<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
For the fiscal year ended December 31, 1999 Commission File No. 000-26719
MERCANTILE BANK CORPORATION
(Name of small business issuer in its charter)
MICHIGAN 38-3360865
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
9.60% CUMULATIVE PREFERRED SECURITIES, $10 LIQUIDATION AMOUNT
(Title of class)
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
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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 $23,614,000.
The aggregate market value of voting stock of the registrant held by
nonaffiliates was approximately $26,537,000 as of February 1, 2000; based on the
average of the closing bid and asked prices ($12.56) on that date.
As of March 1, 2000, 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 20, 2000 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 ("Mercantile") 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, Mercantile is subject to regulation by
the Federal Reserve Board. Mercantile 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. MBWM Capital Trust I
("Capital Trust"), a wholly-owned business trust subsidiary of Mercantile, was
formed in September 1999 for the specific purpose of issuing 9.60% cumulative
preferred securities. Mercantile exists primarily for the purpose of holding all
of the stock of the Bank, and of such other subsidiaries as Mercantile may
acquire or establish.
The expenses of Mercantile to date have generally been paid using the
proceeds from its initial public stock offering in October 1997, a secondary
public stock offering in July 1998, issuance of cumulative preferred securities
in September 1999, and dividends from the Bank. Mercantile's principal source of
future operating funds is expected to be dividends from the Bank.
THE BANK
The Bank is a state banking company that operates under the laws of the
State of Michigan, pursuant to a charter issued by the Michigan Financial
Institutions Bureau. 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 main office located at 216 North Division Avenue,
Grand Rapids, Michigan and its combined branch and operations center located at
4613 Alpine Avenue, Comstock Park, Michigan, provides a wide variety of
commercial banking services primarily to businesses, individuals and
governmental units. The Bank makes secured and unsecured commercial,
construction, mortgage and consumer loans, and accepts checking, savings and
time deposits. The Bank owns two automated teller machines ("ATM") that
participate in the MAC and NYCE regional network systems, 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.
Courier service is provided to certain commercial customers, and safe deposit
facilities are available at both locations. The Bank does not have trust powers.
THE CAPITAL TRUST
In 1999 Mercantile formed Capital Trust, a Delaware business trust.
Capital Trust's business and affairs are conducted by its property trustee, a
Delaware trustee, and three individual administrative trustees who are employees
and officers of Mercantile. Capital Trust exists for the sole purpose of issuing
and selling its preferred securities and common securities, and using the
proceeds from the sales of those securities to acquire subordinated debentures
issued by Mercantile. Substantially all of the net proceeds from the
transactions were contributed to the Bank in the form of capital. Additional
information regarding Capital Trust is included in Note 14 - Sale of Trust
Preferred Securities and Note 16 - Regulatory Matters to the Consolidated
Financial Statements of Mercantile at Page F-35, and Pages F-36 and 37,
respectively, of this Annual Report.
1.
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EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of Mercantile 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
Mercantile, 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 Mercantile and its subsidiaries 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.
Neither Mercantile nor its subsidiaries currently engage in any such activity.
The Bank is subject to certain restrictions imposed by federal law on
any extension of credit to Mercantile 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 Mercantile from borrowing from
the Bank unless the loans are secured in designated amounts.
With respect to the acquisition of banking organizations, Mercantile 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, 1999, the Company and the Bank employed 54 full-time
and 12 part-time persons. Management believes that the Bank's relations with its
employees are good.
2.
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LOAN POLICY
As a routine part of business, the Bank makes loans to businesses and
individuals located within its 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,
supported by the Bank's strong credit culture and the significant experience of
the commercial lending staff, 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 $1.0 million
require approval by the Officers Loan Committee. Loan requests exceeding $1.5
million, up to the legal lending limit of approximately $10.3 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.
The loan policy also limits the amount of funds that may be loaned
against specified types of real estate 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, such
as accounts receivable and machinery and equipment. In addition, the loan policy
provides general guidelines as to: environmental analysis, loans to employees,
executive officers and directors, problem loan identification, maintenance of an
allowance for loan losses, loan review and grading, mortgage and consumer
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 six lenders, with over 70 years of combined commercial lending
experience. Loans are originated for general business purposes, including
working capital, accounts receivable financing, machinery and equipment
acquisition, as well as 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 are generally 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, while commercial real estate loans are usually
written with a five-year maturity and amortized over a 15 year period. These
commercial loan types have an interest rate that is fixed to maturity or is tied
to the national prime rate.
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 generally required by certified independent appraisers
who are well known to the Bank 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.
3.
<PAGE> 5
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 limiting the amount of credit to any one
borrower to an amount less than the Bank's legal lending limit and avoiding
certain types of commercial real estate financings.
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 usually according
to secondary market underwriting standards; however, loans not conforming to
those standards are made in certain limited circumstances. These loans provide
borrowers with a fixed or adjustable interest rate with terms up to 30 years.
The Bank also has a home equity line of credit program. Generally
secured by either a first or second mortgage on the borrower's primary
residence, the program provides revolving credit at a rate tied to the national
prime rate.
Consumer Loans. The Bank originates consumer loans for a variety of
personal financial needs, including 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 and usually involve more
credit risk than single-family residential real estate loans because of the type
and nature of the collateral.
While the Bank does not utilize a formal credit scoring system in
making the credit decision, the Bank believes its consumer 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 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
The Bank has a comprehensive loan grading system for commercial loans
as well as residential mortgage and consumer loans. Administered as part of the
loan review program, all commercial loans are graded on an eight grade rating
system. Utilizing a standardized grade paradigm that analyzes several critical
factors such as cash flow, management and collateral coverage, all commercial
loans are graded at inception and at various intervals thereafter. Residential
mortgage and consumer loans are graded on a four grade rating system using a
separate standardized grade paradigm that analyzes several critical factors such
as debt-to-income and credit and employment histories. Residential mortgage and
consumer loans are generally only graded once, and is performed subsequent to
the loans being extended.
The Bank's independent loan review program is primarily responsible for
the administration of the loan grading systems and ensuring adherence to
established loan policies and procedures, and is an integral part of maintaining
the strong asset quality culture. The Loan Review Officer works closely with the
President of the Bank and the Senior Vice President of Credit Administration,
although functionally reports to the Board of Directors. All commercial loan
relationships exceeding $1 million are formally reviewed at least annually.
Watch list credits are formally reviewed at least quarterly. Credits between
$0.5 million but less than $1 million are formally reviewed every two years,
with a random sampling performed on credits under $0.5 million.
4.
<PAGE> 6
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, 1999, loans placed in nonaccrual
status were nominal in amount. At December 31, 1999, 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 that could have a material effect on the Company's
operating results, liquidity, or capital resources.
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 - Loans and Allowance For Loan Losses to the Consolidated
Financial Statements of Mercantile at Page F-27 of this Annual Report.
ALLOWANCE FOR LOAN LOSSES
In each accounting period, the allowance for loan losses is adjusted by
management to the amount management believes is necessary to maintain the
allowance for loan losses at adequate levels. Through the Bank's loan review
program, management attempts to allocated specific portions of the allowance for
loan losses based on specifically identifiable problem loans. Management's
evaluation of the allowance for loan losses 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 for loan losses is
adequate, based on the broad range of considerations listed above.
The primary risk element considered by management with respect to each
consumer 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 collateral
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 - Loans and Allowance For Loan Losses to the Consolidated Financial Statements
of Mercantile at Page F-27 of this Annual Report.
Although management believes that the allowance for loan 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 investments of Mercantile are its investment in the
common stock of the Bank and the common securities of Capital Trust. Funds
retained by Mercantile from time to time may be invested in various debt
instruments, including but not limited to obligations of or guaranteed by the
United States, general obligations of a state or political subdivision or agency
thereof, 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.
Mercantile is permitted to make unlimited 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. There
are no present plans to make any such equity investment, though the Bank may
from time-to-time consider acquiring land for future branch purposes.
Mercantile's Board of Directors may alter the investment policy without
shareholder approval.
5.
<PAGE> 7
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 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 - Investment
Securities to the Consolidated Financial Statements of Mercantile at Pages F-25
and 26 of this Annual Report.
COMPETITION
Mercantile and the Bank face strong competition for deposits, loans and
other financial services from numerous banks, savings banks, thrifts, credit
unions and other financial institutions as well as other entities which provide
financial services, including consumer finance companies, securities brokerage
firms, mortgage brokers, insurance companies, mutual funds, and other lending
sources and investment alternatives. Some of the financial institutions and
financial service organizations with which the Bank competes are not subject to
the same degree of regulation as the Bank. Many of the financial institutions
and financial service organizations aggressively compete for business in the
Bank's market area. Most of these competitors have been in business for many
years, have customer bases, deposits and lending limits that are substantially
larger than those of the Bank, and are able to offer certain services that the
Bank does not currently provide, including extensive branch networks, trust
services and international banking services. In addition, most of these entities
have greater capital resources than the Bank, which, among other things, may
allow them to price their services at levels more favorable to the customer and
to provide larger credit facilities than could the Bank. Additionally, recently
effective legislation regarding interstate branching and banking may increase
competition in the future from out-of-state banks.
SELECTED STATISTICAL INFORMATION
Management's Discussion and Analysis beginning at Page F-4 of this
Annual Report includes selected statistical information.
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 in downtown Grand Rapids, Michigan
for use as the Bank's main office and Mercantile's headquarters. This building
is of masonry construction and has approximately 11,000 square feet of usable
space with on-site parking. The lease for the Bank's office, which commenced in
1997, has an initial term of ten years and the Bank has four, five-year renewal
options.
The Bank designed and constructed a full service branch and operations
facility in Alpine Township, a suburb of Grand Rapids, that opened in July of
1999. The facility is one story, of masonry construction, and has approximately
8,000 square feet of usable space. The land and building is owned by the Bank.
The facility has multiple drive-through lanes and ample parking space.
6.
<PAGE> 8
The Bank's main office and Mercantile's headquarters are located at 216
North Division Avenue between Lyon Street and Michigan Street in downtown Grand
Rapids, Michigan. The Alpine Township branch and operations center is located at
4613 Alpine Avenue NW, Comstock Park, Michigan.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Mercantile and the Bank may be involved in various
legal proceedings that are incidental to their business. In the opinion of
management, neither Mercantile nor the Bank is a party to any current legal
proceedings that are material to their financial condition, either individually
or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name and Position Age
----------------- ---
<S> <C>
Gerald R. Johnson, Jr. 53
Chairman of the Board and Chief
Executive Officer
Michael H. Price 43
President and Chief Operating
Officer
Robert B. Kaminski 38
Senior Vice President and
Secretary
Charles E. Christmas 34
Chief Financial Officer, Treasurer,
and Compliance Officer
</TABLE>
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.
7.
<PAGE> 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of Mercantile is quoted on the Nasdaq National Market
under the symbol MBWM. Prior to July 19, 1999, Mercantile's common stock was
quoted on the OTC Bulletin Board under the same symbol. At February 18, 2000,
there were 99 record holders of Mercantile's common stock. In addition,
Mercantile estimates that there are more than 1,500 beneficial owners of its
common stock who own their shares through brokers or banks. Mercantile has not
paid dividends since its formation in 1997.
The following table shows the high and low bid prices by quarter during
the period from the date of Mercantile's initial public stock offering (October
23, 1997) through December 31, 1999. The quotations reflect bid prices as
reported by the OTC Bulletin Board through July 18, 1999, and as reported by the
Nasdaq National Market on and after July 19, 1999. The quotations do not include
retail mark-up, mark-down or commission.
<TABLE>
<CAPTION>
BID PRICES
HIGH LOW
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<S> <C> <C>
CALENDAR YEAR 1999
First Quarter.............................................................................$17.50 $13.00
Second Quarter............................................................................$16.63 $13.00
Third Quarter.............................................................................$16.00 $14.00
Fourth Quarter............................................................................$15.50 $12.25
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-17 of this
Annual Report are incorporated here by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
8.
<PAGE> 10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information presented under the caption "Information about
Directors, Nominees and Executive Officers" in the definitive Proxy Statement of
Mercantile for its April 20, 2000 Annual Meeting of Shareholders (the "Proxy
Statement"), a copy of which will be filed with the Securities and Exchange
Commission before the meeting date, is incorporated here by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information presented under the captions "Summary Compensation
Table," "Options Granted in 1999," "Aggregated Stock Option Exercises in 1999
and Year End Option Values", and "Employment Agreements", and in the last
paragraph under the caption "Board of Directors Meetings and Committees", in the
Proxy Statement 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 is incorporated here by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information listed under the caption "Certain Transactions" in the
Proxy Statement is incorporated here by reference.
9.
