-----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, JSeVU5z7zTRlca3nALa1G2EgAqYuOp+3HQxJoLSH8I7dB9fmcHF89oxh9tTn4X53 e/GBjyKevdK/kDWbu5ECpg== 0000950124-01-502327.txt : 20010716 0000950124-01-502327.hdr.sgml : 20010716 ACCESSION NUMBER: 0000950124-01-502327 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20010713 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: S-2 SEC ACT: SEC FILE NUMBER: 333-65144 FILM NUMBER: 1681250 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 S-2 1 k63607s-2.txt FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 2001 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- MERCANTILE BANK CORPORATION MICHIGAN 38-3360865 (STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.) ORGANIZATION)
------------------------- 216 NORTH DIVISION AVENUE GRAND RAPIDS, MICHIGAN 49503 (616) 242-9000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) GERALD R. JOHNSON, JR. CHAIRMAN AND CHIEF EXECUTIVE OFFICER 216 NORTH DIVISION AVENUE GRAND RAPIDS, MICHIGAN 49503 (616) 242-9000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------- COPY TO: JEROME M. SCHWARTZ JENNIFER R. EVANS DICKINSON WRIGHT PLLC VEDDER, PRICE, KAUFMAN & KAMMHOLZ 500 WOODWARD AVENUE, 222 NORTH LASALLE STREET, SUITE 4000 SUITE 2600 DETROIT, MICHIGAN 48226 CHICAGO, ILLINOIS 60601 (313) 223-3628 (312) 609-7686
------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [ ] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED TITLE OF EACH CLASS OF MAXIMUM MAXIMUM AMOUNT OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE ---------------------- ---------------- -------------- -------------- ------------ common stock (no par value).......... 1,380,000 shares(1) $16.90(2) $23,322,000 $5,831 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes 180,000 shares of common stock, which may be purchased by the Underwriters to cover over-allotments. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c), based on the average of the high and low prices of the common stock, $16.80 and $17.00, as reported by the Nasdaq National Market, on July 12, 2001. WE HEREBY AMEND THIS REGISTRATION STATEMENT ON THE DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL WE SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON THE DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A) OF THE SECURITIES ACT OF 1933, MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE CANNOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 13, 2001 PROSPECTUS 1,200,000 SHARES MERCANTILE BANK CORPORATION [MERCANTILE LOGO] COMMON STOCK ------------------------- Mercantile Bank Corporation is offering 1,200,000 shares of common stock. Our common stock is quoted on the Nasdaq National Market under the symbol "MBWM." On July 12, 2001, the last reported sale price of our common stock as reported on the Nasdaq National Market was $16.80 per share. ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------------- THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
PER SHARE TOTAL --------- --------- Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds to Mercantile Bank Corporation..................... $ $
This is a firm commitment underwriting. The underwriters have been granted a 30-day option to purchase up to an additional 180,000 shares of common stock to cover over-allotments, if any. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. STIFEL, NICOLAUS & COMPANY INCORPORATED HOWE BARNES INVESTMENTS, INC. TUCKER ANTHONY SUTRO CAPITAL MARKETS , 2001 3 MERCANTILE BANK CORPORATION [MAP] 4 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and consolidated financial statements and related notes appearing elsewhere in this prospectus. Unless otherwise noted, all information in this prospectus assumes that the underwriters will not exercise the option to purchase additional shares to cover over-allotments from us in the offering. Unless the text clearly suggests otherwise, references in this prospectus to "us," "we," "our," or "the company" include Mercantile Bank Corporation and its wholly-owned subsidiaries. These subsidiaries include Mercantile Bank of West Michigan, which we sometimes refer to as "our bank," and Mercantile Bank Mortgage Company, which we sometimes refer to as "our mortgage company." This prospectus contains forward-looking statements. The outcome of the events described in these forward-looking statements is subject to risks and actual results could differ materially. The sections entitled "Forward-Looking Statements," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business" contain a discussion of some of the factors that could contribute to those differences. MERCANTILE BANK CORPORATION We are a single bank holding company headquartered in Grand Rapids, Michigan that provides commercial and retail banking services primarily to small- to medium-sized businesses based in and around Grand Rapids. Through our bank subsidiary, Mercantile Bank of West Michigan, we serve principally the Kent and Ottawa Counties of western Michigan. We formed Mercantile Bank Mortgage Company, a wholly owned subsidiary of our bank, in October 2000 to increase the profitability and efficiency of our bank's mortgage loan function. At June 30, 2001, we had total assets of $617.9 million, loans of $508.1 million, deposits of $520.2 million and shareholders' equity of $40.4 million. GROWTH HISTORY We have grown significantly since our bank opened in December 1997. We posted our first profit in the third quarter of 1998, only nine months after our bank opened. Since inception, management has focused on achieving profitable internal growth while maintaining strong asset quality. At June 30, 2001, our assets exceeded $600.0 million and our non-performing loans were 0.03% of loans. A number of factors have contributed to our growth: - our experienced management team has extensive long-term relationships and a strong reputation within the western Michigan business community; - a track record of customer attentiveness and responsive service; - achieving the size and visibility to be a major competitor for commercial loans in our markets; and - over the past four years, the Grand Rapids financial services market has undergone continued market disruption as the largest local banks have been acquired by out-of-state institutions. 1 5 We believe the combination of these factors has contributed to our strong historical performance and will provide significant opportunities for continued growth and profitability. FINANCIAL SUMMARY We have maintained strong asset quality while continuing to internally grow our organization. The table below presents selected operating and financial highlights:
AS OF OR FOR THE SIX MONTHS ENDED AS OF OR FOR THE JUNE 30, YEARS ENDED DECEMBER 31, ------------------- ----------------------------------------- 2001 2000 2000 1999 1998 1997(5) -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenue(1).............. $ 7,934 $ 6,291 $ 13,467 $ 10,284 $ 5,027 $ 140 Diluted earnings (loss) per share....................... 0.58 0.44 1.07 0.80 (0.55) (0.26) Total assets.................. 617,888 440,317 512,746 368,037 216,237 24,109 Loans......................... 508,111 374,986 429,804 308,006 184,745 12,887 Deposits(2)................... 520,222 361,613 425,740 294,829 171,998 9,688 Shareholders' equity.......... 40,447 29,239 31,854 27,968 26,701 13,473 Efficiency ratio(3)........... 54.64% 58.52% 55.80% 57.25% 70.90% NM Return on average shareholders' equity(4)..... 9.18 8.02 9.48 7.70 (6.40) (30.90) Net charge-offs to average loans(4).................... 0.01 0.01 0.05 0.04 0.00 0.00
- ------------------------- (1) Total revenue is defined as net interest income plus non-interest income. (2) Includes out-of-area CDs. (3) Non-interest expense divided by the sum of net interest income plus non-interest income. (4) Annualized for interim periods. (5) As we were incorporated in 1997, the 1997 period is from July 15, 1997 (date of inception) through December 31, 1997. - - Our earnings per share increased 31.8% for the six-month period ended June 30, 2001 over the same period in 2000, and 33.8% for the fiscal year ended 2000 compared to the fiscal year ended 1999. - - Our total revenues increased 26.1% for the six-month period ended June 30, 2001 over the same period in 2000, and 31.0% for the fiscal year ended 2000 compared to the fiscal year ended 1999. - - Our loans have grown 35.5% ($133.1 million) for the twelve-month period ended June 30, 2001. - - Our ratio of net charge-offs to average loans has averaged 0.03% over the last three fiscal years ended December 31, 2000, and was 0.01% for the six-month period ended June 30, 2001. 2 6 OPERATING STRATEGY The key elements of our operating strategy are presented below. FOCUS ON LOCALLY-OWNED AND OPERATED BUSINESSES. Our lending activities focus primarily on providing local businesses with commercial business loans and loans secured by owner-occupied real estate. Typically, we seek commercial lending relationships with customers borrowing from $250,000 to $6.0 million. Our legal lending limit was approximately $12.0 million as of June 30, 2001, and this limit accommodates the vast majority of credit opportunities we encounter. If local businesses have credit needs beyond the scope of our lending capacity, we will often look to participate out a portion of the credit with other financial institutions in order to accommodate our customers' needs. As of June 30, 2001, we had six relationships borrowing more than $5.0 million from our bank. EMPLOYING FEWER, BUT HIGHLY QUALIFIED AND PRODUCTIVE INDIVIDUALS AND FOCUSING ON LOW NET OVERHEAD RATIOS. Key to our growth and profitability is our management's extensive experience in providing community banking services and our ability to create a culture committed to both proactive sales and disciplined credit quality. Our practice of employing fewer, but highly qualified and productive individuals at all levels of the organization is key to maintaining a decentralized management structure. These individuals are able to manage large loan portfolios, which increases interest income while controlling personnel costs. Our commercial lending focus allows us to generate larger relationships than a retail focus would allow, which permits us to accelerate asset growth with fewer resources. We believe our organizational structure and loan focus will allow us to continue to improve and maintain our favorable net overhead ratios as our bank matures. OPERATING A LIMITED NUMBER OF OFFICES WITH A HIGH ASSET BASE PER OFFICE. We currently have two full-service branches and plan to open a third in the fall of 2001. We actively solicit local deposits to fund our asset growth. We grew our local deposit base 29.8% in 2000 and 20.3% in the first six months of 2001. However, our loan portfolio has increased faster than our local deposits. Because of this, our strategy is to garner out-of-area CDs from across the country at rates similar to our local deposit market in order to help fund our growth. Our ability to attract adequate funding with minimal branching allows us to grow at a lower overhead cost. We plan to continue using out-of-area deposits because we believe that this source of funds gives us an efficiency advantage in our market. MAINTAINING STRONG ASSET QUALITY. Equally important as our growth is our emphasis on the quality of our loan portfolio and the adequacy of our reserves. Since opening, our ratio of annual net charge-offs to average loans has never been greater than 0.05%, and for the six-months ended June 30, 2001 our ratio was 0.01%. Our ratio of non-performing loans to loans was 0.03% at June 30, 2001. In addition to controlling provision expense, we believe that strong asset quality leads to greater operating performance because it minimizes the time and money spent managing problem assets. At the same time we understand the risks associated with our loan portfolio and maintain a loan loss reserve that we believe is appropriate. At June 30, 2001 our ratio of allowance for loan losses to total loans was 1.47%. 3 7 MARKET AREA Our market area is the Kent and Ottawa Counties of western Michigan, including the City of Grand Rapids, the second largest city in the State of Michigan. Kent County, which encompasses most of the Grand Rapids metropolitan area, has a diverse economy based primarily on manufacturing, retail and service businesses. Statistically, Kent County has approximately 554,000 people, 200,000 households and a median household income that is estimated to have grown approximately 65% from 1990 to 2000. Kent County is a significant banking market in the State of Michigan. According to available industry data, as of June 30, 2000, total deposits in Kent County, including those of banks and thrifts, were approximately $8.5 billion. Our principal executive offices are located at 216 North Division Avenue, Grand Rapids, Michigan. Our telephone number is (616) 242-9000. THE OFFERING Common stock offered by Mercantile Bank Corporation..... 1,200,000 shares Offering price per share........ $ Common stock to be outstanding after this offering........... 4,312,702 shares(1) Use of proceeds................. We intend to use the net proceeds from this offering to increase our capital position in anticipation of future growth, and for other general corporate purposes. Promptly following the completion of this offering, we intend to contribute substantially all of the net proceeds to our bank to increase its capital position. Cash dividends.................. We have not paid cash dividends on our common stock since our formation in 1997, and we currently have no intention of doing so in the foreseeable future. Risk factors.................... See "Risk Factors" beginning on page 7 and other information included or incorporated by reference in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock. Nasdaq National Market Symbol... MBWM. - ------------------------- (1) The number of shares to be outstanding after this offering excludes 166,526 shares issuable upon the exercise of outstanding employee stock options. 4 8 SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes our selected consolidated financial information and other financial data. The selected balance sheet and statement of income data, insofar as they relate to the years ended December 31, 2000, 1999, 1998 and 1997 are derived from our consolidated financial statements, which have been audited by Crowe, Chizek and Company LLP. The selected consolidated financial data as of and for the six-month periods ended June 30, 2001 and 2000 are derived from unaudited consolidated financial statements. In our opinion, all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of results as of and for the six-month periods ended June 30, 2001 and 2000 have been included. This information should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. Results for past periods are not necessarily indicative of results that may be expected for any future period, and results for the six-month period ended June 30, 2001 are not necessarily indicative of results that may be expected for the full year ending December 31, 2001.
