-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TPRN/TsZC3mIAwTTcIMIC8XclwsB3Ffcp+cedXV9/0dIXY2D5Ts8PbpKLsfHaRks wjmk/w8Ooo9TagrKiaafVg== 0000950124-01-001167.txt : 20010312 0000950124-01-001167.hdr.sgml : 20010312 ACCESSION NUMBER: 0000950124-01-001167 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE BANK CORP CENTRAL INDEX KEY: 0001042729 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 383360865 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26719 FILM NUMBER: 1563934 BUSINESS ADDRESS: STREET 1: 42 DEER RUN DRIVE CITY: ADA STATE: MI ZIP: 49301 BUSINESS PHONE: 6166760201 MAIL ADDRESS: STREET 1: 42 DEER RUN DRIVE CITY: ADA STATE: MI ZIP: 49301 10-K405 1 k60448e10-k405.txt ANNUAL REPORT ENDED 12/31/00 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- --------------- Commission File Number 000-26719 MERCANTILE BANK CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) MICHIGAN 38-3360865 -------------------------------------------------------------- ------------------------------------ (State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number) 216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503 ------------------------------------------------- --------- (Address of Principal Executive Offices) (Zip Code)
(616) 242-9000 --------------------------------------------------- (Registrant's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant Section 12(g) of the Act: COMMON STOCK ---------------- (Title of Class) 9.60% CUMULATIVE PREFERRED SECURITIES, $10 LIQUIDATION AMOUNT ------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendments to this Form 10-K. [ ] As of February 1, 2001, there were issued and outstanding 2,596,102 shares of the Registrant's Common Stock. The aggregate value of the voting stock held by non-affiliates (persons other than directors and executive officers) of the Registrant, computed by reference to the average of the closing bid and asked prices of the Common Stock as of February 1, 2001, $14.00, was $31.0 million. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 2000 (Parts II and IV). 2. Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders (Part III). 2 PART I ITEM 1. 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, primarily for the purpose of holding all of the stock of Mercantile Bank of West Michigan ("Bank"), and of such other subsidiaries as Mercantile may acquire or establish. The Bank 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 Bank Mortgage Company ("Mortgage Company"), a wholly-owned subsidiary of the Bank, initiated business in October 2000 for the purpose of increasing the profitability and efficiency of the Bank's mortgage loan function. 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. Mercantile's election to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act and implementing Federal Reserve Board regulations was effective March 23, 2000. At the present time Mercantile has no plans to engage in any of the expanded activities permitted under the new regulations. 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 Division of Financial Institutions of the Michigan Department of Consumer & Industry Services. 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 was established for the purpose of issuing and selling its preferred securities and common securities, and used the proceeds from the sales of those securities to acquire subordinated debentures issued by Mercantile. Substantially all of the net proceeds received by Mercantile from the transaction were contributed to the Bank as capital. Additional information regarding Capital Trust is incorporated by reference to "Note 14 - Sale of Trust Preferred Securities" and "Note 16 - Regulatory Matters" of the Consolidated Financial Statements included in this Annual Report on pages F-36 through F-38. - -------------------------------------------------------------------------------- 2. 3 THE MORTGAGE COMPANY The Mortgage Company commenced operations on October 24, 2000 when the Bank contributed most if its residential mortgage loan portfolio and participation interests in certain commercial mortgage loans to the Mortgage Company. On the same date the Bank also transferred its residential mortgage origination function to the Mortgage Company. Mortgage loans originated and held by the Mortgage Company are serviced by the Bank pursuant to a servicing agreement. 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 subsidiary to those of banking and the management of banking organizations, and to certain non-banking activities, including those activities which the Federal Reserve Board may find, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board is empowered to differentiate between activities by a bank holding company, or a subsidiary, and activities commenced by acquisition of a going concern. With respect to non-banking activities, the Federal Reserve Board has, by regulation, determined that certain non-banking activities are closely related to banking within the meaning of the Bank Holding Company Act. These activities include, among other things, operating a mortgage company, finance company, credit card company or factoring company, performing certain data processing operations, providing certain investment and financial advice, acting as an insurance agent for certain types of credit related insurance, leasing property on a full-payout, nonoperating basis; and, subject to certain limitations, providing discount securities brokerage services for customers. The Mortgage Company formed in 2000 complies with the regulations of the Federal Reserve Board. Neither Mercantile nor its subsidiaries currently engage in any other activity referred to above. 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 of Mercantile, 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, 2000, Mercantile or the Bank employed 56 full-time and 18 part-time persons. Management believes that relations with employees are good. - -------------------------------------------------------------------------------- 3. 4 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 be modified 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 $6.0 million for the Bank's Chairman of the Board and its President and Chief Executive Officer; however, the latter $6.0 million lending authority is used in rare circumstances where timing is of the essence. Generally, loan requests exceeding $2.5 million require approval by the Officers Loan Committee, and loan requests exceeding $3.0 million, up to the legal lending limit of approximately $10.4 million, require approval by the Board of Directors. In most circumstances 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 75 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 three to five 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. - -------------------------------------------------------------------------------- 4. 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 Mortgage Company 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 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. Home equity credit is 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, 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 thus likely to be adversely affected by job loss, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying collateral. The Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans and that consumer loans are important to its efforts to serve the credit needs of the communities and customers that it serves. LOAN PORTFOLIO QUALITY 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 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 function works closely with senior management, 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 monthly. 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. - -------------------------------------------------------------------------------- 5. 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, 2000, loans placed in nonaccrual status were nominal in amount. At December 31, 2000, 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. Furthermore, management is not aware of any potential problem loans that could have a material effect on Mercantile's operating results, liquidity, or capital resources. Management is not aware of any other factors that would cause future net loan charge-offs, in total and by loan category, to significantly differ from those experienced by institutions of similar size. Additional detail and information relative to the loan portfolio is incorporated by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations ("Management's Discussion and Analysis") beginning on Page F-4 and Note 3 of the Consolidated Financial Statements on pages F-28 and F-29 included in 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 its loan review and credit departments, management attempts to allocate 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, but not limited to, consideration of internally prepared calculations based upon the experience of senior management and lending staff making similar loans in the same community over the past 15 years, composition of the loan portfolio, third party analysis of the loan administration processes and loan portfolio and general economic conditions. In addition, Mercantile's status as a de novo banking organization and the rapid loan growth since inception is taken into account. Management believes that the present allowance for loan losses is adequate, based on the broad range of considerations listed above. 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. 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. Additional detail regarding the allowance for loan losses is incorporated by reference to Management's Discussion and Analysis beginning on Page F-4 and Note 3 of the Consolidated Financial Statements on pages F-28 and F-29 included in 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 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. Although 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, Mercantile has no present plans to make any such equity investment. Mercantile's Board of Directors may alter the investment policy without shareholder approval. - -------------------------------------------------------------------------------- 6. 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 the acquisition and development of real property for sale, or the improvement of real property by construction or rehabilitation of residential or commercial units for sale or lease. 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 Division of Financial Institutions of the State of Michigan's Department of Consumer & Industry Services 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. Additional detail and information relative to the securities portfolio is incorporated by reference to Management's Discussion and Analysis beginning at Page F-4 and Note 2 of the Consolidated Financial Statements on pages F-27 and F-28 included in 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 from other entities which provide financial services, including consumer finance companies, securities brokerage firms, mortgage companies, 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 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 enacted legislation regarding interstate branching and banking has resulted in increased competition. SELECTED STATISTICAL INFORMATION Management's Discussion and Analysis beginning at Page F-4 in 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 in this Annual Report. ITEM 2. PROPERTIES 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 this facility, which commenced in 1997, has an initial term of ten years and the Bank has four, five-year renewal options. The address of this facility is 216 North Division Avenue, and is located between Lyon Street and Michigan Street in downtown Grand Rapids. - -------------------------------------------------------------------------------- 7. 8 The Bank designed and constructed a full service branch and operations facility in Alpine Township, a northwest suburb of Grand Rapids, that opened in July of 1999. The facility is one story, of masonry construction, and has approximately 8,000 square feet of usable space. The land and building is owned by the Bank. The facility has multiple drive-through lanes and ample parking space. The address of this facility is 4613 Alpine Avenue NW, Comstock Park, Michigan. In October 2000, construction began on two new facilities, both of which are being built on a 4-acre parcel of land purchased by the Bank earlier in 2000. The land is located in the City of Wyoming, a southwest suburb of Grand Rapids. The larger of the two buildings, a two-story facility of masonry construction with approximately 25,000 square feet of usable space, will serve as the new location for the operations and accounting departments and will include a full service branch. The other building, a single-story facility of masonry construction with approximately 7,000 square feet of usable space, will accommodate the administration function. The facilities, which will be owned by the Bank, are scheduled to open in August 2001. The location of these facilities will be on the southeast corner of 56th Street and Byron Center Avenue, Wyoming, 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
Name and Position Age ----------------- --- Gerald R. Johnson, Jr. 54 Chairman of the Board and Chief Executive Officer Michael H. Price 44 President and Chief Operating Officer Robert B. Kaminski 39 Senior Vice President and Secretary Charles E. Christmas 35 Senior Vice President, Chief Financial Officer and Treasurer
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 and Treasurer and Compliance Officer effective January 1, 1999. On October 12, 2000 Mr. Christmas was promoted to Senior Vice President, Chief Financial Officer and Treasurer. - -------------------------------------------------------------------------------- 8. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S 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 1, 2001, there were 102 record holders of Mercantile's common stock. In addition, Mercantile estimates that there were approximately 2,400 beneficial owners of its common stock who own their shares through brokers or banks. On January 10, 2001, Mercantile declared a 5% stock dividend on its common stock, payable on February 1, 2001 to record holders as of January 19, 2001. The stock dividend increased the number of common shares outstanding from 2,472,500 to 2,596,102. Mercantile has not paid cash dividends on its common stock since its formation in 1997, and currently has no intention of doing so in the foreseeable future. The following table shows the high and low bid prices by quarter during 2000 and 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, but have been adjusted for the stock dividend paid on February 1, 2001
BID PRICES HIGH LOW ---- --- CALENDAR YEAR 2000 First Quarter.............................................................................$12.35 $9.50 Second Quarter............................................................................$10.45 $8.79 Third Quarter.............................................................................$11.76 $8.91 Fourth Quarter............................................................................$12.35 $10.57 CALENDAR YEAR 1999 First Quarter.............................................................................$16.63 $12.35 Second Quarter............................................................................$15.79 $12.35 Third Quarter.............................................................................$15.20 $13.30 Fourth Quarter............................................................................$14.73 $11.64
ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data on page F-3 in this Annual Report is incorporated here by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Management's Discussion and Analysis on pages F-4 through F-18 in this Annual Report is incorporated here by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the heading "Market Risk Analysis" on pages F-16 through F-18 in this Annual Report is incorporated here by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Notes to Consolidated Financial Statement and the Report of Independent Public Accountants on pages F-19 through F-40 in this Annual Report are incorporated here by reference. - -------------------------------------------------------------------------------- 9. 10 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information listed under the captions "Information about Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement of Mercantile for its April 19, 2001 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 11. EXECUTIVE COMPENSATION The information presented under the captions "Summary Compensation Table," "Options Granted in 2000," "Aggregated Stock Option Exercises in 2000 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 12. 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information listed under the caption "Certain Transactions" in the Proxy Statement is incorporated here by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements. The following financial statements and report of independent public accountants of Mercantile Bank Corporation and its subsidiaries are filed as part of this report: Report of Independent Public Accountants dated January 19, 2001 Consolidated Balance Sheet --- December 31, 2000 and 1999 Consolidated Statements of Income for each of the three years in the period ended December 31, 2000 Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 2000 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000 - -------------------------------------------------------------------------------- 10. 11 Notes to Consolidated Financial Statements The financial statements, the notes to financial statements, and the report of independent public accountants listed above are incorporated by reference in Item 8 of this report. (2) Financial Statement Schedules Not applicable (b) Reports on Form 8-K Mercantile has not filed any reports on Form 8-K during the last quarter of the period covered by this Report. (c) 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 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 October 23, 1997 10.3 Agreement between Fiserve Solution, 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 the Bank 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 10.4 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 10.5 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) 10.6 Employment Agreement among Michael H. Price, Mercantile and the Bank dated December 1, 1998, is incorporated by reference to exhibit 10.6 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)
- -------------------------------------------------------------------------------- 11. 12
Exhibit No. EXHIBIT DESCRIPTION ----------- ------------------- 10.7 Mercantile Bank of West Michigan Deferred Compensation Plan for Members of the Board of Directors (1999) is incorporated by reference to exhibit 10.7 of the Registration Statement of Mercantile and MBWM Capital Trust I on Form SB-2 (Commission File 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 File 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 File 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 File 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., is incorporated by reference to exhibit 10.12 of Mercantile's Form 10-KSB for the fiscal year ended December 31, 1999 (Commission File No. 000-26719) (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, is incorporated by reference to exhibit 10.13 of Mercantile's Form 10-KSB for the fiscal year ended December 31, 1999 (Commission File No. 000-26719) (management contract or compensatory plan) 10.14 Mercantile Bank Corporation 2000 Employee Stock Option Plan, approved by the shareholders at the annual meeting on April 20, 2000 10.15 Extension Agreement of Data Processing Contract between Fiserve Solution, Inc. and the Bank dated May 12, 2000 extending the agreement between Fiserve Solution, Inc. and the Bank dated September 10, 1997 10.16 Amended and Restated Employment Agreement dated as of October 12, 2000, among Mercantile, the Bank and Gerald R. Johnson, Jr. (management contract or compensatory plan)
- -------------------------------------------------------------------------------- 12. 13
Exhibit No. EXHIBIT DESCRIPTION ----------- ------------------- 10.17 Amended and Restated Employment Agreement dated as of October 12, 2000, among Mercantile, the Bank and Michael H. Price (management contract or compensatory plan) 10.18 Employment Agreement dated as of October 12, 2000, among Mercantile, the Bank and Robert B. Kaminski (management contract or compensatory plan) 10.19 Employment Agreement dated as of October 12, 2000, among Mercantile, the Bank and Charles E. Christmas (management contract or compensatory plan) 10.20 Agreement between the Bank and C.D. Barnes dated October 28, 2000, on Amendment to Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is also the Constructor, for construction of two Bank facilities in Wyoming, Michigan 21 Subsidiaries of Mercantile 23 Consent of Independent Accountants
(d) Financial Statements Not Included In Annual Report Not applicable - -------------------------------------------------------------------------------- 13. 14 MERCANTILE BANK CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- F-1 15 MERCANTILE BANK CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 CONTENTS SELECTED FINANCIAL DATA................................................... F-3 MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... F-4 REPORT OF INDEPENDENT AUDITORS............................................ F-19 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS.......................................... F-20 CONSOLIDATED STATEMENTS OF INCOME.................................... F-21 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY........... F-22 CONSOLIDATED STATEMENTS OF CASH FLOWS................................ F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... F-24
- -------------------------------------------------------------------------------- F-2 16 SELECTED FINANCIAL DATA
2000 1999 1998 ---- ---- ---- (In thousands except per share data) CONSOLIDATED RESULTS OF OPERATIONS: Interest income $ 36,835 $ 22,766 $ 10,168 Interest expense 24,560 13,330 5,629 --------- --------- --------- Net interest income 12,275 9,436 4,539 Provision for loan losses 1,854 1,961 2,572 Noninterest income 1,192 848 488 Noninterest expense 7,515 5,888 3,564 --------- --------- --------- Income (loss) before income tax expense and cumulative effect of change in accounting principle 4,098 2,435 (1,109) Income tax expense 1,303 292 0 --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle 2,795 2,143 (1,109) Cumulative effect of change in accounting principle .. 0 (42) 0 --------- --------- --------- Net income (loss) $ 2,795 $ 2,101 $ (1,109) ========= ========= ========= CONSOLIDATED BALANCE SHEET DATA: Total assets $ 512,746 $ 368,037 $ 216,237 Cash and cash equivalents 18,102 13,650 6,456 Investment securities 60,457 41,957 24,160 Loans, net of deferred loan fees 429,804 308,006 184,745 Allowance for loan losses 6,302 4,620 2,765 Deposits 425,740 294,829 171,998 Securities sold under agreements to repurchase 32,151 26,607 17,038 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures 16,000 16,000 0 Shareholders' equity 31,854 27,968 26,701 CONSOLIDATED FINANCIAL RATIOS: Return on average assets 0.63% 0.71% (0.86)% Return on average shareholders' equity 9.48% 7.70% (6.40)% Nonperforming loans to loans 0.02% 0.00% 0.00% Allowance for loan losses to loans 1.47% 1.50% 1.50% Tier 1 leverage capital 8.59% 10.88% 13.83% Tier 1 leverage risk-based capital 8.59% 10.64% 11.79% Total risk-based capital 10.97% 13.67% 13.01% PER SHARE DATA: Net Income (Loss): Basic before cumulative effect of change in accounting principle $ 1.08 $ 0.83 $ (0.55) Diluted before cumulative effect of change in accounting principle 1.07 0.82 (0.55) Basic 1.08 0.81 (0.55) Diluted 1.07 0.80 (0.55) Book value at end of period 12.24 10.74 10.26 Dividends declared NA NA NA NA - Not Applicable
Note: 1997 data not meaningful as operations commenced on December 15, 1997. - -------------------------------------------------------------------------------- F-3 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Bank Corporation ("Mercantile"), Mercantile Bank of West Michigan ("Bank"), MBWM Capital Trust I ("Capital Trust") and Mercantile Bank Mortgage Company ("Mortgage Company"). 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. 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 and its wholly-owned subsidiaries, the Bank and Capital Trust, as well as the Mortgage Company, a wholly-owned subsidiary of the Bank. Mercantile was incorporated on July 15, 1997 as a bank holding company to establish and own the Bank. 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. Mercantile utilizes certificates of deposit from customers located outside of the primary market area to assist in funding the rapid asset growth Mercantile has experienced since inception. The 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 contribution to the Bank. The Mortgage Company, formed to increase the profitability and efficiency of Mercantile's mortgage loan operations, initiated business on October 24, 2000 from the Bank's contribution of most of its residential mortgage loan portfolio and participation interests in certain commercial mortgage loans to the Mortgage Company. On the same date the Bank also transferred its residential mortgage origination function to the Mortgage Company. Mortgage loans originated and held by the Mortgage Company will be serviced by the Bank pursuant to a servicing agreement. - -------------------------------------------------------------------------------- F-4 18 At certain times during 2000 Mercantile was engaged in preliminary discussions with several unaffiliated banking organizations to explore the possibility of an acquisition by Mercantile. To date the discussions have been exploratory in nature and no likely candidate has been identified. Mercantile expects that such discussions will continue with these or other banking organizations in future periods. FINANCIAL CONDITION Mercantile continued to experience significant asset growth during 2000. Assets increased from $368.0 million on December 31, 1999 to $512.7 million on December 31, 2000. This represents an increase in total assets of $144.7 million, or 39%. The increase in total assets was primarily comprised of a $120.1 million increase in net loans, an $18.5 million increase in investment securities and a $4.4 million increase in cash and cash equivalents. The increase in assets was primarily funded by a $130.9 million increase in deposits, a $5.5 million increase in securities sold under agreements to repurchase ("repurchase agreements"), and an increase of $2.8 million in retained income. EARNING ASSETS Average earning assets equaled over 96% of average total assets during 2000. Although Mercantile experienced significant asset growth during 2000, 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 2000, is primarily comprised of commercial loans. Constituting 91% of average loans and growing by $108.2 million during 2000, the commercial loan portfolio represents loans to business interests generally located within Mercantile's market area. Approximately 61% 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 only 9% of average loans during 2000, 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, 2000, according to scheduled repayments of principal on fixed rate loans and repricing frequency on variable rate loans.
0-1 1-5 After 5 Year Years Years Total ---- ----- ----- ----- Construction and land development - fixed rate $ 4,488,620 $ 10,305,471 $ 1,586,551 $ 16,380,642 Construction and land development - variable rate 22,434,794 22,434,794 Real estate - secured by nonfarm nonresidential properties - fixed rate 3,704,514 151,771,603 4,596,848 160,072,965 Real estate - secured by nonfarm nonresidential properties - variable rate 39,072,144 39,072,144 Commercial - fixed rate 2,393,673 66,243,029 6,337,305 74,974,007 Commercial - variable rate 76,278,024 91,997 76,370,021 ------------ ------------ ------------ ------------ $148,371,769 $228,412,100 $ 12,520,704 $389,304,573 ============ ============ ============ ============
- -------------------------------------------------------------------------------- F-5 19 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 remained very low and well below banking industry averages during 2000. As of December 31, 2000, past due loans and nonaccrual loans totaled $271,000, or only 0.06% of total loans. Of this amount, $176,000 was fully guaranteed by the U.S. Small Business Administration. Net loan charge-offs during 2000 totaled $173,000, or only 0.05% of average total loans. During 1999 net loan charge-offs equaled 0.04% of average total loans. 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 loan review and 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, although not limited to, consideration of the internally prepared Loan Loss Reserve Analysis ("Reserve Analysis"), composition of the loan portfolio, third party analysis of the loan administration processes and loan portfolio and general economic conditions. In addition, Mercantile's rapid loan growth since inception is taken into account. The Reserve Analysis, used since the inception of the Bank and completed monthly, applies reserve allocation factors to outstanding loan balances to calculate an overall allowance dollar amount. For commercial loans, which have averaged about 92% of total loans since the inception of the Bank, reserve allocation factors are based on the loan ratings as determined by Mercantile's comprehensive loan rating paradigm which is administered by the loan review function. For retail loans reserve allocation factors are based on the type of credit. Adjustments for specific loan relationships are made on a case-by-cases basis. The reserve allocation factors are primarily based on the experience of senior management and lending staff making similar loans in the same community over the past 15 years, and are adjusted periodically based upon identifiable trends and experience. The Reserve Analysis is under regular review by senior management and the Board of Directors. The following table illustrates the breakdown of the allowance balance to loan type (dollars in thousands).
2000 1999 ---- ---- 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 ------------- ------ -------------- ------ -------------- Commercial, financial and agricultural $5,839 90.6% $4,306 91.3% Residential real estate 369 7.8 239 7.3 Installment loans to individuals 94 1.6 75 1.4 Unallocated 0 N/A 0 N/A ------ ------ ------ ------ $6,302 100.0% $4,620 100.0% ====== ====== ====== ======
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. 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. - -------------------------------------------------------------------------------- F-6 20 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 in any given period that could be substantial in relation to, or greater than, the size of the allowance. The investment securities portfolio also experienced significant growth during 2000, increasing from $42.0 million on December 31, 1999 to $60.5 million at December 31, 2000. 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 2000, the portfolio equaled 12% of average earning assets. At December 31, 2000, the portfolio was comprised of high credit quality U.S. Government Agency issued and guaranteed mortgage-backed securities (57%), municipal general obligation and revenue bonds (26%), U.S. Government Agency issued bonds (16%) and Federal Home Loan Bank stock (1%). 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, 2000 and 1999 was $45.9 million and $34.9 million, respectively. The net unrealized gain/(loss) recorded at December 31, 2000 and 1999, was $290,000 and $(802,000), 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. As of December 31, 2000 and 1999, held to maturity securities had an amortized cost of $14.5 million and $7.1 million and a fair value of $14.9 million and $7.0 million, respectively. Federal funds sold, consisting of excess funds sold overnight to correspondent banks, are used to manage daily liquidity needs and interest rate sensitivity. During 2000, the average balance of these funds equaled 2% of average earning assets. This level is 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 $294.8 million at December 31, 1999, to $425.7 million on December 31, 2000. Included within these numbers is the excellent success Mercantile achieved in generating deposit growth from customers located within the market area during 2000. Local deposits increased from $103.3 million at December 31, 1999, to $126.7 million on December 31, 2000, an increase of over 22%. In addition, Mercantile's repurchase agreement program, which contains the characteristics of an interest-bearing checking account, increased by $5.5 million, or 21%, during the same time period. However, despite this success in obtaining funds from local customers, the substantial asset growth has necessitated the continued 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. During 2000 Mercantile experienced excellent growth in its check-writing deposit accounts, which include noninterest-bearing demand accounts, interest-bearing checking accounts and money market deposit accounts. In aggregate these deposit types grew by 26%. Leading the growth were noninterest-bearing demand accounts. Comprised primarily of business loan customers, noninterest-bearing demand accounts grew $7.9 million, or 40%, and equaled 5% of average funding sources during 2000. Interest-bearing checking accounts increased $1.9 million, or 18%, and equaled 3% of average funding sources during 2000. Money market deposit accounts decreased $0.4 million, or 7%, and equaled 1% of average funding sources during 2000, respectively. Business loan customers also comprise the majority of interest-bearing checking and money market deposit types, although to a lower extent than noninterest-bearing checking accounts. Pursuant to banking regulations, incorporated businesses may not own interest-bearing checking accounts and transactions from money market accounts are limited. Mercantile anticipates continued growth of its check-writing deposit accounts as additional business loans are extended. - -------------------------------------------------------------------------------- F-7 21 Savings account balances recorded a decline of $3.4 million, or 9%, during 2000, and equaled 8% of average funding sources during 2000. The decline was due primarily from several large customers withdrawing funds for business purposes, not from account closings. Business loan customers also comprise the majority of savings account holders, although to a lower extent than checking-writing accounts. Mercantile anticipates an increase in savings account balances as additional business loans are extended. Certificates of deposit purchased by customers located within the market area increased significantly during 2000, growing from $27.4 million at December 31, 1999, to $44.8 million on December 31, 2000, a growth rate of 63%. These deposits accounted for 9% of average funding sources during 2000. Leading the growth were certificates of deposit issued to local municipalities, primarily counties, cities and townships, increasing from $7.0 million at December 31, 1999, to $18.6 million on December 31, 2000. The increase is due primarily from Mercantile qualifying for additional funds from existing customers through a combination of asset growth and profitability as measured by the municipalities' investment policy guidelines, and is a trend that Mercantile expects to continue. During 2000 certificates of deposit obtained from customers located outside of the market area increased by $107.5 million, and represented 56% of average funding sources during 2000. At December 31, 2000, this deposit type totaled $299.0 million. These certificates of deposit were primarily 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. During most of 2000 rates paid on new out-of-area certificates of deposit were very similar to rates paid on new certificates of deposit issued to local customers. 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. The reliance on out-of-area certificates of deposit is expected to remain given Mercantile's asset growth expectations. Repurchase agreements increased $5.5 million and equaled 7% of average funding sources during 2000. Part of Mercantile's sweep account program, collected funds from certain business noninterest-bearing checking accounts, are invested into overnight 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. Shareholders' equity increased $3.9 million and equaled 7% of average funding sources during 2000. The increase is attributable to net income from operations, which totaled $2.8 million, and a $1.1 million mark-to-market adjustment for available for sale securities as defined in SFAS No. 115. This adjustment is due solely to the changes in the interest rate environment during 2000. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 SUMMARY Mercantile recorded strong earnings performance during 2000, only its third full year of operations. Net income was $2.8 million, or $1.08 per basic share and $1.07 per diluted share. This earnings performance compares very favorably to net income of $2.1 million, or $0.81 per basic share and $0.80 per diluted share, recorded in 1999. The 1999 net income figure includes a one-time charge of $42,210 ($0.02 per share), reflecting a change in accounting for organization costs. The earnings improvement during 2000 over that of 1999 is primarily attributable to increased net interest income and improved operating efficiencies resulting from asset growth, strong credit culture, and controlled overhead expenses, and was achieved despite a significant increase in federal income tax expense. As in 1999, significant loan growth necessitated large provisions to the allowance during 2000, substantially impacting Mercantile's earnings performance. A rate of loan growth exceeding the banking average is anticipated in 2001. - -------------------------------------------------------------------------------- F-8 22 The following table shows some of the key performance and equity ratios for the years ended December 31, 2000 and 1999.