<PAGE> 11
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. EXHIBIT DESCRIPTION
----------- -------------------
3.1 Articles of Incorporation of Mercantile are
incorporated by reference to exhibit 3.1 of
Mercantile's Registration Statement on Form SB-2
(Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 By laws of Mercantile are incorporated by
reference to Exhibit 3.2 of Mercantile's
Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on
October 23, 1997
10.1 1997 Employee Stock Option Plan of Mercantile is
incorporated by reference to exhibit 10.1 of
Mercantile's Registration Statement on Form SB-2
(Commission File No. 333-33081) that became
effective on October 23, 1997 (management contract
or compensatory plan)
10.2 Lease Agreement between Mercantile and Division
Avenue Partners, L.L.C. dated August 16, 1997, is
incorporated by reference to exhibit 10.2 of
Mercantile's Registration Statement on Form SB-2
(Commission File No. 333-33081) that became
effective on October 23, 1997
10.3 Agreement between Fiserve Solutions, Inc. and the
Bank dated September 10, 1997, is incorporated by
reference to Exhibit 10.3 of Mercantile's
Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on
October 23, 1997
10.4 Agreement between Mercantile 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 is incorporated by
reference to Exhibit 10.3 of Mercantile's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1998 (Commission File No.
333-33081)
10.5 Employment Agreement among Gerald R. Johnson, Jr.,
Mercantile and the Bank dated December 1, 1998, is
incorporated by reference to Exhibit 10.4 of
Mercantile's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998 (Commission
File No. 333-33081) (management contract or
compensatory plan)
10.6 Employment Agreement among Michael H. Price,
Mercantile and the Bank dated December 1, 1998, is
incorporated by reference to Exhibit 10.5 of
Mercantile's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998 (Commission
File No. 333-33081) (management contract or
compensatory plan)
10.7 Mercantile Bank of West Michigan Deferred
Compensation Plan for Members of the Board of
Directors (1999) is incorporated by reference to
Exhibit 10.6 of the Registration Statement of
Mercantile and MBWM Capital Trust I on Form SB-2
(Commission Files Nos. 333-84313 and 333-84313-01)
that became effective on September 13, 1999
10.
<PAGE> 12
10.8 Subordinated Indenture dated as of September 17,
1999 between Mercantile and Wilmington Trust
Company, as Trustee, relating to 9.60% Junior
Subordinated Debentures due 2029 is incorporated by
reference to Exhibit 4.1 of the Registration
Statement of Mercantile and MBWM Capital Trust I on
Form SB-2 (Commission Files Nos. 333-84313 and
333-84313-01) that became effective on September
13, 1999
10.9 Amended and Restated Trust Agreement dated as of
September 17, 1999 among Mercantile, as depositor,
Wilmington Trust Company, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and
the Administrative Trustees is incorporated by
reference to Exhibit 4.5 of the Registration
Statement of Mercantile and MBWM Capital Trust I on
Form SB-2 (Commission Files Nos. 333-84313 and
333-84313-01) that became effective on September
13, 1999
10.10 Preferred Securities Guarantee Agreement between
Mercantile and Wilmington Trust Company dated
September 17, 1999, is incorporated by reference to
Exhibit 4.7 of the Registration Statement of
Mercantile and MBWM Capital Trust I on Form SB-2
(Commission Files Nos. 333-84313 and 333-84313-01)
that became effective on September 13, 1999
10.11 Agreement as to Expenses and Liabilities dated as
of September 17, 1999, between Mercantile and MBWM
Capital Trust I (included as Exhibit D to Exhibit
10.9)
10.12 Amended and Restated Employment Agreement dated
as of December 31, 1999, among Mercantile, the Bank
and Gerald R. Johnson, Jr., (management contract or
compensatory plan)
10.13 Amended and Restated Employment Agreement dated
as of December 31, 1999, among Mercantile, the Bank
and Michael H. Price (management contract or
compensatory plan)
21 Subsidiaries of Mercantile
23 Consent of Independent Accountants
27 Financial Data Schedule
(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.
11.
<PAGE> 13
MERCANTILE BANK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
F-1
<PAGE> 14
MERCANTILE BANK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SELECTED FINANCIAL DATA..................................................................................... F-3
MANAGEMENT'S DISCUSSION AND ANALYSIS........................................................................ F-4
REPORT OF INDEPENDENT AUDITORS.............................................................................. F-17
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS............................................................................ F-18
CONSOLIDATED STATEMENTS OF INCOME...................................................................... F-19
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME........................................................ F-20
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY............................................. F-21
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................................. F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................. F-23
</TABLE>
F-2
<PAGE> 15
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998
---- ----
(In thousands except per share data)
<S> <C> <C>
CONSOLIDATED RESULTS OF OPERATIONS:
Interest income $ 22,766 $ 10,168
Interest expense 13,330 5,629
--------- ---------
Net interest income 9,436 4,539
Provision for loan losses 1,961 2,572
Noninterest income 848 488
Noninterest expense 5,888 3,564
--------- ---------
Income (loss) before income tax expense and cumulative
effect of change in accounting principle 2,435 (1,109)
Income tax expense 292 0
--------- ---------
Income (loss) before cumulative effect of change in
accounting principle 2,143 (1,109)
Cumulative effect of change in accounting principle (42) 0
--------- ---------
Net income (loss) 2,101 (1,109)
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 368,037 $ 216,237
Cash and cash equivalents 13,650 6,456
Investment securities 41,957 24,160
Loans, net of deferred loan fees 308,006 184,745
Allowance for loan losses 4,620 2,765
Deposits 294,829 171,998
Securities sold under agreements to repurchase 26,607 17,038
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures 16,000 0
Shareholders' equity 27,968 26,701
CONSOLIDATED FINANCIAL RATIOS:
Return on average assets 0.71% (0.86%)
Return on average shareholders' equity 7.70% (6.40%)
Nonperforming loans to loans 0.00% 0.00%
Allowance for loan losses to loans 1.50% 1.50%
Tier 1 leverage capital 10.88% 13.83%
Tier 1 leverage risk-based capital 10.64% 11.79%
Total risk-based capital 13.67% 13.01%
PER SHARE DATA:
Net Income:
Basic before cumulative effect of change
in accounting principle $ 0.87 $ (0.58)
Diluted before cumulative effect of change
in accounting principle 0.86 (0.58)
Basic 0.85 (0.58)
Diluted 0.84 (0.58)
Book value at end of period 11.31 10.80
Dividends declared NA NA
</TABLE>
NA - Not Applicable
F-3
<PAGE> 16
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 ("Mercantile") and its wholly-owned subsidiaries,
Mercantile Bank of West Michigan ("Bank") and MBWM Capital Trust I ("Capital
Trust").
Mercantile was incorporated on July 15, 1997 as a bank holding company to
establish and own the Bank. In October 1997, in connection with the organization
of Mercantile and Bank, Mercantile sold 1,495,000 shares of common stock in an
underwritten, initial public offering. Mercantile funded the capital of the Bank
and paid certain expenses from the net proceeds of the public offering.
The Bank, after receiving all necessary regulatory approvals, began operations
on December 15, 1997. The Bank has a strong commitment to community banking and
offers a wide range of financial products and services, primarily to small- to
medium-sized businesses, as well as individuals. The Bank's lending strategy
focuses on commercial lending, and, to a lesser extent, residential mortgage and
consumer lending. The Bank also offers a broad array of deposit products,
including checking, savings, money market, and certificates of deposit, as well
as security repurchase agreements. The Bank's primary market area is the Kent
and Ottawa County areas of West Michigan, which includes the City of Grand
Rapids, the second largest city in the State of Michigan.
Capital Trust, a business trust subsidiary of Mercantile, was incorporated in
1999 for the purpose of issuing 1.6 million shares of 9.60% Cumulative Preferred
Securities ("trust preferred securities") at $10.00 per trust preferred
security. The proceeds from the September, 1999 sale were used by Capital Trust
to purchase an equivalent amount of subordinated debentures of Mercantile.
Mercantile, in turn, used a majority of the proceeds from the issuance of the
subordinated debentures for a capital injection to the Bank.
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
Mercantile and the 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. Mercantile 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
Mercantile experienced significant asset growth during 1999. Assets increased
from $216.2 million on December 31, 1998 to $368.0 million on December 31, 1999.
This represents an increase in total assets of $151.8 million, or 70.2%. The
increase in total assets was primarily comprised of a $121.4 million increase in
net loans, a $17.8 million increase in investment securities and a $6.5 million
increase in Federal funds sold. The increase in assets was primarily funded by a
$122.8 million increase in deposits, the issuance of $16 million in trust
preferred securities, a $9.6 million increase in securities sold under
agreements to repurchase (repurchase agreements), and an increase of $1.3
million in shareholders' equity. While Mercantile expects continued asset growth
above the banking industry average, it is anticipated that the growth will occur
at a slower rate.
F-4
<PAGE> 17
EARNING ASSETS
Average earning assets equaled over 96% of average total assets during 1999.
While Mercantile experienced significant asset growth during 1999, the asset
structure remained relatively constant. The loan portfolio continued to comprise
a majority of earning assets, followed by investments securities, federal funds
sold, and short term investments.
Mercantile's loan portfolio, which equaled 86% of average earnings assets during
1999, is primarily comprised of commercial loans. Averaging 91% of average loans
and growing by $109.2 million during 1999, the commercial loan portfolio
represents loans to business interests generally located within Mercantile's
market area. Approximately 70% of the commercial loan portfolio is 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
Mercantile's strategy of focusing a substantial amount of its efforts on
commercial banking. Business lending is an area of expertise for all of
Mercantile's senior management team and commercial lending staff. Residential
mortgage and consumer lending, while averaging 9% of average loans during 1999,
also experienced excellent growth; however, Mercantile'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 loan portfolio
category.
The following table presents the maturity of total loans outstanding, other than
residential mortgages and personal loans, as of December 31, 1999, according to
scheduled repayments of principal on fixed rate loans and earliest repricing
opportunity on variable rate loans.
<TABLE>
<CAPTION>
0-1 1-5 After 5
Year Years Years Total
---- ----- ----- -----
<S> <C> <C> <C> <C>
Construction and land development
- fixed rate $ 4,122,045 $ 14,534,391 $ 6,011,260 $ 24,667,696
Construction and land development
- variable rate 12,557,151 12,557,151
Real estate - secured by nonfarm
nonresidential properties - fixed rate 1,345,626 124,985,120 4,527,320 130,858,066
Real estate - secured by nonfarm
nonresidential properties - variable rate 29,166,787 29,166,787
Commercial - fixed rate 1,023,358 34,858,640 851,851 36,733,849
Commercial - variable rate 46,655,617 104,261 46,759,878
--------------- ---------------- ------------- ----------------
$ 94,870,584 $ 174,482,412 $ 11,390,431 $ 280,743,427
=============== ================ ============= ================
</TABLE>
Mercantile's credit policies establish guidelines to manage credit risk and
asset quality. These guidelines include loan review and early identification of
problem loans to 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, Mercantile must
rely on estimates, appraisals and evaluations of loans and the possibility that
changes in these could occur quickly because of changing economic conditions.
Identified problem loans, which exhibit characteristics (financial or otherwise)
that could cause the loans to become nonperforming or require restructuring in
the future, are included on the internal "Watch List." Senior management reviews
this list regularly and adjusts for changing conditions.
Reflective of Mercantile's strong credit culture, past due loans and net loan
charge-offs are very low and well below banking industry averages. As of
December 31, 1999, past due loans equaled only 0.03% of total loans, with no
loans past due more than 90 days or in nonaccrual status. Net loan charge-offs
during 1999 totaled only 0.04% of average total loans.
F-5
<PAGE> 18
In each accounting period, the allowance for loan and lease losses (allowance)
is adjusted by management to the amount believed necessary to maintain the
allowance at adequate levels. Through its credit department, management attempts
to allocate specific portions of the allowance 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 following table illustrates the breakdown of the allowance balance to loan
type (dollars in thousands).
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8
------- -------
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 $ 4,306 93.2% $ 2,612 84.3%
Residential real estate 239 5.2 114 14.6
Installment loans to individuals 75 1.6 39 1.1
Unallocated 0 N/A 0 N/A
--------- ------ --------- ------
$ 4,620 100.0% $ 2,765 100.0%
========= ====== ========= ======
</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 is adequate to sustain losses as
they arise, there can be no assurance that the Bank will not sustain losses as
they arise, and 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.