AS OF OR FOR THE SIX MONTHS ENDED JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31, --------------------- --------------------------------------------- 2001 2000 2000 1999 1998 1997(4) --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF INCOME: Interest income........... $ 21,866 $ 16,712 $ 36,835 $ 22,766 $ 10,168 $ 154 Interest expense.......... 14,707 10,911 24,560 13,330 5,629 14 --------- --------- --------- --------- --------- --------- Net interest income....... 7,159 5,801 12,275 9,436 4,539 140 Provision for loan losses.................. 1,180 945 1,854 1,961 2,572 193 Non-interest income....... 775 489 1,192 848 488 0 Non-interest expenses..... 4,335 3,681 7,515 5,888 3,564 351 --------- --------- --------- --------- --------- --------- Income (loss) before income taxes............ 2,419 1,665 4,098 2,393 (1,109) (404) Federal income tax expense................. 727 528 1,303 292 0 0 --------- --------- --------- --------- --------- --------- Net income (loss)......... $ 1,692 $ 1,137 $ 2,795 $ 2,101 $ (1,109) $ (404) ========= ========= ========= ========= ========= ========= COMMON SHARE DATA: Diluted earnings (loss) per share............... $ 0.58 $ 0.44 $ 1.07 $ 0.80 $ (0.55) $ (0.26) Book value per share...... 12.99 11.26 12.24 10.74 10.26 8.58 Cash dividends per share................... 0.00 0.00 0.00 0.00 0.00 0.00 Weighted average common and common equivalent shares-diluted.......... 2,944,345 2,596,125 2,603,331 2,623,729 2,003,018 1,569,750 BALANCE SHEET DATA: Total assets.............. $ 617,888 $ 440,317 $ 512,746 $ 368,037 $ 216,237 $ 24,109 Loans..................... 508,111 374,986 429,804 308,006 184,745 12,887 Allowance for loan losses.................. 7,462 5,527 6,302 4,620 2,765 193 Total securities.......... 67,625 49,271 60,457 41,957 24,160 2,998 Deposits.................. 520,222 361,613 425,740 294,829 171,998 9,688 Trust preferred securities.............. 16,000 16,000 16,000 16,000 0 0 Shareholders' equity...... 40,447 29,239 31,854 27,968 26,701 13,473
5 9
AS OF OR FOR THE SIX MONTHS ENDED JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------- -------------------------------------------------- 2001 2000 2000 1999 1998 1997(4) -------- -------- -------- -------- -------- -------- SELECTED PERFORMANCE RATIOS: Return on average assets(1)............... 0.61% 0.55% 0.63% 0.71% (0.86)% (21.78)% Return on average shareholders' equity(1)............... 9.18 8.02 9.48 7.70 (6.40) (30.94) Net interest margin (tax equivalent)(1)(2)....... 2.73 2.95 2.90 3.30 3.61 NM Efficiency ratio(3)....... 54.64 58.52 55.80 57.25 70.90 NM ASSET QUALITY RATIOS: Non-performing loans to total loans............. 0.03% 0.03% 0.02% 0.00% 0.00% 0.00% Non-performing assets to total assets............ 0.03 0.03 0.02 0.00 0.00 0.00 Allowance for loan losses to non-performing loans................... 4,288.51 4,605.83 2,325.46 NA NA NA Allowance for loan losses to total loans.......... 1.47 1.47 1.47 1.50 1.50 1.50 Net charge-offs to average loans(1)................ 0.01 0.01 0.05 0.04 0.00 0.00 LIQUIDITY AND CAPITAL RATIOS: Average loans to average deposits................ 99.06% 101.99% 102.03% 101.68% 103.30% 91.22% Total shareholders' equity to total assets......... 6.55 6.64 6.21 7.60 12.35 55.88 Tier 1 leverage capital ratio(5)................ 9.26 9.30 8.59 10.88 13.83 69.72 Tier 1 risk-based capital ratio................... 9.11 9.30 8.59 10.64 11.79 77.04 Total risk-based capital ratio................... 10.82 12.00 10.97 13.67 13.01 78.12
- ------------------------- (1) Certain financial ratios for interim periods have been annualized. (2) Net interest income divided by average interest-earning assets. (3) Non-interest expense divided by the sum of net interest income plus non-interest income. (4) We were incorporated in 1997. The 1997 period is from July 15, 1997 (date of inception) through December 31, 1997. (5) The Tier 1 leverage ratio is Tier 1 capital divided by average quarterly assets, after deducting intangible assets and net deferred tax assets in excess of regulatory maximum limits. NM Not meaningful. 6 10 RISK FACTORS Investing in our common stock involves risks. You should carefully consider the following risk factors before you decide to buy our common stock. You should also consider other information in this prospectus, as well as in the other documents incorporated by reference into this prospectus. If any of these risks actually occur, our business could be adversely affected, the trading price of our common stock could decline, and you could lose all or a part of your investment. CHANGES IN ECONOMIC CONDITIONS OR INTEREST RATES MAY NEGATIVELY AFFECT OUR EARNINGS, CAPITAL AND LIQUIDITY. The results of operations for financial institutions, including our bank, may be materially and adversely affected by changes in prevailing local and national economic conditions, including declines in real estate market values, rapid increases or decreases in interest rates and changes in the monetary and fiscal policies of the federal government. Our profitability is heavily influenced by the spread between the interest rates we earn on investments and loans and the interest rates we pay on deposits and other interest-bearing liabilities. Substantially all our loans are to businesses and individuals in western Michigan, and any decline in the economy of this area could adversely affect us. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors that influence market interest rates and our ability to respond to changes in these rates. At any given time, our assets and liabilities will be such that they will be affected differently by a given change in interest rates. OUR CREDIT LOSSES COULD INCREASE AND OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN LOSSES. The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have a materially adverse effect on our earnings and overall financial condition as well as the value of our common stock. Our focus on commercial lending may result in a larger concentration of loans to small businesses. As a result, we may assume greater lending risks than other banks. Also, many of our loans have been made recently, and in certain circumstances there is limited repayment history against which we can fully assess the adequacy of the allowance for loan losses. We make various assumptions and judgements about the collectibility of our loan portfolio and provide an allowance for potential losses based on several factors. If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, which would have an adverse affect on our operating results. While we have not experienced any significant charge-offs or had large numbers of nonperforming loans, due to the significant increase in loans originated since we began operations, we cannot assure you that we will not experience an increase in delinquencies and losses as these loans continue to mature. The actual amount of future provisions for loan losses cannot be determined at this time and may exceed the amounts of past provisions. Additions to our allowance for loan losses decrease our net income. WE RELY HEAVILY ON OUR MANAGEMENT AND OTHER KEY PERSONNEL, AND THE LOSS OF ANY OF THEM MAY ADVERSELY AFFECT OUR OPERATIONS. We are and will continue to be dependent upon the services of our management team, including Gerald R. Johnson, Jr., our Chairman and Chief Executive Officer, Michael H. Price, our President and Chief Operating Officer, and our other senior managers. The loss of either Mr. Johnson or Mr. Price, or any of our other senior managers, could have an adverse affect on our growth and performance. We have entered into employment contracts 7 11 with Mr. Johnson and Mr. Price and two other senior managers. The contracts provide for a three year employment period that is extended for an additional year each year unless a notice is given indicating that the contract will not be extended. We presently maintain policies of key man life insurance on the lives of Mr. Johnson and Mr. Price in the amount of $1 million each. In addition, we will continue to depend on our ability to retain our key loan officers. Our success can be attributed in large part to the relationships these officers as well as members of our management team have developed and are able to maintain with our customers as we continue to implement our community banking philosophy. DECLINE IN THE AVAILABILITY OF OUT-OF-AREA DEPOSITS COULD CAUSE LIQUIDITY OR INTEREST RATE MARGIN CONCERNS, OR LIMIT OUR GROWTH. We have utilized out-of-area or wholesale deposits to support our asset growth. These deposits are generally a lower cost source of funds when compared to the interest rates that we would have to offer in our local market to generate a commensurate level of funds. In addition, the overhead costs associated with wholesale deposits are considerably less than the overhead costs we would incur to administer a similar level of local deposits. A decline in the availability of these wholesale deposits would require us to fund our growth with more costly funding sources, which could reduce our net interest margin, limit our growth, reduce our asset size, or increase our overhead costs. FUTURE SALES OF OUR COMMON STOCK OR OTHER SECURITIES MAY DILUTE THE VALUE OF OUR COMMON STOCK. In many situations, our Board of Directors has the authority, without any vote of our shareholders, to issue shares of our authorized but unissued stock, including shares authorized but unissued under our stock option plans. In the future, we may issue additional securities, through public or private offerings, in order to raise additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the common stock. In addition, option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms. The sale, or availability for sale, of a substantial number of shares of common stock in the public market as a result of or following this offering could adversely affect the price of our common stock and could impair our ability to raise additional capital through the sale of equity securities. OUR GROWTH AND EXPANSION MAY BE LIMITED BY MANY FACTORS. We have pursued and intend to continue to pursue an internal growth strategy, the success of which will depend primarily on generating an increasing level of loans and deposits at acceptable risk and interest rate levels without corresponding increases in non-interest expenses. There can be no assurance that we will be successful in continuing our growth strategies due to delays and other impediments resulting from regulatory oversight, limited availability of qualified personnel, or unavailability of branch sites. In addition, the success of our growth strategy will depend on maintaining sufficient regulatory capital levels and on continued favorable economic conditions in our market area. In addition, we may acquire banks, related businesses or branches of other financial institutions that we believe provide a strategic fit with our business. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or 8 12 profitably manage this growth. Acquiring other banks, businesses, or branches involves risks commonly associated with acquisitions, including: - exposure to unknown or contingent liabilities of banks, businesses, or branches we acquire; - exposure to asset quality issues of the acquired banks, businesses or branches; - difficulty and expense of integrating the operations and personnel of banks, businesses, or branches we acquire; - potential disruption to our business; - potential diversion of our management's time and attention; - the possible loss of key employees and customers of the banks, businesses, or branches we acquire; and - the need for financial reporting purposes to record and amortize core deposit premiums. OUR FUTURE SUCCESS IS DEPENDENT ON OUR ABILITY TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE BANKING INDUSTRY. We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. We compete for deposits, loans and other financial services with numerous Michigan-based and out-of-state banks, thrifts, credit unions and other financial institutions as well as other entities that provide financial services. Some of the financial institutions and financial service organizations with which we compete are not subject to the same degree of regulation as we are. Most of our competitors have been in business for many years, have established customer bases, are larger, have substantially higher lending limits than we do and offer branch networks and other services which we do not, including, brokerage, insurance, trust, mutual fund and international banking services. Most of these entities have greater capital resources than we do, 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 we do. This competition may limit our growth or earnings. Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which we conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION, AND ANY REGULATORY CHANGES MAY ADVERSELY AFFECT US. The banking industry is heavily regulated under both federal and state law. These regulations are primarily intended to protect customers, not our creditors or shareholders. Existing state and federal banking laws subject us to substantial limitations with respect to the making of loans, the purchase of securities, the payment of dividends and many other aspects of our business. Some of these laws may benefit us, others may increase our costs 9 13 of doing business, or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition. Federal economic and monetary policy may also affect our ability to attract deposits, make loans and achieve satisfactory interest spreads. WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGE, AND WE MAY HAVE FEWER RESOURCES THAN OUR COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS. The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as creating additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. OUR ARTICLES OF INCORPORATION AND BY-LAWS AND THE LAWS OF MICHIGAN CONTAIN PROVISIONS THAT COULD MAKE A TAKEOVER MORE DIFFICULT. Our Articles of Incorporation and By-laws, and the corporate laws of the State of Michigan, include provisions which are designed to provide our board of directors with time to consider whether a hostile takeover offer is in our company's and shareholders' best interest. These provisions, however, could discourage potential acquisition proposals and could delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common stock to participate in tender offers, including tender offers at a price above the then-current market price for our common stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for their shares over then-current market prices, and may limit the ability of our shareholders to approve transactions that they may deem to be in their best interests. The Michigan Business Corporation Act contains provisions intended to protect shareholders and prohibit or discourage various types of hostile takeover activities. In addition to these provisions and the provisions of our Articles of Incorporation and By-laws, federal law requires the Federal Reserve Board's approval prior to acquisition of "control" of a bank holding company. All of these provisions may have the effect of delaying or preventing a change in control without action by our shareholders, and could adversely affect the price of our common stock. THERE IS A LIMITED TRADING MARKET FOR OUR COMMON STOCK. The price of our common stock subject to this offering may be greater than the market price for our common stock following the offering. Our common stock is quoted on the Nasdaq National Market under the symbol "MBWM". The development and maintenance of an active public trading market depends upon the existence of willing buyers and sellers, the presence of which is beyond our control. While we are a publicly-traded company, the volume of trading activity in our stock is still relatively limited. Even if a more active market develops, there can be no assurance that such a market will continue, or that our shareholders will be able to sell their shares at or above the offering price. 10 14 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $ million from the sale of 1,200,000 shares of our common stock in this offering, at a public offering price of $ per share, after deducting the underwriting discount and commissions and estimated offering expenses of approximately $212,000 payable by us. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $ million. We intend to use the net proceeds from this offering to increase our capital position in anticipation of future growth, and for other general corporate purposes. Promptly following the completion of this offering, we intend to contribute substantially all of the net proceeds to our bank to increase its capital position. 11 15 CAPITALIZATION The following table sets forth our indebtedness and capitalization at June 30, 2001: - on an actual basis; and - on an adjusted basis to give effect to the offering, as if the sale of the shares of our common stock being offered had been consummated on June 30, 2001. These data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.