2000 1999 ---- ---- Return on average total assets 0.6% 0.7% Return on average equity 9.5 7.7 Dividend payout ratio N/A N/A Average equity to average assets 6.6 9.2
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 (adjusted for tax-exempt income) and interest expense totaled $37.1 million and $24.6 million during 2000, respectively, providing for net interest income of $12.5 million. This performance compares very favorably to that of 1999 when interest income and interest expense were $22.8 million and $13.3 million, respectively, providing for net interest income of $9.5 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 3.30% in 1999 to 2.90% in 2000, primarily resulting from the full-year's impact of the September 1999 issuance of trust preferred securities, increased reliance on out-of-area certificates of deposit and lower level of shareholders' equity as a percent of average assets. The following table depicts the average balance, interest earned and paid, and weighted average rate of Mercantile's assets, liabilities and shareholders' equity during 2000, 1999 and 1998 (dollars in thousands). 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%.
Years ended December 31, --------------2000------------- ---------------1999------------- -------------1998---------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ------- -------- ------- Taxable securities $ 38,788 $ 2,662 6.86% $ 30,124 $ 1,869 6.20% $ 15,375 $ 881 5.73% Tax-exempt securities 10,972 782 7.12 1,251 84 6.74 0 0 0.00 --------- --------- --------- --------- --------- --------- Total securities 49,760 3,444 6.92 31,375 1,953 6.22 15,375 881 5.73 Loans 372,428 33,057 8.88 246,921 20,410 8.27 105,075 9,008 8.57 Short-term investments 115 6 4.74 551 26 4.68 413 23 5.68 Federal funds sold 8,986 567 6.31 8,099 406 5.01 4,821 256 5.32 --------- --------- --------- --------- --------- --------- Total earning assets 431,289 37,074 8.60 286,946 22,795 7.94 125,684 10,168 8.09 Allowance for loan losses (5,527) (3,681) (1,590) Cash and due from banks 8,926 7,096 4,229 Other non-earning assets 10,044 6,099 2,540 --------- --------- --------- Total assets $ 444,732 $ 296,460 $ 130,863 ========= ========= =========
- -------------------------------------------------------------------------------- F-9 23
Years ended December 31, --------------2000-------------- ---------------1999------------ -------------1998------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ------- -------- ------- Interest-bearing demand deposits $ 11,207 $ 501 4.47% $ 8,575 $ 351 4.09% $ 4,025 $ 171 4.24% Savings deposits 36,040 1,875 5.20 38,886 1,871 4.81 17,494 904 5.17 Money market accounts 5,405 251 4.64 4,411 189 4.29 1,170 58 4.98 Time deposits 288,791 18,992 6.58 173,158 9,629 5.56 68,243 4,008 5.87 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total interest- bearing deposits 341,443 21,619 6.33 225,030 12,040 5.35 90,932 5,141 5.65 Short-term borrowings 29,331 1,369 4.67 20,229 835 4.13 10,376 488 4.71 Long-term borrowings 16,033 1,572 9.80 4,654 455 9.78 0 0 0.00 -------- -------- -------- -------- -------- -------- Total interest- bearing liabilities 386,807 24,560 6.35 249,913 13,330 5.33 101,308 5,629 5.56 -------- -------- -------- Demand deposits 23,568 17,812 10,782 Other liabilities 4,893 1,447 343 -------- -------- -------- Total liabilities 415,268 269,172 112,433 Average equity 29,464 27,288 18,430 -------- -------- -------- Total liabilities and equity $444,732 $296,460 $130,863 ======== ======== ======== Net interest income $ 12,514 $ 9,465 $ 4,539 ======== ======== ======== Rate spread 2.25 2.61 2.53 Net interest margin 2.90 3.30 3.61
Years ended December 31, -------------2000 over 1999--------------- -------------1999 over 1998-------------- Total Volume Rate Total Volume Rate ----- ------ ---- ----- ------ ---- Increase (decrease) in interest income Taxable securities $ 793,736 $ 579,224 $ 214,512 $ 988,140 $ 909,383 $ 78,757 Tax exempt securities 697,304 692,256 5,048 84,286 84,286 0 Loans 12,646,547 11,042,857 1,603,690 11,402,485 11,736,016 (333,531) Short term investments (20,358) (20,681) 323 2,336 6,926 (4,590) Federal funds sold 161,720 47,814 113,906 149,236 165,035 (15,799) ------------ ------------ ------------ ------------ ------------ ------------ Net change in tax-equivalent income 14,278,949 12,341,470 1,937,479 12,626,483 12,901,646 (275,163) Increase (decrease) in interest expense Interest-bearing demand deposits 150,459 115,433 35,026 180,447 186,460 (6,013) Savings deposits 3,864 (142,183) 146,047 966,973 1,033,269 (66,296) Money market accounts 61,803 45,219 16,584 130,733 139,968 (9,235) Time deposits 9,363,466 7,352,358 2,011,108 5,620,966 5,845,057 (224,091) Short term borrowings 533,604 413,787 119,817 346,867 413,370 (66,503) Long term borrowings 1,116,660 1,115,539 1,121 455,216 455,216 0 ------------ ------------ ------------ ------------ ------------ ------------ Net change in interest expense 11,229,856 8,900,153 2,329,703 7,701,202 8,073,340 (372,138) ------------ ------------ ------------ ------------ ------------ ------------ Net change in tax-equivalent net interest income $ 3,049,093 $ 3,441,317 $ (392,224) $ 4,925,281 $ 4,828,306 $ 96,975 ============ ============ ============ ============ ============ ============
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 $14.3 million during 2000 from that earned in 1999, totaling $37.1 million in 2000 compared to $22.8 million in the previous year. Approximately 86% of the increase is due to the growth in earning assets, with the remaining amount due to the increased interest rate environment during 2000. The yield on average earning assets increased from the 7.94% recorded in 1999 to 8.60% in 2000. - -------------------------------------------------------------------------------- F-10 24 The growth in interest income is primarily attributable to an increase in earning assets. During 2000, earning assets averaged $431.3 million, a level substantially higher than the average earning assets of $286.9 million during 1999. Growth in average total loans, totaling $125.5 million, comprised 87% of the increase in average earnings assets. Interest income generated from the loan portfolio increased $12.6 million during 2000 over the level earned in 1999, comprised of an increase of $11.0 million due to growth in the loan portfolio and an increase of $1.6 million due to an increase in the yield earned on the loan portfolio. The improved loan portfolio yield is primarily due to increased market interest rates during 2000. Growth in the investment securities portfolio and a slightly larger federal funds sold position also added to the increase in interest income during 2000 over that of 1999. Average investment securities increased by $18.4 million in 2000, increasing from $31.4 million in 1999 to $49.8 million in 2000. This growth equated to an increase in interest income of $1.3 million. A higher investment securities portfolio yield during 2000 also increased interest income by $0.2 million. Average federal funds sold increased about $0.9 million in 2000 that, when combined with an increase in yield, added $0.2 million to interest income. The improved yield on investment securities and federal funds sold is the result of increased market rates during 2000. Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree repurchase agreements and trust preferred securities. Interest expense increased $11.2 million during 2000 from that paid in 1999, totaling $24.5 million in 2000 compared to $13.3 million in the previous year. The growth in interest expense is primarily attributable to an increase in interest-bearing liabilities and increased market interest rates during 2000. Interest-bearing liabilities averaged $386.8 million during 2000, a level substantially higher than the average interest-bearing liabilities of $249.9 million during 1999. This growth resulted in increased interest expense of $8.9 million. Increased interest expense of $2.3 million was recorded during 2000 due to higher market interest rates on all interest-bearing liability categories except trust preferred securities that have a fixed interest rate. The cost of average interest-bearing liabilities increased from the 5.33% recorded in 1999 to 6.35% in 2000. Growth in average certificates of deposits, totaling $115.6 million, comprised 84% of the increase in average interest-bearing liabilities between 2000 and 1999. The certificate of deposit growth during 2000 equated to an increase in interest expense of $7.4 million. In addition, interest expense of $2.0 million was recorded due to the increase in the average rate paid. Growth in repurchase agreements also added to the increased interest expense during 2000 over that of 1999, as average repurchase agreements grew from $20.2 million in 1999 to $29.3 million in 2000. The growth equated to an increase in interest expense of $0.4 million, with an additional $0.1 million in interest expense recorded due to the increase in the average rate paid. Higher interest rates paid on interest-bearing checking accounts, savings deposits and money market accounts added, in aggregate, $0.2 million in interest expense during 2000, while the change in volume added less than $0.1 million in interest expense. The September 1999 issuance of $16.0 million trust preferred securities had a sizeable impact on interest expense during 2000, adding $1.1 million in interest expense over that recorded during 1999. PROVISION FOR LOAN LOSSES Reflecting continued significant loan growth the provision for loan losses totaled approximately $1.9 million during 2000, compared to the $2.0 million expensed during 1999. The allowance as a percentage of total loans outstanding as of December 31, 2000 was 1.47%, slightly lower than the 1.50% at year-end 1999. Net loan charge-offs during 2000 approximated $173,000, or only 0.05% of average total loans. Loan charge-offs during 1999 totaled $106,000, or 0.04% of average total loans. Mercantile maintains the allowance at a level management feels is adequate to absorb losses contained within the loan portfolio. NONINTEREST INCOME Other income totaled $1.2 million in 2000, a significant increase over the $0.8 million earned in 1999. Deposit and repurchase agreement service charges totaled $346,000 in 2000, an increase of $144,000, or 71%, from the amount earned in 1999. 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 $391,000 in 2000, an increase of $123,000, or 46%, from the fees earned in 1999. Credit card and debit card interchange income, reflecting increased issuance and usage, increased $46,000 during 2000, totaling $144,000 for the year. Fees earned on referring residential mortgage loan applicants to various third parties, reflecting a decline in volume due to the increased rate environment, totaled $175,000 in 2000, compared to the $208,000 earned in 1999. - -------------------------------------------------------------------------------- F-11 25 To reduce the negative impact of rising interest rates on net interest income, during the second quarter of 2000 Mercantile entered into a $50 million two-year interest rate swap agreement with a correspondent bank. Due to market expectations and the resulting impact on the value of the interest rate swap agreement, Mercantile terminated the interest rate swap agreement to lock-in the earned benefit shortly thereafter. A termination fee of $275,000 was received from the correspondent bank. At the same time Mercantile elected to sell $7.0 million in relatively low-yielding U.S. Government-Sponsored Agency callable bonds and reinvest the monies in higher-yielding U.S. Government-Sponsored mortgage-backed securities. The loss on the sale of the bonds totaled $275,000; however, the consummation of this transaction will generate a higher level of interest income than would have otherwise been earned over at least the next three years on a present value basis, while at the same time improving Mercantile's interest rate risk position. NONINTEREST EXPENSE Noninterest expense during 2000 totaled $7.5 million, a significant increase over the $5.9 million expensed in 1999. 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 in mid-1999. All other noninterest costs also increased, reflecting additional expenses required to administer the significantly increased loan and deposit base. 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 2000, noninterest costs were 1.69% of average assets, a significant decline from the 1.99% level in 1999. The efficiency ratio, a banking industry standardized calculation that attempts to reflect the utilization of overhead costs, also declined during 2000. Computed by dividing noninterest expenses by net interest income plus noninterest income, the efficiency ratio was 55.8% in 2000. This level compares very favorably to a very respectable 57.3% recorded in 1999, 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, 2000 was a relatively high $7.9 million. FEDERAL INCOME TAX EXPENSE Federal income tax expense was $1.3 million in 2000, or 32% of pre-tax net operating income, compared to $0.3 million, or 12% of pre-tax net operating income, in 1999. During 1999 Mercantile used tax-loss carryforwards generated in 1997 and 1998 to reduce federal income tax expense. These tax-loss carryforwards were fully utilized over the course of 1999; therefore, Mercantile had to expense the full statutory tax rate in 2000. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 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. - -------------------------------------------------------------------------------- F-12 26 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. 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. 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-13 27 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 9.81% 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. 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. - -------------------------------------------------------------------------------- F-14 28 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 $31.9 million and $28.0 million at December 31, 2000 and 1999, respectively. The increase during 2000 is attributable to net income from operations totaling $2.8 million and a $1.1 million mark-to-market adjustment for available for sale securities as defined in SFAS No. 115. The mark-to-market adjustment was due to the difference in the interest rate environment between year-end 2000 and year-end 1999. In September 1999 Mercantile, through its wholly-owned business trust subsidiary, Capital Trust, issued 1.6 million shares of trust preferred stock at $10.00 per share. 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, 2000, $10.5 million of the $16.0 million was considered Tier 1 capital, 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. To provide sufficient capital for anticipated asset growth, Mercantile has been evaluating alternatives for increasing its capital. On February 21, 2001 Mercantile sold 70,000 shares of common stock in a private placement for approximately $1.0 million. Mercantile contributed the proceeds to the Bank as capital. In order to maintain adequate capital to support continuing asset growth, Mercantile expects to continue evaluating alternatives for increasing its capital. 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, 2000 and 1999 are disclosed under Note 16 on page F-37 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. Mercantile declared a 5% stock dividend on January 10, 2001, payable on February 1, 2001 to record holders as of January 19, 2001. Mercantile has not paid cash dividends on its common stock since its formation in 1997, and currently has no intention of doing so in the foreseeable future. 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. - -------------------------------------------------------------------------------- F-15 29 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 $29.0 million, or 22%, during 2000, the growth was not sufficient to meet the substantial loan growth of $121.8 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, 2000, out-of-area deposits totaled $299.0 million, or 65% of combined deposits and repurchase agreements, an increase from the $191.5 million, or 59% of combined deposits and repurchase agreements, as of December 31, 1999. Reliance on out-of-area deposits is expected to be ongoing due to the planned future growth. Mercantile has the ability to borrow money on a daily basis through correspondent banks using established federal funds purchased lines; however, this is viewed as only a secondary and temporary source of funds. The federal funds purchased lines were utilized on only rare occasions during 2000. During 2000, Mercantile's federal funds sold position averaged $9.0 million. In addition, as a member of the Federal Home Loan Bank of Indianapolis ("FHLBI"), Mercantile has access to the FHLBI's borrowing programs. Based on ownership of FHLBI stock and available collateral at December 31, 2000, the Bank could borrow up to $15.0 million. The Bank has yet to use its established borrowing line at the FHLBI. On February 28, 2001 Mercantile was extended a $10.0 million unsecured revolving line of credit from a correspondent bank. The line of credit matures on February 27, 2002. Proceeds from the line of credit may be used for working capital, investment in the Bank or acquisition of financial institutions. 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, 2000, Mercantile had a total of $121.5 million in unfunded loan commitments and $36.9 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $101.4 million were commitments available as lines of credit to be drawn at any time as customers' cash needs vary, and $20.1 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. 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. - -------------------------------------------------------------------------------- F-16 30 Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. Mercantile's interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk Mercantile assesses the existing and potential future effects of changes in interest rates on its financial condition, including capital adequacy, earnings, liquidity and asset quality. There are two interest rate risk measurement techniques used by Mercantile. The first, which is commonly referred to as GAP analysis, measures the difference between the dollar amounts of interest-sensitive assets and liabilities that will be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to the net interest margin during periods of changing market interest rates. The following table depicts Mercantile's GAP position as of December 31, 2000 (dollars in thousands):
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------ -------- ------ ------ ----- Assets: Commercial loans $ 139,454 $ 8,917 $ 228,412 $ 12,521 $ 389,304 Residential real estate loans 9,186 1,913 16,181 6,429 33,709 Consumer loans 1,559 917 4,107 208 6,791 Investment securities (1) 785 604 14,497 44,571 60,457 Federal funds sold 6,300 6,300 Short term investments 109 109 Allowance for loan losses (6,302) (6,302) Other assets 22,378 22,378 --------- ----------- ----------- --------- --------- Total assets 157,393 12,351 263,197 79,805 512,746 Liabilities: Interest-bearing checking 12,968 12,968 Savings 36,331 36,331 Money market accounts 5,196 5,196 Time deposits under $100,000 17,923 35,245 8,257 61,425 Time deposits $100,000 and over 64,939 172,967 44,546 282,452 Short term borrowings 32,151 32,151 Long term borrowings 57 16,000 16,057 Noninterest-bearing checking 27,368 27,368 Other liabilities 6,944 6,944 --------- ----------- ----------- --------- --------- Total liabilities 169,565 208,212 52,803 50,312 480,892 Shareholders' equity 31,854 31,854 --------- ----------- ----------- --------- --------- Total sources of funds 169,565 208,212 52,803 82,166 512,746 --------- ----------- ----------- --------- --------- Net asset (liability) GAP $ (12,172) $ (195,861) $ 210,394 $ (2,361) ========= =========== =========== ========= Cumulative GAP $ (12,172) $ (208,033) $ 2,361 ========= =========== =========== Percent of cumulative GAP to total assets (2.4)% (40.6)% 0.5% ========= =========== ===========
(1) Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of December 31, 2000. - -------------------------------------------------------------------------------- F-17 31 The second interest rate risk measurement used is commonly referred to as net interest income simulation analysis. Mercantile believes that this methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and therefore, serves as the primary interest rate risk measurement technique used by Mercantile. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates. Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest-sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and Mercantile's strategies, among other factors. Mercantile conducted multiple simulations as of December 31, 2000, 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.
Dollar Change In Percent Change In Interest Rate Scenario Net Interest Income Net Interest Income ---------------------- ------------------- ------------------- Interest rates down 200 basis points $687,000 4.8% Interest rates down 100 basis points 451,000 3.2 No change in interest rates 213,000 1.5 Interest rates up 100 basis points 137,000 1.0 Interest rates up 200 basis points 64,000 0.5
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. - -------------------------------------------------------------------------------- F-18 32 [CROWE CHIZEK LOGO] 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, 2000 and 1999 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 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 Crowe, Chizek and Company LLP Grand Rapids, Michigan January 19, 2001 - -------------------------------------------------------------------------------- F-19 33 MERCANTILE BANK CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 - --------------------------------------------------------------------------------
2000 1999 ---- ---- ASSETS Cash and due from banks $ 11,692,825 $ 6,570,631 Short term investments 108,846 579,725 Federal funds sold 6,300,000 6,500,000 ------------- ------------- Total cash and cash equivalents 18,101,671 13,650,356 Securities available for sale 45,147,493 34,115,303 Securities held to maturity (fair value of $14,942,311 at December 31, 2000 and $6,982,329 at December 31, 1999) 14,524,341 7,056,492 Federal Home Loan Bank stock 784,900 784,900 Total loans 429,804,105 308,006,476 Allowance for loan losses (6,301,805) (4,620,469) ------------- ------------- Total loans, net 423,502,300 303,386,007 Premises and equipment - net 4,119,385 3,461,187 Accrued interest receivable 2,758,054 1,842,874 Other assets 3,808,218 3,739,969 ------------- ------------- Total assets $ 512,746,362 $ 368,037,088 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 27,368,257 $ 19,513,231 Interest-bearing 398,372,056 275,315,741 ------------- ------------- Total 425,740,313 294,828,972 Securities sold under agreements to repurchase 32,151,391 26,607,289 Other borrowed money 56,510 13,755 Accrued expenses and other liabilities 6,944,262 2,619,203 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures 16,000,000 16,000,000 ------------- ------------- Total liabilities 480,892,476 340,069,219 Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, none issued Common stock, no par value; 9,000,000 shares authorized; 2,596,102 and 2,472,500 shares outstanding at December 31, 2000 and 1999 29,935,401 28,181,798 Retained earnings 1,628,277 587,639 Accumulated other comprehensive income (loss) 290,208 (801,568) ------------- ------------- Total shareholders' equity 31,853,886 27,967,869 ------------- ------------- Total liabilities and shareholders' equity $ 512,746,362 $ 368,037,088 ============= =============
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-20 34 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------
2000 1999 1998 ---- ---- ---- Interest income Loans, including fees $ 33,056,700 $ 20,410,153 $ 9,007,668 Investment securities 3,206,105 1,925,065 880,639 Federal funds sold 567,379 405,659 256,422 Short term investments 5,464 25,822 23,487 ------------ ------------ ------------ Total interest income 36,835,648 22,766,699 10,168,216 Interest expense Deposits 21,619,499 12,039,907 5,140,788 Short term borrowings 1,368,901 835,297 488,430 Long term borrowings 1,571,876 455,216 0 ------------ ------------ ------------ Total interest expense 24,560,276 13,330,420 5,629,218 ------------ ------------ ------------ NET INTEREST INCOME 12,275,372 9,436,279 4,538,998 Provision for loan losses 1,854,000 1,960,900 2,571,800 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,421,372 7,475,379 1,967,198 Noninterest income Service charges on accounts 346,131 201,796 82,170 Letter of credit fees 391,143 267,753 159,064 Mortgage loan referral fees 174,579 208,042 209,667 Gain on sale of loans 49,975 13,047 0 Gain (loss) on sale of securities (275,321) 0 128 Interest rate swap termination fee 275,000 0 0 Other income 230,395 156,905 37,149 ------------ ------------ ------------ Total noninterest income 1,191,902 847,543 488,178 Noninterest expense Salaries and benefits 4,274,262 3,256,456 1,891,264 Occupancy 510,357 412,531 304,231 Furniture and equipment 440,378 350,131 176,756 Data processing 435,433 335,079 170,990 Advertising 196,763 157,973 110,431 Loan processing cost 74,855 63,582 153,835 Other expense 1,583,659 1,312,203 756,916 ------------ ------------ ------------ Total noninterest expenses 7,515,707 5,887,955 3,564,423 ------------ ------------ ------------ INCOME (LOSS) BEFORE FEDERAL INCOME TAX AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 4,097,567 2,434,967 (1,109,047) Federal income tax expense 1,303,000 292,000 0 ------------ ------------ ------------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,794,567 2,142,967 (1,109,047) Cumulative effect of change in accounting principle (net of taxes) 0 (42,210) 0 ------------ ------------ ------------ NET INCOME (LOSS) $ 2,794,567 $ 2,100,757 $ (1,109,047) ============ ============ ============ Earnings (loss) per share before cumulative effect of change in accounting principle: Basic $ 1.08 $ 0.83 $ (0.55) ============ ============ ============ Diluted $ 1.07 $ 0.82 $ (0.55) ============ ============ ============ Per share cumulative effect of change in accounting principle $ 0.00 $ 0.02 $ 0.00 ============ ============ ============ Earnings (loss) per share: Basic $ 1.08 $ 0.81 $ (0.55) ============ ============ ============ Diluted $ 1.07 $ 0.80 $ (0.55) ============ ============ ============ Average shares outstanding 2,596,102 2,596,102 2,003,018 ============ ============ ============