The investment securities portfolio also experienced significant growth during
1999, increasing from $24.2 million on December 31, 1998 to $42.0 million at
December 31, 1999. Mercantile maintains the portfolio at levels to provide
adequate pledging for the repurchase agreement program and secondary liquidity
for Mercantile's daily operations. In addition, the portfolio serves a primary
interest rate risk management function. During 1999, the portfolio equaled 11%
of average earning assets. At December 31, 1999, the portfolio was comprised of
high credit quality U.S. Government Agency issued bonds (33%), U.S. Government
Agency issued and guaranteed mortgage-backed securities (46%), municipal general
obligation and revenue bonds (19%) and Federal Home Loan Bank stock (2%).
All securities with the exception of tax-exempt municipal bonds 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 (SFAS No. 115). 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 fair value of
securities designated as available for sale at December 31, 1999 and 1998 was
$34.9 million and $24.2 million, respectively. The net unrealized gain/(loss)
recorded at December 31, 1999 and 1998, was $(801,568) and $31,836,
respectively. All tax-exempt municipal bonds have been designated as "held to
maturity" as defined in SFAS No. 115, and are stated at amortized cost. At
December 31, 1999 held to maturity securities had an amortized cost of $7.1
million and a fair value of $7.0 million. There were no securities designated as
held to maturity at December 31, 1998.
F-6
<PAGE> 19
Federal funds sold, consisting of excess funds sold overnight to correspondent
banks, are used to manage daily liquidity needs and interest rate sensitivity.
During 1999, the average balance of these funds equaled 3% 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
Mercantile's major source of funds is from deposits. Total deposits increased
from $172.0 million at December 31, 1998, to $294.8 million on December 31,
1999. Although Mercantile has experienced significant success in obtaining
deposits from customers located within the market area, the substantial asset
growth has necessitated the acquisition of funds from depositors outside of the
market area. While Mercantile's business plan anticipated the reliance on
out-of-area deposits in the early stages of the Bank's development, Mercantile's
longer term strategy for funding the Bank is to increase local deposits and
lower its reliance on out-of-area deposits. However, although local deposits
have and are expected to increase as new business, governmental and consumer
deposit relationships are established and existing customers increase their
deposit accounts, the high reliance on out-of-area deposits will likely remain.
Mercantile experienced excellent growth in its non-maturing deposit accounts
during 1999. Noninterest-bearing checking accounts, comprised primarily of
business loan customers, grew $5.2 million and equaled 7% of average funding
sources during 1999. Interest-bearing checking accounts increased $3.2 million,
savings accounts increased $10.9 million and money market accounts increased
$1.8 million and equaled 3%, 14%, and 2% of average funding sources during 1999,
respectively. Business loan customers also comprise the majority of
interest-bearing checking, savings and money market 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 savings and money market accounts are limited.
Mercantile anticipates continued growth of its non-maturing deposits as
additional business loans are extended.
Certificates of deposit increased by $101.6 million and represented 65% of
average funding sources during 1999. At December 31, 1999, this deposit type
totaled $218.9 million. Of this amount 13% of the balances were owned by
customers from within the market area, primarily individuals and local
government municipalities. The remaining certificates of deposit were primarily
obtained from depositors outside of the market area and placed by deposit
brokers for a fee, but also include certificates of deposit obtained from the
deposit owners directly. Out-of-area certificates of deposit are utilized to
support the asset growth of Mercantile, and are generally a lower cost source of
funds when compared to the interest rates that would have to be offered in the
local market to generate a commensurate level of funds. In addition, the
overhead costs associated with the out-of-area certificates of deposit are
considerably less than the overhead costs that would be incurred to administer a
similar level of local deposits. Out-of-area certificates of deposit increased
$94.2 million and equaled 50% of average funding sources during 1999.
Repurchase agreements increased $9.7 million and equaled 7% of average funding
sources during 1999. Part of Mercantile's sweep account program, collected funds
from certain business noninterest-bearing checking accounts are invested into
over-night interest-bearing repurchase agreements. The securities
collateralizing the repurchase agreement program are recorded as assets of
Mercantile. Although not considered deposits, and therefore not afforded Federal
Deposit Insurance Corporation insurance, funds generated by this product enable
Mercantile to provide the equivalent of an interest-bearing checking account to
incorporated businesses that are prohibited by banking regulations from owning
such an account. The sweep account program is designed for businesses that
maintain relatively large checking account balances.
F-7
<PAGE> 20
In September 1999, Mercantile, through its wholly-owned subsidiary Capital
Trust, issued 1.6 million shares of trust preferred securities at $10.00 per
security. Net proceeds from the sale, after the payment of issuance costs which
included brokerage, accounting and attorney fees, were $15.0 million.
Substantially all of the net proceeds were ultimately contributed to the Bank to
provide support for asset growth, fund investments in loans and securities, and
for general corporate purposes. Subject to certain limitations the trust
preferred securities are considered a component of capital for purposes of
calculating regulatory capital ratios. At December 31, 1999, $9.6 million of the
$16.0 million was considered Tier 1 capital of Mercantile, with the remaining
included as Tier 2 capital. Under current Federal Reserve regulations the amount
of trust preferred securities that can be included in Tier 1 capital of
Mercantile is limited to 25% of total Tier 1 capital. The portion includable as
Tier 1 capital is expected to gradually increase in future periods as
shareholders' equity increases from anticipated net income from operations.
Shareholders' equity increased $1.3 million and equaled 10% of average funding
sources during 1999. The increase is directly attributable to net income from
operations, which totaled $2.1 million. Shareholders' equity was negatively
impacted by an $801,568 mark-to-market adjustment for available for sale
securities as defined in SFAS No. 115. This adjustment is due solely to the
increase in the interest rate environment during 1999.
RESULTS OF OPERATIONS
SUMMARY
Mercantile recorded a net operating profit during 1999, only its second full
year of operations. Net operating income was $2.1 million, or $0.85 per basic
share ($0.84 diluted). This earnings performance compares very favorably to the
net operating loss of $1.1 million, or $0.58 per basic and diluted share,
recorded in 1998. The 1999 net operating income includes a one-time charge of
$42,210 ($0.02 per share), reflecting a change in accounting for organization
costs. In accordance with previous accounting guidelines, these costs were being
amortized over a five-year period; however, as required by AICPA Statement of
Position 98-5, the unamortized balance was written off effective January 1,
1999, and is reflected in the Consolidated Financial Statements as a change in
accounting principle. The earnings improvement during 1999 over that of 1998 is
primarily attributable to increased net interest income and improved operating
efficiencies resulting from asset growth, strong credit culture, and controlled
overhead expenses. As in 1998, significant loan growth necessitated large
provisions to the allowance during 1999, substantially impacting Mercantile's
earnings performance. Continued loan growth exceeding the banking average is
anticipated.
Although Mercantile's overall earnings performance is expected to improve, a
change in federal income tax status will have a substantial impact when
comparing the earnings performance recorded in 1999 with future reporting
periods. Federal income tax expense for 1999 totaled $292,000, or 12% of pre-tax
net operating income. While Mercantile is subject to the statutory federal
income tax rate of 34%, use of tax loss carryforwards generated during 1997 and
1998 enabled Mercantile to reduce its federal income tax expense during 1999.
The entire tax loss carryforward was utilized during 1999; therefore,
Mercantile's federal income tax expense will be at the statutory tax rate in
future reporting periods.
The following table shows some of the key performance and equity ratios for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Return on average total assets 0.7% (.9)%
Return on average equity 7.7 (6.4)
Dividend payout ratio N/A N/A
Average equity to average assets 9.2 13.4
</TABLE>
F-8
<PAGE> 21
NET INTEREST INCOME
Net interest income, the difference between revenue generated from earning
assets and the interest cost of funding those assets, is Mercantile's primary
source of earnings. Interest income and interest expense totaled $22.7 million
and $13.3 million during 1999, respectively, providing for net interest income
of $9.4 million. This performance compares very favorably to that of 1998 when
interest income and interest expense were $10.1 million and $5.6 million,
respectively, providing for net interest income of $4.5 million. 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 interest margin. The net
interest margin declined from 3.61% in 1998 to 3.30% in 1999. Although the
weighted average cost of interest-bearing liabilities declined at a faster rate
than the decline of the yield on interest-earning assets during 1999, the net
interest margin declined primarily due to a lower level of interest-free demand
deposits and shareholders' equity as a percent of average earning assets, as
well as the issuance of trust preferred securities.
The following table depicts the average balance, interest earned and paid, and
weighted average rate of Mercantile's assets, liabilities and shareholders'
equity during 1999 and 1998. The table also depicts the dollar amount of change
in interest income and interest expense of interest-earning assets and
interest-bearing liabilities, segregated between change due to volume and change
due to rate. For tax-exempt securities interest income and yield have been
computed on a tax equivalent basis using a marginal tax rate of 34%.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------1 9 9 9--------------- --------------------1 9 9 8---------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Taxable securities $ 30,124,215 $ 1,868,779 6.20% $ 15,375,036 $ 880,639 5.73%
Tax-exempt securities 1,250,377 84,286 6.74 0 0 0.00
-------------- ------------ -------------- -------------
Total securities 31,374,592 1,953,065 6.22 15,375,036 880,639 5.73
Loans 246,921,414 20,410,153 8.27 105,075,354 9,007,668 8.57
Short term investments 551,221 25,822 4.68 413,469 23,486 5.68
Federal funds sold 8,099,452 405,659 5.01 4,820,456 256,423 5.32
-------------- ------------ -------------- -------------
Total earning assets 286,946,679 22,794,699 7.94 125,684,315 10,168,216 8.09
Less allowance for loan
losses (3,681,964) (1,590,597)
Cash and due from banks 7,095,802 4,228,926
Other non-earning assets 6,099,279 2,540,475
-------------- --------------
Total assets $ 296,459,796 $ 130,863,119
============== ==============
Interest-bearing demand
deposits $ 8,575,266 $ 351,041 4.09% $ 4,025,099 $ 170,594 4.24%
Savings deposits 38,885,670 1,870,854 4.81 17,493,517 903,881 5.17
Money market accounts 4,410,553 189,054 4.29 1,170,457 58,321 4.98
Time deposits 173,158,174 9,628,958 5.56 68,243,140 4,007,992 5.87
-------------- ------------ -------------- -------------
Total interest-bearing
deposits 225,029,663 12,039,907 5.35 90,932,213 5,140,788 5.65
Short term borrowings 20,229,314 835,297 4.13 10,376,227 488,430 4.71
Long term borrowings 4,654,379 455,216 9.78 0 0 0.00
-------------- ------------ -------------- -------------
Total interest-bearing
liabilities 249,913,356 13,330,420 5.33 101,308,440 5,629,218 5.56
------------ -------------
Demand deposits 17,812,031 10,782,250
Other liabilities 1,446,423 342,510
-------------- --------------
Total liabilities 269,171,810 112,433,200
Average equity 27,287,986 18,429,919
-------------- --------------
Total liabilities and
equity $ 296,459,796 $ 130,863,119
============== ==============
Net interest income $ 9,464,279 $ 4,538,998
============ =============
Rate spread 2.61 2.53
Net interest margin 3.30 3.61
</TABLE>
F-9
<PAGE> 22
<TABLE>
<CAPTION>
Year ended December 31,
1999 over 1998
Total Volume Rate
----- ------ ----
Increase (decrease) in interest income
<S> <C> <C> <C>
Taxable securities $ 988,140 $ 909,383 $ 78,757
Tax exempt securities 84,286 84,286 0
Loans 11,402,485 11,736,016 (333,531)
Short term investments 2,336 6,926 (4,590)
Federal funds sold 149,236 165,035 (15,799)
------------ ------------ ------------
Net change in tax-equivalent income 12,626,483 12,901,646 (275,163)
Increase (decrease) in interest expense
Interest-bearing demand deposits 180,447 186,460 (6,013)
Savings deposits 966,973 1,033,269 (66,296)
Money market accounts 130,733 139,968 (9,235)
Time deposits 5,620,966 5,845,057 (224,091)
Short term borrowings 346,867 413,370 (66,503)
Long term borrowings 455,216 455,216 0
------------ ------------ ------------
Net change in interest expense 7,701,202 8,073,340 (372,138)
------------ ------------ ------------
Net change in tax-equivalent net interest income $ 4,925,281 $ 4,828,306 $ 96,975
============ ============ ============
</TABLE>
Interest income is primarily generated from the loan portfolio, and to a lesser
degree from investment securities, Federal funds sold and short term
investments. Interest income increased $12.6 million during 1999 from that
earned in 1998, totaling $22.8 million in 1999 compared to $10.2 million in the
previous year. The yield on average earning assets declined from the 8.09%
recorded in 1998 to 7.94% in 1999.