JUNE 30, 2001 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (DOLLARS IN THOUSANDS) (UNAUDITED) SHORT-TERM INDEBTEDNESS: Short-term borrowings (including securities sold under agreement to repurchase and federal funds purchased)........................................... $34,899 $34,899 ======= ======= LONG-TERM INDEBTEDNESS: Guaranteed preferred beneficial interests in the Corporation's subordinated debentures................ 16,000 16,000 ------- ------- SHAREHOLDERS' EQUITY: Preferred stock, no par value; 1,000,000 shares authorized, none issued.............................. 0 0 Common stock, no par value; 9,000,000 shares authorized; 3,112,702 shares issued and outstanding; 4,312,702 shares issued and outstanding as adjusted............ 36,684 Retained earnings....................................... 3,320 3,320 Accumulated other comprehensive income.................. 443 443 ------- ------- Total shareholders' equity........................... 40,447 ------- ------- Total capitalization(1).............................. $56,447 $ ======= ======= CAPITAL RATIOS: Total shareholders' equity to total assets.............. 6.55% % Tier 1 leverage capital ratio(2)........................ 9.26 Tier 1 risk-based capital ratio......................... 9.11 Total risk-based capital ratio.......................... 10.82
- ------------------------- (1) Includes shareholders' equity and long-term indebtedness. (2) The Tier 1 leverage ratio is Tier 1 capital divided by average quarterly assets, after deducting intangible assets and net deferred tax assets in excess of regulatory maximum limits. 12 16 MARKET FOR COMMON STOCK Our common stock is quoted on the Nasdaq National Market under the symbol MBWM. Prior to July 19, 1999, our common stock was quoted on the OTC Bulletin Board under the same symbol. At July 2, 2001, there were 124 record holders of our common stock. In addition, we estimate that there were approximately 1,900 beneficial owners of our common stock who own their shares through brokers or banks. The following table shows the high and low bid prices by quarter during 2000 and 1999, and for the first three quarters of 2001 through the date indicated. 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 over-the-counter market quotations reflect inter-dealer prices and do not include retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. All prices have been adjusted for the 5% stock dividend we paid on February 1, 2001. On July 12, 2001, the closing sale price of our common stock was $16.80.
HIGH LOW ------ ------ 2001 First Quarter............................................... $16.00 $11.50 Second Quarter.............................................. 17.55 14.76 Third Quarter (through July 12, 2001)....................... 17.80 16.67 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 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
DIVIDEND POLICY On January 10, 2001, we declared a 5% stock dividend on our common stock, payable on February 1, 2001 to record holders as of January 19, 2001. We have not paid cash dividends on our common stock since our formation in 1997, and we currently have no intention of doing so in the foreseeable future. We are a holding company and substantially all of our assets are held by our subsidiaries. Our ability to pay dividends to our shareholders, if we determine in the future to do so, will depend primarily on our bank's ability to pay dividends to us. Dividend payments and extensions of credit to us from our bank are subject to legal and regulatory limitations, generally based on capital levels and current and retained earnings imposed by law and regulatory agencies with authority over our bank. The ability of our bank to pay dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. In addition, under the terms of our 9.60% junior subordinated debentures due 2029, we would be precluded from paying dividends on our common stock if we were in default under the debentures and did not take reasonable steps to cure the default, if we exercised our right to defer payments of interest on the debentures, or if certain related defaults occurred. 13 17 FORWARD-LOOKING STATEMENTS This prospectus includes "forward-looking statements." All statements regarding our expected financial position, business and strategies are forward-looking statements and we intend for them to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The words "anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends," and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, and have based these expectations on our beliefs as well as assumptions we have made, these expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from our expectations include, without limitation, the failure of a significant number of borrowers to repay their loans, general changes in economic conditions and interest rates, as well as restrictions imposed on us by regulations or regulators of the banking industry. For information about factors that could cause our actual results to differ from the expectations stated in the forward-looking statements, see the discussion under the captions "Risk Factors," "Management Discussion and Analysis of Financial Condition and Results of Operations," and "Business." We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this prospectus. The forward-looking statements included in this prospectus are made only as of the date of this prospectus. We do not intend, and undertake no obligation, to update these forward-looking statements. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission. 14 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION -- JUNE 30, 2001 During the first six months of 2001, our assets increased from $512.7 million at December 31, 2000, to $617.9 million at June 30, 2001. This represents a total increase in assets of $105.2 million, or 20.5%. The asset growth was comprised primarily of a $77.1 million increase in net loans, an increase of $12.1 million in federal funds sold and an increase of $7.2 million in investment securities. The increase in assets was primarily funded by growth in deposits of $94.5 million and an increase of $2.6 million in securities sold under agreements to repurchase, along with the receipt of $6.8 million in net proceeds from the sale of common stock. Commercial loans increased by $76.5 million during the first six months of 2001, and at June 30, 2001 totaled $465.8 million, or 91.7% of the total loan portfolio. The continued significant concentration of the loan portfolio in commercial loans and the rapid growth of this portion of our lending business is consistent with our strategy of focusing a substantial amount of our efforts on "wholesale" banking. Corporate and business lending continues to be an area of expertise of our senior management team, and our eight commercial lenders have over 110 years of combined commercial lending experience. Of each of the loan categories that we originate, commercial loans are most easily originated and managed, thus reducing overhead by necessitating the attention of fewer full-time employees. Our commercial lending business generates the greatest amount of local deposits, and is virtually our only source of significant demand deposits. Residential mortgage and consumer loans also increased by $1.4 million and $0.4 million, respectively, during the first six months of 2001. As of June 30, 2001, these loan types totaled a combined $42.3 million, or 8.3% of the total loan portfolio. Although the residential mortgage loan and consumer loan portfolios are expected to increase in future periods, given our wholesale banking strategy, the commercial sector of our lending efforts and resultant assets are expected to remain the dominant loan portfolio category. The quality of the loan portfolio remains strong. Net loan charge-offs during the first six months of 2001 totaled $19,713, or only 0.01% of average total loans. Past due loans and nonaccrual loans at June 30, 2001 totaled $176,252, or only 0.03% of period-ending total loans. We believe we have instilled a very strong credit culture within our lending departments as it pertains to the underwriting and administration processes, which in part is reflected in our loan charge-off and delinquency ratios. Over 98% of the loan portfolio consists of loans extended directly to companies and individuals doing business and residing within our market area. The remaining portion is comprised of commercial loans participated with certain non-affiliated commercial banks outside of our immediate market area, which are underwritten using the same loan underwriting criteria as though our bank was the originating bank. Deposits increased $94.5 million during the first six months of 2001, totaling $520.2 million at June 30, 2001. Local deposits increased $25.7 million, or 20.3%, while out-of-area deposits increased $68.8 million, or 23.0%. As a percent of total deposits, local deposits declined slightly from 29.8% at December 31, 2000, to 29.3% at June 30, 2001. Noninterest-bearing demand deposits, comprising 7.4% of total deposits, increased $11.0 million during the first six months of 2001. Savings deposits (7.8% of total deposits) increased $4.3 million, interest-bearing checking deposits (2.8% of total deposits) increased 15 19 $1.8 million and money market deposit accounts (1.0% of total deposits) increased $0.1 million during the first six months of 2001. Local certificates of deposit, comprising 10.3% of total deposits, increased by $8.5 million during the first six months of 2001. Out-of-area deposits totaled $367.8 million, or 70.7% of total deposits, as of June 30, 2001. Out-of-area deposits consist primarily of certificates of deposit obtained from depositors located outside our market area and placed by deposit brokers for a fee, but also include certificates of deposit obtained from the deposit owners directly. Out-of-area deposits are utilized to support our asset growth, 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 sufficient level of funds. During the first six months of 2001, 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 out-of-area deposits are considerably less than the overhead costs that would be incurred to administer a similar level of local deposits. While we anticipated the reliance on out-of-area deposits in the early stages of our development, our longer-term funding strategy is to increase local deposits and lower our 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 as existing customers increase the balances in their deposit accounts, the relatively high reliance on out-of-area deposits will likely remain. Securities sold under agreements to repurchase ("repurchase agreements") increased by $2.6 million during the first six months of 2001. As part of our sweep account program, collected funds from certain business noninterest-bearing checking accounts are invested into over-night interest-bearing repurchase agreements. Although not considered a deposit account and therefore not afforded federal deposit insurance, the repurchase agreements have characteristics very similar to that of business checking deposit accounts. RESULTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 2001 AND 2000 Net income for the first six months of 2001 was $1.7 million ($0.58 per basic and diluted share), which represents a 48.9% increase over net income of $1.1 million ($0.44 per basic and diluted share) recorded during the first six months of 2000. Basic and fully diluted earnings per share were 31.8% higher in the first six months of 2001 over the level recorded during the comparable time period in 2000. The improvement in net income and earnings per share is primarily the result of an increase in net interest income, higher noninterest income and greater employee efficiency. Interest income during the first six months of 2001 was $21.9 million, an increase of 30.8% over the $16.7 million earned during the first six months of 2000. The growth in interest income is primarily attributable to an increase in earning assets. During the first six months of 2001, earning assets averaged $539.3 million, a level significantly higher than average earning assets of $400.7 million during the same time period in 2000. The increase in total loans and investment securities accounted for 83.7% and 13.3% of the growth in average earnings assets, respectively. Negatively impacting the growth in interest income during the first six months of 2001 was the decline in yield on earning assets. During the first six months of 2001 and 2000, earning assets had a weighted average yield of 8.24% and 8.44% respectively. The decrease in the weighted average yields in 2001 is primarily due to the overall decline of market interest rates during the first six months of 2001, in part evidenced by the 275 basis point drop in the prime rate since January 3, 2001. 16 20 Interest expense during the first six months of 2001 was $14.7 million, an increase of 34.8% over the $10.9 million expensed during the first six months of 2000. The growth in interest expense is primarily attributable to the growth in assets, which necessitated an increase in funding liabilities. During the first six months of 2001, interest-bearing liabilities averaged $512.6 million, a level substantially higher than average interest-bearing funds of $358.9 million during the same time period in 2000. During the first six months of 2001, interest-bearing liabilities had a weighted average rate of 6.13%, slightly higher than the weighted average rate of 6.10% during the first six months of 2000. The increasing interest rate environment during 2000, which peaked towards the end of the second quarter of 2000 and remained relatively stable throughout the remainder of 2000, resulted in a significant increased cost of funds during the second half of 2000. The aforementioned decline in market interest rates during 2001 has resulted in a substantial decline in the cost of funds over the past six months that is not reflected in the six month 2001 and 2000 comparison. A continued decline in the cost of interest-bearing liabilities is expected so long as market interest rates remain at current levels or continue to decline further. Net interest income during the first six months of 2001 was $7.2 million, an increase of 23.4% over the $5.8 million earned during the same time period in 2000. The net interest margin declined from 2.97% during the first six months of 2000 to 2.74% in the first six months of 2001. Although we experienced significant asset growth during the first six months of 2001 when compared to the same time period in 2000, the net interest margin declined primarily due to the rapid decline in market interest rates that occurred during the first six months of 2001 and our sensitivity to such declines in the short-term. The level of loans tied to the prime rate is approximately double the level of non- certificate of deposit funding products. As a result, and despite the fact that most of the major interest rate indicies declined in a similar manner, each time market interest rates declined our net interest margin was negatively impacted. However, the negative impact of this repricing gap is short-term in nature. As interest rates stabilize and a significant volume of local and out-of-area certificates of deposit mature and reprice to much lower levels throughout the remainder of 2001 and into 2002, our net interest margin is expected to improve. See "Quantitative and Qualitative Disclosure About Market Risk". In addition to providing interest income and secondary liquidity, our investment portfolio plays an integral role in managing our net interest margin. During the relatively high interest rate environment in 2000, our bank purchased four $1.0 million heavily discounted U.S. government-sponsored agency callable bonds. A major factor in purchasing the bonds was the expectation that the bonds would likely be called by the issuer in a declining interest rate environment, resulting in the remaining discount being immediately accreted into interest income and at least partially offsetting the short-term negative impact a declining interest rate environment would have on our net interest margin. With interest rates declining during the first quarter of 2001, two of the bonds were called by the issuer and the combined unaccreted discount of $71,808 was immediately taken into interest income. Of the remaining two bonds, one was not initially callable until June 2001, and the other bond, while immediately callable, was not called by the issuer as interest rates had not declined to a level where it was likely to be called by the issuer. Given that net interest margin management was a major factor in purchasing the bonds, we decided to sell the remaining two bonds, and an aggregate profit of $97,289 was recorded during the first quarter of 2001. Although accounting standards require that gains on the sales of securities be recorded as noninterest income, if the resulting gains were allowed to be recorded as interest income, thereby paralleling management's intent, the net interest 17 21 margin for the first six months of 2001 would have been 2.78%, or about four basis points higher than the 2.74% addressed earlier. The following table sets forth certain information relating to our consolidated average interest earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the second quarter of 2001 and 2000. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented. For tax-exempt securities, interest income and yield have been computed on a tax equivalent basis using a marginal tax rate of 34%.