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-21 35 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998
Accumulated Retained Other Total Common Earnings Comprehensive Shareholders' Stock (Deficit) Income Equity ------- --------- ------------- ------------ 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 Comprehensive income (loss): Net loss (1,109,047) (1,109,047) Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effect 35,467 35,467 ------------ Total comprehensive income (loss) (1,073,580) ------------ ------------ ------------ ------------ BALANCES, DECEMBER 31, 1998 28,181,798 (1,513,118) 31,836 26,700,516 Comprehensive income: Net income 2,100,757 2,100,757 Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effect (833,404) (833,404) ------------ Total comprehensive income 1,267,353 ------------ ------------ ------------ ------------ BALANCES, DECEMBER 31, 1999 28,181,798 587,639 (801,568) 27,967,869 Payment of 5% stock dividend 1,753,603 (1,753,929) (326) Comprehensive income: Net income 2,794,567 2,794,567 Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effect 1,091,776 1,091,776 ------------ Total comprehensive income 3,886,343 ------------ ----------- ------------ ------------ BALANCES, DECEMBER 31, 2000 $ 29,935,401 $ 1,628,277 $ 290,208 $ 31,853,886 ============ =========== ============ ============
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-22 36 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,794,567 $ 2,100,757 $ (1,109,047) Adjustments to reconcile net income (loss) to net cash from operating activities Depreciation and amortization 590,087 538,996 274,364 Provision for loan losses 1,854,000 1,960,900 2,571,800 Gain on sale of loans (49,975) (13,047) 0 (Gain)/loss on sale of securities 275,321 0 (128) Net change in Accrued interest receivable (915,180) (695,042) (1,095,021) Other assets (827,706) (2,869,730) (432,695) Accrued expenses and other liabilities 4,325,059 2,118,482 208,517 ------------- ------------- ------------- Net cash from operating activities 8,046,173 3,141,316 417,790 CASH FLOWS FROM INVESTING ACTIVITIES Loan originations and payments, net (121,920,318) (123,354,358) (171,857,839) Purchase of: Securities available for sale (19,816,814) (17,765,304) (28,320,575) Securities held to maturity (7,472,674) (7,056,858) 0 Federal Home Loan Bank stock 0 (784,900) 0 Premises and equipment (1,098,833) (1,926,748) (1,082,815) Proceeds from: Sales of available for sale securities 6,718,120 0 1,000,313 Maturities and repayments of available for sale securities 3,497,789 6,526,816 6,203,087 ------------- ------------- ------------- Net cash from investing activities (140,092,730) (144,361,352) (194,057,829) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 130,911,341 122,830,953 162,309,755 Proceeds from the sale of trust preferred securities 0 16,000,000 0 Net proceeds from sale of common stock 0 0 14,300,826 Net increase in other borrowed money 42,755 13,755 0 Fractional shares purchased (326) 0 0 Net increase in securities sold under agreements to repurchase 5,544,102 9,569,688 16,382,154 ------------- ------------- ------------- Net cash from financing activities 136,497,872 148,414,396 192,992,735 ------------- ------------- ------------- Net change in cash and cash equivalents 4,451,315 7,194,360 (647,304) Cash and cash equivalents at beginning of period 13,650,356 6,455,996 7,103,300 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,101,671 $ 13,650,356 $ 6,455,996 ============= ============= ============= Supplemental disclosures of cash flow information Cash paid during the year for Interest $ 20,382,032 $ 11,796,860 $ 5,237,768 Federal income tax 1,693,000 1,620,773 165,000 Cash received during the year for Gain on termination of interest rate swap 275,000 0 0
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. F-23 37 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 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 its wholly-owned subsidiary, Mercantile Bank Mortgage Company, 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. Substantially all revenues are derived from banking products and services. Mercantile Capital Trust I ("Capital Trust") was formed in September 1999. All of the common securities of this special purpose trust are owned by Mercantile. 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. The capital securities are presented as a separate line item on the consolidated balance sheet as guaranteed preferred beneficial interests in Mercantile's subordinated debentures. During 2000, the Mercantile Bank Mortgage Company ("Mortgage Company"), a wholly-owned subsidiary of the Bank, was established to increase the profitability and efficiency of its mortgage loan operations. The Mortgage Company initiated business on October 24, 2000 via the Bank's contribution of most of its residential mortgage loan portfolio and participation interests in certain commercial mortgage loans. On the same date the Bank also transferred its residential mortgage origination function to the Mortgage Company. Mortgage loans originated and held by the Mortgage Company are serviced by the Bank pursuant to a servicing agreement. Mercantile's election to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act and implementing Federal Reserve Board regulations was effective March 23, 2000. At the present time Mercantile has no plans to engage in any of the expanded activities permitted under the new regulations. 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. - -------------------------------------------------------------------------------- (Continued) F-24 38 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Securities are written down to fair value when a decline in fair value is not temporary. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Payments received on such loans are reported as principal reductions. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and recoveries, and decreased by charge-offs. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. A loan is impaired 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 or at the fair value of collateral if repayment is expected solely from the collateral. 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. - -------------------------------------------------------------------------------- (Continued) F-25 39 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financials instruments are recorded when they are funded. Interest Rate Hedge Agreements: Mercantile may enter into interest rate hedge agreements which involve the exchange of fixed and floating rate interest payments over the life of the agreement without the exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements as an adjustment to interest income. 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. 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. Earnings (loss) per share are restated for all stock dividends, including the 5% stock dividend paid on February 1, 2001. 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. - -------------------------------------------------------------------------------- (Continued) F-26 40 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Adoption of this standard on January 1, 2001 did not have a material effect on the Bank's condition or results of operations. 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:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Values ---------- ---------- ----------- ----------- AVAILABLE FOR SALE 2000 U.S. Government agency debt obligations $ 9,800,282 $ 137,309 $ (60,271) $ 9,877,320 Mortgage-backed securities 33,907,502 475,643 (117,287) 34,265,858 Municipal revenue bonds 1,000,000 4,315 0 1,004,315 ------------ ------------ ------------ ------------ $ 44,707,784 $ 617,267 $ (177,558) $ 45,147,493 ============ ============ ============ ============ 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 ------------ ------------ ------------ ------------ $ 35,329,867 $ 0 $ (1,214,564) $ 34,115,303 ============ ============ ============ ============ HELD TO MATURITY 2000 Municipal general obligation bonds $ 13,065,553 $ 394,004 $ (926) $ 13,458,631 Municipal revenue bonds 1,458,788 30,463 (5,571) 1,483,680 ------------ ------------ ------------ ------------ $ 14,524,341 $ 424,467 $ (6,497) $ 14,942,311 ============ ============ ============ ============ 1999 Municipal general obligation bonds $ 6,433,594 $ 0 $ (51,132) $ 6,382,462 Municipal revenue bonds 622,898 0 (23,031) 599,867 ------------ ------------ ------------ ------------ $ 7,056,492 $ 0 $ (74,163) $ 6,982,329 ============ ============ ============ ============
The amortized cost and fair values of debt investment securities at year-end 2000, 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. - -------------------------------------------------------------------------------- (Continued) F-27 41 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 2 - INVESTMENT SECURITIES (Continued)
--------------Held-to-Maturity------ --------Available-for-Sale---------- Weighted Weighted Average Amortized Fair Average Amortized Fair Yield Cost Value Yield Cost Value --------- --------- ----- ------ --------- ----- Due in one year or less 5.38% $ 102,257 $ 102,210 6.35% $ 500,000 $ 501,395 Due from one to five years 6.66 2,459,284 2,494,428 6.12 5,500,813 5,471,660 Due from five to ten years 6.87 5,470,924 5,626,116 7.35 3,899,383 3,946,710 Due after ten years 7.67 6,491,876 6,719,557 7.74 900,086 961,870 Mortgage-backed NA -- -- 6.98 33,907,502 34,265,858 ----------- ----------- ----------- ----------- 7.19 $14,524,341 $14,942,311 6.92 $44,707,784 $45,147,493 =========== =========== =========== ===========
During 2000, investment securities with an aggregated amortized cost basis of $6,993,441 were sold, resulting in an aggregate realized loss of $275,321. There were no sales of investment securities during 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 $40,015,759 and $28,733,258 at December 31, 2000 and 1999, respectively. NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES Year-end loans are as follows:
Percent December 31, 2000 December 31, 1999 Increase/ Balance % Balance % (Decrease) ------- - ------- - ---------- Real Estate: Construction and land development $ 38,815,436 9.0% $ 37,224,847 12.1% 4.3% Secured by 1 - 4 family properties 33,708,709 7.8 22,535,386 7.3 49.6 Secured by multi- family properties 2,127,047 0.5 2,326,684 0.8 (8.6) Secured by nonfarm nonresidential properties 197,018,062 45.9 157,686,466 51.2 24.9 Commercial 151,344,028 35.2 83,908,726 27.2 80.4 Consumer 6,790,823 1.6 4,324,367 1.4 57.0 ------------ ----- ------------ ----- ----- $429,804,105 100.0% $308,006,476 100.0% 39.5% ============ ===== ============ ===== =====
Activity in the allowance for loan losses is as follows:
2000 1999 1998 ---- ---- ---- Beginning balance $ 4,620,469 $ 2,765,100 $ 193,300 Provision charged to operating expense 1,854,000 1,960,900 2,571,800 Charge-offs (185,876) (108,531) 0 Recoveries 13,212 3,000 0 ----------- ----------- ----------- Ending balance $ 6,301,805 $ 4,620,469 $ 2,765,100 =========== =========== ===========
- -------------------------------------------------------------------------------- (Continued) F-28 42 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Impaired loans were as follows:
2000 1999 ---- ---- Year-end loans with no allocated allowance for loan losses $ 0 $ 0 Year-end loans with allocated allowance for loan losses 94,892 0 -------- -------- $ 94,892 $ 0 ======== ======== Amount of the allowance for loan losses allocated $ 20,000 $ 0 Average of impaired loans during the year 138,518 24,347
The Bank did not recognize any interest income on impaired loans during 2000, 1999 or 1998. Concentrations within the loan portfolio were as follows at year-end:
2000 1999 ---- ---- Percentage of Percentage of Balance Loan Portfolio Balance Loan Portfolio ------- -------------- ------- -------------- Commercial real estate loans to operators of non-residential buildings $ 62,089,376 14.4% $ 41,039,899 13.3%
NOTE 4 - PREMISES AND EQUIPMENT - NET Year-end premises and equipment are as follows:
2000 1999 ---- ---- Land and improvements $1,134,548 $ 443,408 Buildings and leasehold improvements 2,128,353 2,111,049 Construction in process 220,797 0 Furniture and equipment 1,586,621 1,417,086 ---------- ---------- 5,070,319 3,971,543 Less: accumulated depreciation 950,934 510,356 ---------- ---------- $4,119,385 $3,461,187 ========== ==========
- -------------------------------------------------------------------------------- (Continued) F-29 43 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 5 - DEPOSITS Deposits at year-end are summarized as follows:
Percent December 31, 2000 December 31, 1999 Increase/ Balance % Balance % (Decrease) ------- - ------- - ---------- Noninterest-bearing demand $ 27,368,257 6.4% $ 19,513,231 6.6% 40.3% Interest-bearing checking 12,968,028 3.1 11,040,426 3.7 17.5 Money market 5,196,217 1.2 5,604,816 1.9 (7.3) Savings 36,331,140 8.6 39,737,096 13.5 (8.6) Time, under $100,000 6,164,803 1.4 4,873,222 1.7 26.5 Time, $100,000 and over 38,681,764 9.1 22,573,206 7.7 71.4 ------------ ----- ------------ ----- ----- 126,710,209 29.8 103,341,997 35.1 22.6 Out-of-area time, under $100,000 55,260,216 13.0 71,997,053 24.4 (23.2) Out-of-area time, $100,000 and over 243,769,888 57.2 119,489,922 40.5 104.0 ------------ ----- ------------ ----- ----- 299,030,104 70.2 191,486,975 64.9 56.2 ------------ ----- ------------ ----- ----- $425,740,313 100.0% $294,828,972 100.0% 44.4% ============ ===== ============ ===== =====
Out-of-area certificates of deposit consist of certificates obtained from depositors outside of the primary market area. As of December 31, 2000, out-of-area certificates of deposit totaling $288,389,984 were obtained through deposit brokers, with the remaining $10,640,120 obtained directly from the depositors. The following table depicts the maturity distribution for certificates of deposit at year-end.
2000 1999 ---- ---- In one year $291,073,673 $203,685,797 In two years 49,585,317 13,534,313 In three years 3,195,678 623,293 In four years 22,003 1,090,000 In five years 0 0 ------------ ------------ $343,876,671 $218,933,403 ============ ============
The following table depicts the maturity distribution for certificates of deposit with balances of $100,000 or more at year-end.
2000 1999 ---- ---- Up to three months $ 64,938,960 $ 48,761,878 Three months to six months 65,612,880 53,506,644 Six months to twelve months 107,354,179 32,250,070 Over twelve months 44,545,633 7,544,536 ------------ ------------ $282,451,652 $142,063,128 ============ ============
- -------------------------------------------------------------------------------- (Continued) F-30 44 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 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:
2000 1999 ---- ---- Outstanding balance at yearend $32,151,391 $26,607,289 Average interest rate at yearend 4.63% 4.22% Average balance during the year 29,190,780 20,229,314 Average interest rate during the year 4.66% 4.13% Maximum month end balance during the year 35,473,498 26,607,289
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. NOTE 7 - FEDERAL INCOME TAXES The consolidated provision for income taxes is as follows:
2000 1999 1998 ---- ---- ---- Current $ 1,913,297 $ 1,820,858 $ 399,852 Deferred benefit (610,297) (636,480) (1,147,247) Change in valuation allowance 0 (892,378) 747,395 ----------- ----------- ----------- Tax expense $ 1,303,000 $ 292,000 $ 0 =========== =========== ===========
The recorded consolidated income tax provision in both 2000 and 1999 differs from that computed by multiplying pre-tax income by the statutory federal income tax rates as follows:
2000 1999 1998 ---- ---- ---- Statutory rates $ 1,393,173 $ 827,889 $ (377,076) Increase (decrease) from Tax-exempt interest (110,102) (14,972) 0 Valuation allowance 0 (526,565) 365,813 Nondeductible expenses 19,929 5,648 11,263 ----------- ----------- ----------- Tax expense $ 1,303,000 $ 292,000 $ 0 =========== =========== ===========
- -------------------------------------------------------------------------------- (Continued) F-31 45 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 7 - FEDERAL INCOME TAXES (Continued) The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities as of December 31, 2000 and 1999:
2000 1999 ---- ---- Deferred tax assets Provision for loan losses $2,023,051 $1,392,691 Start-up/pre-opening expenses 59,537 73,973 Deferred loan fees 91,507 92,822 Unrealized loss on securities available for sale 0 412,953 Deferred compensation 19,213 4,677 Miscellaneous accruals 0 5,500 ---------- ---------- 2,193,308 1,982,616 Deferred tax liabilities Unrealized gain on securities available for sale 154,000 0 Miscellaneous expenses 0 0 Accretion 7,978 2,659 Depreciation 29,775 21,746 ---------- ---------- 191,753 24,405 Net deferred tax asset $2,001,555 $1,958,211 ========== ==========
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 was required for 2000 or at year-end 1999. NOTE 8 - STOCK OPTION PLAN Stock option plans are used to reward employees and provide them with additional equity interest. Stock options are granted at the market price on the date of grant. The stock options fully vest within three years and expire ten years from the date of grant. At year-end 2000 there were 95,970 shares authorized for future grants.
2000 1999 1998 ---- ---- ---- Stock options outstanding Beginning 127,836 127,836 81,636 Granted 38,690 0 46,200 -------- -------- -------- Ending 166,526 127,836 127,836 ======== ======== ======== Options exercisable at year-end 114,186 80,236 52,674 -------- -------- -------- Minimum exercise price $ 9.52 $ 9.52 $ 9.52 Maximum exercise price 12.98 12.98 12.98 Average exercise price 11.01 10.95 10.95 Average remaining option term 7.6 Years 8.0 Years 9.0 Years Estimated fair value of stock options granted: $155,003 $172,510 Assumptions used: Risk-free interest rate 5.99% 4.56% Expected option life 10 Years 7 Years Expected stock volatility 37% 11% Expected dividends 0% 0%
- -------------------------------------------------------------------------------- (Continued) F-32 46 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 8 - STOCK OPTION PLAN (Continued) SFAS No. 123, Accounting for Stock Based Compensation, requires proforma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. The following proforma information presents net income and basic and diluted earnings per share had the fair value been used to measure compensation cost for stock option plans. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. No compensation cost was actually recognized for stock options.
2000 1999 1998 ---- ---- ---- 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 $ 2,741,602 $ 2,065,991 $ (1,299,991) Basic income (loss) per share before cumulative effect of change in accounting principle 1.06 0.80 (0.65) Diluted income (loss) per share before cumulative effect of change in accounting principle 1.05 0.79 (0.65) Net income (loss) $ 2,741,602 $ 2,023,781 $ (1,299,991) Basic income (loss) per share 1.06 0.78 (0.65) Diluted income (loss) per share 1.05 0.77 (0.65)
NOTE 9 - RELATED PARTIES Certain directors and executive officers of the Bank, including their immediate families and companies in which they are principal owners, were loan customers of the Bank. At year-end 2000 and 1999, the Bank had approximately $7,099,000 and $9,046,000 in loan commitments to directors and executive officers, of which approximately $3,914,000 and $5,063,000 were outstanding at December 31, 2000 and 1999, respectively, as reflected in the following table.
2000 1999 ---- ---- Beginning balance $ 5,063,000 $ 9,095,000 New loans 2,035,000 876,000 Repayments (3,184,000) (4,908,000) ----------- ----------- Ending balance $ 3,914,000 $ 5,063,000 =========== ===========
Related party deposits and repurchase agreements totaled approximately $13,173,000 at December 31, 2000 and $14,800,000 at December 31, 1999. - -------------------------------------------------------------------------------- (Continued) F-33 47 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 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, 2000 and 1999, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties. The Bank's maximum exposure to credit losses for loan commitments and standby letters of credit outstanding at December 31 was as follows:
2000 1999 ---- ---- Commercial unused lines of credit $ 87,121,094 $ 87,488,616 Unused lines of credit secured by 1 - 4 family residential properties 7,641,057 6,112,897 Credit card unused lines of credit 4,578,325 3,419,628 Other consumer unused lines of credit 2,062,084 3,126,906 Commitments to make loans 20,110,500 26,395,600 Standby letters of credit 36,889,288 28,963,217 ------------ ------------ $158,402,348 $155,506,864 ============ ============
Mercantile was required to have $689,000 and $564,000 of cash on hand or on deposit with the Federal Reserve Bank of Chicago to meet regulatory reserve and clearing requirements at year-end 2000 and 1999. 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 2000, 1999 and 1998 was $160,566, $155,889 and $151,349, respectively. Future minimum rentals under this lease as of December 31, 2000 are as follows: 2001 $ 163,740 2002 163,740 2003 163,740 2004 163,740 2005 163,740 Thereafter 272,900 ---------- $1,091,600 ==========
- -------------------------------------------------------------------------------- (Continued) F-34 48 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 11 - BENEFIT PLANS Mercantile established a 401(k) benefit plan effective January 1, 1998, covering substantially all of its employees. Mercantile's 2000, 1999 and 1998 matching 401(k) contribution charged to expense was $135,613, $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 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. The Plan was amended, effective January 1, 2000, to increase the employer match from 4% of compensation contributed to 5%. 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 2000 and 1999 was $2,085 and $625, respectively. NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS Carrying amount and estimated fair values of financial instruments were as follows at year-end.
2000 1999 ---- ---- Carrying Fair Carrying Fair Values Values Values Values -------- -------- -------- -------- Financial assets Cash and cash equivalents $ 18,101,671 $ 18,101,671 $ 13,650,356 $ 13,650,356 Securities available for sale 45,147,493 45,147,493 34,115,303 34,115,303 Securities held to maturity 14,524,341 14,942,311 7,056,492 6,982,329 Federal Home Loan Bank stock 784,900 784,900 784,900 784,900 Loans, net 423,502,300 424,690,000 303,386,007 294,581,000 Accrued interest receivable 2,758,054 2,758,054 1,842,874 1,842,874 Financial liabilities Deposits 425,740,313 424,359,000 294,828,972 295,078,734 Securities sold under agreements to repurchase 32,151,391 32,151,391 26,607,289 26,607,289 Accrued interest payable 6,134,491 6,134,491 1,956,247 1,956,257 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures 16,000,000 11,527,593 16,000,000 11,402,303
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-35 49 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 13 - EARNINGS PER SHARE The factors used in the earnings per share computation follow.
2000 1999 1998 ---- ---- ---- Basic Net income (loss) $ 2,794,567 $ 2,100,757 $(1,109,047) =========== =========== =========== Weighted average common shares outstanding 2,596,102 2,596,102 2,003,041 ----------- ----------- ----------- Basic earnings (loss) per common share $ 1.08 $ 0.81 $ (0.55) =========== =========== =========== Diluted Net income (loss) $ 2,794,567 $ 2,100,757 $(1,109,047) =========== =========== =========== Weighted average common shares outstanding for basic earnings per common share 2,596,102 2,596,102 2,003,018 Add: Dilutive effects of assumed exercises of stock options 7,229 27,627 0 ----------- ----------- ----------- Average shares and dilutive potential common shares 2,603,331 2,623,729 2,003,018 =========== =========== =========== Diluted earnings (loss) per common share $ 1.07 $ 0.80 $ (0.55) =========== =========== ===========
Stock options for 127,838 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 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 1,026,375 shares, as adjusted for the 5% stock dividend paid on February 1, 2001. 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-36 50 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 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:
Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2000 Total capital (to risk weighted assets) Consolidated $53,685 11.0% $39,163 8.0% $48,953 10.0% Bank 51,596 10.6 39,017 8.0 48,771 10.0 Tier 1 capital (to risk weighted assets) Consolidated 42,085 8.6 19,589 4.0 29,383 6.0 Bank 45,497 9.3 19,517 4.0 29,275 6.0 Tier 1 capital (to average assets) Consolidated 42,085 8.6 19,601 4.0 24,502 5.0 Bank 45,497 9.3 19,528 4.0 24,410 5.0 1999 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
The Bank was categorized as well capitalized at year-end 2000 and 1999. - -------------------------------------------------------------------------------- (Continued) F-37 51 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 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 2000, under the most restrictive of these regulations (to remain well capitalized), the Bank could distribute approximately $2,825,000 to Mercantile as dividends without prior regulatory approval. The capital levels as of December 31, 2000 and 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, 2000 and December 31, 1999, approximately $10.5 million and $9.6 million of the $16.0 million of the trust preferred securities were included as Tier 1 capital of Mercantile, respectively. The remaining dollar amounts are 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 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows.