The growth in interest income is primarily attributable to an increase in
earning assets. During 1999 earning assets averaged $286.9 million, a level
substantially higher than the average earning assets of $125.7 million during
1998. Growth in average total loans, totaling $141.8 million, comprised 88% of
the increase in average earnings assets between 1999 and 1998. The loan growth
during 1999 equated to an increase in interest income of $11.4 million, although
the increase in interest income was partially offset by a decline in the loan
portfolio yield from 8.57% in 1998 to 8.27% in 1999, or $0.3 million. The
decline in the loan portfolio yield is primarily due to the overall decline of
market interest rates during the latter part of 1998 and early part of 1999.
Growth in the investment securities portfolio and a larger Federal funds sold
position also added to the increase in interest income during 1999 over that of
1998. Average investment securities increased by $16.0 million in 1999,
increasing from $15.4 million in 1998 to $31.4 million in 1999. This growth
equated to an increase in interest income of $1.1 million. A higher investment
securities portfolio yield during 1999 also increased interest income. Average
Federal funds sold increased from $4.8 million in 1998 to $8.1 million in 1999
that, after accounting for a decline in the yield, added approximately $150,000
to interest income.
Interest expense is primarily generated from interest-bearing deposits, and to a
lesser degree repurchase agreements and trust preferred securities. Interest
expense increased $7.7 million during 1999 from that paid in 1998, totaling
$13.3 million in 1999 compared to $5.6 million in the previous year. The cost of
average interest-bearing liabilities declined from the 5.56% recorded in 1998 to
5.33% in 1999.
The growth in interest expense is primarily attributable to an increase in
interest-bearing liabilities. During 1999 interest-bearing liabilities averaged
$249.9 million, a level substantially higher than the average interest-bearing
liabilities of $101.3 million during 1998. Growth in average certificates of
deposit, totaling $104.9 million, comprised 71% of the increase in average
interest-bearing liabilities between 1999 and 1998. The certificate of deposit
growth during 1999 equated to an increase in interest expense of $5.6 million,
although the increase in interest expense was partially offset by a decline in
the average rate from 5.87% in 1998 to 5.56% in 1999, or $0.2 million. The
decline in the average rate of certificates of deposit is primarily due to the
aforementioned overall decline of market interest rates during the latter part
of 1998 and early part of 1999.
F-10
<PAGE> 23
Growth in savings deposits and repurchase agreements also added to the increase
in interest expense during 1999 over that of 1998. Average savings deposits
increased significantly during 1999, growing from $17.5 million in 1998 to $38.9
million in 1999. The growth equated to an increase in interest expense of $1.0
million, although the increase in interest expense was partially offset by a
decline in the average rate from 5.17% in 1998 to 4.81% in 1999, or
approximately $66,000. Average repurchase agreements increased from $10.4
million in 1998 to $20.2 million in 1999 that, after accounting for a decline in
the average rate, added approximately $300,000 to interest expense. Increases in
average interest-bearing checking accounts and money market accounts of $4.6
million and $3.2 million, respectively, also partially offset with a decline in
the average rate, added approximately $300,000 in aggregate to interest expense.
The September 1999 issuance of $16 million trust preferred securities had a
sizeable impact on interest expense. With an average annualized balance of $4.7
million, trust preferred securities added approximately $500,000 to interest
expense in just the three and one-half months outstanding. At an effective rate
of 9.78% when taking into account the amortization of brokerage fees, it is
anticipated that the trust preferred securities will have a much larger impact
on Mercantile's earnings performance in future periods, although the effect is
expected to decline over time as assets increase and the trust preferred
securities decline as a percent of average earning assets.
PROVISION FOR LOAN LOSSES
Reflecting continued significant loan growth the provision for loan losses
totaled approximately $2.0 million during 1999, compared to the $2.6 million
expensed during 1998. The allowance for loan losses as a percentage of total
loans outstanding as of December 31, 1999 was 1.5%, which also represents the
average ratio for 1999 and 1998. Net loan charge-offs during 1999 approximated
$106,000, or only 0.04% of average total loans. There were no loan charge-offs
during 1998. Mercantile maintains the allowance for loan losses at a level
management feels is adequate to absorb losses inherent in the loan portfolio.
The evaluation is based upon a continuous review of Mercantile'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.
NONINTEREST INCOME
Other income totaled $848,000 in 1999, a significant increase over the $488,000
earned in 1998. Deposit and repurchase agreement service charges in 1999 totaled
$202,000, an increase of approximately $120,000 from the amount earned in 1998.
The increase is primarily due to the growth in the number of deposit accounts.
Reflecting additional letter of credit issuances, letter of credit commitment
fees increased to $268,000 in 1999, an increase of approximately $109,000 from
the fees earned in 1998. Credit card and debit card interchange income,
reflecting increased issuance and usage, increased $69,000 during 1999, totaling
$98,000 for the year. Fees earned on referring residential mortgage loan
applicants to various third parties totaled $208,000 in 1999, a level very
similar to the $210,000 earned in 1998.
NONINTEREST EXPENSE
Noninterest expense during 1999 totaled $5.9 million, a significant increase
over the $3.6 million expensed in 1998. An increase in all major overhead cost
categories, including salaries and benefits, occupancy, and furniture and
equipment, was recorded. The increases primarily result from the hiring of
additional staff and the construction of a new combined branch and operations
center. All other noninterest costs also increased, reflecting additional
expenses required to administer the significantly increased loan and deposit
base.
F-11
<PAGE> 24
Monitoring and controlling overhead expenses, while at the same time providing
high quality of service to customers, is of utmost importance to Mercantile.
While the dollar volume of noninterest costs have increased, as a percent of
average assets the level has substantially declined as a result of Mercantile's
growth and realized operating efficiencies. During 1999 noninterest costs were
2.1% of average assets, a significant decline from the 2.8% level in 1998. The
efficiency ratio, a banking industry standardized calculation that attempts to
reflect the utilization of overhead costs, also declined significantly during
1999. Computed by dividing noninterest expenses by net interest income plus
noninterest income, the efficiency ratio was 57.3% in 1999. This level compares
very favorably to 70.9% recorded in 1998, and reflects the improved efficiencies
resulting from increased asset growth and controlled costs. In addition,
Mercantile's lending philosophy of concentrating on commercial lending results
in higher average loan balances compared to residential mortgage or consumer
loans, which provides for a greater volume of loans with fewer people, thereby
improving its efficiency. This point is demonstrated by Mercantile's total
assets per employee ratio, which as of December 31, 1999 was approximately $6.3
million. This level compares very favorably to the $3.4 million level of banks
of similar asset size.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $292,000 in 1999, or 12% of pre-tax net operating
income. Although Mercantile is subject to the statutory federal income tax rate
of 34%, use of tax loss carryforwards generated during 1997 and 1998 resulting
from recorded net operating losses, enabled Mercantile to reduce its federal
income tax expense during 1999. The entire tax loss carryforward was utilized
during 1999; therefore, Mercantile's federal income tax expense will be at the
statutory tax rate in future reporting periods. Because of the aforementioned
net loss from operations recorded by Mercantile in 1998, no provisions to
federal income tax expense were necessary during 1998.
CAPITAL RESOURCES
Shareholders' equity is a noninterest-bearing source of funds that provides
support for asset growth. Shareholders' equity was $28.0 million and $26.7
million at December 31, 1999 and 1998, respectively. The increase during 1999 is
directly attributable to net income from operations, which totaled $2.1 million.
Shareholders' equity was negatively impacted by a $0.8 million mark-to-market
adjustment for available for sale securities as defined in SFAS No. 115. The
adjustment is due solely to the increase in the interest rate environment in
1999.
In September 1999 Mercantile, through its wholly-owned business trust subsidiary
Capital Trust, issued 1.6 million trust preferred securities at $10.00 per
security. Net proceeds from the sale, after the payment of underwriting costs,
were $15.0 million. Substantially all of the net proceeds were ultimately
contributed to the Bank and were used to support anticipated growth in assets,
fund investments in loans and securities, and for general corporate purposes.
Subject to certain limitations the trust preferred securities are considered a
component of capital for purposes of calculating regulatory capital ratios. At
December 31, 1999, $9.6 million of the $16.0 million was considered Tier 1
capital of Mercantile, with the remaining amount included as Tier 2 capital. The
amount includable as Tier 1 capital is expected to gradually increase in future
periods as shareholders' equity increases from anticipated net income from
operations.
Mercantile and the Bank are subject to regulatory capital requirements
administered by the State of Michigan and 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 Mercantile and the Bank have been categorized as "Well
Capitalized," the highest classification contained within the banking
regulations. The capital ratios of Mercantile and the Bank as of December 31,
1999 and 1998 are disclosed under Note 15 of the Notes to Consolidated Financial
Statements.
The ability of Mercantile to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. No cash or stock dividends were paid in 1999 or 1998.
F-12
<PAGE> 25
LIQUIDITY
Liquidity is measured by Mercantile's ability to raise funds through deposits,
borrowed funds, capital or cash flow from the repayment of loans and investment
securities. These funds are used to meet deposit withdrawals, maintain reserve
requirements, fund loans and operate Mercantile. Liquidity is primarily achieved
through the growth of deposits (both local and out-of-area) and liquid assets
such as securities available for sale, matured securities, and Federal funds
sold. Asset and liability management is the process of managing the balance
sheet to achieve a mix of earning assets and liabilities that maximizes
profitability, while providing adequate liquidity.
Mercantile's liquidity strategy is to fund loan growth with deposits and
repurchase agreements and to maintain an adequate level of short- and
medium-term investments to meet typical daily loan and deposit activity.
Although deposit and repurchase agreement growth from depositors located in the
market area increased by $28.6 million during 1999, the growth was not
sufficient to meet the substantial loan growth of $123.3 million and provide
monies for additional investing activities. To assist in providing the
additional needed funds Mercantile regularly obtained certificates of deposit
from customers outside of the market area and placed by deposit brokers for a
fee, but also included certificates of deposit obtained from the deposit owners
directly. These funds are generally a lower cost source of funds when compared
to the interest rates that would have to be offered in the local market to
generate a commensurate level of funds. In addition, the overhead costs
associated with the out-of-area certificates of deposit are considerably less
than the overhead costs that would be incurred to administer a similar level of
local deposits. As of December 31, 1999, out-of-area deposits totaled
approximately $191.5 million, or 59.6% of combined deposits and repurchase
agreements, an increase from the $97.3 million, or 51.5% of combined deposits
and repurchase agreements, as of December 31, 1998. 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.
Mercantile has the ability to borrow money on a daily basis through
correspondent banks via established federal funds purchased lines; however, this
is viewed as only a secondary and temporary source of funds. The federal funds
purchased lines were not utilized at any time during 1999. During 1999,
Mercantile's federal funds sold position averaged $8.1 million. In addition, the
Bank joined the Federal Home Loan Bank of Indianapolis (FHLBI) during 1999,
providing access to the FHLBI's borrowing programs. Based on ownership of FHLBI
stock and available collateral at December 31, 1999, the Bank could borrow up to
$15.7 million. The Bank has yet to use its established borrowing line at the
FHLBI.
In addition to normal loan funding and deposit flow, Mercantile also needs to
maintain liquidity to meet the demands of certain unfunded loan commitments and
standby letters of credit. As of December 31, 1999, Mercantile had a total of
$126.5 million in unfunded loan commitments and $29.0 million in unfunded
standby letters of credit. Of the total unfunded loan commitments, $100.1
million were commitments available as lines of credit to be drawn at any time as
customers' cash needs vary, and $26.4 million were for loan commitments
scheduled to close and become funded within the next three months. Mercantile
monitors fluctuations in loan balances and commitment levels, and includes such
data in its overall liquidity management.
F-13
<PAGE> 26
MARKET RISK ANALYSIS
Mercantile's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. All of Mercantile's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. Mercantile has only limited
agricultural-related loan assets and therefore has no significant exposure to
changes in commodity prices. Any 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 Mercantile's financial
condition to adverse movements in interest rates. Mercantile derives its income
primarily from the excess of interest collected on its interest-earning assets
over the interest paid on its interest-bearing liabilities. The rates of
interest Mercantile earns on its assets and owes on its liabilities generally
are established contractually for a period of time. Since market interest rates
change over time, Mercantile is exposed to lower profitability if 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 Mercantile's earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to Mercantile's safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. Mercantile's interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information systems and
internal controls are in place to maintain interest rate risk at prudent levels
with consistency and continuity. In evaluating the quantitative level of
interest rate risk Mercantile assesses the existing and potential future effects
of changes in interest rates on its financial condition, including capital
adequacy, earnings, liquidity and asset quality.