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------- 2001 2000 ----------------------------- ----------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS Loans....................... $460,552 $19,426 8.51% $346,172 $14,995 8.69% Investment securities....... 63,878 2,253 7.05 45,377 1,556 6.86 Federal funds sold.......... 14,736 360 4.86 9,033 272 6.02 Short term investments...... 118 2 3.82 147 3 4.56 -------- ------- ---- -------- ------- ---- Total interest-earning assets................. 539,284 22,041 8.24 400,729 16,826 8.47 Allowance for loan losses... (6,795) (5,162) Other assets................ 24,054 17,829 -------- -------- Total assets............. $556,543 $413,396 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits... $436,367 $13,279 6.14% $317,011 $ 9,553 6.08% Short-term borrowings....... 31,691 641 4.08 25,856 564 4.40 Long-term borrowings........ 16,076 787 9.81 16,021 794 9.81 -------- ------- ---- -------- ------- ---- Total interest-bearing liabilities............ 484,134 14,707 6.13 358,888 10,911 6.13 Noninterest-bearing deposits................. 28,534 22,408 Other liabilities........... 6,992 3,673 Shareholders' equity........ 36,883 28,427 -------- -------- Total liabilities and shareholders' equity... $556,543 $413,396 ======== ======== Net interest income......... $ 7,334 $ 5,915 ======= ======= Net interest rate spread.... 2.11% 2.34% ==== ==== Net interest rate spread on average assets........... 2.66% 2.87% ==== ==== Net interest margin on earning assets........... 2.74% 2.97% ==== ====
Provisions to the allowance for loan losses during the first six months of 2001 were $1,180,000, an increase of 24.9% from the $945,000 expensed during the same time period in 2000. The increase reflects the higher volume of loan growth. During the first six months of 2001, net loan charge-offs totaled $19,713 compared to net loan charge-offs of 18 22 $37,984 during the same time period in 2000. The allowance for loan losses as a percentage of total loans outstanding as of June 30, 2001 was 1.47%, unchanged from the level at December 31, 2000. In each accounting period, the allowance for loan losses is adjusted to the amount believed necessary by management to maintain the allowance at adequate levels. Through the loan review and credit department, management attempts to allocate specific portions of the allowance for loan losses based on specifically identifiable problem loans. The evaluation of the allowance for loan losses 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, our bank's status as a relatively new banking organization and the rapid loan growth experienced since inception is taken into account. The Reserve Analysis, used since the inception of our bank and completed monthly, applies reserve allocation factors to outstanding loan balances to calculate an overall allowance dollar amount. For commercial loans, which continue to comprise a majority of total loans, reserve allocation factors are based upon the loan ratings as determined by our comprehensive loan rating paradigm that is administered by the loan review function. For retail loans, reserve allocation factors are based upon the type of credit. The reserve allocation factors are based on the experience of senior management making similar loans in the same community over the past 15 years. The Reserve Analysis is reviewed regularly by senior management and the Board of Directors and is adjusted periodically based upon identifiable trends and experience. Noninterest income, excluding net gains on sales of securities, during the first six months of 2001 was $675,000, an increase of 38.1% over the $489,000 earned during the same time period in 2000. Service charge income on deposits and repurchase agreements increased $68,000 (42.6%) over $159,000 earned in the comparable time period in 2000. The strong increase primarily resulted from new accounts opened during the last 12 months. Reflecting declining interest rates and the resulting increase in residential mortgage loan refinancings, fees earned on referring residential mortgage loan applicants to various third parties increased $110,000 (159.0%) during the first six months of 2001 compared to $69,000 earned during the first six months of 2000. Primarily reflecting the issuance of new letters of credit, letter of credit fees were up $35,000 (29.9%) during the first six months of 2001 when compared to $116,000 earned in the first six months of 2000. Noninterest expense during the first six months of 2001 was $4.3 million, an increase of 17.8% over the $3.7 million expensed during the same time period in 2000. The growth was due to an increase in salaries and benefits, as well as general overhead costs. The increases in salaries and benefits primarily resulted from the hiring of additional staff and annual pay increases. General overhead costs have also increased reflecting the additional expenses required to administer the significantly increased asset base. While the dollar volume of noninterest costs have increased, as a percent of average assets the level has substantially declined as a result of our asset growth and the realization of operating efficiencies. During the first six months of 2001, noninterest costs were 1.57% of average assets on an annualized basis, a 12.8% decline from the 1.80% level during the same period in 2000. Monitoring and controlling our noninterest costs, while at the same time providing high quality service to our customers, is one of our priorities. Our efficiency ratio, computed by dividing noninterest expenses by net interest income plus noninterest 19 23 income, was 54.6% during the first six months of 2001, which compares favorably to the efficiency ratio of 58.5% during the second quarter and first six months of 2000, respectively. A higher level of net revenue growth (net interest income plus noninterest income) when compared to the growth in overhead costs has lead to improved efficiency ratios and overall profitability. Federal income tax expense was $727,000 during the first six months of 2001, an increase of 37.7% over the $528,000 expensed during the first six months of 2000. The increase is due to the growth in our profitability. LIQUIDITY -- JUNE 30, 2001 Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or cash generated from the repayment of loans and investment securities. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and support our operations. 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 our balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity. Our liquidity strategy is to fund our 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 customers located in our market area have consistently increased, the growth has not been sufficient to meet our substantial loan growth and provide monies for additional investing activities. To assist in providing the additional needed funds, we have regularly obtained certificates of deposit from customers outside of our market area and placed by deposit brokers for a fee, as well as certificates of deposit obtained from the deposit owners directly. As of June 30, 2001, out-of-area deposits totaled $367.8 million, or 66.0% of combined deposits and repurchase agreements, an increase from the $299.0 million, or 65.3% of combined deposits and repurchase agreements, as of December 31, 2000. Our bank has the ability to borrow money on a daily basis through correspondent banks via established federal funds purchased lines; however, we view these funds as only a secondary and temporary source of funds. We did not borrow any federal funds during the first six months of 2001. Our bank's federal funds sold position averaged $14.7 million, or 2.6% of average assets, during the first six months of 2001. In addition, as a member of the Federal Home Loan Bank of Indianapolis ("FHLBI"), our bank has access to the FHLBI's borrowing programs. Based on ownership of FHLBI stock and available collateral at June 30, 2001, our bank could borrow up to $15.0 million. We have yet to use our established borrowing line at the FHLBI. We have also been extended a $10.0 million unsecured line of credit from a correspondent bank. Proceeds from borrowings under the credit facility may be used for working capital, investment in our bank or acquisition of financial institutions. The line, which has yet to be utilized, matures on February 27, 2002. In addition to normal loan funding and deposit flow, we must maintain liquidity in order to meet the demands of certain unfunded loan commitments and standby letters of credit. As of June 30, 2001, our bank had a total of $131.1 million in unfunded loan 20 24 commitments and $38.3 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $117.2 million were commitments available as lines of credit to be drawn at any time as customers' cash needs vary, and $13.9 million were for loan commitments expected to close and become funded within the next three months. Management monitors fluctuations in loan balances and commitment levels, and utilizes such data in managing our overall liquidity. CAPITAL RESOURCES -- JUNE 30, 2001 Shareholders' equity is a noninterest-bearing source of funds that provides support for asset growth. Shareholders' equity was $40.4 million and $31.9 million at June 30, 2001 and December 31, 2000, respectively. The increase during the first six months of 2001 was primarily attributable to the sale of common stock and net income. During the first quarter we sold a total of 516,600 shares of our common stock in two private placement offerings, raising $6.7 million in net proceeds. We contributed substantially all of the net proceeds to our bank as capital. Net income equaled $1.7 million during the first six months of 2001. In addition, shareholders' equity was also positively impacted during the first six months of 2001 by a $0.2 million mark-to-market adjustment for available-for-sale securities as defined in SFAS No. 115. The adjustment was due to the decline in interest rates during the first six months of 2001. In September 1999, we, through MBWM Capital Trust I ("the trust"), issued 1.6 million shares of trust preferred securities at $10.00 per share. Substantially all of the net proceeds were ultimately contributed to our bank as capital and were used to support anticipated growth in assets, fund investments in loans and securities, and for general corporate purposes. Although not part of shareholder's equity, subject to certain limitations the trust preferred securities are considered a component of capital for purposes of calculating regulatory capital ratios. At June 30, 2001, $13.3 million of the $16.0 million issued was included as Tier 1 capital, with the remaining amount included as Tier 2 capital. The amount includable as Tier 1 capital is expected to increase in future periods as shareholders' equity increases from anticipated net income. We 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 our financial condition and results of operations. Since our bank commenced operations, both the company and our bank have been categorized as "Well Capitalized," the highest classification contained within the banking regulations. Our capital ratios and the capital ratios of our bank as of June 30, 2001 and December 31, 2000 are disclosed under Note 16 of the Notes to Consolidated Financial Statements included herein. Our and our bank's ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. We declared a 5% stock dividend on January 10, 2001, which was paid on February 1, 2001 to record holders as of January 19, 2001. We have not paid cash dividends on our common stock since our formation in 1997, and we currently have no intention of doing so in the foreseeable future. 21 25 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK -- JUNE 30, 2001 AND DECEMBER 31, 2000 Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. We have only limited agricultural-related loan assets and therefore have 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 our financial condition to adverse movements in interest rates. We derive income primarily from the excess of interest collected on our interest-earning assets over the interest paid on our interest-bearing liabilities. The rates of interest we earn on our assets and owe on our liabilities generally are established contractually for a period of time. Since market interest rates change over time, we are exposed to lower profitability if we 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 our earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our safety and soundness. Evaluating our 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. Our 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 we assess the existing and potential future effects of changes in interest rates on our financial condition, including capital adequacy, earnings, liquidity and asset quality. We use two interest rate risk measurement techniques. 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. 22 26 The following tables depicts our GAP position as of June 30, 2001 (dollars in thousands):