2000 1999 1998 ---- ---- ---- Unrealized holding gains and losses on $ 1,378,885 $(1,262,733) $ 53,866 available-for-sale securities Reclassification adjustments for gains and losses later recognized in income 275,321 0 (128) ----------- ----------- ----------- Net unrealized gains and losses 1,654,206 (1,262,733) 53,738 Tax effect (562,430) 429,329 (18,721) ----------- ----------- ----------- Other comprehensive income (loss) $ 1,091,776 $ (833,404) $ 35,467 =========== =========== ===========
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Income Before Earnings per Share Cumulative Effect of Before Cumulative Effect of Interest Net Interest Change in Accounting Net Change in Accounting Principle Income Income Principle Income Basic Diluted -------- ------------ -------------------- -------- ----- ------- 2000 First quarter $ 7,864,181 $ 2,797,414 $ 500,292 $ 500,292 $ 0.19 $ 0.19 Second quarter 8,848,268 3,004,000 636,472 636,472 0.25 0.25 Third quarter 9,741,242 3,133,073 778,160 778,160 0.30 0.30 Fourth quarter 10,381,957 3,340,885 879,643 879,643 0.34 0.33 1999 First quarter $ 4,531,195 $ 1,929,778 $ 393,901 $ 351,691 $ 0.15 $ 0.15 Second quarter 5,212,444 2,264,714 503,472 503,472 0.19 0.19 Third quarter 6,111,378 2,591,024 562,340 562,340 0.22 0.22 Fourth quarter 6,911,682 2,650,763 683,254 683,254 0.27 0.26
- -------------------------------------------------------------------------------- (Continued) F-38 52 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 19 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS Following are condensed parent company only financial statements. CONDENSED BALANCE SHEETS
2000 1999 ---- ---- ASSETS Cash and cash equivalents $ 626,986 $ 671,235 Investment in subsidiaries 46,291,805 42,617,182 Other assets 1,800,569 1,533,198 ----------- ----------- Total assets $48,719,360 $44,821,615 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities $ 370,624 $ 358,896 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures 16,494,850 16,494,850 Shareholders' equity 31,853,886 27,967,869 ----------- ----------- Total liabilities and shareholders' equity $48,719,360 $44,821,615 =========== ===========
CONDENSED STATEMENTS OF INCOME
2000 1999 1998 ---- ---- ---- Income Dividends from subsidiaries $ 1,583,506 $ 123,162 $ 0 Other 29,663 33,348 28,868 ----------- ----------- ----------- Total income 1,613,169 156,510 28,868 Expenses Interest expense 1,617,300 468,316 0 Other operating expenses 433,149 415,018 187,797 ----------- ----------- ----------- Total expenses 2,050,449 883,334 187,797 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARIES (437,280) (726,824) (158,929) Federal income tax expense (649,000) (420,000) 0 Equity in undistributed net income (loss) of subsidiary 2,582,847 2,407,581 (950,118) ----------- ----------- ----------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,794,567 2,142,967 (1,109,047) Cumulative effect of change in accounting principle (net of applicable taxes 0 (42,210) 0 ----------- ----------- ----------- NET INCOME (LOSS) $ 2,794,567 $ 2,100,757 $(1,109,047) =========== =========== ===========
- -------------------------------------------------------------------------------- (Continued) F-39 53 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 19 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENT OF CASH FLOWS
2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,794,567 $ 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 (2,582,847) (2,407,581) 950,118 Capital investment into Mercantile Bank of West Michigan 0 (14,828,112) (13,771,888) Change in other assets (267,371) (1,451,293) 44,640 Change in other liabilities 11,728 347,396 (41,405) ------------ ------------ ------------ Net cash from operating activities (43,923) (16,238,833) (13,927,582) CASH FLOWS FROM FINANCING ACTIVITIES Fractional shares paid (326) 0 0 Proceeds from the sale of trust preferred securities and issuance of debentures 0 16,494,850 0 Investment in common stock of MBWM Capital Trust I 0 (494,850) 0 Proceeds from sale of common stock 0 0 14,300,826 ------------ ------------ ------------ Net cash from financing activities (326) 16,000,000 14,300,826 ------------ ------------ ------------ Net change in cash and cash equivalents (44,249) (238,833) 373,244 Cash and cash equivalents at beginning of period 671,235 910,068 536,824 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 626,986 $ 671,235 $ 910,068 ============ ============ ============
- -------------------------------------------------------------------------------- (Continued) F-40 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 7, 2001. MERCANTILE BANK CORPORATION /s/ Gerald R. Johnson, Jr. -------------------------- Gerald R. Johnson, Jr. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 7, 2001. /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, Director /s/ Gerald R. Johnson, Jr. /s/ Robert M. Wynalda - -------------------------- --------------------- Gerald R. Johnson, Jr., Chairman of the Board and Chief Robert M. Wynalda, Director Executive Officer (principal executive officer) /s/ Susan K. Jones /s/ Charles E. Christmas - ------------------ ------------------------ Susan K. Jones, Director Charles E. Christmas, Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer)
55 INDEX TO 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 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 October 23, 1997 10.3 Agreement between Fiserve Solution, 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 the Bank 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 10.4 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 10.5 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) 10.6 Employment Agreement among Michael H. Price, Mercantile and the Bank dated December 1, 1998, is incorporated by reference to exhibit 10.6 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 10.7 of the Registration Statement of Mercantile and MBWM Capital Trust I on Form SB-2 (Commission File 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 File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999)
56
EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 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 File 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 File 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., is incorporated by reference to exhibit 10.12 of Mercantile's Form 10-KSB for the fiscal year ended December 31, 1999 (Commission File No. 000-26719) (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, is incorporated by reference to exhibit 10.13 of Mercantile's Form 10-KSB for the fiscal year ended December 31, 1999 (Commission File No. 000-26719) (management contract or compensatory plan) 10.14 Mercantile Bank Corporation 2000 Employee Stock Option Plan, approved by the shareholders at the annual meeting on April 20, 2000 10.15 Extension Agreement of Data Processing Contract between Fiserve Solution, Inc. and the Bank dated May 12, 2000 extending the agreement between Fiserve Solution, Inc. and the Bank dated September 10, 1997 10.16 Amended and Restated Employment Agreement dated as of October 12, 2000, among Mercantile, the Bank and Gerald R. Johnson, Jr. (management contract or compensatory plan) 10.17 Amended and Restated Employment Agreement dated as of October 12, 2000, among Mercantile, the Bank and Michael H. Price (management contract or compensatory plan) 10.18 Employment Agreement dated as of October 12, 2000, among Mercantile, the Bank and Robert B. Kaminski (management contract or compensatory plan) 10.19 Employment Agreement dated as of October 12, 2000, among Mercantile, the Bank and Charles E. Christmas (management contract or compensatory plan) 10.20 Agreement between the Bank and C.D. Barnes dated October 28, 2000, on Amendment to Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is also the Constructor, for construction of two Bank facilities in Wyoming, Michigan 21 Subsidiaries of Mercantile 23 Consent of Independent Accountants
EX-10.14 2 k60448ex10-14.txt MERCANTIL BANK CORP EMPLOYEE STOCK OPTION PLAN 1 EXHIBIT 10.14 MERCANTILE BANK CORPORATION 2000 EMPLOYEE STOCK OPTION PLAN ----------------------- As adopted by the Board of Directors on February 17, 2000 ----------------------- ARTICLE I - PURPOSE The purpose of the 2000 Employee Stock Option Plan (the "Plan") of Mercantile Bank Corporation (the "Company") is to enable officers and other employees of the Company or any Subsidiary to participate in the Company's future growth and profitability by offering them long-term performance-based incentive compensation. The Plan also provides a means through which the Company and its Subsidiaries can attract and retain key employees. ARTICLE II - DEFINITIONS 2.1 The following terms have the meaning described below when used in the Plan: (a) "Board of Directors" shall mean the board of directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended, and as it may be further amended from time to time. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean Mercantile Bank Corporation. (e) "Fair Market Value" on a particular date shall mean the average of the highest and lowest sales prices of shares of the Common Stock reported on The Nasdaq Stock Market (or any successor exchange or system that is the primary exchange or system for trading of the Common Stock) on such date, or if The Nasdaq Stock Market (or any such successor) is closed on that date, the last preceding date on which The Nasdaq Stock Market (or any such successor) was open for trading and on which shares of the Common Stock were traded. For purposes of determining Fair Market Value, if there is only one sale of the Common Stock reported on the applicable date, the sales price for such sale shall be used instead, as though it were the average of the highest and lowest sales prices. If for any reason it is not practical for the Fair Market Value to be determined as provided for above in this paragraph, Fair Market Value shall be determined by any fair and reasonable means prescribed by the Board of Directors. 2 (f) "Incentive Stock Option" shall mean a stock option granted under Article VI that is intended to meet the requirements of Section 422 of the Code. (g) "Non-Qualified Stock Option" shall mean a stock option granted under Article VI that is not intended to be an Incentive Stock Option. (h) "Option" shall mean an Incentive Stock Option or Non-Qualified Stock Option. (i) "Participant" shall mean an eligible employee who has been granted an Option. (j) "Subsidiary" shall mean a corporation a majority of the outstanding voting capital stock of which is owned by the Company. ARTICLE III - ADMINISTRATION 3.1 Stock Option Plan Administration. The Board of Directors of the Company shall administer the Plan. The Board of Directors shall have full power and authority to grant to eligible employees (as determined by the Board of Directors) Options under Article VI of the Plan, to interpret the provisions of the Plan and any agreements relating to Options granted under the Plan, and to administer the Plan. In making determinations of eligibility for the Plan, the Board of Directors may consider the position and responsibilities of the employee, the nature and value of his or her services and accomplishments, the present and potential contribution of the employee to the success of the Company, and such other factors as the Board of Directors may deem relevant. (b) Decisions of Board of Directors. All decisions made by the Board of Directors pursuant to the provisions of the Plan shall be final, conclusive and binding on all persons, including the Company, its shareholders and employees, and beneficiaries of employees. ARTICLE IV - SHARES SUBJECT TO THE PLAN 4.1 (a) Number of Shares. Subject to adjustment as provided for in Section 4.1(b), the maximum number of shares of Common Stock with respect to which Options may be granted shall be 120,000 shares of Common Stock. Shares of Common Stock shall be made available from the authorized but unissued shares of the Company (including shares reacquired by the Company). If an Option granted under the Plan shall expire or terminate for any reason, the shares subject to, but not delivered, under such Option shall be available for other Options to be issued under the Plan. (b) Adjustments. All as may be deemed appropriate by the Board of Directors, the aggregate number of shares of Common Stock which may be issued under the Plan, the number of shares covered by each outstanding Option, and the price per share in each Option, may be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a subdivision or consolidation of shares or any other capital adjustment, a stock split, the payment of a stock dividend, or other increase or decrease in such shares effected without receipt of consideration by the Company. 2 3 ARTICLE V - ELIGIBILITY 5.1 The persons eligible to participate in the Plan and receive Options under the Plan are officers and other employees of the Company and its Subsidiaries, including directors who are full time employees, as determined by the Board of Directors. ARTICLE VI - STOCK OPTIONS 6.1 Grant of Options. Subject to the limitations of the Plan, the Board of Directors, after such consultation with and consideration of the recommendations of management as the Board of Directors considers desirable, shall select from eligible employees Participants to be granted Options and determine the time when each Option shall be granted and the number of shares subject to each Option. Options may be either Incentive Stock Options or Non-Qualified Stock Options. More than one Option may be granted to the same person. The Board of Directors may not grant a Participant Incentive Stock Options which in the aggregate are first exercisable during any one calendar year with respect to Common Stock the aggregate Fair Market Value of which (determined as of the time of grant) exceeds $100,000. 6.2 Option Agreements. Each Option under the Plan shall be evidenced by an option agreement that shall be signed by an officer of the Company and the Participant and shall contain such provisions as may be approved by the Board of Directors. Any such option agreement may be amended from time to time as approved by the Board of Directors and the Participant, provided that the terms of such option agreement after being amended conform to the terms of the Plan. 6.3 Option Price. The price at which shares of Common Stock may be purchased upon exercise of an Option shall be not less than one hundred percent (100%) of the Fair Market Value of such shares on the date such Option is granted. 6.4 Exercise of Options. (a) The period during which each Option may be exercised shall be fixed by the Board of Directors at the time such Option is granted, but such period in no event shall expire later than ten (10) years from the date the Option is granted. (b) Subject to the terms and conditions of the option agreement and unless canceled prior to exercise, each Option shall be exercisable in whole or in part in installments at such time or times as the Board of Directors may prescribe and specify in the applicable option agreement. (c) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment shall be made in cash or through the delivery of shares of Common Stock of the Company with a value equal to the total option price or a combination of cash and shares. Any shares so delivered shall be valued at their Fair Market Value on the exercise date. No Participant shall be deemed to be a holder of any shares subject to any Option prior to the issuance of such shares upon exercise of such Option. 6.5 Ten-Percent Shareholder Rule. If a Participant owns more than ten percent (10%) of the total combined voting power of all classes of the Company or of any Subsidiary's stock at 3 4 the time an Incentive Stock Option is granted to such Participant, the option price to such Participant shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of the Common Stock on the date of grant, and such Incentive Stock Option by its terms shall not be exercisable after the expiration of five (5) years from the date of grant. 6.6 Non-Transferability of Options. No Option or any rights with respect thereto shall be subject to any debts or liabilities of a Participant, nor be assignable or transferable except by Will or the laws of descent and distribution, nor be exercisable during the Participant's lifetime other than by the Participant, nor shall Common Stock be issued to or in the name of one other than the Participant; provided, however, that an Option may after the death or disability of a Participant be exercised pursuant to Section 6.7; and provided further that any Common Stock issued to a Participant hereunder may at the request of the Participant, and with the consent of the Company, be issued in the names of the Participant and one other person, as joint tenants with right of survivorship and not as tenants in common, or in the name of a trust for the benefit of the Participant or for the benefit of the Participant and others. 6.7 Termination of Employment; Death and Disability. Subject to the condition that no Option may be exercised in whole or in part after the expiration of the option period specified in the applicable option agreement: (a) Except as hereinafter provided, an Option may be exercised by the Participant only while such Participant is in the employ of the Company or a Subsidiary. In the event that the employment of a Participant to whom an Option has been granted under the Plan shall terminate (except as set forth below) such Option may be exercised, to the extent that the Option was exercisable on the date of termination of employment, only until the earlier of three (3) months after such termination or the original expiration date of the Option; provided, however, that if termination of employment results from death or total and permanent disability, such three (3) month period shall be extended to twelve (12) months. (b) In the event of the permanent disability of a Participant as determined by the Board of Directors, an Option which is otherwise exercisable may be exercised by the Participant's legal representative or guardian. In the event of the death of the Participant, an Option which is otherwise exercisable may be exercised by the person or persons whom the Participant shall have designated in writing on forms prescribed by and filed with the Board of Directors ("Beneficiaries"), or, if no such designation has been made, by the person or persons to whom the Participant's rights shall have passed by Will or the laws of descent and distribution ("Successors"). The Board of Directors may require an indemnity and/or such evidence or other assurances as the Board of Directors in its sole and absolute discretion may deem necessary in connection with an exercise by a legal representative, guardian, Beneficiary or Successor. ARTICLE VII - GENERAL PROVISIONS 7.1 Change in Control. (a) In the case of a Change in Control (as defined below) of the Company, unless the Board of Directors determines otherwise, each Option then outstanding shall become exercisable in full immediately prior to such Change in Control. 4 5 (b) Any determination by the Board of Directors made pursuant to subsection (a) above may be made as to all outstanding Options or only as to certain Options specified by the Board of Directors and any such determinations shall be made in cases covered by subparagraphs 7.1(c)(i) and (ii) below prior to or as soon as practicable after the occurrence of such event and in the cases covered by subparagraphs 7. 1 (c) (iii) or (iv) prior to the occurrence of such event. (c) A Change in Control shall occur if: (i) Any "person" or "group of persons" as such terms are defined in Section 13(d) and 14(c) of the Securities Exchange Act of 1934 (the "Exchange Act") directly or indirectly purchases or otherwise becomes the "beneficial owner" (as defined in the Exchange Act) or has the right to acquire such beneficial ownership (whether or not such right is exercised immediately, with the passage of time or subject to any condition) of voting securities representing forty percent (40%) or more of the combined voting power of all outstanding voting securities of the Company, (ii) During any period of two consecutive calendar years the individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least the majority of the members thereof unless (1) there are five or more directors then still in office who were directors at the beginning of the period and (2) the election or the nomination for election by the Company's shareholders of each new director was approved by at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period, (iii) The shareholders of the Company shall approve an agreement to merge or consolidate the Company with or into another corporation as a result of which less than fifty percent (50%) of the outstanding voting securities of the surviving or resulting entity are or are to be owned by the former shareholders of the Company (excluding from former shareholders a shareholder who is or as a result of the transaction in question, becomes an affiliate as defined in Rule 12b-2 under the Exchange Act of any party to such consolidation or merger), or (iv) The shareholders of the Company shall approve the sale of all or substantially all of the Company's business and/or assets to a person or entity that is not a wholly-owned subsidiary of the Company. 7.2 No Right of Continued Employment. Neither the establishment of the Plan, the granting of Options or any action of the Company or of the Board of Directors shall be held or construed to confer upon any person any legal right to be continued in the employ of the Company or its Subsidiaries, each of which expressly reserves the right to discharge any employee whenever the interest of any such company in its sole discretion may so require without liability to such company or the Board of Directors, except as to any rights that may be expressly conferred upon such employee under the Plan. 7.3 No Segregation of Cash or Shares. The Company shall not be required to segregate any shares of Common Stock that may at any time be represented by Options, and the Plan shall constitute an "unfunded" plan of the Company. No employee shall have rights with respect to shares of Common Stock prior to the delivery of such shares. The Company shall not, by any provisions of the Plan, be deemed to be a trustee of any Common Stock or any other property and the liabilities of the Company to any employee pursuant to the Plan shall be those of a debtor pursuant to such contract obligations as are created by or pursuant to the Plan, and the 5 6 rights of any employee, former employee or beneficiary under the Plan shall be limited to those of a general creditor of the Company. 7.4 Delivery of Shares. No shares shall be delivered pursuant to any exercise of an Option under the Plan unless the requirements of such laws and regulations as may be deemed by the Board of Directors to be applicable thereto are satisfied. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Board of Directors may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange or quotation system upon which the Common Stock is then listed, and any applicable Federal or state securities law, and the Board of Directors may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 7.5 Governing Law. The Plan and all determinations made and action taken pursuant thereto shall be governed by the laws of the State of Michigan and construed in accordance therewith. 7.6 Payments and Tax Withholding. The delivery of any shares of Common Stock under the Plan shall be for the account of the Company and any such delivery or distribution shall not be made until the recipient shall have made satisfactory arrangements for the payment of any applicable withholding taxes. ARTICLE VIII - AMENDMENT AND TERMINATION 8.1 Amendment or Termination. The Board of Directors may amend or terminate the Plan provided, however, that no such amendment or termination shall adversely affect any Option then in effect unless the prior approval of the Participant so affected is obtained. No Option may be granted under the Plan after December 31, 2009. ARTICLE IX - EFFECTIVENESS OF PLAN 9.1 The Plan was adopted by the Board of Directors on February 17, 2000 subject to the approval of the shareholders of the Company. ARTICLE X - SEVERABILITY 10.1 If any provision of the Plan, or any term or condition of any Option granted thereunder, is invalid, such provision, term, condition or application shall to that extent be void (or, in the discretion of the Board of Directors, such provision, term or condition may be amended so as to avoid such invalidity or failure), and shall not affect other provisions, terms or conditions or applications thereof, and to this extent such provisions, terms and conditions are severable. 6 EX-10.15 3 k60448ex10-15.txt EXTENSION AGREEMENT 1 EXHIBIT 10.15 EXTENSION AGREEMENT DATA PROCESSING CONTRACT BETWEEN MERCANTILE BANK OF WEST MICHIGAN AND FISERV SOLUTION, INC. UNDER THE TERMS OF THE AGREEMENT DATED SEPTEMBER 10, 1997 WHEREAS it is in the best interest of Mercantile Bank of West Michigan (Client) and Fiserv Solutions, Inc. (Fiserv) to extend the relationship represented by the above captioned contract and WHEREAS such extension shall provide for terms and conditions in addition to those in the current contract; The parties to the agreement hereby agree to the following additional terms and conditions. These are understood to be additional terms except in the instances where they conflict with the original contract in which case the terms of this Extension Agreement will take precedence. All non-conflicting terms and conditions of the original contract will continue to apply during the extension term. TERM The initial term of the agreement is extended 3 years from the expiration of the current contract or until December 31, 2003. PRICING The monthly processing fee for 1 to 15,000 accounts (open and closed deposit and loan accounts) will be $0.72 account. The monthly processing fee for accounts over 15,000 (open and closed deposit and loan accounts) will be $0.69 per account. The standard monthly processing fee of $0.04 per account with a minimum of $400.00 for ExecuBanc will be included in the monthly per account processing cost. Fifteen (15) Smart Reports will be included in the base monthly fee. The monthly processing fee for Network Support Services will be $15.00 per station address. There will be no price increase in year one of the contract extension. Any price increases beyond year one of the extension will be limited to CPI. CONFIDENTIALITY Fiserv and Client agree to keep confidential without disclosure to third parties, the prices, terms, and conditions of this Agreement. In witness whereof, the parties hereto have caused this Extension Agreement to be executed by their duly authorized representatives as of the date indicated below. Mercantile Bank of West Michigan Fiserv Solutions, Inc. By: /s/ ROBERT B. KAMINSKI By: /s/ DAVID SANTI ----------------------------- --------------------------------- Name: Robert B. Kaminski Name: David Santi ----------------------------- --------------------------------- Title: SVP Title: EVP ----------------------------- --------------------------------- Dated: 5-12-00 Dated: 5-24-00 ----------------------------- --------------------------------- EX-10.16 4 k60448ex10-16.txt AMENDED & RESTATED EMPLOYMENT AGREEMENT 1 EXHIBIT 10.16 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement ("Agreement") is made as of the 12th day of October, 2000, 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, which has been amended and restated by an Amended and Restated Employment Agreement dated as of December 31, 1999 (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 $275,000 for the year 2001, increase the severance benefit provided for the Employee in Section 8.5(b) and Section 9, and amend Section 13 to address potential issues under Section 280G of the Internal Revenue Code relating to "parachute payments". 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 2 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 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, (b) Two Hundred and Seventy-Five Thousand Dollars ($275,000) for the period from January 1, 2001 through December 31, 2001, and (c) for each January 1 through December 31 from January 1, 2002 through the Termination Date, amounts not less than the annual base salary for the immediately preceding year, 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), (b) or (c) above does not coincide with the first day of a payroll period of the Bank, such change in rate of compensation shall become effective as of the first day of the payroll period that includes such date. 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. 2 3 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 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. 3 4 7.3 Extent of Obligations. The provisions of Sections 7.1 and 7.2 apply only to Disability or death occurring during the Employment Period while the Employee is employed by the Bank and the Company. Other than as set forth in Section 7.1 or 7.2, neither of the Employers shall have any obligation or liability to the Employee upon the employee's death or Disability except that the Employee shall be entitled to all of his accrued rights under stock option, retirement and other employee benefit plans of the Company and the Bank, and the Bank shall promptly pay the Employee (or his personal representative) his Base Cash Compensation due through the effective date of the termination of his employment, the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), and any out-of -pocket expenses for which the Employee is entitled to be reimbursed, and for which reimbursement has not yet been made. 8. Termination of Employment for Cause, Without Cause, Good Reason, or Without Good Reason. 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 4 5 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, 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 5 6 of the termination of employment to the extent that the Bank may do so under the provisions of such plans, and to the extent that it is not permitted to do so shall pay the Employee an amount that will permit him to obtain and pay for substantially equivalent coverage; plus (d) any life insurance policies owned by the Bank or the Company insuring the life of the Employee, to the extent that they may be practically assigned or transferred to the Employee; plus (e) $10,000 for out-placement, interim office, and related expenses. In addition, the Employee shall be entitled to all of his accrued rights under stock option, retirement, and other employee benefit plans of the Company and the Bank. 8.6 Obligation of Employers upon Termination for Cause or by Employee without Good Reason. In the event that during the Employment Period, an Employer terminates the Employee's employment for Cause as provided for in Section 8.1, or the Employee terminates his employment without Good Reason as permitted in Section 8.4; the Bank shall pay and provide to the Employee, to the extent not previously paid, the Employee's Base Cash Compensation due through the effective date of the termination of employment, plus the cash equivalent of any 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. 6 7 10. Confidential Information. Employee agrees that he will not at any time (whether during his employment or at any time thereafter) disclose to any person, corporation, firm, partnership or other entity, except as required by law, any secret or confidential information concerning the business, clients or affairs of the Company or the Bank, or any of their affiliates, for any reason or purpose whatsoever other than in furtherance of the Employee's work for the Company or the Bank, nor shall the Employee make use of any of such secret or confidential information in any manner adverse to the Company or the Bank. 11. Noncompetition Covenant. For a period of eighteen (18) months following the termination of Employee's employment with the Employers, Employee will not be employed by or act as a director or officer of any business involving or engaged in the business of banking within a 50-mile radius of the City of Grand Rapids, Michigan, where such business engages in soliciting, directly or indirectly, customers of the Bank. 12. Remedies under Section 10 and 11. The Employee acknowledges and agrees that his obligations under Sections 10 and 11 are of a special and unique nature and that a failure to 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 and Adjustments re IRC Section 280G. 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. In the event that any payments, distributions or benefits to or for the benefit of the Employee from the Bank or the Company, whether paid or payable, distributed or distributable, would constitute a "parachute payment", as defined in Section 280G of the Internal Revenue Code of 1986, as amended, or any successors thereto (the "Code"), payments under this Agreement shall be reduced to the largest amount that will eliminate both the imposition of the excise tax imposed by Section 4999 of the Code and the disallowance as deductions to the Employers under Section 280G of the Code of any such payments, distributions or benefits. The determination of any reduction in the payments under this Agreement pursuant to this paragraph shall be made by a major national or regional accounting firm selected by the Bank and approved by the Employee, which approval shall not be unreasonably withheld. 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. 7 8 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. 