F-14
<PAGE> 27
There are two interest rate risk measurement techniques used by Mercantile. The
first, which is commonly referred to as GAP analysis, measures the difference
between the dollar amounts of interest-sensitive assets and liabilities that
will be refinanced or repriced during a given time period. A significant
repricing gap could result in a negative impact to the net interest margin
during periods of changing market interest rates. The following table depicts
Mercantile's GAP position as of December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------ ------ ----- ----- -----
Assets:
<S> <C> <C> <C> <C> <C>
Commercial loans $ 89,553 $ 5,318 $ 174,482 $ 11,390 $ 280,743
Residential real estate loans 5,762 1,224 10,703 4,846 22,535
Consumer loans 1,411 28 3,046 243 4,728
Investment securities (1) 1,073 19,648 21,236 41,957
Federal funds sold 6,500 6,500
Short term investments 580 580
Allowance for loan losses (4,620) (4,620)
Other assets 15,614 15,614
----------- ----------- ----------- ----------- -----------
Total Assets 104,879 6,570 207,879 48,709 368,037
Liabilities:
Interest-bearing checking 11,040 11,040
Savings 39,737 39,737
Money market accounts 5,605 5,605
Time deposits < $100,000 30,382 38,785 7,703 76,870
Time deposits $100,000 and over 48,762 85,757 7,544 142,063
Short term borrowings 26,607 26,607
Long term borrowings 14 16,000 16,014
Noninterest-bearing checking 19,513 19,513
Other liabilities 2,620 2,620
----------- ----------- ----------- ----------- -----------
Total Liabilities 162,147 124,542 15,247 38,133 340,069
Shareholders' Equity 27,968 27,968
----------- ----------- ----------- ----------- -----------
Total Sources of Funds 162,147 124,542 15,247 66,101 368,037
----------- ----------- ----------- ----------- -----------
Net asset (liability) GAP $ (57,268) $ (117,972) $ 192,632 $ (17,392)
=========== =========== =========== ===========
Cumulative GAP $ (57,268) $ (175,240) $ 17,392
=========== =========== ===========
Percent of cumulative GAP to
total assets (16)% (48)% 5%
=========== =========== ===========
</TABLE>
(1) Mortgage-backed securities are categorized by expected maturities based
upon prepayment trends as of December 31, 1999.
The second interest rate risk measurement used is commonly referred to as net
interest income simulation analysis. Mercantile believes that this methodology
provides a more accurate measurement of interest rate risk than the GAP
analysis, and therefore, serves as the primary interest rate risk measurement
technique used by Mercantile. The simulation model assesses the direction and
magnitude of variations in net interest income resulting from potential changes
in market interest rates. Key assumptions in the model include prepayment speeds
on various loan and investment assets; cash flows and maturities of
interest-sensitive assets and liabilities; and changes in market conditions
impacting loan and deposit volume and pricing. These assumptions are inherently
uncertain, subject to fluctuation and revision in a dynamic environment;
therefore, the model cannot precisely estimate net interest income or exactly
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions and
Mercantile's strategies, among other factors.
F-15
<PAGE> 28
Mercantile conducted multiple simulations as of December 31, 1999, 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 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 $241,884 2.4%
Interest rates down 100 basis points 31,095 0.3
No change in interest rates (177,112) (1.8)
Interest rates up 100 basis points (255,060) (2.6)
Interest rates up 200 basis points (331,765) (3.4)
</TABLE>
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of other variables, including: the growth,
composition and absolute levels of loans, deposits, and other earning assets and
interest-bearing liabilities; economic and competitive conditions; potential
changes in lending, investing, and deposit gathering strategies; client
preferences; and other factors.
YEAR 2000
The year 2000 issue that confronted Mercantile and its vendors and customers
centered on the potential inability of computer systems and embedded technology
to properly recognize dates at the end of and beyond the year 1999. In early
1998 Mercantile established a year 2000 working group consisting of senior
officers and other key employees. In accordance with bank regulatory guidelines,
throughout 1998 and 1999 this group developed and implemented a comprehensive
plan to address the potential impact of the year 2000 problem on Mercantile's
information technology and non-information technology systems.
Mercantile completed an inventory, assessment and planning phases for its
mission-critical information technology and non-information technology systems,
which posed risks to Mercantile's ability to process data for its loans,
deposits and general ledger, thereby impacting revenues and operating results.
Recognizing that its ability to be year 2000 compliant was also dependent upon
the year 2000 efforts of its vendors, Mercantile had requested and received year
2000 readiness information from all significant vendors. In addition, Mercantile
utilized letters and questionnaires to assess material loan customers'
readiness, and followed-up with phone calls or additional letters when deemed
necessary. Finally, the year 2000 working group developed and tested contingency
plans to address alternative courses of action in the event that
mission-critical systems did not function properly. The total costs associated
with Mercantile's year 2000 compliance, primarily personnel expenses, were
estimated to aggregate less than $75,000 for 1998 and 1999.
The arrival of year 2000 appears to have caused no major computer-related
problems for Mercantile or any of its vendors or customers. All of Mercantile's
information technology and non-information technology systems are working
properly. Management is not aware of any vendors or customers that have
experienced computer-related problems or concerns as the result of the year 2000
problem that have materially and adversely affected Mercantile.
F-16
<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, 1999 and 1998 and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of Mercantile'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, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
As disclosed in Note 1, the Corporation changed its method of accounting for
start-up costs in 1999 to comply with new accounting guidance.
/s/ Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 20, 2000
F-17
<PAGE> 30
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,570,631 $ 5,940,713
Short term investments 579,725 515,283
Federal funds sold 6,500,000 0
--------------- --------------
Total cash and cash equivalents 13,650,356 6,455,996
Securities available for sale 34,115,303 24,160,247
Securities held to maturity (fair value of $6,982,329
at December 31, 1999) 7,056,492 0
Federal Home Loan Bank stock 784,900 0
Total loans 308,006,476 184,744,602
Allowance for loan losses (4,620,469) (2,765,100)
---------------- --------------
Total loans, net 303,386,007 181,979,502
Premises and equipment - net 3,461,187 1,857,805
Organizational costs - net 0 64,210
Accrued interest receivable 1,842,874 1,147,832
Other assets 3,739,969 571,265
--------------- --------------
Total assets $ 368,037,088 $ 216,236,857
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 19,513,231 $ 14,319,290
Interest-bearing 275,315,741 157,678,729
--------------- --------------
Total 294,828,972 171,998,019
Securities sold under agreements to repurchase 26,607,289 17,037,601
Other borrowed money 13,755 0
Accrued expenses and other liabilities 2,619,203 500,721
--------------- --------------
Total liabilities 324,069,219 189,536,341
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures 16,000,000 0
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, 1999 and 1998 28,181,798 28,181,798
Retained earnings (deficit) 587,639 (1,513,118)
Accumulated other comprehensive income (801,568) 31,836
--------------- --------------
Total shareholders' equity 27,967,869 26,700,516
--------------- --------------
Total liabilities and shareholders' equity $ 368,037,088 $ 216,236,857
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 31
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest income
Loans, including fees $ 20,410,153 $ 9,007,668
Investment securities 1,925,065 880,639
Federal funds sold 405,659 256,422
Short term investments 25,822 23,487
-------------- ---------------
Total interest income 22,766,699 10,168,216
Interest expense
Deposits 12,039,907 5,140,788
Short term borrowings 835,297 488,430
Long term borrowings 455,216 0
-------------- ---------------
Total interest expense 13,330,420 5,629,218
-------------- ---------------
NET INTEREST INCOME 9,436,279 4,538,998
Provision for loan losses 1,960,900 2,571,800
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,475,379 1,967,198
Noninterest income
Service charges on accounts 201,796 82,170
Letter of credit fees 267,753 159,064
Mortgage loan referral fees 208,042 209,667
Gain on sale of loans 13,047 0
Gain on sale of securities 0 128
Other income 156,905 37,149
-------------- ---------------
Total noninterest income 847,543 488,178
Noninterest expense
Salaries and benefits 3,256,456 1,891,264
Occupancy 412,531 304,231
Furniture and equipment 350,131 176,756
Data processing 335,079 170,990
Advertising 157,973 110,431
Loan processing cost 63,582 153,835
Other expense 1,312,203 756,916
-------------- ---------------
Total noninterest expenses 5,887,955 3,564,423
-------------- ---------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,434,967 (1,109,047)
Federal income tax expense 292,000 0
-------------- ---------------
Income (loss) before cumulative effect of change in accounting principle 2,142,967 (1,109,047)
Cumulative effect of change in accounting principle (net of applicable taxes) (42,210) 0
-------------- ---------------
NET INCOME (LOSS) $ 2,100,757 $ (1,109,047)
============== ===============
Basic income (loss) per share before cumulative effect of
change in accounting principle $ 0.87 $ (0.58)
======== ========
Diluted income (loss) per share before cumulative effect of
change in accounting principle $ 0.86 $ (0.58)
======== ========
Basic income (loss) per share $ 0.85 $ (0.58)
======== ========
Diluted income (loss) per share $ 0.84 $ (0.58)
======== ========
Average shares outstanding 2,472,500 1,907,658
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 32
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NET INCOME (LOSS) $ 2,100,757 $ (1,109,047)
Other comprehensive income (loss):
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification and tax effects (833,404) 35,467
-------------- ---------------
COMPREHENSIVE INCOME (LOSS) $ 1,267,353 $ (1,073,580)
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 33
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Common Earnings Comprehensive Shareholders'
Stock (Deficit) Income Equity
----- --------- ------ ------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ 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
Net income 2,100,757 2,100,757
Change in net unrealized gain (loss)
on securities available for sale,
net of tax effect (833,404) (833,404)
--------------- -------------- ----------- ----------------
BALANCES, DECEMBER 31, 1999 $ 28,181,798 $ 587,639 $ (801,568) $ 27,967,869
=============== ============== =========== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 34
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,100,757 $ (1,109,047)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 538,996 274,364
Provision for loan losses 1,960,900 2,571,800
Gain on sale of loans (13,047) 0
Gain on sale of securities 0 (128)
Net change in
Accrued interest receivable (695,042) (1,095,021)
Other assets (2,869,730) (432,695)
Accrued expenses and other liabilities 2,118,482 208,517
--------------- ----------------
Net cash from operating activities 3,141,316 417,790
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and payments, net (123,354,358) (171,857,839)
Purchase of:
Securities available for sale (17,765,304) (28,320,575)
Securities held to maturity (7,056,858) 0
Federal Home Loan Bank stock (784,900) 0
Premises and equipment (1,926,748) (1,082,815)
Proceeds from:
Sales of available for sale securities 0 1,000,313
Maturities and repayments of available for sale securities 6,526,816 6,203,087
--------------- ----------------
Net cash from investing activities (144,361,352) (194,057,829)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 122,830,953 162,309,755
Proceeds from the sale of trust preferred securities 16,000,000 0
Net proceeds from sale of common stock 0 14,300,826
Net increase in other borrowed money 13,755 0
Net increase in securities sold under agreements to repurchase 9,569,688 16,382,154
--------------- ----------------
Net cash from financing activities 148,414,396 192,992,735
--------------- ----------------
Net change in cash and cash equivalents 7,194,360 (647,304)
Cash and cash equivalents at beginning of period 6,455,996 7,103,300
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,650,356 $ 6,455,996
=============== ================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 11,796,860 $ 5,237,768
Federal income tax 1,620,773 165,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 35
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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 subsidiaries,
Mercantile Bank of West Michigan and MBWM Capital Trust I, after elimination of
significant intercompany transactions and accounts.
Nature of Operations: Mercantile Bank Corporation ("Mercantile") 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 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.
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.
Mercantile Capital Trust I was formed in September 1999. All of the common
securities of this special purpose trust are owned by the Corporation. The Trust
exists solely to issue capital securities. For financial reporting purposes, the
Trust is reported as a subsidiary and is consolidated into the financial
statements of Mercantile Bank Corporation. The capital securities are presented
as a separate line item on the consolidated balance sheet as guaranteed
preferred beneficial interests in the Corporation's subordinated debentures.
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 classified as held to maturity are carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. 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. Other securities such as Federal Home Loan Bank stock are
carried at cost.
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.
- --------------------------------------------------------------------------------
(Continued)
F-23
<PAGE> 36
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and recoveries, and
decreased by charge-offs. Management estimates the allowance balance required
based on past industry loan loss experience, known and inherent risks in similar
portfolios, and economic conditions. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in aggregate for smaller-balance loans of
similar nature such as residential mortgage, consumer and credit card loans, and
on an individual loan basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when the internal grading system indicates a doubtful classification.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both straight-line and
accelerated methods over the estimated useful lives of the respective assets.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. These assets are
reviewed for impairment under SFAS No. 121 when events indicate the carrying
amount may not be recoverable.