WITHIN THREE TO ONE TO THREE TWELVE FIVE AFTER FIVE MONTHS MONTHS YEARS YEARS TOTAL -------- --------- -------- ---------- -------- Assets: Commercial loans......... $208,544 $ 5,006 $240,479 $ 11,770 $465,799 Residential real estate loans................. 11,173 1,043 15,523 7,359 35,098 Consumer loans........... 1,541 992 4,554 127 7,214 Investment securities(1)......... 785 1,180 24,611 41,049 67,625 Federal funds sold....... 18,400 0 0 0 18,400 Short term investments... 142 0 0 0 142 Allowance for loan losses................ 0 0 0 (7,462) (7,462) Other assets............. 0 0 0 31,071 31,071 -------- --------- -------- -------- -------- Total assets............... 240,585 8,221 285,167 83,914 617,887 Liabilities: Interest-bearing checking.............. 14,788 0 0 0 14,788 Savings.................. 40,621 0 0 0 40,621 Money market accounts.... 5,285 0 0 0 5,285 Time deposits <$100,000............. 24,337 39,867 16,280 0 80,484 Time deposits $100,000 and over.............. 98,416 167,837 74,410 0 340,663 Short-term borrowings.... 34,788 0 0 0 34,788 Long-term borrowings..... 111 0 0 16,000 16,111 Noninterest-bearing checking.............. 0 0 0 38,381 38,381 Other liabilities........ 0 0 0 6,319 6,319 -------- --------- -------- -------- -------- Total liabilities.......... 218,346 207,704 90,690 60,700 577,440 Shareholders' equity....... 40,447 40,447 -------- --------- -------- -------- -------- Total sources of funds..... 218,346 207,704 90,690 101,147 617,887 -------- --------- -------- -------- -------- Net asset (liability) GAP...................... $ 22,239 $(199,483) $194,477 $(17,233) ======== ========= ======== ======== Cumulative GAP............. $ 22,239 $(177,244) $ 17,233 ======== ========= ======== Percent of cumulative GAP to total assets.......... 3.6% (28.7)% 2.8% ======== ========= ========
- ------------------------- (1) Mortgage-backed securities are categorized by expected final maturities based upon prepayment trends as of June 30, 2001. 23 27 The following tables depicts our 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 0 0 0 6,300 Short term investments.... 109 0 0 0 109 Allowance for loan losses................. 0 0 0 (6,302) (6,302) Other assets.............. 0 0 0 22,378 22,378 -------- --------- -------- ------- -------- Total assets................ 157,393 12,351 263,197 79,805 512,746 Liabilities: Interest-bearing checking............... 12,968 0 0 0 12,968 Savings................... 36,331 0 0 0 36,331 Money market accounts..... 5,196 0 0 0 5,196 Time deposits under $100,000............... 17,923 35,245 8,257 0 61,425 Time deposits $100,000 and over................... 64,939 172,967 44,546 0 282,452 Short term borrowings..... 32,151 0 0 0 32,151 Long term borrowings...... 57 0 0 16,000 16,057 Noninterest-bearing checking............... 0 0 0 27,368 27,368 Other liabilities......... 0 0 0 6,944 6,944 -------- --------- -------- ------- -------- Total liabilities........... 169,565 208,212 52,803 50,312 480,892 Shareholders' equity........ 0 0 0 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. The second interest rate risk measurement used is commonly referred to as net interest income simulation analysis. We believe 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 we use. 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 24 28 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 our strategies, among other factors. We regularly conduct multiple simulations, 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 is well within the policy parameters we established to manage and monitor interest rate risk. The following table depicts the results of the net interest income simulation analysis as of June 30, 2001:
DOLLAR CHANGE IN PERCENT CHANGE IN INTEREST RATE SCENARIO NET INTEREST INCOME NET INTEREST INCOME ---------------------- ------------------- ------------------- Interest rates down 200 basis points........ $3,270,000 19.9% Interest rates down 100 basis points........ 3,158,000 19.3 No change in interest rates................. 3,040,000 18.5 Interest rates up 100 basis points.......... 3,113,000 19.0 Interest rates up 200 basis points.......... 3,184,000 19.4
The increase in net interest income under all interest rate scenarios reflects the expected repricing of local and out-of-area certificates of deposit during the next twelve months. Unlike our floating rate loans that declined throughout the first six months of 2001 as the prime rate declined, our certificates of deposit have fixed interest rates and only reprice at maturity. Throughout the remainder of 2001 and into 2002 we have a large volume of certificates of deposit that will mature and will be refinanced at lower interest rates. The following table depicts the results of the net interest income simulation analysis as of December 31, 2000:
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
The following table depicts the results of the net interest income simulation analysis as of December 31, 1999:
DOLLAR CHANGE IN PERCENT CHANGE IN INTEREST RATE SCENARIO NET INTEREST INCOME NET INTEREST INCOME ---------------------- ------------------- ------------------- Interest rates down 200 basis points........ $ 242,000 2.4% Interest rates down 100 basis points........ 31,000 0.3 No change in interest rates................. (177,000) (1.8) Interest rates up 100 basis points.......... (255,000) (2.6) Interest rates up 200 basis points.......... (332,000) (3.4)
25 29 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. FINANCIAL CONDITION -- DECEMBER 31, 2000 We 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 repurchase agreements, and an increase of $2.8 million in retained income. Average earning assets equaled over 96% of average total assets during 2000. Although we experienced significant asset growth during 2000, the asset structure remained relatively constant. Our loan portfolio continued to comprise a majority of earning assets, followed by investments securities, federal funds sold, and short-term investments. Our 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, our commercial loan portfolio represents loans to business interests generally located within our market area. At December 31, 2000, approximately 61% of our commercial loan portfolio was primarily secured by real estate properties, with the remaining generally secured by other business assets such as accounts receivable, inventory, and equipment. There were no significant industry concentrations within our commercial loan portfolio. The concentration and rapid growth in commercial loans was in keeping with our strategy of focusing a substantial amount of our efforts on commercial banking. Residential mortgage and consumer lending, while averaging only 9% of average loans during 2000, also experienced excellent growth; however, our 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. 26 30 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 0 0 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 0 0 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 0 76,370,021 ------------ ------------ ----------- ------------ $148,371,769 $228,412,100 $12,520,704 $389,304,573 ============ ============ =========== ============
Our 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, we 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 our 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. 27 31 The following table illustrates the breakdown of the allowance balance to loan type (dollars in thousands).
2000 1999 --------------------------- --------------------------- PERCENT OF LOANS PERCENT OF LOANS BALANCE AT END OF IN EACH CATEGORY IN EACH CATEGORY PERIOD 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% ====== ===== ====== =====
1998 1997 --------------------------- --------------------------- PERCENT OF LOANS PERCENT OF LOANS BALANCE AT END OF IN EACH CATEGORY IN EACH CATEGORY PERIOD APPLICABLE TO AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS -------------------- ------- ---------------- ------- ---------------- Commercial, financial and agricultural.................. $2,612 84.3% $ 193 98.6% Residential real estate......... 114 14.6 0 1.3 Installment loans to individuals................... 39 1.1 0 0.1 Unallocated..................... 0 N/A 0 N/A ------ ----- ------ ----- $2,765 100.0% $ 193 100.0% ====== ===== ====== =====
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. We have a policy of requesting and reviewing periodic financial statements from our commercial loan customers, and periodically review the existence of collateral and its value. The primary risk element considered by us with respect to each installment and residential real estate loan is lack of timely payment. We have a reporting system that monitors past due loans and we have adopted policies to pursue our creditor's rights in order to preserve our position. Although we believe that the allowance is adequate to cover incurred losses, there can be no assurance that we 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. We maintain the portfolio at levels to provide adequate pledging for the repurchase agreement program and secondary liquidity for our 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 28 32 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. Our 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 we 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, our 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. During 2000 we experienced excellent growth in our 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. 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. 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 us qualifying for additional funds from existing customers through a 29 33 combination of asset growth and profitability as measured by the municipalities' investment policy guidelines. 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. 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. Repurchase agreements increased $5.5 million and equaled 7% of average funding sources during 2000. Part of our sweep account program, collected funds from certain business noninterest-bearing checking accounts, is invested into overnight interest-bearing repurchase agreements. 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 was due solely to the changes in the interest rate environment during 2000. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 We recorded strong earnings performance during 2000, only our 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 our earnings performance. The following table shows some of our key performance and equity ratios for the years ended December 31, 2000 and 1999.
2000 1999 1998 ---- ---- ---- Return on average total assets......................... 0.6% 0.7% (0.9)% Return on average equity............................... 9.5 7.7 (6.4) Dividend payout ratio.................................. N/A N/A N/A Average equity to average assets....................... 6.6 9.2 13.4
Net interest income, the difference between revenue generated from our earning assets and the interest cost of funding our assets, is our 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 30 34 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 our earning assets is greater than the weighted average interest cost of our 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 our net interest margin. Our 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. 31 35 The following table depicts the average balance, interest earned and paid, and weighted average rate of our 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%.