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. 8 9 The parties have executed this Agreement as of the day and year first above written. MERCANTILE BANK CORPORATION By: /s/ Michael H. Price ----------------------------------------- Name: /s/ Michael H. Price ----------------------------------- Its: President & Chief Operating Officer ------------------------------------ MERCANTILE BANK OF WEST MICHIGAN By: /s/ Michael H. Price ----------------------------------------- Name: Michael H. Price ----------------------------------- Its: President & Chief Executive Officer ------------------------------------ EMPLOYEE Gerald R. Johnson, Jr. --------------------------------------------- Gerald R. Johnson, Jr. 9 10 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: 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 MERCANTILE BANK OF WEST MICHIGAN EMPLOYEE BONUS -2001 Employees receive $0.33 for every 1.00 over budgeted net operating income. Maximum payouts are calculate as a percentage of salary as follows: 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 10 EX-10.17 5 k60448ex10-17.txt AMENDED & RESTATED EMPLOYMENT AGREEMENT 1 EXHIBIT 10.17 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement ("Agreement") is made as of the 12th day of October, 2000, 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, which has been amended and restated by an Amended and Restated Employment Agreement dated as of December 31, 1999 (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 $242,000 for the year 2001, increase the severance benefit provided for the Employee in Section 8.5(b) and Section 9, and amend Section 13 to address potential issues under Section 280G of the Internal Revenue Code relating to "parachute payments". 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 2 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 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, (b) Two Hundred and Forty-Two Thousand Dollars for the period from January 1, 2001 through December 31, 2001, and (c) for each January 1 through December 31 from January 1, 2002 through the Termination Date, amounts not less than the annual base salary for the immediately preceding year, 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), (b) or (c) above does not coincide with the first day of a payroll period of the Bank, such change in rate of compensation shall become effective as of the first day of the payroll period that includes such date. 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. 2 3 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 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. 3 4 7.3 Extent of Obligations. The provisions of Sections 7.1 and 7.2 apply only to Disability or death occurring during the Employment Period while the Employee is employed by the Bank and the Company. Other than as set forth in Section 7.1 or 7.2, neither of the Employers shall have any obligation or liability to the Employee upon the employee's death or Disability except that the Employee shall be entitled to all of his accrued rights under stock option, retirement and other employee benefit plans of the Company and the Bank, and the Bank shall promptly pay the Employee (or his personal representative) his Base Cash Compensation due through the effective date of the termination of his employment, the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), and any out-of -pocket expenses for which the Employee is entitled to be reimbursed, and for which reimbursement has not yet been made. 8. Termination of Employment for Cause, Without Cause, Good Reason, or Without Good Reason. 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 4 5 Section 3, 4, 5, or 6, other than a insubstantial or inadvertent failure which is remedied by the applicable Employer promptly after receipt of written notice from the Employee. Any termination for Good Reason shall be effective upon the Employee giving the Employers written notice that the Employee is terminating his employment, and setting forth in reasonable detail the basis for such termination, and that such termination is for Good Reason. Any such termination shall be effective upon the giving of such notice by the Employee; and any such notice shall terminate his employment with both Employers. 8.4 Termination by Employee Without Good Reason. The Employee shall have the right at any time to terminate the Employee's employment with both Employers without Good Reason by giving the Employers written notice that the Employee is terminating his employment. Any such termination shall apply to the Employee's employment with both Employers and be effective ninety (90) days after the giving of such notice by the Employee. 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 5 6 (e) $10,000 for out-placement, interim office, and related expenses. In addition, the Employee shall be entitled to all of his accrued rights under stock option, retirement, and other employee benefit plans of the Company and the Bank. 8.6 Obligation of Employers upon Termination for Cause or by Employee without Good Reason. In the event that during the Employment Period, an Employer terminates the Employee's employment for Cause as provided for in Section 8.1, or the Employee terminates his employment without Good Reason as permitted in Section 8.4; the Bank shall pay and provide to the Employee, to the extent not previously paid, the Employee's Base Cash Compensation due through the effective date of the termination of employment, plus the cash equivalent of any 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 6 7 Company or the Bank, nor shall the Employee make use of any of such secret or confidential information in any manner adverse to the Company or the Bank. 11. Noncompetition Covenant. For a period of eighteen (18) months following the termination of Employee's employment with the Employers, Employee will not be employed by or act as a director or officer of any business involving or engaged in the business of banking within a 50-mile radius of the City of Grand Rapids, Michigan, where such business engages in soliciting, directly or indirectly, customers of the Bank. 12. Remedies under Section 10 and 11. The Employee acknowledges and agrees that his obligations under Sections 10 and 11 are of a special and unique nature and that a failure to 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 and Adjustments re IRC Section 280G. 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. In the event that any payments, distributions or benefits to or for the benefit of the Employee from the Bank or the Company, whether paid or payable, distributed or distributable, would constitute a "parachute payment", as defined in Section 280G of the Internal Revenue Code of 1986, as amended, or any successors thereto (the "Code"), payments under this Agreement shall be reduced to the largest amount that will eliminate both the imposition of the excise tax imposed by Section 4999 of the Code and the disallowance as deductions to the Employers under Section 280G of the Code of any such payments, distributions or benefits. The determination of any reduction in the payments under this Agreement pursuant to this paragraph shall be made by a major national or regional accounting firm selected by the Bank and approved by the Employee, which approval shall not be unreasonably withheld. 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 7 8 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. 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. 8 9 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 & Chief Executive Officer ----------------------------------- 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 9 10 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: 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 MERCANTILE BANK OF WEST MICHIGAN EMPLOYEE BONUS -2001 Employees receive $0.33 for every 1.00 over budgeted net operating income. Maximum payouts are calculate as a percentage of salary as follows: 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 10 EX-10.18 6 k60448ex10-18.txt EMPLOYMENT AGREEMENT 1 EXHIBIT 10.18 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made this 12th day of October, 2000, 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 Robert B. Kaminski (the "Employee"). RECITALS A. The employee presently serves as Senior Vice President and Secretary of the Company and Senior Vice President, Chief Operating Officer and Chief Loan Review Officer of the Bank. B. This Agreement sets forth the terms of the Employee's employment as Senior Vice President and Secretary of the Company and Senior Vice President, Chief Operating Officer and Chief Loan Review Officer of the Bank effective January 1, 2001. C. The Employers believe that entering into this Agreement is in the best interest of their respective shareholders. D. The Employee believes that entering into this Agreement is in his best interest. TERMS OF AGREEMENT In consideration of the mutual covenants and obligations set forth in this Agreement, to induce the Employee to remain in the employment of the Employers, and for other good and valuable consideration, the Employers and the Employee agree as follows: 1. Employment, Term, and Acceptance: The Company agrees to employ the Employee as its Senior Vice President and Secretary, and the Bank agrees to employ the Employee as its Senior Vice President, Chief Operating Officer and Chief Loan Review Officer for the period from January 1, 2001 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, 2003. Effective as of December 31, 2001, and as of each December 31 after December 31, 2001, 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 31, be an Employment Period of three years remaining. The Employee hereby accepts such employment. 2 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 Employers as are normally expected of persons appointed to Senior Vice President and Secretary and Senior Vice President, Chief Operating Officer and Chief Loan Review Officer positions, respectively, 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 or employee), the Bank shall pay the Employee an annual base salary (prorated for any partial year) of (a) One Hundred Twenty-One Thousand Dollars ($121,000) for the period from January 1, 2001 through December 31, 2001, and (b) for each January 1 through December 31 from January 1, 2002 through the Termination Date, amounts not less than the annual base salary for the immediately preceding year, 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 year 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 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; provided that such reimbursement shall be subject to 2 3 any guidelines provided by the Board of Directors or Chief Executive Officer of the Bank or the Company prior to an expense being incurred. 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 $100,000. 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 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. Notwithstanding the above, the assignment to the Employee of any title or duties at the Bank or the Company that he has previously held or performed at the Bank or the Company, shall not be sufficient to constitute Good Reason for termination of employment by the Employee. 4 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) $250,000; in either case, payable in eighteen (18) substantially equal monthly installments commencing within thirty (30) days after the effective date of the termination of employment; plus (c) coverage for the Employee and his dependents under the Bank's Life, Disability, and Medical Plans for the eighteen (18) month period commencing on the effective date of the termination of employment to the extent that the Bank may do so under the provisions of such plans, and to the extent that it is not permitted to do so shall pay the Employee an amount that will permit him to obtain and pay for substantially equivalent coverage; plus (d) any life insurance policies owned by the Bank or the Company insuring the life of the Employee, to the extent that they may be practically assigned or transferred to the Employee; plus (e) $10,000 for out-placement, interim office, and related expenses. In addition, the Employee shall be entitled to all of his accrued rights under stock option, retirement, and other employee benefit plans of the Company and the Bank. 5 6 8.6 Obligation of Employers upon Termination for Cause or by Employee without Good Reason. In the event that during the Employment Period, an Employer terminates the Employee's employment for Cause as provided for in Section 8.1, or the Employee terminates his employment without Good Reason as permitted in Section 8.4; the Bank shall pay and provide to the Employee, to the extent not previously paid, the Employee's Base Cash Compensation due through the effective date of the termination of employment, plus the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), within ten (10) days of such effective date. In addition, the Employee shall be entitled to all of his accrued rights under stock option (except with respect to stock option plans, in the event of termination for Cause), retirement, and other employee benefit plans of the Company and the Bank. 8.7 No Other Obligations of Employers upon Termination. Upon termination of the Employee's employment, the Employers shall have no obligations to the Employee except as set forth in this Agreement, or accrued rights under stock option, retirement, or other employee benefit plans of either Employer. 9. Severance Payments on Termination after the Employment Period. If at any time after the Employment Period 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) $125,000, 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 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 and Adjustments re IRC Section 280G. 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. In the event that any payments, distributions or benefits to or for the benefit of the Employee from the Bank or the Company, whether paid or payable, distributed or distributable, would constitute a "parachute payment", as defined in Section 280G of the Internal Revenue Code of 1986, as amended, or any successors thereto (the "Code"), payments under this Agreement shall be reduced to the largest amount that will eliminate both the imposition of the excise tax imposed by Section 4999 of the Code and the disallowance as deductions to the Employers under Section 280G of the Code of any such payments, distributions or benefits. The determination of any reduction in the payments under this Agreement pursuant to this paragraph shall be made by a major national or regional accounting firm selected by the Bank and approved by the Employee, which approval shall not be unreasonably withheld. 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 7 8 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. 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 & Chief Executive Officer -------------------------------------- 8 9 MERCANTILE BANK OF WEST MICHIGAN By: /s/ Gerald R. Johnson, Jr. ------------------------------------------- Name: Gerald R. Johnson, Jr. ------------------------------------- Its: Chairman -------------------------------------- EMPLOYEE /s/ Robert B. Kaminski ----------------------------------------------- Robert B. Kaminski 9 10 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: 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 MERCANTILE BANK OF WEST MICHIGAN EMPLOYEE BONUS -2001 Employees receive $0.33 for every 1.00 over budgeted net operating income. Maximum payouts are calculate as a percentage of salary as follows: 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 10 EX-10.19 7 k60448ex10-19.txt EMPLOYMENT AGREEMENT 1 EXHIBIT 10.19 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made this 12th day of October, 2000, 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 Charles E. Christmas (the "Employee"). RECITALS A. The employee presently serves as Senior Vice President, Chief Financial Officer and Treasurer of the Company and Senior Vice President and Chief Financial Officer of the Bank. B. This Agreement sets forth the terms of the Employee's employment as Senior Vice President , Chief Financial Officer and Treasurer of the Company and Senior Vice President and Chief Financial Officer of the Bank. C. The Employers believe that entering into this Agreement is in the best interest of their respective shareholders. D. The Employee believes that entering into this Agreement is in his best interest. TERMS OF AGREEMENT In consideration of the mutual covenants and obligations set forth in this Agreement, to induce the Employee to remain in the employment of the Employers, and for other good and valuable consideration, the Employers and the Employee agree as follows: 1. Employment, Term, and Acceptance. The Company agrees to employ the Employee as its Senior Vice President, Chief Financial Officer and Treasurer, and the Bank agrees to employ the Employee as its Senior Vice President and Chief Financial Officer, for the period from January 1, 2001 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, 2003. Effective as of December 31, 2001, and as of each December 31 after December 31, 2001, 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 31, be an Employment Period of three years remaining. The Employee hereby accepts such employment. 2 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 Employers as are normally expected of persons appointed to Senior Vice President, Chief Financial Officer and Treasurer, and Senior Vice President and Chief Financial Officer positions, respectively, 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 or employee), the Bank shall pay the Employee an annual base salary (prorated for any partial year) of (a) Ninety-Five Thousand Dollars ($95,000) for the period from January 1, 2001 through December 31, 2001, and (b) for each January 1 through December 31 from January 1, 2002 through the Termination Date, amounts not less than the annual base salary for the immediately preceding year, 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 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 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; provided that such reimbursement shall be subject to 2 3 any guidelines provided by the Board of Directors or Chief Executive Officer of the Bank or the Company prior to an expense being incurred. 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 $100,000. 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 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. Notwithstanding the above, the assignment to the Employee of any title or duties at the Bank or the Company that he has previously held or performed at the Bank or the Company, shall not be sufficient to constitute Good Reason for termination of employment by the Employee. 4 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) $250,000; in either case, payable in eighteen (18) substantially equal monthly installments commencing within thirty (30) days after the effective date of the termination of employment; plus (c) coverage for the Employee and his dependents under the Bank's Life, Disability, and Medical Plans for the eighteen (18) month period commencing on the effective date of the termination of employment to the extent that the Bank may do so under the provisions of such plans, and to the extent that it is not permitted to do so shall pay the Employee an amount that will permit him to obtain and pay for substantially equivalent coverage; plus (d) any life insurance policies owned by the Bank or the Company insuring the life of the Employee, to the extent that they may be practically assigned or transferred to the Employee; plus (e) $10,000 for out-placement, interim office, and related expenses. In addition, the Employee shall be entitled to all of his accrued rights under stock option, retirement, and other employee benefit plans of the Company and the Bank. 5 6 8.6 Obligation of Employers upon Termination for Cause or by Employee without Good Reason. In the event that during the Employment Period, an Employer terminates the Employee's employment for Cause as provided for in Section 8.1, or the Employee terminates his employment without Good Reason as permitted in Section 8.4; the Bank shall pay and provide to the Employee, to the extent not previously paid, the Employee's Base Cash Compensation due through the effective date of the termination of employment, plus the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), within ten (10) days of such effective date. In addition, the Employee shall be entitled to all of his accrued rights under stock option (except with respect to stock option plans, in the event of termination for Cause), retirement, and other employee benefit plans of the Company and the Bank. 8.7 No Other Obligations of Employers upon Termination. Upon termination of the Employee's employment, the Employers shall have no obligations to the Employee except as set forth in this Agreement, or accrued rights under stock option, retirement, or other employee benefit plans of either Employer. 9. Severance Payments on Termination after the Employment Period. If at any time after the Employment Period 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) $125,000, 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 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 and Adjustments re IRC Section 280G. 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. In the event that any payments, distributions or benefits to or for the benefit of the Employee from the Bank or the Company, whether paid or payable, distributed or distributable, would constitute a "parachute payment", as defined in Section 280G of the Internal Revenue Code of 1986, as amended, or any successors thereto (the "Code"), payments under this Agreement shall be reduced to the largest amount that will eliminate both the imposition of the excise tax imposed by Section 4999 of the Code and the disallowance as deductions to the Employers under Section 280G of the Code of any such payments, distributions or benefits. The determination of any reduction in the payments under this Agreement pursuant to this paragraph shall be made by a major national or regional accounting firm selected by the Bank and approved by the Employee, which approval shall not be unreasonably withheld. 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 7 8 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. 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 & Chief Executive Officer ---------------------------------- 8 9 MERCANTILE BANK OF WEST MICHIGAN By: /s/ Gerald R. Johnson, Jr. --------------------------------------- Name: Gerald R. Johnson, Jr. --------------------------------- Its: Chairman ---------------------------------- EMPLOYEE /s/ Charles E. Christmas ------------------------------------------- Charles E. Christmas 9 10 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: 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 MERCANTILE BANK OF WEST MICHIGAN EMPLOYEE BONUS -2001 Employees receive $0.33 for every 1.00 over budgeted net operating income. Maximum payouts are calculate as a percentage of salary as follows: 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 10 EX-10.20 8 k60448ex10-20.txt AGREEMENT BETWEEN THE BANK & C.D. BARNES 1 EXHIBIT 10.20 1998 EDITION AIA DOCUMENT A121/CMc-a AMENDMENT TO THE STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONSTRUCTION MANAGER WHERE THE CONSTRUCTION MANAGER IS ALSO THE CONSTRUCTOR This amendment modifies the Standard Form of Agreement Between Owner and Construction Manager, AIA Document A121/CMc and AGC Document 565, 1991 Edition. Where a portion of the Standard Form of Agreement Between Owner and Construction Manager is modified by this amendment, the unaltered portions shall remain in effect. The following changes are made to the Agreement dated between Mercantile Bank of West Michigan (Owner) and C.D. Barnes (Construction Manager) for Mercantile Bank of West Michigan branch (the Project). and administration building at 5610 Byron Center Ave. 1. In Paragraph 1.2, the reference to the 1987 Edition of AIA Document A201 shall be changed to A201-1997. 2. In Paragraph 2.5, the reference to A201 Subparagraph 10.1.2 shall be changed to A201 Subparagraphs 10.3.1 and 10.3.2. 3. In the first sentence of Paragraph 3.3, the words "Basic Services" shall be changed to "services". In the second sentence of Paragraph 3.3, the words "those Additional Services described in AIA Document B141" shall be changed to "other services". 4. In Clause 6.1.8.1, the reference to A201 Paragraph 10.3 shall be changed to A201 Paragraph 10.6. PURPOSE. This document is intended to amend the 1991 Editions of AIA Document A121/CMc and AGC Document 565. Use of this document will ensure that the 1991 Editions of AIA Document A121/CMc and AGC Document 565 comport with AIA Document A201-1997, General Conditions of the Contract for Construction, and AIA Document B141-1997, Standard Form of Agreement Between Owner and Architect with Standard Form of Architect's Services. This document has important legal consequences; consultation with an attorney is encouraged with respect to its completion or modification. [AIA LOGO] (C)1998 AIA(R) AIA DOCUMENT A121/CMc-a AMENDMENT TO THE OWNER-CONSTRUCTION MANAGER AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 - ---------- AMENDMENT TO AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 (C)1998 by the American Institute of Architects. Reproduction of the material herein or substantial quotation of its provisions without permission of the AIA violates the copyright laws of the United States and will subject the violator to legal prosecution. WARNING: Unlicensed photocopying violates U.S. copyright laws and will subject the violator to legal prosecution. 2 5. In Clause 7.1.7.1, the reference to A201 Subparagraph 7.3.7 shall be changed to A201 Subparagraphs 7.3.7 and 7.3.8. 6. In Paragraph 8.2, the reference to A201 Paragraphs 11.2 and 11.3 shall be changed to A201 Paragraphs 11.2 and 11.4. 7. In Subparagraph 10.11, the reference to A201 Subparagraph 14.1.1 shall be changed to A201 Subparagraphs 14.1.1, 14.1.2 and 14.1.4. 8. In Subparagraphs 10.2.1 and 10.2.2, the references to A201 Subparagraph 14.1.2 shall be changed to A201 Subparagraph 14.1.3. /s/ ROBERT B. KAMINSKI C.O.O. /s/ JOHN A. DROZER - -------------------------------- ------------------------------ Owner (Signature) CONSTRUCTION MANAGER (Signature) Mercantile Bank of West Michigan Robert B. Kaminski C.O.O. John A. Drozer, President - -------------------------------- ------------------------------ (Printed name and title) (Printed name and title) [LOGO] (C)1998 AIA(R) AIA DOCUMENT A121/CMc-a AMENDMENT TO OWNER- CONSTRUCTION MANAGER AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 Unlicensed photocopying violates U.S. copyright laws and will subject the violator to legal prosecution. 3 - -------------------------------------------------------------------------------- AIA Document A121/CMc and AGC Document 565 STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONSTRUCTION MANAGER where the Construction Manager is also THE CONSTRUCTOR 1991 EDITION THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. The 1987 Edition of AIA Document A201, General Conditions of the Contract for Construction, is referred to herein. This Agreement requires modification if other general conditions are utilized. - -------------------------------------------------------------------------------- AGREEMENT made as of the 28th day of October in the year of 2000 (In words, indicate day, month and year) BETWEEN the Owner: Mercantile Bank of West Michigan (Name and address) 216 N. Division Grand Rapids, MI and the Construction Manager: (Name and address) C.D. Barnes 3437 Eastern Grand Rapids, MI 49508 The Project is: (Name, address and brief description) Mercantile Bank of West of West Michigan and the Administration Building at 5610 Byron Center Avenue The Architect is: William C. Granzow (Name and address) Concept Design Group 89 Monroe Center Grand Rapids, MI 49503 The Owner and Construction Manager agree as set forth below. - -------------------------------------------------------------------------------- Portions of this document are derived from AIA Document A111, Standard Form of Agreement Between the Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee, copyright 1920, 1925, 1951, 1958, 1961, 1963, 1967, 1974, 1978, (C)1987 by The American Institute of Architects; other portions are derived from AGC Document 500, (C)1980 by The Associated General Contractors of America. Material in this document differing from that found in AIA Document A111 and AGC Document 500 is copyrighted (C)1991 by The American Institute of Architects and The Associated General Contractors of America. Reproduction of the material herein or substantial quotation of its provisions without written permission of AIA and AGC violates the copyright laws of the United States and will subject the violator to legal prosecution. - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMC AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION o AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK [LOGO] AVENUE, N.W., WASHINGTON, D.C. 20006-5209 A121/CMc [AGC LOGO] o AGC(R) o (C)1991 o THE ASSOCIATED GENERAL --------- CONTRACTORS OF AMERICA, 1957 E STREET, N.W., AGC 565 - 1991 1 WASHINGTON, D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 4 TABLE OF CONTENTS - -------------------------------------------------------------------------------------- ARTICLE 1 GENERAL PROVISIONS ARTICLE 6 COST OF THE WORK FOR CONSTRUCTION PHASE 1.1 Relationship of Parties 6.1 Costs To Be Reimbursed 1.2 General Conditions 6.2 Costs Not To Be Reimbursed 6.3 Discounts, Rebates and Refunds ARTICLE 2 CONSTRUCTION MANAGER'S 6.4 Accounting Records RESPONSIBILITIES ARTICLE 7 CONSTRUCTION PHASE 2.1 Preconstruction Phase 2.2 Guaranteed Maximum Price 7.1 Progress Payments Proposal and Contract Time 7.2 Final Payment 2.3 Construction Phase 2.4 Professional Services 2.5 Unsafe Materials ARTICLE 8 INSURANCE AND BONDS ARTICLE 3 OWNER'S RESPONSIBILITIES 8.1 Insurance Required of the Construction Manager 3.1 Information and Services 8.2 Insurance Required of the Owner 3.2 Owner's Designated Representative 8.3 Performance Bond and 3.3 Architect Payment Bond 3.4 Legal Requirements ARTICLE 9 MISCELLANEOUS PROVISIONS ARTICLE 4 COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE 9.1 Dispute Resolution for the SERVICES Preconstruction Phase 9.2 Dispute Resolution for the 4.1 Compensation Construction Phase 4.2 Payments 9.3 Other Provisions ARTICLE 5 COMPENSATION FOR ARTICLE 10 TERMINATION OR SUSPENSION CONSTRUCTION PHASE SERVICES 10.1 Termination Prior to Establishing Guaranteed Maximum Price 5.1 Compensation 10.2 Termination Subsequent to 5.2 Guaranteed Maximum Price Establishing Guaranteed 5.3 Changes in the Work Maximum Price 10.3 Suspension ARTICLE 11 OTHER CONDITIONS AND SERVICES ATTACHMENTS AMENDMENT NO. 1 TO AGREEMENT BETWEEN OWNER AND CONSTRUCTION MANAGER
