997 2000
Dale J. Visser, 62, Director................................ 1997 2000
Donald Williams, Sr., 62, Director.......................... 1998 2001
Robert M. Wynalda, 63, Director............................. 1997 1999
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, nominees and executive
officers of the Corporation for at least the past five years is summarized
below:
BETTY S. BURTON (Director) Betty S. Burton is President and Chief Executive
Officer of Wonderland Business Forms, Inc. She has held director positions at
First Michigan Bank and Butterworth Hospital. Prior to taking over the family
business in 1990, Mrs. Burton was a long time elementary teacher in the public
school system. She is a graduate of Western Michigan University, Grand Valley
State University and Dartmouth College 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.
EDWARD J. CLARK (Director) Mr. Clark is the President and Chief Executive
of The American Seating Company, and has held this position since he joined the
company in 1986. American Seating is headquartered in Grand Rapids, Michigan,
and produces seating furniture for laboratories, offices, 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 sole owner. Mr. Cordes is a 1966 graduate of St. Louis
University with a degree in aeronautics. He is a native of Traverse City,
Michigan and has spent the last eighteen years in West Michigan.
3
<PAGE> 5
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. Mr. Gill is a native of Lakeview, Michigan.
DAVID M. HECHT (Director) Mr. Hecht has practiced law for 37 years,
including the past 25 years in Grand Rapids. For more than the past five years
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 the Corporation 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 the Company. Mr. Johnson served as Chairman
of the Board and Chief Executive Officer of the Corporation 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 the Corporation 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). Mr.
Johnson has been involved in charitable and community activities for many years.
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 Project Rehab. Mr. Johnson
also 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 and a tenured, full-time Associate Professor of Marketing at Ferris
State University in Big Rapids, Michigan. She began her own 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 secretary of the Arts Council
of Greater Grand Rapids, 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 Vice
President-Elect of Communications of the West Michigan American Marketing
Association, and as a trustee of the Chicago Association of Direct Marketing
Educational Foundation. She is a resident of East Grand Rapids, Michigan.
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 is an active
supporter of the Catholic secondary schools system in Grand Rapids. 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
4
<PAGE> 6
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 the
Corporation 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, then President of FMB-Grand Rapids before joining the
Bank in late 1997. Mr. Price served as President and Chief Operating Officer of
the Corporation and the Bank from December of 1997 through 1998, and has served
as President and Chief Operating Officer of the Corporation 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 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 also been the recipient of numerous awards in the Grand Rapids and
West Michigan area, for community services and job performance. He currently
resides in Grand Rapids.
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 College of
Grand Rapids, and formerly served as a director of a local financial
institution.
ROBERT B. KAMINSKI (Senior Vice President and Secretary) Mr. Kaminski 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 the Corporation 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 served as Vice President of Finance, Treasurer and
Compliance Officer of the Corporation and the Bank in 1998, and in 1999 was
elected Chief Financial Officer, Treasurer and Compliance Officer. Prior to
joining the Corporation, he worked with various financial institutions for over
ten years while serving as a bank examiner with the Federal Deposit Insurance
Corporation ("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.
5
<PAGE> 7
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Corporation has standing Audit, Compensation, and Nominating Committees
of the Board of Directors.
The members of the Audit Committee consist of C. John Gill, David M. Hecht,
and Robert M. Wynalda. The Audit Committee's responsibilities include
recommending to the Board of Directors the selection of independent accountants,
approving the scope of audit and non-audit services performed by the independent
accountants, reviewing the results of their audit, reviewing the Corporation's
internal auditing activities and financial statements, and reviewing the
Corporation's system of accounting controls and recordkeeping.
The members of the Compensation Committee consist of Peter A. Cordes,
Lawrence W. Larson, and Calvin D. Murdock. The Compensation Committee's
responsibilities include considering and recommending to the Board of Directors
any changes in compensation and benefits for officers of the Corporation. At
present, all officers of the Corporation are also officers of the Bank, and
although they receive compensation from the Bank in their capacity as officers
of the Bank, they presently receive no separate cash compensation from the
Corporation.
The members of the Nominating Committee consist of David M. Hecht, Dale J.
Visser, and Robert M. Wynalda. The Nominating Committee is responsible for
reviewing and making recommendations to the Board of Directors as to its size
and composition, and recommending to the Board of Directors candidates for
election as directors at the Corporation's annual meetings. The Nominating
Committee will consider as potential nominees persons recommended by
shareholders. Recommendations should be submitted to the Nominating Committee in
care of Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of the
Corporation. Each recommendation should include a personal biography of the
suggested nominee, an indication of the background or experience that qualifies
such person for consideration, and a statement that such person has agreed to
serve if nominated and elected. Shareholders who themselves wish to effectively
nominate a person for election to the Board of Directors, as contrasted with
recommending a potential nominee to the Nominating Committee for its
consideration, are required to comply with the advance notice and other
requirements set forth in the Corporation's Articles of Incorporation.