Cumulative Effect of Change in Accounting Principle: In 1998, the Accounting
Standards Executive Committee (AcSEC) of the American Institute of Certified
Public Accountants promulgated Statement of Position (SOP) 98-5. This SOP
provides guidance on the financial reporting of start-up costs and organization
costs. It requires cost of start-up activities and organization costs to be
expensed as incurred. Initial application of this SOP should be reported as a
cumulative effect of a change in accounting principle. Mercantile elected to
adopt the provisions of SOP 98-5 on January 1, 1999. Included in the December
31, 1999 Consolidated Statement of Income is a charge to operations of $42,210
reported as a cumulative effect of change in accounting principle.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts. Issuance costs of trust preferred securities are amortized
over the term of the securities.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
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, if needed,
reduces deferred tax assets to the amount expected to be realized.
(Continued)
F-24
<PAGE> 37
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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: Mercantile and the Bank are subject to banking regulations
which require the maintenance of certain capital levels and positive retained
earnings, which will prevent payment of dividends until positive retained
earnings are achieved and may limit the amount of dividends thereafter.
Earnings (Loss) Per Share: Basic earnings (loss) per share is based on weighted
average common shares outstanding during the period. Diluted earnings (loss) per
share includes the dilutive effect of additional potential common shares
issuable under stock options.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at year-end were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
1999
- ----
U.S. Government agency
debt obligations $ 14,071,776 $ 0 $ 408,337 $ 13,663,439
Mortgage-backed securities 20,258,091 0 796,283 19,461,808
Municipal revenue bonds 1,000,000 0 9,944 990,056
--------------- ------------ ------------ ----------------
Totals $ 35,329,867 $ 0 $ 1,214,564 $ 34,115,303
=============== ============ ============ ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-25
<PAGE> 38
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
1998
- ----
U.S. Treasury securities $ 4,506,744 $ 16,376 $ 0 $ 4,523,120
U.S. Government agency
debt obligations 12,015,020 45,207 29,437 12,030,790
Mortgage-backed securities 7,590,648 21,104 5,415 7,606,337
--------------- ------------ ------------ ----------------
Totals $ 24,112,412 $ 82,687 $ 34,852 $ 24,160,247
=============== ============ ============ ================
</TABLE>
HELD TO MATURITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999
- ----
Municipal general obligation bonds $ 6,433,594 $ 0 $ 51,132 $ 6,382,462
Municipal revenue bonds 622,898 0 23,031 599,867
--------------- ------------ ------------ ----------------
Totals $ 7,056,492 $ 0 $ 74,163 $ 6,982,329
=============== ============ ============ ================
</TABLE>
The amortized cost and fair values of debt investment securities at year-end
1999, by contractual maturity, are shown below. The contractual maturity is
utilized below for U.S. Government agency debt obligations and municipal bonds.
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>
Held-to-maturity Available for sale
---------------- ------------------
Weighted Weighted
Average Amortized Fair Average Amortized Fair
Yield Cost Value Yield Cost Value
----- ---- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Due in one year or less $ 0 $ 0 5.85% $ 3,074,574 $ 3,032,669
Due from one to five years 6.94% 509,003 502,411 6.11 11,004,285 10,699,736
Due from five to ten years 7.83 5,230,410 5,177,945 6.23 992,917 921,090
Due after ten years 8.35 1,317,079 1,301,973 0 0
Mortgage-backed 0 0 6.41 20,258,091 19,461,808
-------------- -------------- ------------- --------------
Total $ 7,056,492 $ 6,982,329 $ 35,329,867 $ 34,115,303
============== ============== ============= ==============
</TABLE>
There were no sales of securities in 1999. The sale of an investment security
during 1998 resulted in a realized gain of $128.
The carrying value of investment securities that are pledged to secure
securities sold under agreements to repurchase and other deposits was
$28,733,258 and $24,160,247 at December 31, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
(Continued)
F-26
<PAGE> 39
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Year-end loans are as follows:
<TABLE>
<CAPTION>
Percent
December 31, 1999 December 31, 1998 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
Real Estate:
Construction and land
<S> <C> <C> <C> <C> <C>
development $ 37,224,847 12.1% $ 13,656,284 7.4% 172.6%
Secured by 1 - 4
family properties 22,535,386 7.3 10,655,703 5.8 111.5
Secured by multi-
family properties 2,326,684 0.8 2,520,747 1.4 (7.7)
Secured by nonfarm
nonresidential properties 157,686,466 51.2 100,742,487 54.5 56.5
Commercial 83,908,726 27.2 55,071,347 29.8 52.4
Consumer 4,324,367 1.4 2,098,034 1.1 106.1
--------------- ------ --------------- ------- --------
Total Loans $ 308,006,476 100.0% $ 184,744,602 100.0% 66.7%
=============== ====== =============== ======= ========
Activity in the allowance for loan losses is as follows:
1999 1998
---- ----
Beginning balance $ 2,765,100 $ 193,300
Charge-Offs (108,531) 0
Recoveries 3,000 0
Provision charged to operating expense 1,960,900 2,571,800
--------------- ----------------
Ending balance $ 4,620,469 $ 2,765,100
=============== ================
</TABLE>
There were no loans classified as impaired or nonperforming at December 31, 1999
or 1998. The average impaired loans during 1999 were $24,347. No interest income
was recognized during impairment.
Concentrations within the loan portfolio were as follows at year-end 1999:
<TABLE>
<CAPTION>
Percentage of
Balance Loan Portfolio
------- --------------
<S> <C> <C>
Commercial real estate loans to lessors of real property $ 31,431,045 10.2%
Commercial loans to holding and other investment offices 42,606,665 13.8
Commercial real estate loans to operators of non-residential
buildings 41,039,899 13.3
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-27
<PAGE> 40
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 4 - PREMISES AND EQUIPMENT - NET
Year-end premises and equipment are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and improvements $ 443,408 $ 315,020
Buildings and leasehold improvements 2,111,049 759,942
Construction in process 0 100,638
Furniture and equipment 1,417,086 869,195
--------------- ----------------
3,971,543 2,044,795
Less: accumulated depreciation 510,356 186,990
--------------- ----------------
$ 3,461,187 $ 1,857,805
=============== ================
</TABLE>
NOTE 5 - DEPOSITS
Deposits at year-end are summarized as follows:
<TABLE>
<CAPTION>
Percent
December 31, 1999 December 31, 1998 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
demand $ 19,513,231 6.6% $ 14,319,290 8.3% 36.3%
Interest-bearing
checking 11,040,426 3.7 7,765,703 4.5 42.2
Money market 5,604,816 1.9 3,822,019 2.2 46.6
Savings 39,737,096 13.5 28,796,603 16.8 38.0
Time, under $100,000 4,873,222 1.7 3,305,504 1.9 47.4
Time, $100,000 and
over 22,573,206 7.7 16,718,705 9.7 35.0
---------------- -------- ---------------- ------- -----------
103,341,997 35.1 74,727,824 43.4 38.3
Out-of-area time,
under $100,000 71,997,053 24.4 77,847,412 45.3 (7.5)
Out-of-area time,
$100,000 and over 119,489,922 40.5 19,422,783 11.3 515.2
---------------- -------- ---------------- ------- -----------
191,486,975 64.9 97,270,195 56.6 96.9
---------------- -------- ---------------- ------- -----------
Total Deposits $ 294,828,972 100.0% $ 171,998,019 100.0% 71.4%
================ ======== ================ ======= ===========
</TABLE>
Out-of-area certificates of deposit consist of certificates obtained from
depositors outside of the primary market area. As of December 31, 1999,
out-of-area certificates of deposit totaling $177,796,688 were obtained through
deposit brokers, with the remaining $13,690,287 obtained directly from the
depositors.
- --------------------------------------------------------------------------------
(Continued)
F-28
<PAGE> 41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS (Continued)
The following table depicts the maturity distribution for certificates of
deposit at year-end.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
In one year $ 203,685,797 $ 89,659,963
In two years 13,534,313 22,049,689
In three years 623,293 4,194,752
In four years 1,090,000 1,390,000
In five years 0 0
-------------- ---------------
$ 218,933,403 $ 117,294,404
============== ===============
</TABLE>
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>
1999 1998
---- ----
<S> <C> <C>
Outstanding balance at yearend $ 26,607,289 $ 17,037,601
Average interest rate at yearend 4.22% 4.20%
Average balance during the year 20,229,314 10,305,728
Average interest rate during the year 4.13% 4.72%
Maximum month end balance during the year 26,607,289 18,498,833
</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 uninsured deposit equivalent investments.
(Continued)
F-29
<PAGE> 42
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 7 - FEDERAL INCOME TAXES
The consolidated provision for income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current $ 1,820,858 $ 399,852
Deferred benefit (636,480) (1,147,247)
Change in valuation allowance (892,378) 747,395
-------------- ---------------
Tax expense $ 292,000 $ 0
============== ===============
</TABLE>
The recorded consolidated income tax provision in both 1999 and 1998 differs
from that computed by multiplying pre-tax income by the statutory federal income
tax rates due to the valuation allowance, tax-exempt interest income and
nondeductible expenses.
The net deferred tax asset recorded includes the following amounts of deferred
tax assets and liabilities as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets
Provision for loan losses $ 1,392,691 $ 787,422
Start-up/pre-opening expenses 73,973 76,713
Deferred loan fees 92,822 52,273
Depreciation 0 8,146
Unrealized loss on securities available for sale 412,953 0
Deferred compensation 4,677 0
Miscellaneous accruals 5,500 0
-------------- ---------------
1,982,616 924,554
Deferred tax liabilities
Unrealized gain on securities available for sale 0 16,400
Miscellaneous expenses 0 13,600
Accretion 2,659 2,176
Depreciation 21,746 0
-------------- ---------------
24,405 32,176
Net deferred tax asset before valuation allowance 1,958,211 892,378
Valuation allowance 0 (892,378)
-------------- ---------------
Net deferred tax asset after valuation allowance $ 1,958,211 $ 0
============== ===============
</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 no valuation
allowance is required for 1999 and that a valuation allowance of $892,378 was
required for 1998.
(Continued)
F-30
<PAGE> 43
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE 8 - STOCK OPTION PLAN
1999 1998
---- ----
<S> <C> <C>
Stock options outstanding
Beginning 121,750 77,750
Granted 0 44,000
---------- -------------
Ending 121,750 121,750
========== =============
Options exercisable at year-end 76,416 50,166
---------- -------------
Minimum exercise price $ 10.00 $ 10.00
Maximum exercise price 13.63 13.63
Average exercise price 11.50 11.50
Average remaining option term 8.0 Years 9.0 Years
Estimated fair value of stock options granted: 172,510
Assumptions used:
Risk-free interest rate 4.56
Expected option life 7 years
Expected stock volatility 11%
Expected dividends 0%
Pro-forma income (loss), assuming SFAS 123 fair value method was used for
stock options:
Income (loss) before cumulative effect of change in
accounting principle $2,065,991 $ (1,299,991)
Basic income (loss) per share before cumulative effect of
change in accounting principle 0.84 (0.68)
Diluted income (loss) per share before cumulative effect of
change in accounting principle 0.83 (0.68)
Net income (loss) $2,023,781 $ (1,299,991)
Basic income (loss) per share 0.82 (0.68)
Diluted income (loss) per share 0.81 (0.68)
</TABLE>
(Continued)
F-31
<PAGE> 44
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 9 - RELATED PARTIES
Certain directors and executive officers of Mercantile, including their
immediate families and companies in which they are principal owners, were loan
customers of the Bank. At year-end 1999 and 1998, the Bank had approximately
$9,046,000 and $12,815,000 in loan commitments to directors and executive
officers, of which approximately $5,063,000 and $9,095,000 were outstanding at
December 31, 1999 and 1998, respectively, as reflected in the following table.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 9,095,000 $ 2,147,000
New loans 876,000 7,222,000
Repayments (4,908,000) (274,000)
-------------- ---------------
Ending balance $ 5,063,000 $ 9,095,000
============== ===============
</TABLE>
Related party deposits and repurchase agreements totaled approximately
$14,800,000 at December 31, 1999 and $7,978,000 at December 31, 1998.
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, 1999 and
1998, the rates on existing off-balance sheet instruments were substantially
equivalent to current market rates, considering the underlying credit standing
of the counterparties.
(Continued)
F-32
<PAGE> 45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued)
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>
1999 1998
---- ----
<S> <C> <C>
Commercial unused lines of credit $ 87,488,616 $ 61,600,909
Unused lines of credit secured by 1 - 4 family
residential properties 6,112,897 3,434,290
Credit card unused lines of credit 3,419,628 2,251,329
Other consumer unused lines of credit 3,126,906 1,534,497
Commitments to make loans 26,395,600 21,751,900
Standby letters of credit 28,963,217 19,271,848
----------------- -----------------
$ 155,506,864 $ 109,844,773
================= =================
</TABLE>
Mercantile was required to have $564,000 and $325,000 of cash on hand or on
deposit with the Federal Reserve Bank of Chicago to meet regulatory reserve and
clearing requirements at year-end 1999 and 1998. These balances do not earn
interest.