- -------------------------------------------------------------------------------- A121/CMc AIA DOCUMENT A121/CM(C) AND AGC DOCUMENT FEE o --------- OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o 2 AGC 565-1991 (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 ACC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 5 - -------------------------------------------------------------------------------- STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONSTRUCTION MANAGER WHERE THE CONSTRUCTION MANAGER IS ALSO THE CONSTRUCTOR - -------------------------------------------------------------------------------- ARTICLE 1 GENERAL PROVISIONS 1.1 RELATIONSHIP OF PARTIES The Construction Manager accepts the relationship of trust and confidence established with the Owner by this Agreement, and covenants with the Owner to furnish the Construction Manager's reasonable skill and judgment and to cooperate with the Architect in furthering the interests of the Owner. The Construction Manager shall furnish construction administration and management services and use the Construction Manager's best efforts to perform the Project in an expeditious and economical manner consistent with the interests of the Owner. The Owner shall endeavor to promote harmony and cooperation among the Owner, Architect, Construction Manager and other persons or entities employed by the Owner for the Project. 1.2 GENERAL CONDITIONS For the Construction Phase, the General Conditions of the Contract shall be the 1987 Edition of AIA Document A201, General Conditions of the Contract for Construction, which is incorporated herein by reference. For the Preconstruction Phase, or in the event that the Preconstruction and Construction Phases proceed concurrently, AIA Document A201 shall apply to the Preconstruction Phase only as specifically provided in this Agreement. The term "Contractor" as used in AIA Document A201 shall mean the Construction Manager. ARTICLE 2 CONSTRUCTION MANAGER'S RESPONSIBILITIES The Construction Manager shall perform the services described in this Article. The services to be provided under Paragraphs 2.1 and 2.2 constitute the Preconstruction Phase services. If the Owner and Construction Manager agree, after consultation with the Architect, the Construction Phase may commence before the Preconstruction Phase is completed, in which case both phases shall proceed concurrently. 2.1 PRECONSTRUCTION PHASE 2.1.1 PRELIMINARY EVALUATION The Construction Manager shall provide a preliminary evaluation of the Owner's program and Project budget requirements, each in terms of the other. 2.1.2 CONSULTATION The Construction Manager with the Architect shall jointly schedule and attend regular meetings with the Owner and Architect. The Construction Manager shall consult with the Owner and Architect regarding site use and improvements, and the selection of materials, building systems and equipment. The Construction Manager shall provide recommendations on construction feasibility; actions designed to minimize adverse effects of labor or material shortages; time requirements for procurement, installation and construction completion; and factors related to construction cost including estimates of alternative designs or materials, preliminary budgets and possible economies. 2.1.3 PRELIMINARY PROJECT SCHEDULE When Project requirements described in Subparagraph 3.1.1 have been sufficiently identified, the Construction Manager shall prepare, and periodically update, a preliminary Project schedule for the Architect's review and the Owner's approval. The Construction Manager shall obtain the Architect's approval of the portion of the preliminary Project schedule relating to the performance of the Architect's services. The Construction Manager shall coordinate and integrate the preliminary Project schedule with the services and activities of the Owner, Architect and Construction Manager. As design proceeds, the preliminary Project schedule shall be updated to indicate proposed activity sequences and durations, milestone dates for receipt and approval of pertinent information, submittal of a Guaranteed Maximum Price proposal, preparation and processing of shop drawings and samples, delivery of materials or equipment requiring long-lead time procurement, Owner's occupancy requirements showing portions of the Project having occupancy priority, and proposed date of Substantial Completion. If preliminary Project schedule updates indicate that previously approved schedules may not be met, the Construction Manager shall make appropriate recommendations to the Owner and Architect. 2.1.4 PHASED CONSTRUCTION The Construction Manager shall make recommendations to the Owner and Architect regarding the phased issuance of Drawings and Specifications to facilitate phased construction of the Work, if such phased construction is appropriate for the Project, taking into consideration such factors as economies, time of performance, availability of labor and materials, and provisions for temporary facilities. 2.1.5 PRELIMINARY COST ESTIMATES 2.1.5.1 When the Owner has sufficiently identified the Project requirements and the Architect has prepared other basic design criteria, the Construction Manager shall prepare, for the review of the Architect and approval of the Owner, a preliminary cost estimate utilizing area, volume or similar conceptual estimating techniques. 2.1.5.2 When Schematic Design Documents have been prepared by the Architect and approved by the Owner, the Construction Manager shall prepare for the review of the Architect and approval of the Owner, a more detailed estimate with supporting data. During the preparation of the Design Development Documents, the Construction Manager shall update and refine this estimate at appropriate intervals agreed to by the Owner, Architect and Construction Manager. 2.1.5.3 When Design Development Documents have been prepared by the Architect and approved by the Owner, the - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CM(c) AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION o AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW A121/CMc YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 o AGC(R) o -------- (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, AGC 565 - 1991 3 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 6 Construction Manager shall prepare a detailed estimate with supporting data for review by the Architect and approval by the Owner. During the preparation of the Construction Documents, the Construction Manager shall update and refine this estimate at appropriate intervals agreed to by the Owner, Architect and Construction Manager. 2.1.5.4 If any estimate submitted to the Owner exceeds previously approved estimates of the Owner's Budget, the Construction Manager shall make appropriate recommendations to the Owner and Architect. 2.1.6 SUBCONTRACTORS AND SUPPLIERS The Construction Manager shall seek to develop subcontractor interest in the Project and shall furnish to the Owner and Architect for their information a list of possible subcontractors, including suppliers who are to furnish materials or equipment fabricated to a special design, from whom proposals will be requested for each principal portion of the Work. The Architect will promptly reply in writing to the Construction Manager if the Architect or Owner know of any objection to such subcontractor or supplier. The receipt of such list shall not require the Owner or Architect to investigate the qualifications of proposed subcontractors or suppliers, nor shall it waive the right of the Owner or Architect later to object to or reject any proposed subcontractor or supplier. 2.1.7 LONG-LEAD TIME ITEMS The Construction Manager shall recommend to the Owner and Architect a schedule for procurement of long-lead time items which will constitute part of the Work as required to meet the Project schedule. If such long-lead time items are procured by the Owner, they shall be procured on terms and conditions acceptable to the Construction Manager. Upon the Owner's acceptance of the Construction Manager's Guaranteed Maximum Price proposal, all contracts for such items shall be assigned by the Owner to the Construction Manager, who shall accept responsibility for such items as if procured by the Construction Manager. The Construction Manager shall expedite the delivery of long-lead time items. 2.1.8 EXTENT OF RESPONSIBILITY The Construction Manager does not warrant or guarantee estimates and schedules except as may be included as part of the Guaranteed Maximum Price. The recommendations and advice of the Construction Manager concerning design alternatives shall be subject to the review and approval of the Owner and the Owner's professional consultants. It is not the Construction Manager's responsibility to ascertain that the Drawings and Specifications are in accordance with applicable laws, statutes, ordinances, building codes, rules and regulations. However, if the Construction Manager recognizes that portions of the Drawings and Specifications are at variance therewith, the Construction Manager shall promptly notify the Architect and Owner in writing. 2.1.9 EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION The Construction Manager shall comply with applicable laws, regulations and special requirements of the Contract Documents regarding equal employment opportunity and affirmative action programs. 2.2 GUARANTEED MAXIMUM PRICE PROPOSAL AND CONTRACT TIME 2.2.1 When the Drawings and Specifications are sufficiently complete, the Construction Manager shall propose a Guaranteed Maximum Price, which shall be the sum of the estimated Cost of the Work and the Construction Manager's Fee. 2.2.2 As the Drawings and Specifications may not be finished at the time the Guaranteed Maximum Price proposal is prepared, the Construction Manager shall provide in the Guaranteed Maximum Price for further development of the Drawings and Specifications by the Architect that is consistent with the Contract Documents and reasonably inferable therefrom. Such further development does not include such things as changes in scope, systems, kinds and quality of materials, finishes or equipment, all of which, if required, shall be incorporated by Change Order. 2.2.3 The estimated Cost of the Work shall include the Construction Manager's contingency, a sum established by the Construction Manager for the Construction Manager's exclusive use to cover costs arising under Subparagraph 2.2.2 and other costs which are properly reimbursable as Cost of the Work but not the basis for a Change Order. 2.2.4 BASIS OF GUARANTEED MAXIMUM PRICE The Construction Manager shall include with the Guaranteed Maximum Price proposal a written statement of its basis, which shall include: .1 A list of the Drawings and Specifications, including all addenda thereto and the Conditions of the Contract, which were used in preparation of the Guaranteed Maximum Price proposal. .2 A list of allowances and a statement of their basis. .3 A list of the clarifications and assumptions made by the Construction Manager in the preparation of the Guaranteed Maximum Price proposal to supplement the information contained in the Drawings and Specifications. .4 The proposed Guaranteed Maximum Price, including a statement of the estimated cost organized by trade categories, allowances, contingency, and other items and the fee that comprise the Guaranteed Maximum Price. .5 The Date of Substantial Completion upon which the proposed Guaranteed Maximum Price is based, and a schedule of the Construction Documents issuance dates upon which the date of Substantial Completion is based. 2.2.5 The Construction Manager shall meet with the Owner and Architect to review the Guaranteed Maximum Price proposal and the written statement of its basis. In the event that the Owner or Architect discovers any inconsistencies or inaccuracies in the information presented, they shall promptly notify the Construction Manager, who shall make appropriate adjustments to the Guaranteed Maximum Price proposal, its basis or both. 2.2.6 Unless the Owner accepts the Guaranteed Maximum Price proposal in writing on or before the date specified in the proposal for such acceptance and so notifies the Construction Manager, the Guaranteed Maximum Price proposal shall not be effective without written acceptance by the Construction Manager. 2.2.7 Prior to the Owner's acceptance of the Construction Manager's Guaranteed Maximum Price proposal and issuance of a Notice to Proceed, the Construction Manager shall not incur any cost to be reimbursed as part of the Cost of the Work, except as the Owner may specifically authorize in writing. - -------------------------------------------------------------------------------- A121/CMc AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o --------- OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o 4 AGC 565-1991 (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 7 2.2.8 Upon acceptance by the Owner of the Guaranteed Maximum Price proposal, the Guaranteed Maximum Price and its basis shall be set forth in Amendment No. 1. The Guaranteed Maximum Price shall be subject to additions and deductions by a change in the Work as provided in the Contract Documents and the date of Substantial Completion shall be subject to adjustment as provided in the Contract Documents. 2.2.9 The Owner shall authorize and cause the Architect to revise the Drawings and Specifications to the extent necessary to reflect the agreed-upon assumptions and clarifications contained in Amendment No. 1. Such revised Drawings and Specifications shall be furnished to the Construction Manager in accordance with schedules agreed to by the Owner, Architect and Construction Manager. The Construction Manager shall promptly notify the Architect and Owner if such revised Drawings and Specifications are inconsistent with the agreed- upon assumptions and clarifications. 2.2.10 The Guaranteed Maximum Price shall include in the Cost of the Work only those taxes which are enacted at the time the Guaranteed Maximum Price is established. 2.3 CONSTRUCTION PHASE 2.3.1 GENERAL 2.3.1.1 The Construction Phase shall commence on the earlier of: (1) the Owner's acceptance of the Construction Manager's Guaranteed Maximum Price proposal and issuance of a Notice to Proceed, or (2) the Owner's first authorization to the Construction Manager to: (a) award a subcontract, or (b) undertake construction Work with the Construction Manager's own forces, or (c) issue a purchase order for materials or equipment required for the Work. 2.3.2 ADMINISTRATION 2.3.2.1 Those portions of the Work that the Construction Manager does not customarily perform with the Construction Manager's own personnel shall be performed under subcontracts or by other appropriate agreements with the Construction Manager. The Construction Manager shall obtain bids from Subcontractors and from suppliers of materials or equipment fabricated to a special design for the Work from the list previously reviewed and, after analyzing such bids, shall deliver such bids to the Owner and Architect. The Owner shall then determine, with the advice of the Construction Manager and subject to the reasonable objection of the Architect, which bids will be accepted. The Owner may designate specific persons or entities from whom the Construction Manager shall obtain bids; however, if the Guaranteed Maximum Price has been established, the Owner may not prohibit the Construction Manager from obtaining bids from other qualified bidders. The Construction Manager shall not be required to contract with anyone to whom the Construction Manager has reasonable objection. 2.3.2.2 If the Guaranteed Maximum Price has been established and a specific bidder among those whose bids are delivered by the Construction Manager to the Owner and Architect (1) is recommended to the Owner by the Construction Manager; (2) is qualified to perform that portion of the Work; (3) has submitted a bid which conforms to the requirements of the Contract Documents without reservations or exceptions, but the Owner requires that another bid be accepted, then the Construction Manager may require that a change in the Work be issued to adjust the Contract Time and the Guaranteed Maximum Price by the difference between the bid of the person or entity recommended to the Owner by the Construction Manager and the amount of the subcontract or other agreement actually signed with the person or entity designated by the Owner. 2.3.2.3 Subcontracts and agreements with suppliers furnishing materials or equipment fabricated to a special design shall conform to the payment provisions of Subparagraphs 7.1.8 and 7.1.9 and shall not be awarded on the basis of cost plus a fee without the prior consent of the Owner. 2.3.2.4 The Construction Manager shall schedule and conduct meetings at which the Owner, Architect, Construction Manager and appropriate Subcontractors can discuss the status of the Work. The Construction Manager shall prepare and promptly distribute meeting minutes. 2.3.2.5 Promptly after the Owner's acceptance of the Guaranteed Maximum Price proposal, the Construction Manager shall prepare a schedule in accordance with Paragraph 3.10 of AIA Document A201, including the Owner's occupancy requirements. 2.3.2.6 The Construction Manager shall provide monthly written reports to the Owner and Architect on the progress of the entire Work. The Construction Manager shall maintain a daily log containing a record of weather, Subcontractors working on the site, number of workers, Work accomplished, problems encountered and other similar relevant data as the Owner may reasonably require. The log shall be available to the Owner and Architect. 2.3.2.7 The Construction Manager shall develop a system of cost control for the Work, including regular monitoring of actual costs for activities in progress and estimates for uncompleted tasks and proposed changes. The Construction Manager shall identify variances between actual and estimated costs and report the variances to the Owner and Architect at regular intervals. 2.4 PROFESSIONAL SERVICES The Construction Manager shall not be required to provide professional services which constitute the practice of architecture or engineering, unless such services are specifically required by the Contract Documents for a portion of the Work or unless the Construction Manager has specifically agreed in writing to provide such services. In such event, the Construction Manager shall cause such services to be performed by appropriately licensed professionals. 2.5 UNSAFE MATERIALS In addition to the provisions of Paragraph 10.1 in AIA Document A201, if reasonable precautions will be inadequate to prevent foreseeable bodily injury or death to persons resulting from a material or substance encountered but not created on the site by the Construction Manager, the Construction Manager shall, upon recognizing the condition, immediately stop Work in the affected area and report the condition to the Owner and Architect in writing. The Owner, Construction Manager and Architect shall then proceed in the same manner described in Subparagraph 10.1.2 of AIA Document A201. The Owner shall be responsible for obtaining the services of a licensed laboratory to verify the presence or absence - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209 o WARNING: A121/CMc UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND -------- WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. AGC 565-1991 5 8 of the material or substance reported by the Construction Manager and, in the event such material or substance is found to be present, to verify that it has been rendered harmless. Unless otherwise required by the Contract Documents, the Owner shall furnish in writing to the Construction Manager and Architect the names and qualifications of persons or entities who are to perform tests verifying the presence or absence of such material or substance or who are to perform the task of removal or safe containment of such material or substance. The Construction Manager and Architect will promptly reply to the Owner in writing stating whether or not either has reasonable objection to the persons or entities proposed by the Owner. If either the Construction Manager or Architect has an objection to a person or entity proposed by the Owner, the Owner shall propose another to whom the Construction Manager and Architect have no reasonable objection. ARTICLE 3 OWNER'S RESPONSIBILITIES 3.1 INFORMATION AND SERVICES 3.1.1 The Owner shall provide full information in a timely manner regarding the requirements of the Project, including a program which sets forth the Owner's objectives, constraints and criteria, including space requirements and relationships, flexibility and expandability requirements, special equipment and systems, and site requirements. 3.1.2 The Owner, upon written request from the Construction Manager, shall furnish evidence of Project financing prior to the start of the Construction Phase and from time to time thereafter as the Construction Manager may request. Furnishing of such evidence shall be a condition precedent to commencement or continuation of the Work. 3.1.3 The Owner shall establish and update an overall budget for the Project, based on consultation with the Construction Manager and Architect, which shall include contingencies for changes in the Work and other costs which are the responsibility of the Owner. 3.1.4 STRUCTURAL AND ENVIRONMENTAL TESTS, SURVEYS AND REPORTS In the Preconstruction Phase, the Owner shall furnish the following with reasonable promptness and at the Owner's expense, and the Construction Manager shall be entitled to rely upon the accuracy of any such information, reports, surveys, drawings and tests described in Clauses 3.1.4.1 through 3.1.4.4, except to the extent that the Construction Manager knows of any inaccuracy: 3.1.4.1 Reports, surveys, drawings and tests concerning the conditions of the site which are required by law. 3.1.4.2 Surveys describing physical characteristics, legal limitations and utility locations for the site of the Project, and a written legal description of the site. The surveys and legal information shall include, as applicable, grades and lines of streets, alleys, pavements and adjoining property and structures; adjacent drainage; rights-of-way, restrictions, easements, encroachments, zoning, deed restrictions, boundaries and contours of the site; locations, dimensions and necessary data pertaining to existing buildings, other improvements and trees; and information concerning available utility services and lines, both public and private, above and below grade, including inverts and depths. All information on the survey shall be referenced to a project benchmark. 3.1.4.3 The services of geotechnical engineers when such services are requested by the Construction Manager. Such services may include but are not limited to test borings, test pits, determinations of soil bearing values, percolation tests, evaluations of hazardous materials, ground corrosion and resistivity tests, including necessary operations for anticipating subsoil conditions, with reports and appropriate professional recommendations. 3.1.4.4 Structural, mechanical, chemical, air and water pollution tests, tests for hazardous materials, and other laboratory and environmental tests, inspections and reports which are required by law. 3.1.4.5 The services of other consultants when such services are reasonably required by the scope of the Project and are requested by the Construction Manager. 3.2 OWNER'S DESIGNATED REPRESENTATIVE The Owner shall designate in writing a representative who shall have express authority to bind the Owner with respect to all matters requiring the Owner's approval or authorization. This representative shall have the authority to make decisions on behalf of the Owner concerning estimates and schedules, construction budgets, and changes in the Work, and shall render such decisions promptly and furnish information expeditiously, so as to avoid unreasonable delay in the services or Work of the Construction Manager. 3.3 ARCHITECT The Owner shall retain an Architect to provide the Basic Services, including normal structural, mechanical and electrical engineering services, other than cost estimating services, described in the edition of AIA Document B141 current as of the date of this Agreement. The Owner shall authorize and cause the Architect to provide those Additional Services described in AIA Document B141 requested by the Construction Manager which must necessarily be provided by the Architect for the Preconstruction and Construction Phases of the Work. Such services shall be provided in accordance with time schedules agreed to by the Owner, Architect and Construction Manager. Upon request of the Construction Manager, the Owner shall furnish to the Construction Manager a copy of the Owner's Agreement with the Architect, from which compensation provisions may be deleted. 3.4 LEGAL REQUIREMENTS The Owner shall determine and advise the Architect and Construction Manager of any special legal requirements relating specifically to the Project which differ from those generally applicable to construction in the jurisdiction of the Project. The Owner shall furnish such legal services as are necessary to provide the information and services required under Paragraph 3.1. - -------------------------------------------------------------------------------- A121/CMc AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION --------- MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN 6 AGC 565-1991 INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 9 ARTICLE 4 COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE SERVICES The Owner shall compensate and make payments to the Construction Manager for Preconstruction Phase services as follows: 4.1 COMPENSATION 4.1.1 For the services described in Paragraphs 2.1 and 2.2 the Construction Manager's compensation shall be calculated as follows: (State basis of compensation, whether a stipulated sum, multiple of Direct Personnel Expense, actual cost, etc. Include a statement of reimbursement cost items as applicable.) Lump sum bidding phase services $5,000.00 to be paid at the end of bidding phase whereas all sub contracts have been signed. 4.1.2 Compensation for Preconstruction Phase services shall be equitably adjusted if such services extend beyond December 30, 2000 from the date of this Agreement or if the originally contemplated scope of services is significantly modified. 4.1.3 If compensation is based on a multiple of Direct Personnel Expense, Direct Personnel Expense is defined as the direct salaries of the Construction Manager's personnel engaged in the Project and the portion of the cost of their mandatory and customary contributions and benefits related thereto, such as employment taxes and other statutory employee benefits, insurance, sick leave, holidays, vacations, pensions and similar contributions and benefits. 4.2 PAYMENTS 4.2.1 Payments shall be made monthly following presentation of the Construction Manager's invoice and, where applicable, shall be in proportion to services performed. 4.2.2 Payments are due and payable thirty (30) days from the date the Construction Manager's invoice is received by the Owner. Amounts unpaid after the date on which payment is due shall bear interest at the rate entered below, or in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located. (Insert rate of interest agreed upon.) (Usury laws and requirements under the Federal Truth in Lending Act, similar state and local consumer credit laws and other regulations at the Owner's and Construction Manager's principal place of business, the location of the Project and elsewhere may affect the validity of this provision. Legal advice should be obtained with respect to deletions or modifications, and also regarding requirements such as written disclosures or waivers.) ARTICLE 5 COMPENSATION FOR CONSTRUCTION PHASE SERVICES The Owner shall compensate the Construction Manager for Construction Phase services as follows: 5.1 COMPENSATION 5.1.1 For the Construction Manager's performance of the Work as described in Paragraph 2.3, the Owner shall pay the Construction Manager in current funds the Contract Sum consisting of the Cost of the Work as defined in Article 6 and the Construction Manager's Fee determined as follows: (State a lump sum percentage of actual Cost of the Work or other provision for determining the Construction Manager's Fee, and explain how the Construction Manager's Fee is to be adjusted for changes in the Work.) Lump sum fee of $155,555.00 based on construction project cost of $3,425,000.00. - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION A121/CMc MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN --------- INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, 7 AGC 565-1991 D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 10 5.2 GUARANTEED MAXIMUM PRICE 5.2.1 The sum of the Cost of the Work and the Construction Manager's Fee are guaranteed by the Construction Manager not to exceed the amount provided in Amendment No. 1, subject to additions and deductions by changes in the Work as provided in the Contract Documents. Such maximum sum as adjusted by approved changes in the Work is referred to in the Contract Documents as the Guaranteed Maximum Price. Costs which would cause the Guaranteed Maximum Price to be exceeded shall be paid by the Construction Manager without reimbursement by the Owner. (Insert specific provisions if the Construction Manager is to participate in any savings.) 5.3 CHANGES IN THE WORK 5.3.1 Adjustments to the Guaranteed Maximum Price on account of changes in the Work subsequent to the execution of Amendment No. 1 may be determined by any of the methods listed in Subparagraph 7.3.3 of AIA Document A201. 5.3.2 In calculating adjustments to subcontracts (except those awarded with the Owner's prior consent on the basis of cost plus a fee), the terms "cost" and "fee" as used in Clause 7.3.3.3 of AIA Document A201 and the terms "costs" and "a reasonable allowance for overhead and profit" as used in Subparagraph 7.3.6 of AIA Document A201 shall have the meanings assigned to them in that document and shall not be modified by this Article 5. Adjustments to subcontracts awarded with the Owner's prior consent on the basis of cost plus a fee shall be calculated in accordance with the terms of those subcontracts. 5.3.3 In calculating adjustments to the Contract, the terms "cost" and "costs" as used in the above-referenced provisions of AIA Document A201 shall mean the Cost of the Work as defined in Article 6 of the Agreement and the terms "and a reasonable allowance for overhead and profit" shall mean the Construction Manager's Fee as defined in Subparagraph 5.1.1 of this Agreement. 5.3.4 If no specific provision is made in Subparagraph 5.1.1 for adjustment of the Construction Manager's Fee in the case of changes in the Work, or if the extent of such changes is such, in the aggregate, that application of the adjustment provisions of Subparagraph 5.1.1 will cause substantial inequity to the Owner or Construction Manager, the Construction Manager's Fee shall be equitably adjusted on the basis of the fee established for the original Work. ARTICLE 6 COST OF THE WORK FOR CONSTRUCTION PHASE 6.1 COSTS TO BE REIMBURSED 6.1.1 The term "Cost of the Work" shall mean costs necessarily incurred by the Construction Manager in the proper performance of the Work. Such costs shall be at rates not higher than those customarily paid at the place of the Project except with prior consent of the Owner. The Cost of the Work shall include only the items set forth in this Article 6. 6.1.2 LABOR COSTS .1 Wages of construction workers directly employed by the Construction Manager to perform the construction of the Work at the site or, with the Owner's agreement, at off-site workshops. .2 Wages or salaries of the Construction Manager's supervisory and administrative personnel when stationed at the site with the Owner's agreement. (If it is intended that the wages or salaries of certain personnel stationed at the Construction Manager's principal office or offices other than the site office shall be included in the Cost of Work, such personnel shall be identified below.) Field superintendent reimbursement at $54,600 based on 39 week construction duration. .3 Wages and salaries of the Construction Manager's supervisory or administrative personnel engaged, at factories, workshops or on the road, in expediting the production or transportation of materials or equipment required for the Work, but only for that portion of their time required for the Work. .4 Costs paid or incurred by the Construction Manager for taxes, insurance, contributions, assessments and benefits required by law or collective bargaining agreements, and, for personnel not covered by such agreements, customary benefits such as sick leave, medical and health benefits, holidays, vacations and pensions, provided that such costs are based on wages and salaries included in the Cost of the Work under Clauses 6.1.2.1 through 6.1.2.3. 6.1.3 SUBCONTRACT COSTS Payments made by the Construction Manager to Subcontractors in accordance with the requirements of the subcontracts. - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW A121/CMc YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 o AGC(R) o -------- (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, AGC 565-1991 8 1957 E STREET, N.W., WASHINGTON D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 11 6.1.4 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED CONSTRUCTION .1 Costs, including transportation, of materials and equipment incorporated or to be incorporated in the completed construction. .2 Costs of materials described in the preceding Clause 6.1.4.1 in excess of those actually installed but required to provide reasonable allowance for waste and for spoilage. Unused excess materials, if any, shall be handed over to the Owner at the completion of the Work or, at the Owner's option, shall be sold by the Construction Manager; amounts realized, if any, from such sales shall be credited to the Owner as a deduction from the Cost of the Work. 6.1.5 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITIES AND RELATED ITEMS .1 Costs, including transportation, installation, maintenance, dismantling and removal of materials, supplies, temporary facilities, machinery, equipment, and hand tools not customarily owned by the construction workers, which are provided by the Construction Manager at the site and fully consumed in the performance of the Work; and cost less salvage value on such items if not fully consumed, whether sold to others or retained by the Construction Manager. Cost for items previously used by the Construction Manager shall mean fair market value. .2 Rental charges for temporary facilities, machinery, equipment, and hand tools not customarily owned by the construction workers, which are provided by the Construction Manager at the site, whether rented from the Construction Manager or others, and costs of transportation, installation, minor repairs and replacements, dismantling and removal thereof. Rates and quantities of equipment rented shall be subject to the Owner's prior approval. .3 Costs of removal of debris from the site. .4 Reproduction costs, costs of telegrams, facsimile transmissions and long-distance telephone calls, postage and express delivery charges, telephone service at the site and reasonable petty cash expenses of the site office. .5 That portion of the reasonable travel and subsistence expenses of the Construction Manager's personnel incurred while traveling in discharge of duties connected with the Work. 6.1.6 MISCELLANEOUS COSTS .1 That portion directly attributable to this Contract of premiums for insurance and bonds. (If charges for self insurance are to be included, specify the basis of reimbursement.) .2 Sales, use or similar taxes imposed by a governmental authority which are related to the Work and for which the Construction Manager is liable. .3 Fees and assessments for the building permit and for other permits, licenses and inspections for which the Construction Manager is required by the Contract Documents to pay. .4 Fees of testing laboratories for tests required by the Contract Documents, except those related to nonconforming Work other than that for which payment is permitted by Clause 6.1.8.2. .5 Royalties and license fees paid for the use of a particular design, process or product required by the Contract Documents; the cost of defending suits or claims for infringement of patent or other intellectual property rights arising from such requirement by the Contract Documents; payments made in accordance with legal judgments against the Construction Manager resulting from such suits or claims and payments of settlements made with the Owner's consent; provided, however, that such costs of legal defenses, judgments and settlements shall not be included in the calculation of the Construction Manager's Fee or the Guaranteed Maximum Price and provided that such royalties, fees and costs are not excluded by the last sentence of Subparagraph 3.17.1 of AIA Document A201 or other provisions of the Contract Documents. .6 Data processing costs related to the Work. .7 Deposits lost for causes other than the Construction Manager's negligence or failure to fulfill a specific responsibility to the Owner set forth in this Agreement. .8 Legal, mediation and arbitration costs, other than those arising from disputes between the Owner and Construction Manager, reasonably incurred by the Construction Manager in the performance of the Work and with the Owner's written permission, which permission shall not be unreasonably withheld. .9 Expenses incurred in accordance with the Construction Manager's standard personnel policy for relocation and temporary living allowances of personnel required for the Work, in case it is necessary to relocate such personnel from distant locations. 