During 1998, there were a total of six meetings of the Board of Directors
of the Corporation. Each director attended at least 75% of the total number of
meetings of the Board of Directors and Committees of the Board held during the
period that the director served except C. John Gill and Robert M. Wynalda who
attended 63% and 60%, respectively, of the meetings. Messrs. Gill and Wynalda
also attended 17 and 13 meetings, respectively, of the Board of Directors of the
Bank. There were two meetings of the Audit Committee, two meetings of the
Compensation Committee, and two meetings of the Nominating Committee during
1998.
During 1998, no compensation was paid to any directors of the Corporation
or 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.
6
<PAGE> 8
SUMMARY COMPENSATION TABLE
The following table details the compensation received by the named
executives for the period from July 15, 1997 (inception) to December 31, 1997;
and the year ended December 31, 1998:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -----------------------
------------------------- 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 1997 $ 83,654 0 40,000 0
and Chief Executive Officer of the Corporation
and
Chairman of the Board of the Bank
Michael H. Price,................................ 1998 135,307 0 7,000 6,919(2)
President and Chief Operating Officer of the
Corporation and President and 1997 14,112 0 21,000 0
Chief Executive Officer of the Bank
</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 the Corporation's 1997 Employee Stock Option Plan, stock options are
granted to the Corporation's and the Bank's senior management and other key
employees. The Board of Directors of the Corporation is responsible for awarding
the stock options. These options are awarded to give senior management and key
employees an additional interest in the Corporation from a shareholder's
perspective, and enable them to participate in the future growth and
profitability of the Corporation. 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 the Corporation, and such other factors as the Board
may deem relevant.
The following table provides information on options granted to the named
executives during the year ended December 31, 1998:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
NUMBER OF SHARES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED(1) IN 1998 PER SHARE(2) 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 for Mr. Johnson becomes exercisable on July 22, 2001. The option
for Mr. Price becomes exercisable on December 1, 2000.
(2) The exercise price may be paid in cash, by the delivery of previously owned
shares, or a combination thereof.
7
<PAGE> 9
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 executives and the value of
unexercised options at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SHARES UNEXERCISED UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT 12/31/98 OPTIONS AT 12/31/98
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/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) In accordance with the SEC's rules, 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 asked prices reported on the OTC
Bulletin Board on December 31, 1998.
EMPLOYMENT AGREEMENTS
Effective December 1, 1998, the Bank and the Corporation have 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 for him 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 for him 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 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 the Corporation 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 benefits under his Employment Agreement. In the event of
disability, the officer continues 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 the Corporation. The officer also
continues to participate in life, disability, and health insurance plans of the
Bank or the Corporation, 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 the Corporation 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 the Corporation 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 (i) his annual base salary through the end of the Employment
Period or (ii) 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 the Corporation for 18 months, to the
extent permitted under such plans, to an assignment of any assignable life
insurance policies owned by the Bank or the Corporation insuring his life, and
$10,000 for out-placement, interim office and related expenses. The Employment
Agreements also provide severance benefits in the event
8
<PAGE> 10
that after the Employment Period the officer's employment is terminated by the
Bank and the Corporation without "Cause" or the officer's annual base salary is
reduced without "Cause". In such event, the officer receives 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 receives
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 the
Corporation.
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 the Corporation, or use any such
information in any manner adverse to the Bank or the Corporation. In addition,
each has agreed that for 18 months following his employment with the Bank and
the Corporation, 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.
CERTAIN TRANSACTIONS
The Bank has had, and expects in the future to have, loan and other
financial transactions in the ordinary course of business with the Corporation'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 (i) were made in the ordinary course of
business, (ii) 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 (iii) 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 the directors
or executive officers of the Corporation totaling approximately $9.1 million in
aggregate amount under commitments totaling approximately $12.8 million.
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 to be 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 the Corporation
and the Bank, and both were organizers of the Bank. The contract estimates the
construction costs for the facility at not more than approximately $1.3 million.
Visser Brothers is to receive approximately 5% of this amount for its
construction management services, and will be reimbursed for the wages,
salaries, and related taxes and benefits of construction workers and supervisory
and administrative personnel that it employs in connection with the
construction. The Bank estimates that the payments for the percentage amount and
reimbursements will total approximately $65,000 for the project. In addition,
when deemed appropriate by the Bank, the architect for the project, and Visser
Brothers, the Bank may permit Visser Brother to bid as a subcontractor for
portions of the work that is to be performed on the project. In such cases, the
Bank expects that Visser Brothers may be hired as a subcontractor where its bid
is determined to be the most favorable.
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 of 1997 pursuant to
specifications provided by the Bank's architect.
SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Crowe, Chizek & Company LLP as the
Corporation's principal independent auditors for the year ending December 31,
1999. Representatives of Crowe, Chizek & Company
9
<PAGE> 11
LLP plan to attend the Annual Meeting of shareholders, will have the opportunity
to make a statement if they desire to do so, and will respond to appropriate
questions by shareholders.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
A proposal submitted by a shareholder for the 2000 Annual Meeting of
shareholders must be sent to the Secretary of the Corporation, 216 North
Division Avenue, Grand Rapids, Michigan 49503, and received by November 13, 1999
in order to be eligible to be included in the Corporation's Proxy Statement for
that meeting.
OTHER MATTERS
The Board of Directors does not know of any other matters to be brought
before the Annual Meeting. If other matters are presented upon which a vote may
properly be taken it is the intention of the persons named in the proxy to vote
the proxies in accordance with their best judgment.
MBCCM-PS-99
10
<PAGE> 12
[X] PLEASE MARK VOTES APPENDIX
AS IN THIS EXAMPLE
<TABLE>
<CAPTION>
<S><C>
- ------------------------------------ 1. Election of Directors
MERCANTILE BANK CORPORATION Nominees as Directors
- ------------------------------------
BETTY S. BURTON FOR ALL WITH FOR ALL
PETER A. CORDES NOMINEES HELD EXCEPT
DAVID M. HECHT [ ] [ ] [ ]
ROBERT M. WYNALDA
NOTE: If you do not wish your shares voted "For" a particular
nominee, mark the "For All Except" box and strike a line
through the name(s) of the nominee(s). Your shares will be
RECORD DATE SHARES: voted for the remaining nominee(s).
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL
NOMINEES.
2. In their discretion, the Proxies are authorized to vote upon such
other matters as may properly come before the meeting, or at any
adjournment of the meeting.
Mark box at right if you plan to attend the meeting. [ ]
Please be sure to sign and date Mark box at right if an address change or comment has been [ ]
this Proxy. Date noted on the reverse side of this card.
-----------
Shareholder sign here Co-owner sign here
---------------- -------------------
</TABLE>
DETACH CARD DETACH CARD
MERCANTILE BANK CORPORATION
Dear Shareholder,
Enclosed with this proxy is your Notice of Annual Meeting and Proxy
Statement, and 1998 Annual Report. We encourage you to carefully read
these materials and exercise your right to vote your shares.
Please mark the boxes on this proxy card to indicate how your shares
will be voted, then sign the proxy card, detach it, and return your
proxy vote in the enclosed postage paid envelope. If you plan to
attend the meeting, please mark the appropriate box on the proxy.
Your proxy card must be received prior to the Annual Meeting of
Shareholders on April 15, 1999.
Sincerely,
Mercantile Bank Corporation
<PAGE> 13
MERCANTILE BANK CORPORATION
216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 15, 1999
The undersigned hereby appoints Calvin D. Murdock and Susan K. Jones, or either
of them, with power of substitution in each, proxies of the undersigned to vote
all Common Stock of the undersigned in Mercantile Bank Corporation, at the
Annual Meeting of Shareholders to be held on April 15, 1999, and at all
adjournments thereof.
IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED BY THIS PROXY WILL BE
VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR
THE ELECTION OF ALL NOMINEES NAMED IN THIS PROXY.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
Please sign exactly as your name(s) appear(s) hereon. Joint owners should each
sign personally. Trustees and other fiduciaries should indicate the capacity in
which they sign. If a corporation or partnership, the signature should be that
of an authorized person who should state his or her title.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ---------------------------- --------------------------------------
- ---------------------------- --------------------------------------
- ---------------------------- --------------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,940,713
<INT-BEARING-DEPOSITS> 515,283
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 24,160,247
<INVESTMENTS-MARKET> 24,160,247
<LOANS> 184,744,602
<ALLOWANCE> (2,765,100)
<TOTAL-ASSETS> 216,236,857
<DEPOSITS> 171,998,019
<SHORT-TERM> 17,037,601
<LIABILITIES-OTHER> 500,721
<LONG-TERM> 0
0
0
<COMMON> 28,181,798
<OTHER-SE> (1,481,282)
<TOTAL-LIABILITIES-AND-EQUITY> 216,236,857
<INTEREST-LOAN> 9,007,668
<INTEREST-INVEST> 880,639
<INTEREST-OTHER> 279,909
<INTEREST-TOTAL> 10,168,216
<INTEREST-DEPOSIT> 5,140,788
<INTEREST-EXPENSE> 5,629,218
<INTEREST-INCOME-NET> 4,538,998
<LOAN-LOSSES> 2,571,800
<SECURITIES-GAINS> 128
<EXPENSE-OTHER> 3,564,423
<INCOME-PRETAX> (1,109,047)
<INCOME-PRE-EXTRAORDINARY> (1,109,047)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,109,047)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
<YIELD-ACTUAL> 3.62
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 193,300
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,765,100
<ALLOWANCE-DOMESTIC> 2,765,100
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