The Bank leases the main office facility under an operating lease agreement.
Total rental expense for the lease for 1999 and 1998 was $155,889 and $151,349,
respectively. Future minimum rentals under this lease as of December 31, 1999
are as follows:
<TABLE>
<S> <C>
2000 $ 158,976
2001 158,976
2002 158,976
2003 158,976
2004 158,976
Thereafter 423,936
--------------
$ 1,218,816
==============
</TABLE>
NOTE 11 - BENEFIT PLANS
Mercantile established a 401(k) benefit plan effective January 1, 1998, covering
substantially all of its employees. Mercantile's 1999 and 1998 matching 401(k)
contribution charged to expense was $85,080 and $59,705, respectively. The
percent of Mercantile's matching contributions to the 401(k) is determined
annually by the Board of Directors. During 1998 and 1999 the 401(k) benefit plan
allowed employee contributions up to 15% of their compensation, which are
matched at 100% of the first 4% of the compensation contributed. Matching
contributions are immediately vested.
Mercantile established a deferred compensation plan effective May 1, 1999, in
which all persons serving on the Board of Directors during the time the plan is
in effect are eligible to participate. Participants may elect to defer annual
director fees, with distributions to be paid only upon termination of service as
a director. Expense for the plan during 1999 was $625.
(Continued)
F-33
<PAGE> 46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end.
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8
------- -------
Carrying Fair Carrying Fair
Values Values Values Values
------ ------ ------ ------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 13,650,356 $ 13,650,356 $ 6,455,996 $ 6,455,996
Securities available for sale 34,115,303 34,115,303 24,160,247 24,160,247
Securities held to maturity 7,056,492 6,982,329 0 0
Federal Home Loan Bank stock 784,900 784,900 0 0
Loans, net 303,386,007 294,581,000 181,979,502 181,963,000
Accrued interest receivable 1,842,874 1,842,874 1,147,832 1,147,832
Financial liabilities
Deposits 294,828,972 295,078,734 171,998,019 173,664,615
Securities sold under agreements
to repurchase 26,607,289 26,607,289 17,037,601 17,037,601
Accrued interest payable 1,956,247 1,956,257 422,717 422,717
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures 16,000,000 11,402,303 0 0
</TABLE>
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable, demand
deposits, securities sold under agreements to repurchase, and variable rate
loans or deposits that reprice frequently and fully. Security fair values are
based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair value of guaranteed preferred beneficial interests in the
Corporation's subordinated debentures is based on current rates for similar
financing.
(Continued)
F-34
<PAGE> 47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 13 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Basic
Net income (loss) $ 2,100,757 $ (1,109,047)
============= ==============
Weighted average common shares outstanding 2,472,500 1,907,658
------------- --------------
Basic earnings (loss) per common share $ 0.85 $ (0.58)
============ ==============
Diluted
Net income (loss) $ 2,100,757 $ (1,109,047)
============= ==============
Weighted average common shares outstanding for
basic earnings per common share 2,472,500 1,907,658
Add: Dilutive effects of assumed exercises of stock options 26,311 0
------------ --------------
Average shares and dilutive potential common shares 2,498,811 1,907,658
============ ==============
Diluted earnings (loss) per common share $ 0.84 $ (0.58)
============ ==============
</TABLE>
Stock options for 121,750 shares of common stock were not considered in
computing diluted earnings per common share for 1998 because they were
antidilutive.
NOTE 14 - SALE OF TRUST PREFERRED SECURITIES
MBWM Capital Trust I, a business trust subsidiary of Mercantile, sold 1.6
million Cumulative Preferred Securities ("trust preferred securities") at $10.00
per trust preferred security in a September 1999 offering. The proceeds from the
sale of the trust preferred securities were used by MBWM Capital Trust I to
purchase an equivalent amount of subordinated debentures from Mercantile. The
trust preferred securities carry a fixed rate of 9.60%, have a stated maturity
of 30 years, and, in effect, are guaranteed by Mercantile. The securities are
redeemable at par after 5 years. Distributions on the trust preferred securities
are payable quarterly on January 15, April 15, July 15 and October 15. The first
distribution was paid on October 15, 1999. Under certain circumstances,
distributions may be deferred for up to 20 calendar quarters. However, during
any such deferrals, interest accrues on any unpaid distributions at the rate of
9.60% per annum.
NOTE 15 - SALE OF COMMON STOCK
During 1998 Mercantile completed a secondary stock offering, selling 977,500
shares. Net of issuance expenses the common stock sale raised $14.3 million.
Substantially all of the net proceeds were contributed to the Bank, which were
used to support the anticipated growth in assets, fund investments in loans and
securities, and for general corporate purposes.
(Continued)
F-35
<PAGE> 48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 16 - REGULATORY MATTERS
Mercantile and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year end, actual capital levels (in thousands) and minimum required levels
for Mercantile and the Bank were:
<TABLE>
<CAPTION>
Minimum Required
to be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
1999
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk
weighted assets)
Consolidated $ 49,275 13.7% $ 28,830 8.0% $ 36,038 10.0%
Bank 47,402 13.2 28,714 8.0 35,893 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 38,359 10.6 14,420 4.0 21,630 6.0
Bank 42,914 12.0 14,363 4.0 21,544 6.0
Tier 1 capital (to average
assets)
Consolidated 38,359 10.9 14,097 4.0 17,621 5.0
Bank 42,914 12.2 14,042 4.0 17,554 5.0
1998
Total capital (to risk
weighted assets)
Consolidated $ 29,434 13.0% $ 18,100 8.0% $ 22,625 10.0%
Bank 28,453 12.6 18,093 8.0 22,616 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 26,669 11.8 9,050 4.0 13,575 6.0
Bank 25,688 11.4 9,047 4.0 13,570 6.0
Tier 1 capital (to average
assets)
Consolidated 26,669 13.8 7,711 4.0 9,639 5.0
Bank 25,688 13.3 7,707 4.0 9,634 5.0
</TABLE>
The Bank was categorized as well capitalized at year-end 1999 and 1998.
(Continued)
F-36
<PAGE> 49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 16 - REGULATORY MATTERS (Continued)
Federal and state banking laws and regulations place certain restrictions on the
amount of dividends the Bank can transfer to Mercantile and on the capital
levels that must be maintained. At year-end 1999, under the most restrictive of
these regulations, the Bank could distribute approximately $11,509,000 to
Mercantile as dividends without prior regulatory approval.
The capital levels as of December 31, 1999 include an adjustment for the 1.6
million trust preferred securities issued by MBWM Capital Trust I in September
1999 subject to certain limitations. Federal Reserve guidelines limit the amount
of trust preferred securities which can be included in Tier 1 capital of
Mercantile to 25% of total Tier 1 capital. As of December 31, 1999,
approximately $9.6 million of the $16.0 million of the trust preferred
securities were included as Tier 1 capital of Mercantile with the remaining $6.4
million included as Tier 2 capital, a component of risk-based capital. The trust
preferred securities are used to support Mercantile's current capital position
allowing for future growth and increased common shareholder value.
NOTE 17 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 671,235 $ 910,068
Investment in subsidiary 42,617,182 25,720,043
Other assets 1,533,198 81,905
--------------- ----------------
Total assets $ 44,821,615 $ 26,712,016
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 358,896 $ 11,500
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures 16,494,850 0
Shareholders' equity 27,967,869 26,700,516
--------------- ----------------
Total liabilities and shareholders' equity $ 44,821,615 $ 26,712,016
=============== ================
</TABLE>
(Continued)
F-37
<PAGE> 50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 17 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income
Other $ 156,510 $ 28,868
--------------- ----------------
Total income 156,510 28,868
Expenses
Other operating expenses 841,124 187,797
--------------- ----------------
Total expenses 841,124 187,797
--------------- ----------------
Income (loss) before income tax and equity in undistributed
net income (loss) of subsidiaries (684,614) (158,929)
Federal income tax expense (420,000) 0
Equity in undistributed net income (loss) of subsidiary 2,407,581 (950,118)
--------------- ----------------
Income (loss) before cumulative effect of change in
accounting principle 2,142,967 (1,109,047)
Cumulative effect of change in accounting principle (net of
applicable taxes (42,210) 0
--------------- ----------------
Net income (loss) $ 2,100,757 $ (1,109,047)
=============== ================
</TABLE>
(Continued)
F-38
<PAGE> 51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 17 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,100,757 $ (1,109,047)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Equity in undistributed (income) loss of subsidiary (2,407,581) 950,118
Capital investment into Mercantile Bank of West Michigan (14,828,112) (13,771,888)
Change in other assets (1,451,293) 44,640
Change in other liabilities 347,396 (41,405)
--------------- ----------------
Net cash from operating activities (16,238,833) (13,927,582)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of trust preferred securities and issuance
of debentures 16,494,850 0
Investment in common stock of MBWM Capital Trust I (494,850) 0
Proceeds from sale of common stock 0 14,300,826
--------------- ----------------
Net cash from financing activities 16,000,000 14,300,826
--------------- ----------------
Net change in cash and cash equivalents (238,833) 373,244
Cash and cash equivalents at beginning of period 910,068 536,824
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 671,235 $ 910,068
=============== ================
</TABLE>
(Continued)
F-39
<PAGE> 52
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 3, 2000.
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 3, 2000.
<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, Sr.
- ------------------ ------------------------
David M. Hecht, Director Donald Williams, Sr., Director
/s/ Gerald R. Johnson, Jr. /s/ Robert M. Wynalda
- -------------------------- ---------------------
Gerald R. Johnson, Jr., Chairman of the Board and Robert M. Wynalda, Director
Chief 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> 53
EXHIBIT INDEX
Exhibit No. EXHIBIT DESCRIPTION
3.1 Articles of Incorporation of Mercantile are
incorporated by reference to exhibit 3.1 of
Mercantile's Registration Statement on Form SB-2
(Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 Bylaws of Mercantile are incorporated by reference
to Exhibit 3.2 of Mercantile's Registration
Statement on Form SB-2 (Commission File No.
333-33081) that became effective on October 23,
1997
10.1 1997 Employee Stock Option Plan of Mercantile is
incorporated by reference to exhibit 10.1 of
Mercantile's Registration Statement on Form SB-2
(Commission File No. 333-33081) that became
effective on October 23, 1997 (management contract
or compensatory plan)
10.2 Lease Agreement between Mercantile and Division
Avenue Partners, L.L.C. dated August 16, 1997, is
incorporated by reference to exhibit 10.2 of
Mercantile's Registration Statement on Form SB-2
(Commission File No. 333-33081) that became
effective on October 23, 1997
10.3 Agreement between Fiserve Solutions, Inc. and the
Bank dated September 10, 1997, is incorporated by
reference to Exhibit 10.3 of Mercantile's
Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on
October 23, 1997
10.4 Agreement between Mercantile 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 is incorporated by
reference to Exhibit 10.3 of Mercantile's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1998 (Commission File No.
333-33081)
10.5 Employment Agreement among Gerald R. Johnson, Jr.,
Mercantile and the Bank dated December 1, 1998, is
incorporated by reference to Exhibit 10.4 of
Mercantile's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998 (Commission
File No. 333-33081) (management contract or
compensatory plan)
10.6 Employment Agreement among Michael H. Price,
Mercantile and the Bank dated December 1, 1998, is
incorporated by reference to Exhibit 10.5 of
Mercantile's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998 (Commission
File No. 333-33081) (management contract or
compensatory plan)
10.7 Mercantile Bank of West Michigan Deferred
Compensation Plan for Members of the Board of
Directors (1999) is incorporated by reference to
Exhibit 10.6 of the Registration Statement of
Mercantile and MBWM Capital Trust I on Form SB-2
(Commission Files Nos. 333-84313 and 333-84313-01)
that became effective on September 13, 1999
10.8 Subordinated Indenture dated as of September 17,
1999 between Mercantile and Wilmington Trust
Company, as Trustee, relating to 9.60% Junior
Subordinated Debentures due 2029 is incorporated by
reference to Exhibit 4.1 of the Registration
Statement of Mercantile and MBWM Capital Trust I on
Form SB-2 (Commission Files Nos. 333-84313 and
333-84313-01) that became effective on September
13, 1999
<PAGE> 54
10.9 Amended and Restated Trust Agreement dated as of
September 17, 1999 among Mercantile, as depositor,
Wilmington Trust Company, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and
the Administrative Trustees is incorporated by
reference to Exhibit 4.5 of the Registration
Statement of Mercantile and MBWM Capital Trust I on
Form SB-2 (Commission Files Nos. 333-84313 and
333-84313-01) that became effective on September
13, 1999
10.10 Preferred Securities Guarantee Agreement between
Mercantile and Wilmington Trust Company dated
September 17, 1999, is incorporated by reference to
Exhibit 4.7 of the Registration Statement of
Mercantile and MBWM Capital Trust I on Form SB-2
(Commission Files Nos. 333-84313 and 333-84313-01)
that became effective on September 13, 1999
10.11 Agreement as to Expenses and Liabilities dated as
of September 17, 1999, between Mercantile and MBWM
Capital Trust I (included as Exhibit D to Exhibit
10.9)
10.12 Amended and Restated Employment Agreement dated as
of December 31, 1999, among Mercantile, the Bank
and Gerald R. Johnson, Jr., (management contract or
compensatory plan)
10.13 Amended and Restated Employment Agreement dated as
of December 31, 1999, among Mercantile, the Bank
and Michael H. Price (management contract or
compensatory plan)
21 Subsidiaries of Mercantile
23 Consent of Independent Accountants
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.12
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement ("Agreement") is made as
of the 31st day of December, 1999, by and among 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 Company, the Bank and the Employee have previously entered into
an Employment Agreement dated December 1, 1998 (the "Employment Agreement").