6.1.7 OTHER COSTS .1 Other costs incurred in the performance of the Work if and to the extent approved in advance in writing by the Owner. 6.1.8 EMERGENCIES AND REPAIRS TO DAMAGED OR NONCONFORMING WORK The Cost of the Work shall also include costs described in Subparagraph 6.1.1 which are incurred by the Construction Manager: .1 In taking action to prevent threatened damage, injury or loss in case of an emergency affecting the safety of persons and property, as provided in Paragraph 10.3 of AIA Document A201. .2 In repairing or correcting damaged or nonconforming Work executed by the Construction Manager or the Construction Manager's Subcontractors or suppliers, provided that such damaged or nonconforming Work was not caused by the negligence or failure to fulfill a specific responsibility to the Owner set forth in this Agreement of the Construction. - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL A121/CMc CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. --------- 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. AGC 565-1991 9 COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 12 Manager or the Construction Manager's foremen, engineers or superintendents, or other supervisory, administrative or managerial personnel of the Construction Manager, or the failure of the Construction Manager's personnel to supervise adequately the Work of the Subcontractors or suppliers, and only to the extent that the cost of repair or correction is not recoverable by the Construction Manager from Insurance, Subcontractors or suppliers. 6.1.9 The costs described in Subparagraphs 6.1.1 through 6.1.8 shall be included in the Cost of the Work notwithstanding any provision of AIA Document A201 or other Conditions of the Contract which may require the Construction Manager to pay such costs, unless such costs are excluded by the provisions of Paragraph 6.2. 6.2 COSTS NOT TO BE REIMBURSED 6.2.1 The Cost of the Work shall not include: .1 Salaries and other compensation of the Construction Manager's personnel stationed at the Construction Manager's principal office or offices other than the site office, except as specifically provided in Clauses 6.1.2.2 and 6.1.2.3. .2 Expenses of the Construction Manager's principal office and offices other than the site office except as specifically provided in Paragraph 6.1. .3 Overhead and general expenses, except as may be expressly included in Paragraph 6.1. .4 The Construction Manager's capital expenses, including interest on the Construction Manager's capital employed for the Work. .5 Rental costs of machinery and equipment, except as specifically provided in Subparagraph 6.1.5.2. .6 Except as provided in Clause 6.1.8.2, costs due to the negligence of the Construction Manager or to the failure of the Construction Manager to fulfill a specific responsibility to the Owner set forth in this Agreement. .7 Costs incurred in the performance of Preconstruction Phase Services. .8 Except as provided in Clause 6.1.7.1, any cost not specifically and expressly described in Paragraph 6.1. .9 Costs which would cause the Guaranteed Maximum Price to be exceeded. 6.3 DISCOUNTS, REBATES AND REFUNDS 6.3.1 Cash discounts obtained on payments made by the Construction Manager shall accrue to the Owner if (1) before making the payment, the Construction Manager included them in an Application for Payment and received payment therefor from the Owner, or (2) the Owner has deposited funds with the Construction Manager with which to make payments; otherwise, cash discounts shall accrue to the Construction Manager. Trade discounts, rebates, refunds and amounts received from sales of surplus materials and equipment shall accrue to the Owner, and the Construction Manager shall make provisions so that they can be secured. 6.3.2 Amounts which accrue to the Owner in accordance with the provisions of Subparagraph 6.3.1 shall be credited to the Owner as a deduction from the Cost of the Work. 6.4 ACCOUNTING RECORDS 6.4.1 The Construction Manager shall keep full and detailed accounts and exercise such controls as may be necessary for proper financial management under this Contract; the accounting and control systems shall be satisfactory to the Owner. The Owner and the Owner's accountants shall be afforded access to the Construction Manager's records, books, correspondence, instructions, drawings, receipts, subcontracts, purchase orders, vouchers, memoranda and other data relating to this Project, and the Construction Manager shall preserve these for a period of three years after final payment, or for such longer period as may be required by law. ARTICLE 7 CONSTRUCTION PHASE 7.1 PROGRESS PAYMENTS 7.1.1 Based upon Application for Payment submitted to the Architect by the Construction Manager and Certificates for Payment issued by the Architect, the Owner shall make progress payments on account of the Contract Sum to the Construction Manager as provided below and elsewhere in the Contract Documents. 7.1.2 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month, or as follows: 7.1.3. Provided an Application for Payment is received by the Architect not later than the 15th day of a month, the Owner shall make payment to the Construction Manager not later than the 30th day of the month. If an Application for Payment is received by the Architect after the application date fixed above, payment shall be made by the Owner not later than fifteen days after the Architect receives the Application for Payment. - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON D.C. 20006-5209 o WARNING: A121/CMc UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND -------- WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. AGC 565-1991 10 13 7.1.4 With each Application for Payment, the Construction Manager shall submit payrolls, petty cash accounts, receipted invoices or invoices with check vouchers attached, and any other evidence required by the Owner or Architect to demonstrate that cash disbursements already made by the Construction Manager on account of the Cost of the Work equal or exceed (1) progress payments already received by the Construction Manager; less (2) that portion of those payments attributable to the Construction Manager's Fee; plus (3) payrolls for the period covered by the present Application for Payment. 7.1.5 Each Application for Payment shall be based upon the most recent schedule of values submitted by the Construction Manager in accordance with the Contract Documents. The schedule of values shall allocate the entire Guaranteed Maximum Price among the various portions of the Work, except that the Construction Manager's Fee shall be shown as a single separate item. The schedule of values shall be prepared in such form and supported by such data to substantiate its accuracy as the Architect may require. This schedule, unless objected to by the Architect, shall be used as a basis for reviewing the Construction Manager's Applications for Payment. 7.1.6 Applications for Payment shall show the percentage completion of each portion of the Work as of the end of the period covered by the Application for Payment. The percentage completion shall be the lesser of (1) the percentage of that portion of the Work which has actually been completed or (2) the percentage obtained by dividing (a) the expense which has actually been incurred by the Construction Manager on account of that portion of the Work for which the Construction Manager has made or intends to make actual payment prior to the next Application for Payment by (b) the share of the Guaranteed Maximum Price allocated to that portion of the Work in the schedule of values. 7.1.7 Subject to other provisions of the Contract Documents, the amount of each progress payment shall be computed as follows: .1 Take that portion of the Guaranteed Maximum Price properly allocable to completed Work as determined by multiplying the percentage completion of each portion of the Work by the share of the Guaranteed Maximum Price allocated to that portion of the Work in the schedule of values. Pending final determination of cost to the Owner of changes in the Work, amounts not in dispute may be included as provided in Subparagraph 7.3.7 of AIA Document A201, even though the Guaranteed Maximum Price has not yet been adjusted by Change Order. .2 Add that portion of the Guaranteed Maximum Price properly allocable to materials and equipment delivered and suitably stored at the site for subsequent incorporation in the Work or, if approved in advance by the Owner, suitably stored off the site at a location agreed upon in writing. .3 Add the Construction Manager's Fee, less retainage of five percent (5%). The Construction Manager's Fee shall be computed upon the Cost of the Work described in the two preceding Clauses at the rate stated in Subparagraph 5.1.1 or, if the Construction Manager's Fee is stated as a fixed sum in that Subparagraph, shall be an amount which bears the same ratio to that fixed-sum Fee as the Cost of the Work in the two preceding Clauses bears to a reasonable estimate of the probable Cost of the Work upon its completion. .4 Subtract the aggregate of previous payments made by the Owner. .5 Subtract the shortfall, if any, indicated by the Construction Manager in the documentation required by Subparagraph 7.1.4 to substantiate prior Applications for Payment, or resulting from errors subsequently discovered by the Owner's accountants in such documentation. .6 Subtract amounts, if any, for which the Architect has withheld or nullified a Certificate for Payment as provided in Paragraph 9.5 of AIA Document A201. 7.1.8 Except with the Owner's prior approval, payments to Subcontractors shall be subject to retention of not less than five percent (5%). The Owner and the Construction Manager shall agree upon a mutually acceptable procedure for review and approval of payments and retention for subcontracts. 7.1.9 Except with the Owner's prior approval, the Construction Manager shall not make advance payments to suppliers for materials or equipment which have not been delivered and stored at the site. 7.1.10 In taking action on the Construction Manager's Applications for Payment, the Architect shall be entitled to rely on the accuracy and completeness of the information furnished by the Construction Manager and shall not be deemed to represent that the Architect has made a detailed examination, audit or arithmetic verification of the documentation submitted in accordance with Subparagraph 7.1.4 or other supporting data; that the Architect has made exhaustive or continuous on-site inspections or that the Architect has made examinations to ascertain how or for what purposes the Construction Manager has used amounts previously paid on account of the Contract. Such examinations, audits and verifications, if required by the Owner, will be performed by the Owner's accountants acting in the sole interest of the Owner. 7.2 FINAL PAYMENT 7.2.1 Final payment shall be made by the Owner to the Construction Manager when j(1) the Contract has been fully performed by the Construction Manager except for the Construction Manager's responsibility to correct nonconforming Work, as provided in Subparagraph 12.2.2 of AIA Document A201, and to satisfy other requirements, if any, which necessarily survive final payment; (2) a final Application for Payment and final accounting for the Cost of the Work have been submitted by the Construction Manager and reviewed by the Owner's accountants; and (3) a final Certificate for Payment has then been issued by the Architect; such final payment shall be made by the Owner not more than 30 days after the issuance of the Architect's final Certificate for Payment, or as follows: - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW A121/CMc YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 (AGC(R) o --------- (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, AGC 565-1991 11 1957 E STREET, N.W., WASHINGTON D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 14 7.2.2 The amount of the final payment shall be calculated as follows: .1 Take the sum of the Cost of the Work substantiated by the Construction Manager's final accounting and the Construction Manager's Fee; but not more than the Guaranteed Maximum Price. .2 Subtract amounts, if any, for which the Architect withholds, in whole or in part, a final Certificate for Payment as provided in Subparagraph 9.5.1 of AIA Document A201 or other provisions of the Contract Documents. .3 Subtract the aggregate of previous payments made by the Owner. If the aggregate of previous payments made by the Owner exceeds the amount due the Construction Manager, the Construction Manager shall reimburse the difference to the Owner. 7.2.3 The Owner's accountants will review and report in writing on the Construction Manager's final accounting within 30 days after delivery of the final accounting to the Architect by the Construction Manager. Based upon such Cost of the Work as the Owner's accountants report to be substantiated by the Construction Manager's final accounting, and provided the other conditions of Subparagraph 7.2.1 have been met, the Architect will, within seven days after receipt of the written report of the Owner's accountants, either issue to the Owner a final Certificate for Payment with a copy to the Construction Manager, or notify the Construction Manager and Owner in writing of the Architect's reasons for withholding a certificate as provided in Subparagraph 9.5.1 of AIA Document A201. The time periods stated in this Paragraph 7.2 supersede those stated in Subparagraph 9.4.1 of AIA Document A201. 7.2.4 If the Owner's accountants report the Cost of the Work as substantiated by the Construction Manager's final accounting to be less than claimed by the Construction Manager, the Construction Manager shall be entitled to proceed in accordance with Article 9 without a further decision of the Architect. Unless agreed to otherwise, a demand for mediation or arbitration of the disputed amount shall be made by the Construction Manager within 60 days after the Construction Manager's receipt of a copy of the Architect's final Certificate for Payment. Failure to make such demand within this 60-day period shall result in the substantiated amount reported by the Owner's accountant becoming binding on the Construction Manager. Pending a final resolution of the disputed amount, the Owner shall pay the Construction Manager the amount certified in the Architect's final Certificate for Payment. 7.2.5 If, subsequent to final payment and at the Owner's request, the Construction Manager incurs costs described in Paragraph 6.1 and not excluded by Paragraph 6.2 (1) to correct nonconforming Work, or (2) arising from the resolution of disputes, the Owner shall reimburse the Construction Manager such costs and the Construction Manager's Fee, if any, related thereto on the same basis as if such costs had been incurred prior to final payment, but not in excess of the Guaranteed Maximum Price. If the Construction Manager has participated in savings, the amount of such savings shall be recalculated and appropriate credit given to the Owner in determining the net amount to be paid by the Owner to the Construction Manager. ARTICLE 8 INSURANCE AND BONDS 8.1 INSURANCE REQUIRED OF THE CONSTRUCTION MANAGER During both phases of the Project, the Construction Manager shall purchase and maintain insurance as set forth in Paragraph 11.1 of AIA Document A201. Such insurance shall be written for not less than the following limits, or greater if required by law; 8.1.1 Workers' Compensation and Employers' Liability meeting statutory limits mandated by State and Federal laws. If (1) limits in excess of those required by statute are to be provided or (2) the employer is not statutorily bound to obtain such insurance coverage or (3) additional coverages are required, additional coverages and limits for such insurance shall be as follows: 8.1.2 Commercial General Liability including coverage for Premises-Operations, Independent Contractors' Protective, Products-Completed Operations, Contractual Liability, Personal Injury, and Broad Form Property Damage (including coverage for Explosion, Collapse and Underground hazards); $ 1,000,000.00 Each Occurrence ------------------ $ 2,000,000.00 General Aggregate ------------------ $ 1,000,000.00 Personal and ----------------- Advertising Injury $ 1,000,000.00 Products-Completed ----------------- Operations Aggregate
.1 The policy shall be endorsed to have the General Aggregate apply to this Project only. .2 Products and Completed Operations insurance shall be maintained for a minimum period of at least ( ) year(s) after either 90 days following Substantial Completion or final payment, whichever is earlier. .3 The Contractual Liability insurance shall include coverage sufficient to meet the obligations in AIA Document A201 under Paragraph 3.18. - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW A121/CMc YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o -------- (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, AGC 565-1991 12 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 15 8.1.3 Automobile Liability (owned, non-owned and hired vehicles) for bodily injury and property damage: $ 1,000,000.00 Each Accident ---------------------- 8.1.4 Other coverage: (If Umbrella Excess Liability coverage is required over the primary insurance or retention, insert the coverage limits. Commercial General Liability and Automobile Liability limits may be attained by individual policies or by a combination of primary policies and Umbrella and/or Excess Liability policies.) 5,000,000.00 umbrella excess liability 8.2 INSURANCE REQUIRED OF THE OWNER During both phases of the Project, the Owner shall purchase and maintain liability and property insurance, including waivers of subrogation, as set forth in Paragraphs 11.2 and 11.3 of AIA Document A201. Such insurance shall be written for not less than the following limits, or greater if required by law: 8.2.1 Property Insurance: $ 1,000.00 Deductible Per Occurrence ----------- $ -0- Aggregate Deductible --------------- 8.2.2 Boiler and Machinery Insurance with a limit of: $ . ----------------------------------- (If not a blanket policy, list the objects to be insured.) Insurance coverage will be placed on the building. Risk insurance will be based on the improvements as they are made. Insurance coverage is for both property and liability. 8.3 PERFORMANCE BOND AND PAYMENT BOND 8.3.1 The Construction Manager shall not (Insert "shall" or "shall not") furnish bonds covering faithful performance of the Contract and payment of obligations arising thereunder. Bonds may be obtained through the Construction Manager's usual source and the cost thereof shall be included in the Cost of the Work. The amount of each bond shall be equal to __ percent (__%) of the Contract Sum. 8.3.2 The Construction Manager shall deliver the required bonds to the Owner at least three days before the commencement of any Work at the Project site. ARTICLE 9 MISCELLANEOUS PROVISIONS 9.1 DISPUTE RESOLUTION FOR THE PRECONSTRUCTION PHASE 9.1.1 Claims, disputes or other matters in question between the parties to this Agreement which arise prior to the commencement of the Construction Phase or which relate solely to the Preconstruction Phase services of the Construction Manager or to the Owner's obligations to the Construction Manager during the Preconstruction Phase, shall be resolved by mediation or by arbitration. 9.1.2 Any mediation conducted pursuant to this Paragraph 9.1 shall be held in accordance with the Construction Industry Mediation Rules of the American Arbitration Association currently in effect, unless the parties mutually agree otherwise. Demand for mediation shall be filed in writing with the other party to this Agreement and with the American Arbitration Association. Any demand for mediation shall be made within a reasonable time after the claim, dispute or other matter in question has arisen. In no event shall the demand for mediation be made after the date when institution of legal or equitable proceedings based upon such claim, dispute or other matter in question would be barred by the applicable statute of limitations. 9.1.3 Any claim, dispute or other matter in question not resolved by mediation shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect unless the parties mutually agree otherwise. 9.1.4 Demand for arbitration shall be filed in writing with the other party to this Agreement and with the American Arbitration Association. A demand for arbitration may be made concurrently with a demand for mediation and shall be made within a reasonable time after the claim, dispute or other matter in question has arisen. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based upon such claim, dispute or other matter in question would be barred by the applicable statute of limitations. 9.1.5 No arbitration arising out of or relating to the Contract Documents shall include, by consolidation or joinder or in any other manner, the Architect, the Architect's employees or consultants, except by written consent containing specific reference to the Agreement and signed by the Architect, Owner, Construction Manager and any other person or entity sought to be joined. No arbitration shall include, by consolidation or joinder or in any other manner, parties other than the Owner, Construction Manager, a separate contractor as described in Article 6 of AIA Document A201 and other persons substantially involved in a common question of fact or law whose presence is required if complete relief is to be accorded in arbitration. No person or entity other than the Owner or Construction Manager or a separate contractor as described in Article 6 of AIA Document A201 shall be included as an original third party or additional third party to an arbitration whose interest or responsibility is insubstantial. Consent to arbitration involving an additional person or entity shall not constitute agreement to arbitration of a dispute not described in such consent or with a person or entity not named or described therein. The foregoing agreement to arbitrate and other agreements to arbitrate with an additional per- - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER- CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209 o WARNING: UNLICENSED PHOTOCOPYING VIOLATES A121/CMc U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO -------- LEGAL PROSECUTION. AGC 565-1991 13 16 son or entity duly consented to by parties to this Agreement shall be specifically enforceable under applicable law in any court having jurisdiction thereof. 9.1.6 The award rendered by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof. 9.2 DISPUTE RESOLUTION FOR THE CONSTRUCTION PHASE 9.2.1 Any other claim, dispute or other matter in question arising out of or related to this Agreement or breach thereof shall be settled in accordance with Article 4 of AIA Document A201, except that in addition to and prior to arbitration, the parties shall endeavor to settle disputes by mediation in accordance with the Construction Industry Mediation Rules of the American Arbitration Association currently in effect unless the parties mutually agree otherwise. Any mediation arising under this Paragraph shall be conducted in accordance with the provisions of Subparagraphs 9.1.2 and 9.1.3. 9.3 OTHER PROVISIONS 9.3.1 Unless otherwise noted, the terms used in this Agreement shall have the same meaning as those in the 1987 Edition of AIA Document A201, General Conditions of the Contract for Construction. 9.3.2 EXTENT OF CONTRACT This Contract, which includes this Agreement and the other documents incorporated herein by reference, represents the entire and integrated agreement between the Owner and Construction Manager and supersedes all prior negotiations, representations or agreements, either written or oral. This Agreement may be amended only by written instrument signed by both the Owner and Construction Manager. If anything in any document incorporated in this Agreement is inconsistent with this Agreement, this Agreement shall govern. 9.3.3 OWNERSHIP AND USE OF DOCUMENTS The Drawings, Specifications and other documents prepared by the Architect, and copies thereof furnished to the Construction Manager, are for use solely with respect to this Project. They are not to be used by the Construction Manager, Subcontractors, Sub-subcontractors or suppliers on other projects, or for additions to this Project outside the scope of the Work, without the specific written consent of the Owner and Architect. The Construction Manager, Subcontractors, Sub-subcontractors and suppliers are granted a limited license to use and reproduce applicable portions of the Drawings, Specifications and other documents prepared by the Architect appropriate to and for use in the execution of their Work under the Contract Documents. 9.3.4 GOVERNING LAW The Contract shall be governed by the law of the place where the Project is located. 9.3.5 ASSIGNMENT The Owner and Construction Manager respectively bind themselves, their partners, successors, assigns and legal representatives to the other party hereto and to partners, successors, assigns and legal representatives of such other party in respect to covenants, agreements and obligations contained in the Contract Documents. Neither party to the Contract shall assign the Contract as a whole without written consent of the other. If either party attempts to make such an assignment without such consent, that party shall nevertheless remain legally responsible for all obligations under the Contract. ARTICLE 10 TERMINATION OR SUSPENSION 10.1 TERMINATION PRIOR TO ESTABLISHING GUARANTEED MAXIMUM PRICE 10.1.1 Prior to execution by both parties of Amendment No. 1 establishing the Guaranteed Maximum Price, the Owner may terminate this Contract at any time without cause, and the Construction Manager may terminate this Contract for any of the reasons described in Subparagraph 14.1.1 of AIA Document A201. 10.1.2 If the Owner or Construction Manager terminates this Contract pursuant to this Paragraph 10.1 prior to commencement of the Construction Phase, the Construction Manager shall be equitably compensated for Preconstruction Phase services performed prior to receipt of notice of termination; provided, however, that the compensation for such services shall not exceed the compensation set forth in Subparagraph 4.1.1. 10.1.3 If the Owner or Construction Manager terminates this Contract pursuant to this Paragraph 10.1 after commencement of the Construction Phase, the Construction Manager shall, in addition to the compensation provided in Subparagraph 10.1.2, be paid an amount calculated as follows: .1 Take the Cost of the Work incurred by the Construction Manager. .2 Add the Construction Manager's Fee computed upon the Cost of the Work to the date of termination at the rate stated in Paragraph 5.1 or, if the Construction Manager's Fee is stated as a fixed sum in that Paragraph, an amount which bears that same ratio to that fixed-sum Fee as the Cost of Work at the time of termination bears to a reasonable estimate of the probable Cost of the Work upon its completion. .3 Subtract the aggregate of previous payments made by the Owner on account of the Construction Phase. The Owner shall also pay the Construction Manager fair compensation, either by purchase or rental at the election of the Owner, for any equipment owned by the Construction Manager which the Owner elects to retain and which is not otherwise included in the Cost of the Work under Clause 10.1.3.1. To the extent that the Owner elects to take legal assignment of subcontracts and purchase orders (including rental agreements), the Construction Manager shall, as a condition of receiving the payments referred to in this Article 10, execute and deliver all such papers and take all such steps, including the legal assignment of such subcontracts and other contractual rights of the Construction Manager, as the Owner may require for the purpose of fully vesting in the Owner the rights and benefits of the Construction Manager under such subcontracts or purchase orders. Subcontracts, purchase orders and rental agreements entered into by the Construction Manager with the Owner's written approval prior to the execution of Amendment No. 1 shall contain provisions permitting assignment to the Owner as described above. If the Owner accepts such assignment, the Owner shall reimburse or indemnify the Construction Manager with respect to all costs arising under the subcontract, purchase order or rental agreement except those which would not have been reimbursable as Cost of the Work if the contract had not been terminated. If the Owner elects not to accept the assignment of any subcontract, purchase order or rental agreement which would have constituted a Cost of the Work had this agreement not been terminated, the Con- - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o A121/CMc (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, -------- 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209 o WARNING: AGC 565-1991 14 UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 17 struction Manager shall terminate such subcontract, purchase order or rental agreement and the Owner shall pay the Construction Manager the costs necessarily incurred by the Construction Manager by reason of such termination. 10.2 TERMINATION SUBSEQUENT TO ESTABLISHING GUARANTEED MAXIMUM PRICE Subsequent to execution by both parties of Amendment No. 1, the Contract may be terminated as provided in Article 14 of AIA Document A201. 10.2.1 In the event of such termination by the Owner, the amount payable to the Construction Manager pursuant to Subparagraph 14.1.2 of AIA Document A201 shall not exceed the amount the Construction Manager would have been entitled to receive pursuant to Subparagraphs 10.1.2 and 10.1.3 of this Agreement. 10.2.2 In the event of such termination by the Construction Manager, the amount to be paid to the Construction Manager under Subparagraph 14.1.2 of AIA Document A201 shall not exceed the amount the Construction Manager would be entitled to receive under Subparagraphs 10.1.2 or 10.1.3 above, except that the Construction Manager's Fee shall be calculated as if the Work had been fully completed by the Construction Manager, including a reasonable estimate of the Cost of the Work for Work not actually completed. 