FOR THE 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 ======== ======== ========
FOR THE 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
32 36
FOR THE 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 our 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. The growth in interest income is primarily attributable to an increase in our earning assets. During 2000, earning assets averaged $431.3 million, a level substantially higher than our 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 our 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 our loan portfolio and an increase of $1.6 million due to an increase in the yield earned on our loan portfolio. The improved loan portfolio yield is primarily due to increased market interest rates during 2000. Growth in our 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 33 37 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 our interest-bearing deposits, and to a lesser degree our repurchase agreements and our 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 our 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 our average interest-bearing liabilities increased from the 5.33% recorded in 1999 to 6.35% in 2000. Growth in our average certificates of deposits, totaling $115.6 million, comprised 84% of the increase in our 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 our 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 our 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. 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. We maintain the allowance at a level our management feels is adequate to absorb losses contained within the loan portfolio. 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. To reduce the negative impact of rising interest rates on net interest income, during the second quarter of 2000 we entered into a $50 million two-year interest rate swap 34 38 agreement with a correspondent bank. Due to market expectations and the resulting impact on the value of the interest rate swap agreement, we 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 we 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 our interest rate risk position. 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 our significantly increased loan and deposit base. Monitoring and controlling overhead expenses, while at the same time providing high quality service to customers, is of utmost importance to us. While the dollar volume of noninterest costs have increased, as a percent of average assets the level has substantially declined as a result of our 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, our 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 our efficiency. This point is demonstrated by our total assets per employee ratio, which as of December 31, 2000 was a relatively high $7.9 million. 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, we 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, we had to expense the full statutory tax rate in 2000. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 We recorded a net operating profit during 1999, only our 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 our 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 35 39 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 our earnings performance. Federal income tax expense for 1999 totaled $292,000, or 12% of pre-tax net operating income. While we are subject to the statutory federal income tax rate of 34%, use of tax loss carryforwards generated during 1997 and 1998 enabled us to reduce our federal income tax expense during 1999. The entire tax loss carryforward was utilized during 1999; therefore, our federal income tax expense will be at the statutory tax rate in future reporting periods. Net interest income, the difference between revenue generated from our earning assets and the interest cost of funding those assets, is our 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 our asset size, as the weighted average interest rate received on our earning assets is greater than the weighted average interest cost of our funding sources; however, factors such as types of assets and liabilities, interest rate risk, liquidity, and customer behavior also impact our net interest income as well as our net interest margin. Our net interest margin declined from 3.61% in 1998 to 3.30% in 1999. Although the weighted average cost of our interest-bearing liabilities declined at a faster rate than the decline of our yield on interest-earning assets during 1999, our 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 our 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 our 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 our earning assets. During 1999 our earning assets averaged $286.9 million, a level substantially higher than the average our 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. Our 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 our 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 our 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 36 40 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 our interest-bearing deposits, and to a lesser degree our 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 our 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 our 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 certificates 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. Growth in our 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. Our 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. The effective rate is 9.81% when taking into account the amortization of brokerage fees. 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. We maintain the allowance for loan losses at a level our management feels is adequate to absorb losses inherent in the loan portfolio. The evaluation is based upon a continuous review of ours and the banking industry's historical loan loss experience, known and inherent risks contained in the loan portfolio, composition and growth of the loan portfolio, current and projected economic conditions and other factors. 37 41 Other income totaled $848,000 in 1999, a significant increase over the $488,000 we 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 during 1999 totaled $5.9 million, a significant increase over the $3.6 million we 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 our 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 us. While the dollar volume of noninterest costs have increased, as a percent of average assets the level has substantially declined as a result of our 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, our 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, our 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 our efficiency. This point is demonstrated by our total assets per employee ratio, which as of December 31, 1999 was approximately $6.3 million. This level compares very favorably to the $3.4 million level of banks of similar asset size. Federal income tax expense was $292,000 in 1999, or 12% of pre-tax net operating income. Although we are 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 us to reduce our federal income tax expense during 1999. The entire tax loss carryforward was utilized during 1999; therefore, our 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 us in 1998, no provisions to federal income tax expense were necessary during 1998. CAPITAL RESOURCES -- DECEMBER 31, 2000 Shareholders' equity is a noninterest-bearing source of funds that provides support for our 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 38 42 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 we, through the 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 our 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 included as Tier 1 capital, with the remaining amount included as Tier 2 capital. To provide sufficient capital for anticipated asset growth, we have been evaluating alternatives for increasing our capital. On February 21, 2001 we sold 70,000 shares of common stock in a private placement for approximately $1.0 million. We contributed the proceeds to our bank as capital. LIQUIDITY -- DECEMBER 31, 2000 Our 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 we regularly obtained certificates of deposit from customers outside of the market area. 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. We have 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, our federal funds sold position averaged $9.0 million. In addition, as a member of the FHLBI, we have access to the FHLBI's borrowing programs. Based on ownership of FHLBI stock and available collateral at December 31, 2000, our bank could borrow up to $15.0 million. In addition to normal loan funding and deposit flow, we also need to maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit. As of December 31, 2000, we 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. We monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity management. 39 43 BUSINESS OVERVIEW We are a single bank holding company headquartered in Grand Rapids, Michigan that provides commercial and retail banking services primarily to small- to medium-sized businesses based in and around Grand Rapids. We were incorporated on July 15, 1997 under the laws of the State of Michigan. Through our bank subsidiary, Mercantile Bank of West Michigan, we serve principally the Kent and Ottawa Counties of western Michigan. We formed Mercantile Bank Mortgage Company, a wholly owned subsidiary of our bank, in October 2000 to increase the profitability and efficiency of our bank's mortgage loan function. At June 30, 2001, we had total assets of $617.9 million, loans of $508.1 million, deposits of $520.2 million and shareholders' equity of $40.4 million. In September 1999, we formed the trust as a wholly-owned business trust subsidiary for the purpose of issuing 9.60% cumulative preferred securities. To date we have raised capital from our initial public offering of common stock in October 1997, a public offering of common stock in July 1998, issuance of cumulative preferred securities in September 1999, and private placements of common stock in the first quarter of 2001. Our election to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act and implementing regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") was effective March 23, 2000. We have no current plans to engage in any of the expanded activities permitted under the new regulations. OUR BANK Our bank is a state banking corporation 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. Our bank's deposits are insured to the maximum extent provided by the Federal Deposit Insurance Corporation. Through its main office in Grand Rapids, Michigan and its combined branch and operations center located in Comstock Park, a nearby suburb, our bank provides a wide variety of commercial banking services, primarily to businesses, individuals and governmental units. Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans, and accepts checking, savings and time deposits. Our 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. Customers are also able 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. Our bank does not have trust powers. GROWTH HISTORY We have grown significantly since our bank opened in December 1997. We posted our first profit in the third quarter of 1998, only nine months after our bank opened. Since inception, management has focused on achieving profitable internal growth while maintaining strong asset quality. At June 30, 2001, our assets exceeded $600.0 million and 40 44 our non-performing loans were 0.03% of loans. A number of factors have contributed to our growth: - our experienced management team has extensive long-term relationships and a strong reputation within the western Michigan business community; - a track record of customer attentiveness and responsive service; - achieving the size and visibility to be a major competitor for commercial loans in our markets; and - over the past four years, the Grand Rapids financial services market has undergone continued market disruption as the largest local banks have been acquired by out-of-state institutions. We believe the combination of these factors has contributed to our strong historical performance and will provide significant opportunities for continued growth and profitability. OPERATING STRATEGY The key elements of our operating strategy are presented below. Focus on locally-owned and operated businesses. Our lending activities focus primarily on providing local businesses with commercial business loans and loans secured by owner-occupied real estate. Typically, we seek commercial lending relationships with customers borrowing from $250,000 to $6.0 million. Our legal lending limit was approximately $12.0 million as of June 30, 2001, and this limit accommodates the vast majority of credit opportunities we encounter. If local businesses have credit needs beyond the scope of our lending capacity, we will often look to participate out a portion of the credit with other financial institutions in order to accommodate our customers' needs. As of June 30, 2001, we had six relationships borrowing more than $5.0 million from our bank. Employing fewer, but highly qualified and productive individuals and focusing on low net overhead ratios. Key to our growth and profitability is our management's extensive experience in providing community banking services and our ability to create a culture committed to both proactive sales and disciplined credit quality. Our practice of employing fewer, but highly qualified and productive individuals at all levels of the organization is key to maintaining a decentralized management structure. These individuals are able to manage large loan portfolios, which increases interest income while controlling personnel costs. Our commercial lending focus allows us to generate larger relationships than a retail focus would allow, which permits us to accelerate asset growth with fewer resources. We believe our organizational structure and loan focus will allow us to continue to improve and maintain our favorable net overhead ratios as our bank matures. Operating a limited number of offices with a high asset base per office. We currently have two full-service branches. We actively solicit local deposits to fund our asset growth. We grew our local deposit base 29.8% in 2000 and 20.3% in the first six months of 2001. However, our loan portfolio has increased faster than our local deposits. Because of this, our strategy is to garner out-of-area CDs from across the country at rates competitive with our local deposit market in order to help fund our growth. Our ability to attract adequate funding with minimal branching allows us to grow at a lower overhead cost. We plan to 41 45 continue using out-of-area deposits because we believe that this source of funds gives us an efficiency advantage in our market. Maintaining strong asset quality. Equally important as our growth, is our emphasis on the quality of our loan portfolio and the adequacy of our reserves. Since opening, our ratio of annual net charge-offs to average loans has never been greater than 0.05%, and for the six-months ended June 30, 2001 our ratio was 0.01%. Our ratio of non-performing loans to loans was 0.03% at June 30, 2001. In addition to controlling provision expense, we believe that strong asset quality leads to greater operating performance because it minimizes the time and money spent managing problem assets. At the same time we understand the risks associated with our loan portfolio and maintain a loan loss reserve that we believe is appropriate. At June 30, 2001 our ratio of allowance for loan losses to total loans was 1.47%. MARKET AREA Our market area is the Kent and Ottawa Counties of western Michigan, including the City of Grand Rapids, the second largest city in the State of Michigan. Kent County, which encompasses most of the Grand Rapids metropolitan area, has a diverse economy based primarily on manufacturing, retail and service businesses. Statistically, Kent County has approximately 554,000 people, 200,000 households and a median household income that is estimated to have grown approximately 65% from 1990 to 2000. Kent County is a significant banking market in the State of Michigan. According to available industry data, as of June 30, 2000, total deposits in Kent County, including those of banks and thrifts, were approximately $8.5 billion. OUR MORTGAGE COMPANY Our mortgage company commenced operations on October 24, 2000, when our bank contributed most of its residential mortgage loan portfolio and participation interests in certain commercial mortgage loans to our mortgage company. On the same date, our bank also transferred its residential mortgage origination function to our mortgage company. Mortgage loans originated and held by our mortgage company are serviced by our bank pursuant to a servicing agreement. THE TRUST In 1999, we formed the trust as a Delaware business trust. The trust's business and affairs are conducted by its property trustee, a Delaware trustee, and three individual administrative trustees who are officers of the company. The trust was established for the purpose of issuing and selling its preferred securities and common securities, and using the proceeds to acquire subordinated debentures that we issued. Substantially all of the net proceeds that we received from the transaction were contributed to our bank as capital. EFFECT OF GOVERNMENT MONETARY POLICIES Our earnings 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 42 46 inflation or avoid a recession. The policies of the Federal Reserve Board have a major effect on the levels of bank loans, investments and deposits through its open market operations in United States government securities, and through its regulation of 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. Our bank maintains reserves directly with the Federal Reserve Bank of Chicago to the extent required by law. REGULATION AND SUPERVISION As a bank holding company under the Bank Holding Company Act of 1956, we are required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may appropriately require. We are also subject to examination by the Federal Reserve Board. The Bank Holding Company Act limits the activities of bank holding companies that have not qualified as financial holding companies to banking and the management of banking organizations, and to certain non-banking activities. These non-banking activities include those activities that the Federal Reserve Board found, by order or regulation as of the day prior to enactment of the Gramm-Leach-Bliley Act, to be so closely related to banking or managing or controlling banks as to be a proper incident to those activities. Non-banking activities that the Federal Reserve Board has, by regulation, determined are closely related to banking within the meaning of the Bank Holding Company Act 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 - providing discount securities brokerage services for customers. Our mortgage company also complies with the regulations of the Federal Reserve Board. Neither we nor any of our subsidiaries currently engages in any other activity referred to above. In March, 2000, our election to become a financial holding company, as permitted by the Gramm-Leach-Bliley Act, was accepted by the Federal Reserve Board. In order to continue as a financial holding company, we and our bank must satisfy certain statutory requirements regarding capitalization, management, and compliance with the Community Reinvestment Act. As a financial holding company, we are permitted to engage in a broader range of activities than are permitted to bank holding companies. Those expanded activities include any activity which the Federal Reserve Board (in certain instances in consultation with the Department of the Treasury) determines, by order or regulation, to be financial in nature or incidental to such financial activity, or to be complementary to a financial activity and not to pose a substantial risk to the safety or 43 47 soundness of depository institutions or the financial system generally. Such expanded activities include, among others: - insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities, and acting as principal, agent, or broker for such purposes; - providing financial, investment, or economic advisory services, including advising a mutual fund; and - underwriting, dealing in, or making a market in securities. Neither we nor our subsidiaries have any current plans to engage in any such expanded activity. Our bank is subject to certain restrictions imposed by federal law and regulation. These restrictions apply to any extension of credit to us or to our other subsidiaries, to investments in stock or other securities that we issue, to the taking of such stock or securities as collateral for loans to any borrower, and to acquisitions of assets or services from, and sales of certain types of assets to, us or our other subsidiaries. Federal law prevents us from borrowing from our bank unless the loans are secured in designated amounts with specified forms of collateral. With respect to the acquisition of banking organizations, we are generally required to obtain the prior approval of the Federal Reserve Board before we 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 the acquisition, we would own or control more than 5% of the voting shares of the bank. Acquisitions across state lines are subject to certain state and Federal Reserve Board restrictions. LOAN POLICY As a routine part of our business, we make loans to businesses and individuals located within our market area. Our loan policy states that the function of our 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 our customers. We recognize 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. Our 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 our bank. The Board of Directors believes this empowerment, supported by our strong credit culture and the significant experience of our commercial lending staff, makes us more responsive to our customers. The loan policy currently specifies lending authority for certain officers up to $1.0 million, and $6.0 million for our bank's Chairman of the Board 44 48 and its President and Chief Executive Officer; however, the $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 bank's legal lending limit of approximately $12.0 million, require approval by the Board of Directors. In most circumstances we apply an in-house lending limit that is less than our bank's 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 our lending practices. LENDING ACTIVITY Commercial Loans. Our commercial lending group originates commercial loans primarily in our market area. Commercial loans are originated by eight lenders, with over 110 years of combined commercial lending experience. Loans are originated for general business purposes, including working capital, accounts receivable financing, machinery and equipment acquisition, and commercial real estate financing including new construction and land development. Working capital loans are often structured as a line of credit and are reviewed periodically in connection with the borrower's year-end financial reporting. These loans 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 loans have an interest rate that is fixed to maturity or is tied to the national prime rate. We evaluate many aspects of a commercial loan transaction in order to minimize credit and interest rate risk. Underwriting includes an assessment of the management, products, markets, cash flow, capital, income and collateral. This analysis includes a review of the borrower's historical and projected financial results. Appraisals are generally required by certified independent appraisers who are well known to us where real estate is the primary collateral, and in some cases, where equipment is the primary collateral. In certain situations, for creditworthy customers, we may accept title reports instead of requiring lenders' policies of title insurance. Commercial real estate lending involves more risk than residential lending because loan balances are greater and repayment is dependent upon the borrower's business operations. We attempt to minimize the risks associated with these transactions by generally limiting our commercial real estate lending to owner-operated properties of well-known customers or new customers whose businesses have 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 our legal lending limit and avoiding certain types of commercial real estate financings. 45 49 We have no material foreign or agricultural loans, and no material loans to energy producing customers. Single-Family Residential Real Estate Loans. Our mortgage company originates single-family residential real estate loans in our market area, usually according to secondary market underwriting standards. 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. Our bank 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. We originate consumer loans for a variety of personal financial needs, including new and used automobiles, boat loans, credit cards and overdraft protection for our 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 we do not utilize a formal credit scoring system, management believes our consumer loans are underwritten carefully, with a strong emphasis on the amount of the down payment and credit quality, employment stability and monthly income of the borrower. These loans are generally repaid on a monthly repayment schedule with the source of repayment tied to the borrower's periodic income. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and are likely to be adversely affected by job loss, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying collateral. Management believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with these loans and that consumer loans are important to our efforts to serve the credit needs of the communities and customers that we serve. LOAN PORTFOLIO QUALITY We utilize a comprehensive loan grading system for our 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. The rating system utilizes 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 later at various intervals. 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 after the loans are made. Our independent loan review program is primarily responsible for the administration of the loan grading systems and ensuring adherence to established loan policies and procedures. The loan review program is an integral part of maintaining our strong asset quality culture. The loan review function works closely with senior management, although it functionally reports to the Board of Directors. All commercial loan relationships exceeding $1 million are formally reviewed at least annually. Watch list credits are 46 50 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. 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 six-month period ended June 30, 2001, loans placed on nonaccrual status were nominal in amount. At June 30, 2001, 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. Management is not aware of any potential problem loans that could have a material effect on our 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. 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, our bank's status as a relatively new 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 risks associated with 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 risks 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 our collateral position. Although management believes that the allowance for loan losses is adequate to absorb losses as they arise, there can be no assurance that we will not sustain losses in any given period which could be substantial in relation to, or greater than, the size of the allowance for loan losses. INVESTMENTS Our principal investments are our investment in the common stock of our bank and the common securities of the trust. Our funds may be invested from time to time in various debt instruments, including obligations of or guaranteed by the United States, general obligations of a state or political subdivision or an agency of a state or political subdivision, banker's acceptances or certificates of deposit of United States commercial 47 51 banks, or commercial paper of United States issuers rated in the highest category by a nationally-recognized investment rating service. We are permitted to make unlimited portfolio investments in equity securities and to make equity investments in subsidiary corporations engaged in certain non-banking activities, including 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 our bank or acquired for its future use. However, we have no present plans to make any of these equity investments. Our Board of Directors may alter our investment policy at any time without shareholder approval. Our 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, our bank is prohibited from investing in equity securities. Under one exception, in certain circumstances and with the prior approval of the FDIC, our 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. Our bank has no present plans to make such an investment. Real estate acquired by our bank in satisfaction of or foreclosure upon loans may be held by our bank. Our bank is also permitted to invest in such real estate as is necessary for the convenient transaction of its business. Our bank's Board of Directors may alter the investment policy without shareholder approval at any time. COMPETITION Our primary market area for loans and core deposits is the Kent and Ottawa Counties of western Michigan, which includes the City of Grand Rapids, the second largest city in the State of Michigan. We face substantial competition in all phases of our operations from a variety of different competitors. We compete for deposits, loans and other financial services with numerous Michigan-based and out-of-state banks, thrifts, credit unions and other financial institutions as well as other entities that provide financial services. Some of the financial institutions and financial service organizations with which we compete are not subject to the same degree of regulation as we are. Most of our competitors have been in business for many years, have established customer bases, are larger, have substantially higher lending limits than we do, and offer branch networks and other services which we do not, including brokerage, insurance, trust, mutual fund and international banking services. Most of these entities have greater capital resources than we do, 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 we do. Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which we conduct our business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. PROPERTIES Our bank leases a one story building in downtown Grand Rapids, Michigan for use as its main office and our 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 48 52 facility, which commenced in 1997, has an initial term of ten years, and 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. Our 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 our 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 our 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 our 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 our administration function. The facilities, which will be owned by our bank, are scheduled to open later this year. The location of these facilities will be on the southeast corner of 56th Street and Byron Center Avenue, Wyoming, Michigan. EMPLOYEES As of June 30, 2001, we employed 72 full-time and 15 part-time persons. We believe that our relations with our employees are good. LEGAL PROCEEDINGS From time to time, we may be involved in various legal proceedings that are incidental to our business. In the opinion of management, we are not a party to any current legal proceedings that are material to our financial condition, either individually or in the aggregate. 49 53 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 9,000,000 shares of common stock and 1,000,000 shares of preferred stock. As of the date of this prospectus, there are 3,112,702 shares of common stock issued and outstanding. We have not issued any shares of preferred stock. Michigan law allows our Board of Directors to issue additional shares of stock up to the total amount of common stock and preferred stock authorized without obtaining the prior approval of our shareholders. In some circumstances, the rules of the Nasdaq National Market, on which our common stock is quoted, may require that we obtain shareholder approval before issuing shares. PREFERRED STOCK Our Board of Directors is authorized to issue preferred stock, in one or more series, from time to time, with such voting powers, full or limited but not to exceed one vote per share, or without voting powers, and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as may be provided in the resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: - the number of shares and designation of such series; - the dividend rate and whether dividends are to be cumulative; - whether shares are to be redeemable, and, if so, whether redeemable for cash, property or rights; - the rights to which the holders of shares shall be entitled, and the preferences, if any, over any other series; - whether the shares shall be subject to the operation of a purchase, retirement or sinking fund, and, if so, upon what conditions; - whether the shares shall be convertible into or exchangeable for shares of any other class or of any other series of any class of capital stock and the terms and conditions of such conversion or exchange; - the voting powers, full or limited, if any, of the shares; - whether the issuance of any additional shares, or of any shares of any other series, shall be subject to restrictions as to issuance, or as to the powers, preferences or rights of any such other series; and - any other preferences, privileges and powers and relative, participating, optional or other special rights and qualifications, limitations or restrictions. 50 54 COMMON STOCK Dividend Rights Subject to any prior rights of any holders of preferred stock then outstanding, the holders of our common stock will be entitled to dividends when, as and if declared by our Board of Directors out of funds legally available for dividends. Under Michigan law, dividends may be legally declared or paid only if after the distribution we can pay our debts as they come due in the usual course of business and our total assets equal or exceed the sum of our liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock then outstanding whose preferential rights are superior to those receiving the distribution. Voting Rights Subject to the rights, if any, of holders of shares of our preferred stock then outstanding, all voting rights are vested in the holders of shares of our common stock. Each share of common stock entitles the holder to one vote on all matters, including the election of directors. Our shareholders do not have cumulative voting rights. Preemptive Rights Holders of common stock do not have preemptive rights. Liquidation Rights Subject to any rights of any preferred stock then outstanding, holders of our common stock are entitled to share on a pro rata basis in our net assets which remain after satisfaction of all liabilities. Transfer Agent State Street Bank & Trust Company of Boston, Massachusetts, serves as the transfer agent of our common stock. We are in the process of transitioning to EquiServe Trust Company, N.A. of Canton, Massachusetts. CERTAIN CHARTER PROVISIONS The following provisions of our Articles of Incorporation may delay, defer, prevent, or make it more difficult for a person to acquire us or to change control of our Board of Directors, reducing our vulnerability to an unsolicited takeover attempt. Classification of the Board of Directors Our Articles of Incorporation provide that our Board of Directors is divided into three classes with staggered terms; each class to be as nearly equal in number as possible. Each director is elected for a three year term. Approximately one-third of the Board positions are filled by a shareholder vote each year. Our Articles of Incorporation provide that the number of directors shall be fixed by a majority of the Board, but shall be no fewer than six and no more than fifteen members. 51 55 Removal of Directors The Michigan Business Corporation Act provides that, unless the articles of incorporation otherwise provide, shareholders may remove a director or the entire Board of Directors with or without cause. Our Articles of Incorporation provide that a director may be removed only for cause and only by the affirmative vote of the holders of a majority of the voting power of all the shares of the company entitled to vote generally in the election of directors. Filling Vacancies on the Board of Directors Our Articles of Incorporation provide that any vacancies in the Board, or newly created director positions, may be filled by vote of the directors then in office. A new director chosen to fill a vacancy on the Board of Directors will serve for the remainder of the full term of the class in which the vacancy occurred. Nominations of Director Candidates Our Articles of Incorporation include a provision governing nominations of director candidates. Nominations for the election of directors may be made by the Board of Directors, a nominating committee appointed by the Board of Directors, or any shareholder entitled to vote for directors. In the case of a shareholder nomination, the Articles of Incorporation provide certain procedures that must be followed. A shareholder intending to nominate candidates for election must deliver written notice containing certain specified information to the Secretary of the company at least sixty (60) days but not more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of shareholders. Certain Shareholder Action Our Articles of Incorporation require that any shareholder action must be taken at an annual or special meeting of shareholders, that any meeting of shareholders must be called by the Board of Directors or the Chairman of the Board, and, unless otherwise provided by law, prohibit shareholder action by written consent. Our shareholders are not permitted to call a special meeting of shareholders or require that the Board call such a special meeting. The Michigan Business Corporation Act permits shareholders holding 10% or more of all of the shares entitled to vote at a meeting to request the Circuit Court of the County in which our principal place of business or registered office is located to order a special meeting of shareholders for good cause shown. Increased Shareholders Vote for Alteration, Amendment or Repeal of Article Provisions Our Articles of Incorporation require the affirmative vote of the holders of at least 66 2/3 percent of the voting stock of the company entitled to vote generally in the election of directors for the alteration, amendment or repeal of, or the adoption of any provision inconsistent with the foregoing provisions of our Articles of Incorporation. 