B. The Company, the Bank and the Employee wish to amend the Employment
Agreement to establish a base salary for the Employee of $250,000 for the year
2000, provide for the Employment Period to be extended on December 31 of each
year for an additional year so that there is, as of each December 31, a
remaining Employment Period of three years, and make certain conforming and
updating revisions.
C. This Agreement sets forth the terms of the Employee's employment as
Chairman and Chief Executive Officer of the Company and Chairman of the Bank.
D. The Employers believe that entering into this Agreement is in the
best interest of their respective shareholders.
E. 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 amend and restate the Employment Agreement, and agree as follows:
1. Employment, Term, and Acceptance: The Company agrees to employ the
Employee as its Chairman of the Board of Directors and Chief Executive Officer,
and the Bank agrees to employ the Employee as its Chairman of the Board, for the
period from December 31, 1999 through the Termination Date (the "Employment
Period"), unless such employment is terminated earlier pursuant to Section 7 or
8 of this Agreement. The initial Termination Date is December 31, 2002.
Effective as of December 31, 2000, and as of each December 31 after December 31,
2000, the Termination Date will automatically extend to the next succeeding
December 31 after the then existing Termination Date unless prior to a December
31 automatic extension, the Employee, the Company, or the Bank gives notice to
each of the others that the Termination Date shall not be automatically extended
on such December 31; in which case the Termination Date will not be extended.
Accordingly, unless the Employee, the Company or the
<PAGE> 2
Bank gives notice that the Termination Date will not be extended, there will,
as of each December 31, be an Employment Period of three years remaining. The
Employee hereby accepts such employment.
2. Duties and Authority:
2.1 Promotion of Employers' Interest. While employed as an
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 chairman of the board or chief
executive officer positions in the businesses in which the 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) Two Hundred and Fifty Thousand
Dollars ($250,000) for the period from January 1, 2000 through December 31,
2000, and (b) for each January 1 through December 31 from January 1, 2001
through the Termination Date, amounts not less than Two Hundred and Fifty
Thousand Dollars ($250,000) as are determined by the Board of Directors of the
Bank, such determination to be made for each such 12 month 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 in clause (a)
or (b) 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. In addition to the Base Cash
Compensation 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 for the
years 2000 and 2001.
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
2
<PAGE> 3
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 five (5)
weeks paid 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 the Termination Date then in effect).
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
3
<PAGE> 4
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.
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, (a) 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,
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<PAGE> 5
provided that the Board of Directors of the Company has included the Employee on
its slate of nominees as a director, or (b) the assignment to the Employee of
any title or duties at the Bank that he has previously held or performed at the
Bank, shall not be sufficient to constitute Good Reason for termination of
employment by the Employee.
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
the Termination Date then in effect), 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.
5
<PAGE> 6
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 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 and prior to the Employee reaching the
age of 65, (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 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.
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
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<PAGE> 8
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 and Regulatory Compliance. 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. To the extent that any payment provided for by this Agreement
would, in the circumstances prevailing at the time such payment is to be made,
otherwise violate any provision of the Federal Deposit Insurance Act (the
"FDIA") or any rule adopted under the FDIA, including 12 C.F.R. Part 359 (Golden
Parachute and Indemnification Payments), the amount of such payment shall be
reduced to the largest amount that could be paid on such date consistently with
such provision of the FDIA or rule adopted thereunder.
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 & CEO
------------------------
EMPLOYEE
/s/ Gerald R. Johnson, Jr.
---------------------------------
Gerald R. Johnson, Jr.
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<PAGE> 9
EXHIBIT A
MERCANTILE BANK OF WEST MICHIGAN EMPLOYEE BONUS -2000
Non-lenders receive $0.33 for very 1.00 over budgeted net operating income.
Maximum payouts are calculated as a percentage of salary as follows:
<TABLE>
<S> <C>
Chairman and President 35.0% of annual salary
Senior Vice President 25.0% of annual salary
Vice Presidents 20.0% of annual salary
Assistant Vice Presidents 10.0% of annual salary
Officers 7.5% of annual salary
Non-officer employees 5.0% of annual salary
</TABLE>
MERCANTILE BANK OF WEST MICHIGAN EMPLOYEE BONUS -2001
Non-lenders receive $0.33 for every 1.00 over budgeted net operating income.
Maximum payouts are calculate as a percentage of salary as follows:
<TABLE>
<S> <C>
Chairman and President 40.0% of annual salary
Senior Vice President 30.0% of annual salary
Vice Presidents 20.0% of annual salary
Assistant Vice Presidents 10.0% of annual salary
Officers 7.5% of annual salary
Non-officer employees 5.0% of annual salary
</TABLE>
9
<PAGE> 1
EXHIBIT 10.13
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement ("Agreement") is made as
of the 31st day of December, 1999, by and among 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 Company, the Bank and the Employee have previously entered into
an Employment Agreement dated December 1, 1998 (the "Employment Agreement").
B. The Company, the Bank and the Employee wish to amend the Employment
Agreement to establish a base salary for the Employee of $220,000 for the year
2000, provide for the Employment Period to be extended on December 31 of each
year for an additional year so that there is, as of each December 31, a
remaining Employment Period of three years, and make certain conforming and
updating revisions.
C. This Agreement sets forth the terms of the Employee's employment as
President and Chief Operating Officer of the Company and President and Chief
Executive Officer of the Bank.
D. The Employers believe that entering into this Agreement is in the
best interest of their respective shareholders.
E. 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 amend and restate the Employment Agreement, and agree as follows:
1. Employment, Term, Automatic Annual Extensions, and Acceptance: The
Company agrees to employ the Employee as its President and Chief Operating
Officer, and the Bank agrees to employ the Employee as it President and Chief
Executive Officer, for the period from December 31, 1999 through the Termination
Date (the "Employment Period"), unless such employment is terminated earlier
pursuant to Section 7 or 8 of this Agreement. The initial Termination Date is
December 31, 2002. Effective as of December 31, 2000, and as of each December 31
after December 31, 2000, the Termination Date will automatically extend to the
next succeeding December 31 after the then existing Termination Date unless
prior to a December 31 automatic extension, the Employee, the Company, or the
Bank gives notice to each of the others that the Termination Date shall not be
automatically extended on such December 31; in which case the Termination Date
will not be extended. Accordingly, unless the Employee, the Company or the Bank
gives notice that the Termination Date will not be extended, there will, as of
each December
<PAGE> 2
31, be an Employment Period of three years remaining. The Employee hereby
accepts such employment.
2. Duties and Authority:
2.1 Promotion of Employers' Interest. While employed as an 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 president and chief executive or chief
operating officer positions in the businesses in which the 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) Two Hundred Twenty Thousand
Dollars ($220,000) for the period from January 1, 2000 through December 31,
2000, and (b) for each January 1 through December 31 from January 1, 2001
through the Termination Date, amounts not less than Two Hundred Twenty Thousand
Dollars ($220,000) as are determined by the Board of Directors of the Bank, such
determination to be made for each such 12 month 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 in clause (a) or (b) 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. In addition to the Base Cash
Compensation 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 for the
years 2000 and 2001.
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
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<PAGE> 3
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 five (5)
weeks paid 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 the Termination Date then in effect).
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
3
<PAGE> 4
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.
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.
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
the Termination Date then in effect), 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
5
<PAGE> 6
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 and prior to the Employee reaching the age
of 65, (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 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.
6
<PAGE> 7
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.
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.
7
<PAGE> 8
19. Entire Agreement and Regulatory Compliance. 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. To the extent that any payment provided for by this Agreement
would, in the circumstances prevailing at the time such payment is to be made,
otherwise violate any provision of the Federal Deposit Insurance Act (the
"FDIA") or any rule adopted under the FDIA, including 12 C.F.R. Part 359 (Golden
Parachute and Indemnification Payments), the amount of such payment shall be
reduced to the largest amount that could be paid on such date consistently with
such provision of the FDIA or rule adopted thereunder.
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 and CEO
--------------------------
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
8
<PAGE> 9
EXHIBIT A
MERCANTILE BANK OF WEST MICHIGAN EMPLOYEE BONUS -2000
Non-lenders receive $0.33 for very 1.00 over budgeted net operating income.
Maximum payouts are calculated as a percentage of salary as follows:
<TABLE>
<S> <C>
Chairman and President 35.0% of annual salary
Senior Vice President 25.0% of annual salary
Vice Presidents 20.0% of annual salary
Assistant Vice Presidents 10.0% of annual salary
Officers 7.5% of annual salary
Non-officer employees 5.0% of annual salary
</TABLE>
MERCANTILE BANK OF WEST MICHIGAN EMPLOYEE BONUS -2001
Non-lenders receive $0.33 for every 1.00 over budgeted net operating income.
Maximum payouts are calculate as a percentage of salary as follows:
<TABLE>
<S> <C>
Chairman and President 40.0% of annual salary
Senior Vice President 30.0% of annual salary
Vice Presidents 20.0% of annual salary
Assistant Vice Presidents 10.0% of annual salary
Officers 7.5% of annual salary
Non-officer employees 5.0% of annual salary
</TABLE>
9
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE ISSUER
<TABLE>
<CAPTION>
Name of State or Judisdiction
Subsidiary Incorporation or Organization Description
---------- ----------------------------- -----------
<S> <C> <C>
Mercantile Bank of Michigan
West Michigan State of Michigan banking corporation
MBWM Capital Trust I State of Delaware Delaware
business trust
</TABLE>
<PAGE> 1
EXHIBIT 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Mercantile Bank Corporation on Form S-8 (Registration No. 333-75521) of our
report dated January 20, 2000 on the 1999 consolidated financial statements of
Mercantile Bank Corporation, which report is included in the 1999 Annual report
on Form 10-KSB of Mercantile Bank Corporation.
/s/Crowe, Chizek and Company LLP
-----------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 10, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,570,631
<INT-BEARING-DEPOSITS> 579,725
<FED-FUNDS-SOLD> 6,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,900,203
<INVESTMENTS-CARRYING> 7,056,492
<INVESTMENTS-MARKET> 6,982,329
<LOANS> 308,006,476
<ALLOWANCE> 4,620,469
<TOTAL-ASSETS> 368,037,088
<DEPOSITS> 294,828,972
<SHORT-TERM> 26,607,289
<LIABILITIES-OTHER> 2,619,203
<LONG-TERM> 16,013,755
0
0
<COMMON> 28,181,798
<OTHER-SE> (213,929)
<TOTAL-LIABILITIES-AND-EQUITY> 368,037,088
<INTEREST-LOAN> 20,410,153
<INTEREST-INVEST> 1,925,065
<INTEREST-OTHER> 431,481
<INTEREST-TOTAL> 22,766,699
<INTEREST-DEPOSIT> 12,039,907
<INTEREST-EXPENSE> 13,330,420
<INTEREST-INCOME-NET> 9,436,279
<LOAN-LOSSES> 1,960,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,887,955
<INCOME-PRETAX> 2,434,967
<INCOME-PRE-EXTRAORDINARY> 2,142,967
<EXTRAORDINARY> 0
<CHANGES> (42,210)
<NET-INCOME> 2,100,757
<EPS-BASIC> 0.85
<EPS-DILUTED> 0.84
<YIELD-ACTUAL> 3.30
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,765,100
<CHARGE-OFFS> 108,531
<RECOVERIES> 3,000
<ALLOWANCE-CLOSE> 4,620,469
<ALLOWANCE-DOMESTIC> 4,620,469
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