10.3 SUSPENSION The Work may be suspended by the Owner as provided in Article 14 of AIA Document A201; in such case, the Guaranteed Maximum Price, if established, shall be increased as provided in Subparagraph 14.3.2 of AIA Document A201 except that the term "cost of performance of the Contract" in that Subparagraph shall be understood to mean the Cost of the Work and the term "profit" shall be understood to mean the Construction Manager's Fee as described in Subparagraphs 5.1.1 and 5.3.4 of this Agreement. ARTICLE 11 OTHER CONDITIONS AND SERVICES Exhibit G Attachments: Request for Proposal for Construction Management Services. Fee Proposal Bid Form revised per Addendum #1. (Page #1 and Page #2) This Agreement entered into as of the day and year first written above. OWNER: CONSTRUCTION MANAGER: Mercantile Bank of West Michigan By: Robert B. Kaminski, C.O.O. By: JOHN DROZER ---------------------------- ------------------------ Date: 10-28-00 Date: 10-28-00 -------------------------- ---------------------- ATTEST: /s/ ROBERT B. KAMINSKI ATTEST: /s/ JOHN A. DROZER ------------------------ -------------------- AIA CAUTION: YOU SHOULD SIGN AN ORIGINAL AIA DOCUMENT WHICH HAS THIS CAUTION PRINTED IN RED. AN ORIGINAL ASSURES THAT CHANGES WILL NOT BE OBSCURED AS MAY OCCUR WHEN DOCUMENTS ARE REPRODUCED. - ------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON D.C. 20006-5209 o WARNING: A121/CMc UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND -------- WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. AGC 565-1991 15 18 AMENDMENT NO. 1 TO AGREEMENT BETWEEN OWNER AND CONSTRUCTION MANAGER Pursuant to Paragraph 2.2 of the Agreement, dated October 28, 2000 between Mercantile Bank of W. Michigan (Owner) and C.D. Barnes & Associates (Construction Manager), for Wyoming Branch and Admin. Bldg. (the Project), the Owner and Construction Manager establish a Guaranteed Maximum Price and Contract Time for the Work as set forth below. ARTICLE I GUARANTEED MAXIMUM PRICE The Construction Manager's Guaranteed Maximum Price for the Work, including the estimated Cost of the Work as defined in Article 6 and the Construction Manager's Fee as defined in Article 5, is Dollars ($3,604,862.00). This Price is for the performance of the Work in accordance with the Contract Documents listed and attached to this Amendment and marked Exhibits A through F, as follows: Exhibit A Drawings, Specifications, addenda and General, Supplementary and other Conditions of the Contract on which the Guaranteed Maximum Price is based, pages 1 through 1, dated 12/28/00. Exhibit B Allowance items, pages 1 through 1, dated 10/23/00. Exhibit C Assumptions and clarifications made in preparing the Guaranteed Maximum Price, pages 1 through 1, dated 12/28/00. Exhibit D Completion schedule, pages See Attached 1 through 1, dated 12/28/00. Exhibit E Alternate prices, pages incl. in Contract Amt. through __ , dated ________. Exhibit F Unit prices, pages 1 through 1, dated 10/23/00. Exhibit G CM Bid Form 1 through 2 dated 9/16/00. Exhibit H List of Subcontractors 1 through 4 dated 12/28/00. ARTICLE II CONTRACT TIME The date of Substantial Completion established by this Amendment is: August 6, 2001 OWNER: CONSTRUCTION MANAGER: Mercantile Bank of West Michigan C.D. Barnes Assoc., Inc. By: Robert B. Kaminski C.O.O. By: /s/ CARTER HUFFMAN --------------------------------- ------------------------------------- Date: 10-28-00 Date: 10-28-00 ------------------------------- ----------------------------------- ATTEST: /s/ ROBERT B. KAMINSKI ATTEST: ----------------------------- --------------------------------- AIA CAUTION: YOU SHOULD SIGN AN ORIGINAL AIA DOCUMENT WHICH HAS THIS CAUTION PRINTED IN RED. AN ORIGINAL ASSURES THAT CHANGES WILL NOT BE OBSCURED AS MAY OCCUR WHEN DOCUMENTS ARE REPRODUCED. - -------------------------------------------------------------------------------- AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 o OWNER-CONSTRUCTION MANAGER AGREEMENT o 1991 EDITION AIA(R) o (C)1991 o THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5209 AGC(R) o (C)1991 o THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209 o WARNING: A121/CMc UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND -------- WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. AGC 565-1991 16 19 EXHIBIT A DRAWING SPECIFICATIONS AND ADDENDUMS 12/28/00 T1.1 Title Sheet, General Notes, Abbreviations, General Information, Symbol Legend 10/6/00 C1 Site Layout Plan 10/6/00 C2 Grading, Paving & Drainage 10/6/00 C3 Soil Erosion 10/6/00 C4 Site Details 10/6/00 C5 Site Details 10/6/00 L1 Landscaping Plan 10/6/00 A1.0 Basement Floor Plan (Building A) 10/6/00 A1.1 First Floor Plan (Building A) 10/6/00 A1.2 Second Floor Plan (Building A) 10/6/00 A1.3 Roof Plan and Details (Building A) 10/6/00 A1.4 Main Floor Plan (Building B) 10/6/00 A1.5 Roof Plan and Details (Building B) 10/6/00 A2.1 Interior Finish Schedules 10/6/00 A2.2 Door/Window Details and Schedules 10/6/00 A3.0 Basement Reflected Ceiling Plan (Building A) 10/6/00 A3.1 First Floor Reflected Ceiling Plan (Building A) 10/6/00 A3.2 Second Floor Reflected Ceiling Plan (Building A) 10/6/00 A3.3 Main floor Reflected Ceiling Plan (Building B) 10/6/00 A4.1 Interior Elevations (Building A) 10/6/00 A4.2 Interior Elevations (Building A) 10/6/00 A4.3 Interior Elevations (Building A) 10/6/00 A4.4 Interior Elevations (Building B) 10/6/00 A4.5 Interior Elevations (Building B) 10/6/00 A5.1 Exterior Elevations (Building A) 10/6/00 A5.2 Exterior Elevations (Building B) 10/6/00 A6.1 Building Sections (Building A) 10/6/00 A6.2 Building Sections (Building B) 10/6/00 A7.1 Wall Sections (Building A) 10/6/00 A7.2 Wall Sections (Building A) 10/6/00 A7.3 Wall Sections (Building B) 10/6/00 A7.4 Wall Sections (Building B) 10/6/00 A8.1 Details 10/6/00 A8.2 Details 10/6/00 A8.3 Details 10/6/00 A8.4 Details 10/6/00 A8.5 Details 10/6/00 A9.1 Stair Section (Building A) 10/6/00 S1.1 Foundation Plan (Building A) 10/16/00 S1.2 Foundation Plan (Building B) 10/16/00 S2.2 Foundation Details (Building B) 10/16/00 S3.1 First Floor Framing Plan (Building A) 10/16/00 S3.2 Second Floor Framing Plan (Building A) 10/16/00 S3.3 Roof Framing Plan (Building A) 10/16/00 S3.4 Roof Framing Plan (Building B) 10/16/00 S4.1 Framing Details (Building A & B) 10/16/00 S4.2 Framing Details (Building A) 10/16/00 S4.3 Framing Details (Building B) 10/16/00 S4.4 Structural Notes 10/16/00 P1.0 Lower Level Plumbing Plan (Building A) 10/16/00 P1.1 First Floor Plumbing Plan (Building A) 10/16/00 P1.2 Second Floor Plumbing Plan (Building A) 10/16/00 P1.3 Main Floor Plumbing Plan (Building B) 10/16/00 M1.0 Lower Level HVAC Plan (Building A) 10/16/00 M1.1 First Floor HVAC Plan (Building A) 10/16/00 M2.1 Main Floor Piping Plan (Building A) 10/16/00 M1.2 Second Floor HVAC Plan (Building A) 10/16/00 M2.2 Second Floor Piping Plan (Building A) 10/16/00 M1.3 Main Floor HVAC Plan (Building B) 10/16/00 M3.0 Mechanical Equipment Schedules 10/16/00 M4.0 Mechanical Details 10/16/00 E1.0 Lower Level Lighting Plan (Building A) 10/6/00 E1.1 Main Level Lighting Plan (Building A) 10/6/00 E1.2 Upper Level Lighting Plan (Building A) 10/6/00 E2.0 Lower Level Power Plan (Building A) 10/6/00 E2.1 Main Level Power Plan (Building A) 10/6/00 E2.2 Upper Level Power Plan (Building A) 10/6/00 E1.3 Lighting Plan (Building B) 10/6/00 E2.3 Power Plan (Building B) 10/6/00 E3.0 One-Line Diagram 10/6/00 E4.0 Electrical Site Plan 10/6/00 F1.0 Basement Furniture Plan (Building A) 10/16/00 F1.1 First Floor Furniture Plan (Building A) 10/16/00 F1.2 Second Floor Furniture Plan (Building A) 10/16/00 F1.3 Main Floor Furniture Plan (Building B) 10/16/00 Specification Book 10/6/00 Addendum #1 10/16/00 Addendum #2 10/23/00
20 DATE: October 23, 2000 EXHIBIT B ALLOWANCES Included in the contract amount are the following allowances: Cold Weather Protection/Temporary Enclosures $ 788.00 Temporary heat 1,500.00 Fuel For Heat 15,000.00 Water 315.00 Temporary Wiring/Lighting 2,500.00 Snow Removal 850.00 Layout/Testing 11,000.00 Michcon Natural Gas 750.00 Consumers Power Co. Charges 5,000.00 Water Assessment 5,700.00
21 EXHIBIT C ASSUMPTIONS AND CLARIFICATION OF GUARANTEED MAXIMUM PRICE DEVELOPMENT OF CONTRACT AMOUNT MERCANTILE BANK REVISED SCHEDULE OF VALUES DECEMBER 15, 2000 Base Bid $ 3,559,154.00 Fee (155,500.00) -------------- Sub Total $ 3,403,654.00 Light Fixtures $ (3,700.00) Base Bid Panels (118,900.00) Base Bid Sheet Metal (8,462.00) ALPLY - AGM 157,229.00 ADS Pipe in lieu of Concrete (6,912.00) -------------- Primary Power +21,453.00 -------------- HVAC building Audomation +5,000.00 -------------- Total $ 3,449,362.00 -------------- ADD FEE BACK 155,500.00 -------------- CONTRACT AMOUNT $ 3,604,862.00 ==============
Included in the contract amount are the following allowances: Cold Weather Protection/Temporary Enclosures $ 788.00 Temporary Heat 1,500.00 Fuel For Heat 15,000.00 Water 315.00 Temporary Wiring/Lighting 2,500.00 Snow Removal 850.00 Layout/Testing 11,000.00 Michcon Natural Gas 750.00 Consumers Power Co. Charges 5,000.00 Water Assessment 5,700.00
22 DATE: October 28, 2000 EXHIBIT F UNIT PRICES Remove/Replace Unsuitable Soll
SUBCONTRACTOR CM COST TO LOCATION COST MARK-UP OWNER - ----------------------------------------------------------------- PARKING $10.00/cuf 7.5% $10.75/cuf FOOTING $12.00/cuf 7.5% $12.90/cuf TRENCHES $10.00/cuf 7.5% $10.75/cuf
23 EXHIBIT 'D'
- ----------------------------------------------------------------------------------------------------- C.D. BARNES ASSOCIATES, INC. MERCANTILE BANK OF WEST MICHIGAN DECEMBER 28, 2000 - ----------------------------------------------------------------------------------------------------- ID TASK NAME DURATION START FINISH - ---- --------- -------- --------- --------- 1 START 0d 11/06/00 11/06/00 2 CLEAR GRUB STRIP 5d 11/06/00 11/10/00 3 EXCAVATE FOR FOUNDATION 4d 11/13/00 11/16/00 4 POUR FOOTINGS 5d 11/16/00 11/22/00 5 FOUNDATION WALLS 45d 11/24/00 01/25/01 6 MEP UNDERGROUND UTILITIES 3d 01/25/01 01/29/01 7 READY BUILDING PAD 3d 01/25/01 01/29/01 8 SLAB ON GRADE 3d 01/30/01 02/01/01 9 STEEL DELIVERY 0d 01/19/01 01/19/01 10 ERECT STEEL 20d 01/19/01 02/15/01 11 UTILITIES WATER 1d 11/23/00 11/23/00 12 UTILITIES SANITARY SEWER 2d 11/27/00 11/28/00 13 UTILITIES STORM SEWER 8d 11/29/00 12/08/00 14 MASONRY HOLLOW METAL 5d 01/04/01 01/10/01 15 MASONRY STAIRWELL 15d 01/04/01 01/24/01 16 MASONRY ELEVATOR SHAFT 10d 01/04/01 01/17/01 17 MAIN FLOOR CONCRETE 2d 02/05/01 02/06/01 18 UPPER LEVEL CONCRETE 2d 02/07/01 02/08/01 19 PARKING LOT SUBBASE 5d 12/08/00 12/14/00 20 AGGREGATE BASE 3d 12/14/00 12/18/00 21 CURB & GUTTER/SIDEWALKS 15d 12/11/00 12/29/00 22 EXTERIOR METAL STUDS 30d 02/08/01 03/21/01 23 BRICK VENEER 35d 02/08/01 03/28/01 24 EXTERIOR ALUMINUM FRAME 15d 03/05/01 03/23/01 25 CONSTRUCT VAULT 3d 03/01/01 03/05/01 26 EXTERIOR INSULATION 3d 03/14/01 03/16/01 27 EXTERIOR GLAZING 4d 04/05/01 04/10/01 28 METAL ROOF FRAMING 10d 02/05/01 02/16/01 29 ROOF BLOCKING/SHEATHING 7d 02/12/01 02/20/01 30 SKYLIGHT FRAMING 1d 02/19/01 02/19/01 31 MEMBRANE ROOFING 5d 02/15/01 02/21/01 32 METAL ROOF PANELS 8d 03/19/01 03/28/01
24
- -------------------------------------------------------------------------------------------- C.D. BARNES ASSOCIATES, INC. MERCANTILE BANK OF WEST MICHIGAN DECEMBER 28, 2000 - -------------------------------------------------------------------------------------------- ID TASK NAME DURATION START FINISH - ---- --------- -------- -------- -------- 33 ELEVATOR JACKHOLE 1d 03/20/01 03/20/01 34 SKYLIGHT PANELS 1d 04/02/01 04/02/01 35 EXTERIOR METAL PANELS 8d 04/19/01 04/30/01 36 EXTERIOR DOORS 1d 03/06/01 03/06/01 37 INTERIOR FRAMING 25d 03/19/01 04/20/01 38 HOLLOW METAL FRAMES 10d 03/26/01 04/06/01 39 MEP ROUGH-IN 20d 04/05/01 05/02/01 40 INSPECTIONS MEP 3d 04/30/01 05/02/01 41 ELEVATOR CAR ASSEMBLY 5d 03/08/01 03/14/01 42 STAIRWELL FRAMING 5d 02/28/01 03/06/01 43 POUR TREADS 2d 03/05/01 03/06/01 44 VAULT PREPERATION 2d 03/01/01 03/02/01 45 SOUND ATTENUATION 3d 05/03/01 05/07/01 46 BASE COAT ASPHALT 1d 05/01/01 05/01/01 47 DRYWALL HANG 20d 05/03/01 05/30/01 48 DRYWALL FINISH 10d 05/16/01 05/29/01 49 PAINTING 15d 05/23/01 06/12/01 50 MILLWORK 27d 05/25/01 07/02/01 51 HANG DOORS 3d 05/30/01 06/01/01 52 FLOORING 20d 06/04/01 06/29/01 53 HARDWARE 5d 06/04/01 06/08/01 54 MEP FINISH 27d 05/25/01 07/02/01 55 CEILING GRID 15d 05/30/01 06/19/01 56 DROP PADS 4d 05/25/01 05/30/01 57 TOILET PARTITIONS 2d 06/25/01 05/26/01 58 FINAL VAULT PREPERATIONS 2d 06/25/01 06/26/01 59 TOILET ACCESSORIES 3d 06/18/01 06/20/01 60 ASPHALT FINISH COAT 1d 06/25/01 06/25/01 61 LOT STRIPPING 1d 07/02/01 07/02/01 62 LANDSCAPING 15d 06/07/01 06/27/01 63 ATM/DRIVE-THRU EQUIPMENT 10d 06/21/01 07/04/01 64 GENERATOR/LIGHT POLES 6d 07/02/01 07/09/01 65 FINAL CLEAN 3d 07/06/01 07/10/01 66 FINAL INSPECTIONS 3d 07/04/01 07/06/01 67 PUNCH LIST REVIEW 15d 07/11/01 07/31/01 68 OWNER OCCUPANCY 0d 08/06/01 08/06/01
25 EXHIBIT G PAGE 1 BASIC CM SERVICES BIDDING PHASE COST: $5,000.00 o Locate, screen and pre-qualify bidders for Owner and A/E approval. o Develop proposal forms and write work scope descriptions for each separate bidding category. o Assist in receiving and evaluating proposals. o Conduct post-bid interviews with apparent low bidders. o Make award recommendation to A/E. o Prepare and review contract and associated documents. o List preferred subs and selection of preferred sub. CONSTRUCTION PHASE COST: $150,550.00 o Provide full-time, on-site staff to plan, manage and coordinate on-site contractors activities. o Provide progress reports and conduct progress meetings. o Conduct monthly project meetings for planning, coordination and payments. o Monitor contractor performance and contract compliance. o Coordinate construction interfaces, methods, techniques and sequences. o Monitor, evaluate and administer change order requests and Owner and A/E approvals. o Institute and administer procedures for shop drawings and sample approval. o Prepare a detailed construction schedule, short term activities plan and a completion/occupancy schedule. o Facilitate the development of as-built records, warranties and guarantees. o Coordinate punch lists, final inspections, Owner acceptance and move-in. o Prepare and administer payment and cost control procedures, including the following: o Contractor's Schedule of Values o Contractor's Payment Application and Certification o Contractor's Sworn Statements and Waivers of Lien, if applicable o Purchase Order and Disbursement Summaries o Change Order Listings o Budget Cost Summary Reports o Administer all general condition and construction support activities on behalf of the Owner. o Expedite Owner material and equipment delivery. POST CONSTRUCTION COST: $0.00 o Provide Post Construction follow-up for the duration of the longest warranty period covered by a contractor on the project. o When authorized and requested, consult, advise and assist the Owner with special and/or additional services beyond the scope of basic services. 26 EXHIBIT G PAGE 2 FEE PROPOSAL (BID FORM): REVISED PER ADDENDUM #1 1. Briefly describe compensation (fee) for your Construction Management services (including pre-construction involvement, starting with design development, through construction, as defined within this RFP). a. Lump sum fee - Based on $3,425,000.00 construction project. (This fee is to include cost of General Superintendent, Field Superintendent, Chief Estimator Project Coordinator, all office support staff, general liability insurance, budgeting, scheduling, accounting, processing shop drawings, preparing and awarding bid packages and other overhead items, as required and generally described in AIA Document A121 CMc, Article). Attach an itemized listing of how your fee breaks down.* * Note: Supplementary, provide an itemized listing/budget estimate for reimbursable general condition items as defined in AIA Document A121 CMc, Article 6 as part of your fee proposal. All costs related to main office (and branch offices), including management and support staff, insurance, overhead and profit, etc., in support of this project, are to be included in your base fee. FEE $155,550.00 *See Attachment ------------------------------------ b. Provide cost for Field Superintendent assigned as part of the construction management team, based on a 39 week construction duration. (Cost of Field Superintendent is part of the above fee.) SUPERINTENDENT $54,600.00 ------------------------- c. Itemized budget 1. Building Permit Costs $ 18,338.00 --------------- 2. Layout & Testing Engineers $ 11,000.00 --------------- 3. Snow Removal $ 850.00 --------------- 4. Temporary Electrical Power Installation $ 2,500.00 --------------- 5. Temporary Enclosures $ 788.00 --------------- 6. Temporary Heat $ 1,500.00 --------------- 7. Temporary Toilets $ Included in fee --------------- 8. Temporary Water $ 315.00 --------------- 9. Traffic Control $ -0- --------------- TOTAL $ 35,291.00 --------------- d. Identify percentage of mark-up on labor and materials for Owner generated project scope changes. MARK-UP PERCENTAGE 7.5% ----------------- MARK-UP SUBCONTRACTOR 5% ----------------- e. Completion date for substantial completion/temporary occupancy permit. DATE: July 05, 2001 ----------------- CERTIFICATION: We, the undersigned, understand that the above information, along with any additional submissions, becomes part of any agreement subsequently made with the Owner, and we attest, to the best of our knowledge, to its accuracy. Signed: Title: Corporate Secretary ------------------------------------- ------------------------- Print Name: Todd G. Oosting Date: August 16, 2000 --------------------------------- ------------------------- 27 EXHIBIT H Date: December 28, 2000 MERCANTILE BANK - WYOMING BRANCH 5610 BYRON CENTER AVENUE, S.W. Job Number: 00-616 WYOMING, MICHIGAN 49509 Page: 1
- ------------------------------------------------------------------------------------------------------ DIVISION CONTRACT PHONE FAX - ------------------------------------------------------------------------------------------------------ OWNER MERCANTILE BANK 4613 Alpine Avenue, N.W. Comstock Park, Michigan 49321 CONTACT: Bob Kaminski 616-242-7766 616-454-5843 John Schulte 616-785-5468 616-785-5481 - ------------------------------------------------------------------------------------------------------ ARCHITECT CONCEPT DESIGN GROUP 89 Monroe Centre Grand Rapids, Michigan 49503 616-771-0909 616-771-0912 CONTACT: Bill Granzow - ------------------------------------------------------------------------------------------------------ CONTRACTOR C. D. BARNES ASSOCIATES, INC. 3437 Eastern Ave S.E. Grand Rapids, Michigan 49508 CONTACT: Chris Westover (Cell 262-4502/P 63502) 616-241-4491 616-241-1177 JOB SITE CONTACT: Pete Heinen (Cell 293-3594/P 35230) 616-249-9396 616-249-9396 - ------------------------------------------------------------------------------------------------------ ENGINEER CLASSIC ENGINEERING, LLC 100 Grandville Ave., SW, Suite 400 Grand Rapids, Michigan 49503 616-742-2810 616-742-2814 CONTACT: Larry Woods - ------------------------------------------------------------------------------------------------------ 00865 DRIESENGA & ASSOCIATES 3522 Roger B. Chaffee Blvd., SE Grand Rapids, Michigan 49508 616-245-5710 616-245-5725 Quality Controls CONTACT: Daniel Pratt - ------------------------------------------------------------------------------------------------------ 02200 THOMAS EXCAVATING, INC. 3492 - 146th Avenue Staking/Layout Zeeland, Michigan 49464 616-688-5112 616-688-5716 Site Work CONTACT: Tom DeJonge - ------------------------------------------------------------------------------------------------------ 02500 WOODLAND PAVING COMPANY, LLC MAILING ADDRESS 3566 Millcreek Avenue P.O. Box 309 Comstock Park, Michigan 49321 Comstock Park, MI 616-784-5220 616-784-5040 Asphalt Paving CONTACT: Eric Olson 49321-0309 - ------------------------------------------------------------------------------------------------------ 02900 TERRA VERDE LANDSCAPING, LLC 3863 - 3 Mile Road, N.E. Grand Rapids, Michigan 49525 616-361-8544 616-361-7165 Landscaping CONTACT: Mark Anderson - ------------------------------------------------------------------------------------------------------ 03300 BURGESS CONCRETE CONSTRUCTION CO. 1262 Cutting Industrial Drive Moline, Michigan 49335 616-877-0008 616-877-0073 Concrete CONTACT: - ------------------------------------------------------------------------------------------------------
1 of 4 28 MERCANTILE BANK - WYOMING BRANCH Date: December 28, 2000 5610 BYRON CENTER AVENUE, S.W. WYOMING, MICHIGAN 49509 Job Number: 00-616 Page: 2
- ------------------------------------------------------------------------------------------------------ DIVISION CONTRACT PHONE FAX - ------------------------------------------------------------------------------------------------------ 04000 NORTHWEST MASONRY COMPANY, INC. 4330 E. Cleveland Street Coopersville, Michigan 49404 616-837-1300 616-837-1400 Masonry CONTACT: Mark Olrce - ------------------------------------------------------------------------------------------------------ 05100 BUILDERS IRON & CRANE 7770 Venture Drive Sparta, Michigan 49345-8206 616-887-9127 616-887-9167 Structural Steel CONTACT: John VerSluys - ------------------------------------------------------------------------------------------------------ 06200 GRAND VALLEY WOOD PRODUCTS 3113 Hillcroft, S.W. Wyoming, Michigan 49548 616-475-5890 616-475-5899 Millwork CONTACT: Terry Idema - ------------------------------------------------------------------------------------------------------ 07100 NORTHERN WATERPROOFING & BUILDING RESTORATION P.O. Box 8277 Grand Rapids, Michigan 49508 616-534-5171 616-538-1970 Waterproofing CONTACT: Brian Teshka - ------------------------------------------------------------------------------------------------------ 07150 HELMS CAULKING & WATERPROOFING, INC. 6724 Pine Ridge Court Jenison, Michigan 49428 616-538-7520 616-538-6944 Caulking CONTACT: Diane Helms - ------------------------------------------------------------------------------------------------------ 07400 ARCHITECTURAL GLASS & METALS, INC. 552 South 8th Street, PO Box 19067 Glass/Glazing Kalamazoo, Michigan 49019-0067 616-375-6165 616-375-4765 Alum Entrances CONTACT: David Sheasley - ------------------------------------------------------------------------------------------------------ 07500 TOTAL ROOF SYSTEMS, INC. 4055 VanBuren, Suite 2 Sheet Roofing/ Hudsonville, Michigan 49426 616-669-6670 616-669-2807 Insulation CONTACT: Bud LeGallee (Pager 380-9465) - ------------------------------------------------------------------------------------------------------ 07900 CAULKING (THE) COMPANY 5142 Havana, S.W. Wyoming, Michigan 49509 616-531-7334 616-531-7334 Joint Sealants CONTACT: Edward Paynich - ------------------------------------------------------------------------------------------------------ 08100, 08200 S.A. MORMAN & COMPANY 08700, 10160 1100 Gezon Parkway, S.W. 10800 Grand Rapids, Michigan 49509-9582 616-245-0583 616-245-9275 HM/Wood Doors CONTACT: Dave Coleman Accessories - ------------------------------------------------------------------------------------------------------ 08400 COMMERCIAL GLASS & GLAZING, INC. Glass Doors/Walls 2716 Courier Court, Suite G Alum Entrances Grand Rapids, Michigan 49544 616-735-3970 616-735-3972 Windows/Glazing CONTACT: Ron Terpstra - ------------------------------------------------------------------------------------------------------
2 of 4 29 Date: December 28, 2000 MERCANTILE BANK - WYOMING BRANCH 5610 BYRON CENTER AVENUE, S.W. Job Number: 00-616 WYOMING, MICHIGAN 49509 Page: 3
- ------------------------------------------------------------------------------------------------------ DIVISION CONTRACT PHONE FAX - ------------------------------------------------------------------------------------------------------ 09250 RITSEMA ASSOCIATES MAILING ADDRESS 2438 - 28th Street, S.W. P.O. 9370 Grand Rapids, Michigan 49509 Grand Rapids, MI 616-538-0120 616-538-9695 Flooring CONTACT: Robert Spohr 49509-9370 - ------------------------------------------------------------------------------------------------------ 09650 HEYBOER & BOLT, INC. 5724 Clay Avenue, S.W. Wyoming, Michigan 49548 616-531-2330 616-531-0709 Drywall/EIFS CONTACT: Richard Bolt - ------------------------------------------------------------------------------------------------------ 09900 METRO PAINTING 2133 Wilson Avenue, N.W. Grand Rapids, Michigan 49544 616-299-2431 616-735-4793 Painting CONTACT: Thomas DeMaat - ------------------------------------------------------------------------------------------------------ 10100 CIG JAN PRODUCTS, INC. 3300 Hanna Lake Industrial Dr., S.E. Dutton, Michigan 49316 616-698-9070 616-698-9681 Markerboards CONTACT: - ------------------------------------------------------------------------------------------------------ 10270 RICHMOND INTERIOR SYSTEMS 3305 Remembrance Road, N.W. Access Floor Walker, Michigan 49544 616-453-1659 616-453-0300 System CONTACT: Tim Hoebeke - ------------------------------------------------------------------------------------------------------ 10520, 11130 FIRE FIGHTERS SALES AND SERVICE 3015 Madison Avenue, S.E. Grand Rapids, Michigan 49548 616-452-2184 616-452-6719 Projection Screens CONTACT: Joe McCarthy - ------------------------------------------------------------------------------------------------------ 11400 POSTEMA SALES, INC. 3396 Chicago Drive, S.W. Grandville, Michigan 49418 616-532-6181 616-532-0613 Appliances CONTACT: Scott Keiser - ------------------------------------------------------------------------------------------------------ 14200 SCHINDLER ELEVATOR COMPANY 5610 Byron Center Avenue, SW Wyoming, Michigan 49509 616-656-1450 616-656-1454 Elevators CONTACT: Rick Murphy - ------------------------------------------------------------------------------------------------------ 15300 GRAND RAPIDS FIRE PROTECTION, INC. 1956 - 36th Street Wyoming, Michigan 49509 616-538-7692 616-538-8069 Fire Protection CONTACT: Cruz Paiz - ------------------------------------------------------------------------------------------------------ 15400 GALE PLUMBING & HYDRONICS 6505 South Division, S.W. Grand Rapids, Michigan 49548 616-281-6999 616-281-6996 Plumbing CONTACT: Mike Gale - ------------------------------------------------------------------------------------------------------
3 of 4 30 MERCANTILE BANK - WYOMING BRANCH Date: December 28, 2000 5610 BYRON CENTER AVENUE, S.W. WYOMING, MICHIGAN 49509 Job Number: 00-616 Page: 4
- ------------------------------------------------------------------------------------------------------ DIVISION CONTRACT PHONE FAX - ------------------------------------------------------------------------------------------------------ 15500 QUALITY AIR HEATING & COOLING 3395 Kraft, S.E. Grand Rapids, Michigan 49512-0703 616-956-0200 616-956-0955 HVAC CONTACT: Larry Peacy - ------------------------------------------------------------------------------------------------------ 16000 ASSOCIATED ELECTRICAL SERVICE, INC. 6360 East Fulton Street, SE Ada, Michigan 49301 616-676-8800 616-676-8823 Electrical CONTACT: Marvin Baar - ------------------------------------------------------------------------------------------------------
4 of 4 31 AMENDMENT #2, TO CONTRACT This amendment modifies the Standard Form of Agreement between "Owner" and "Construction Manager" dated October 28, 2000 and executed by and between Mercantile Bank of West Michigan as Owner and CD Barnes & Associates as Construction Manager. Where a portion of the Standard Form of Agreement between Owner and Construction Manager is modified by this amendment, the unaltered portions shall remain in effect. 1) Article 4.1.3 is hereby deleted in its entirety. 2) In Article 5.1.1, the sentence that reads "Lump sum fee of $155,550 based on Construction project cost of $3,425,000.00" is hereby deleted and replaced with the following: "The Lump sum fee is $155,500.00. The mark-up on labor and materials for owner generated project scope changes - mark-up percentage - Construction Manager is 7.5%; the mark-up percentage for Sub-Contractors is 5.0%." 3) Article 6.1.2.2 - The following shall be added concerning field superintendent reimbursement. "If the construction period shall be greater than or less than 39 weeks, the Superintendent reimbursement shall be increased or decreased by $280.00/day based on the number of days the construction duration exceeds or is less than 39 weeks." 4) Exhibit G. The following language shall be added to the top of the Exhibit. "This exhibit is intended to supplement, not conflict with or alter or amend, that certain Standard Form of Agreement between Owner and Construction Manager dated October 28, 2000 and executed by and between Mercantile Bank of West Michigan as Owner and CD Barnes & Associates as Construction Manager (the "Agreement"). If any provision of this Exhibit conflicts with or alters or amends one or more provisions of the Agreement, the provisions of the Agreement shall control." 5) Article 7.1 of the Standard Form of Agreement between Owner and Construction Manager shall be supplemented as follows: "Not withstanding the provisions of the General Conditions of Contract (1997 Edition of AIA Document A201) in regard to each Application for Payment under Article 7.1, the Construction Manager will be required to provide lien waivers, sworn statements, and any other information or documentation requested by Owner and/or title insurance company assisting with the processing of the Application for Payment." Owner: Mercantile Bank of West Michigan Construction Manager: By: /s/ ROBERT B. KAMINSKI By: /s/ CARTER HUFFMAN _______________________ _______________________ Its: COO Its: Vice President _______________________ _______________________ Date: 10-28-00 Date: 10-28-00 _______________________ _______________________ 32 DISBURSEMENT AGREEMENT This Agreement dated this 7th date of November, 2000, by and between Mercantile Bank of West Michigan, hereinafter referred to as "Mercantile", and C.D. Barnes Associates, Inc., a Michigan corporation, hereinafter referred to as "Contractor" and Transnation Title Insurance Company, an Arizona corporation, hereinafter referred to as "Trans". WHEREAS, Mercantile is the owner of certain property described as: (SEE ATTACHED) WHEREAS, Mercantile and Contractor and Concept Design Group, Inc., hereinafter referred to as "Architect", have entered into a certain Construction Contract dated October 23, 2000, wherein Mercantile had obligated itself to construct a Building in accordance with the plans and specifications per said Construction Contract, and: WHEREAS, Mercantile desires to utilize the staff and expertise of Trans in the disbursement of construction draws: NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises contained in this Agreement and other good and valuable consideration, the parties hereto agree as follows: I. This Agreement shall in no way be construed to modify the rights and/or obligations of the parties to a certain Construction Contract among Mercantile, Contractor and Architect dated October 28, 2000, and any amendments thereto (hereinafter referred to as the "said Contract"). II. This Agreement shall in no way be construed to obligate Trans to insure, and Trans will not insure, against unrecorded Construction Liens, or to obligate Trans to insure, and Trans will not insure, completion of the improvements or that such improvements conform with the plans and specifications. III. Trans shall administer the construction draws subject to, and conditioned upon, compliance by the parties hereto with the following procedures: A. From time to time, within the sole discretion of Mercantile, Mercantile shall make advances of construction proceeds pursuant to the terms of said Contract and Trans shall disburse such advances only upon and after receipt of a Sworn Statement and Waivers of Lien relative hereto. B. Trans shall not make any such advances until and unless Trans receives the Sworn Statement(s) and corresponding Waivers of Lien for those parties shown on the Sworn Statement and Trans examines the title and such examination discloses no defects in title arising subsequent to the date of the prior draw. 33 C. Trans shall, upon disbursement of such advances received from Mercantile, issue its endorsement to the Owner's Title Insurance Policy which will be issued by Trans under Commitment Number 268500C insuring Mercantile for the amount of that disbursement and the total amount of all previous disbursements. D. Trans shall be responsible for the completeness of the Sworn Statement(s) and the Waivers of Lien submitted in connection with said Sworn Statement(s) in that Trans shall assure that said Sworn Statement(s) and Waivers of Lien supply the information required by the respective forms themselves. Trans shall not be liable for the validity, authenticity, and accuracy of the Sworn Statement(s) and Waivers of Lien, which it accepts, nor shall it be liable for any loss(es) resulting from fraud of forgery. Relative to the Sworn Statement(s), Trans shall not be liable should said Sworn Statement(s) fail to disclose any parties who should, in fact, be listed thereon, except to the extent Trans is notified in writing of the existence of said parties by either Mercantile or any subcontractor, laborer, or supplier, in which case Trans shall require a Waiver of Lien from each of said parties. IV. Trans shall not accept any change orders or make disbursements on any change orders, unless such change orders are in writing and approved in writing by Mercantile. V. If any advances to Trans remain undisbursed for ten (10) days after such advances are made by Mercantile, Trans shall notify Mercantile of such undisbursed advances and shall return such advances to Mercantile upon written request. VI. Trans will receive a fee from Mercantile for performing its obligations under this Agreement, and such fee shall be in addition to the premium charged for the Owner's Policy to be issued by Trans under Commitment Number 268500C. IN WITNESS THEREOF, the parties hereto have executed this Agreement as of this date first above written. Mercantile Bank of West Michigan /s/ ROBERT B. KAMINSKI - -------------------------------- -------------------------------- By: Robert B. Kaminski Its: Chief Operating Officer 34 C.D. Barnes Associates, Inc. /s/ CARTER HUFFMAN - ------------------------------ ----------------------------------- By: Carter Huffman Its: Vice President Transnation Title Insurance Company /s/ THOMAS L. HOST - ------------------------------ ----------------------------------- By: Thomas L. Host Its: Manager EX-21 9 k60448ex21.txt SUBSIDIARIES OF MERCANTILE 1 EXHIBIT 21 SUBSIDIARIES OF MERCANTILE BANK CORPORATION Mercantile Bank Of West Michigan, a Michigan banking corporation Wholly-owned bank subsidiary of Mercantile Bank Corporation MBWM Capital Trust I A Delaware business trust subsidiary of Mercantile Bank Corporation Mercantile Bank Mortgage Company, a Michigan business corporation Wholly-owned subsidiary of Mercantile Bank of West Michigan EX-23 10 k60448ex23.txt CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Mercantile Bank Corporation on Form S-8 (Registration Nos. 333-75521 and 333-52620) of our report dated January 19, 2001 on the 2000 consolidated financial statements of Mercantile Bank Corporation, which report is included in the 2000 Annual Report on Form 10-K of Mercantile Bank Corporation. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Grand Rapids, Michigan March 7, 2001 -----END PRIVACY-ENHANCED MESSAGE-----