52 56 CERTAIN ANTI-TAKEOVER PROVISIONS Michigan Fair Price Act Certain provisions of the Michigan Business Corporation Act establish a statutory scheme similar to the supermajority and fair price provisions found in many corporate charters (the "Fair Price Act"). The Fair Price Act provides that a supermajority vote of 90 percent of the shareholders and no less than two-thirds of the votes of noninterested shareholders must approve a "business combination." The Fair Price Act defines a "business combination" to encompass any merger, consolidation, share exchange, sale of assets, stock issue, liquidation, or reclassification of securities involving an "interested shareholder" or certain "affiliates." An "interested shareholder" is generally any person who owns 10 percent or more of the outstanding voting shares of the company. An "affiliate" is a person who directly or indirectly controls, is controlled by, or is under common control with, a specified person. The supermajority vote required by the Fair Price Act does not apply to business combinations that satisfy certain conditions. These conditions include, among others: (i) the purchase price to be paid for the shares of the company in the business combination must be at least equal to the highest of either (a) the market value of the shares or (b) the highest per share price paid by the interested shareholder within the preceding two-year period or in the transaction in which the shareholder became an interested shareholder, whichever is higher; (ii) once becoming an interested shareholder, the person may not become the beneficial owner of any additional shares of the company except as part of the transaction which resulted in the interested shareholder becoming an interested shareholder or by virtue of proportionate stock splits or stock dividends; and (iii) five years must have elapsed since the person involved became an interested shareholder. The requirements of the Fair Price Act do not apply to business combinations with an interested shareholder that the Board of Directors has approved or exempted from the requirements of the Fair Price Act by resolution prior to the time that the interested shareholder first became an interested shareholder. Control Share Act The Michigan Business Corporation Act regulates the acquisition of "control shares" of large public Michigan corporations (the "Control Share Act"). The Control Share Act establishes procedures governing "control share acquisitions." A control share acquisition is defined as an acquisition of shares by an acquiror which, when combined with other shares held by that person or entity, would give the acquiror voting power, alone or as part of a group, at or above any of the following thresholds: 20 percent, 33 1/3 percent or 50 percent. Under the Control Share Act, an acquiror may not vote "control shares" unless the corporation's disinterested shareholders (defined to exclude the acquiring person, officers of the target corporation, and directors of the target corporation who are also employees of the corporation) vote to confer voting rights on the control shares. The Control Share Act does not affect the voting rights of shares owned by an acquiring person prior to the control share acquisition. The Control Share Act entitles corporations to redeem control shares from the acquiring person under certain circumstances. In other cases, the Control Share Act 53 57 confers dissenters' rights upon all of the corporation's shareholders except the acquiring person. INDEMNIFICATION OF DIRECTORS AND OFFICERS Our Articles of Incorporation provide that we shall indemnify our present and past directors, officers, and such other persons as the Board of Directors may authorize to the full extent permitted by law. Our Bylaws contain indemnification provisions concerning third party actions as well as actions in the right of the company. The Bylaws provide that we shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the company) by reason of the fact that he or she is or was a director or officer of the company or while serving as such a director or officer, is or was serving at the request of the company as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorney's fees), judgments, penalties, fees and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the company or its shareholders and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Federal Deposit Insurance Corporation regulations impose limitations on indemnification payments which could restrict, in certain circumstances, payments by us or our bank to our respective directors or officers otherwise permitted under the Michigan Business Corporation Act or the Michigan Banking Code. With respect to derivative actions, the Bylaws provide that we shall indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the company to procure a judgment in its favor by reason of the fact that he or she is or was a director or officer of the company, or while serving as such a director or officer, is or was serving at the request of the company as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorney's fees) and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the company or its shareholders. No indemnification is provided in the Bylaws in respect of any claim, issue or matter in which such person has been found liable to us except to the extent that a court of competent jurisdiction determines upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the company pursuant to the provisions discussed above or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. 54 58 Under an insurance policy maintained by us, our directors and officers are insured within the limits and subject to the limitations of the policy, against specified expenses in connection with the defense of specified claims, actions, suits or proceedings, and specified liabilities which might be imposed as a result of claims, actions, suits or proceedings, which may be brought against them by reason of being or having been directors and officers of our company. Limitation of Director Liability The Michigan Business Corporation Act permits corporations to limit the personal liability of their directors in certain circumstances. Our Articles of Incorporation provide that our directors shall not be personally liable to us or our shareholders for monetary damages for breach of the director's fiduciary duty. However, they do not eliminate or limit the liability of a director for any breach of a duty, act or omission for which the elimination or limitation of liability is not permitted by the Michigan Business Corporation Act, currently including, without limitation, the following: (1) breach of the director's duty of loyalty to us or our shareholders; (2) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of the law; (3) illegal loans, distributions of dividends or assets, or stock purchases as described in Section 551(1) of the Michigan Business Corporation Act; and (4) transactions from which the director derived an improper personal benefit. 55 59 UNDERWRITING Subject to the terms and conditions of the underwriting agreement among us and the underwriters named below, for whom Stifel, Nicolaus & Company, Incorporated, Howe Barnes Investments, Inc. and Tucker Anthony Incorporated are acting as representatives, the underwriters have severally agreed to purchase from us, and we have agreed to sell to them, an aggregate of 1,200,000 shares of common stock in the amounts set forth below opposite their respective names.
NUMBER OF UNDERWRITERS SHARES ------------ --------- Stifel, Nicolaus & Company, Incorporated.................... Howe Barnes Investments, Inc. .............................. Tucker Anthony Incorporated................................. --------- Total.................................................. 1,200,000 =========
Under the terms and conditions of the underwriting agreement, the underwriters are committed to accept and pay for all of the shares, if any are taken. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or, in certain cases, the underwriting agreement may be terminated. In the underwriting agreement, the obligations of the underwriters are subject to approval of certain legal matters by their counsel, including, without limitation, the authorization and the validity of the shares, and to various other conditions contained in the underwriting agreement, such as receipt by the underwriters of officers' certificates and legal opinions. The underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus, and to certain securities dealers (who may include the underwriters) at such price, less a concession not in excess of $ per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the offering, the offering price and other selling terms may from time to time be changed by the underwriters. We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase up to 180,000 additional shares of our common stock solely to cover over-allotments, if any, at the same price per share to be paid by the underwriters for the other shares of common stock in this offering. If the underwriters purchase any additional shares under this option, each underwriter will be committed to purchase the additional shares in approximately the same proportion allocated to them in the table above. The following table shows the underwriting fees to be paid to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.
NO EXERCISE FULL EXERCISE ----------- ------------- Per Share.............................................. $ $ Total............................................. $ $
56 60 In connection with the offering, the underwriters may engage in transactions that are intended to stabilize, maintain or otherwise affect the price of the common stock during and after the offering, such as the following: - The underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than have been sold to them; - The underwriters may elect to cover any such short position by purchasing shares of common stock in the open market or by exercising the over-allotment option; - The underwriters may stabilize or maintain the price of the common stock by bidding; - The underwriters may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in the offering are reclaimed if shares of common stock previously distributed in the offering are repurchased in connection with stabilization transactions or otherwise; and - The underwriters may engage in passive market-making transactions. The effect of these transactions may be to stabilize or maintain the market price of the common stock at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales of the common stock. The magnitude or effect of any stabilization or other transactions is uncertain. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. In connection with this offering, some underwriters may also engage in passive market making transactions in the common stock on the Nasdaq National Market. Passive market making consists of displaying bids on the Nasdaq National Market limited by the prices of independent market makers and effecting purchases limited by those prices in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases that each passive market maker may make and the displayed size of each bid. Passive market making may stabilize the market price of the common stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. We have agreed to indemnify the underwriters and their controlling persons against specified liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments that the underwriters may be required to make for such liabilities. We and each of our executive officers and directors have agreed that for a period of 90 days after the date of this prospectus, we and they will not, without the prior written consent of Stifel, Nicolaus & Company, Incorporated, directly or indirectly offer for sale, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer (subject to certain exceptions) any shares of our common stock or securities convertible into or exchangeable or exercisable for shares of our common stock. Certain of the underwriters engage in transactions with, and from time to time, have performed services for, us and our subsidiaries in the ordinary course of business. 57 61 LEGAL MATTERS The validity of the shares of our common stock offered by this prospectus are being passed upon for us by Dickinson Wright PLLC, Detroit and Grand Rapids, Michigan. Certain legal matters relating to this offering are being passed upon for the underwriters by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois. EXPERTS Our consolidated financial statements as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998, included in this prospectus have been audited by Crowe, Chizek and Company LLP, independent public accountants, as indicated in their report accompanying the financial statements. These financial statements are included in reliance upon this report given upon the authority of Crowe, Chizek and Company LLP as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We file reports, proxy statements and other information with the SEC, as required. You may read and copy the reports, proxy statements and other information at the public reference room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 may also provide, at prescribed rates, copies of such material. You may obtain information on the operation of the SEC's public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the SEC. The address of the site is http://www.sec.gov. You may also inspect reports and other information concerning us at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. Our web site address is: http://www.mercbank.com. We have filed a registration statement with the SEC in accordance with the provisions of the Securities Act of 1933. This prospectus does not contain all of the information set forth in the registration statement, certain portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about this offering and us, reference is made to the registration statement, including the exhibits filed as a part of this registration statement. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents, which we have filed with the SEC, are incorporated by reference in this prospectus: (1) Our annual report on Form 10-K for the fiscal year ended December 31, 2000; and (2) Our reports on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001. 58 62 All documents that we file with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this prospectus and before the termination of this offering of the shares of our common stock shall be deemed incorporated by reference in this prospectus and to be a part of this prospectus from the respective dates of filing these documents. We will provide without charge to each person to whom a copy of this prospectus is delivered, upon the person's written or oral request, a copy of any and all of the information incorporated by reference in this prospectus, other than exhibits to these documents, unless the exhibits are specifically incorporated by reference into the information that this prospectus incorporates. Requests should be directed in writing to Robert B. Kaminski, Senior Vice President and Secretary, at Mercantile Bank Corporation, 216 North Division Avenue, Grand Rapids, Michigan 49503; or by phone at (616) 242-9000. Any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed modified, superseded or replaced for purposes of this prospectus to the extent that a statement contained in this prospectus or in any subsequently filed document that also is or is deemed to be incorporated by reference in this prospectus modifies, supersedes or replaces that statement. Any statement that is modified, superseded or replaced shall not be deemed, except as so modified, superseded or replaced, to constitute a part of this prospectus. 59 63 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS MERCANTILE BANK CORPORATION Report of Independent Auditors.............................. F-2 Consolidated Financial Statements Consolidated Balance Sheets............................... F-3 Consolidated Statements of Income......................... F-4 Consolidated Statements of Changes in Shareholders' Equity................................................. F-5 Consolidated Statements of Cash Flows..................... F-6 Notes to Consolidated Financial Statements................ F-7
F-1 64 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 auditing standards generally accepted in the United States of America. 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 accounting principles generally accepted in the United States of America. As disclosed in Note 1, the Corporation changed its method of accounting for start-up costs in 1999 to comply with new accounting guidance. Crowe, Chizek and Company LLP Grand Rapids, Michigan January 19, 2001, except Note 15 which is dated March 22, 2001 F-2 65 MERCANTILE BANK CORPORATION CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, DECEMBER 31, 2001 2000 1999 ------------ ------------ ------------ (UNAUDITED) ASSETS Cash and due from banks................. $ 14,719,854 $ 11,692,825 $ 6,570,631 Short term investments.................. 141,552 108,846 579,725 Federal funds sold...................... 18,400,000 6,300,000 6,500,000 ------------ ------------ ------------ Total cash and cash equivalents...... 33,261,406 18,101,671 13,650,356 Securities available for sale........... 47,040,262 45,147,493 34,115,303 Securities held to maturity (fair value of $20,398,446 at June 30, 2001 (unaudited), $14,942,311 at December 31, 2000 and $6,982,329 at December 31, 1999)............................ 19,799,934 14,524,341 7,056,492 Federal Home Loan Bank stock............ 784,900 784,900 784,900 Total loans............................. 508,110,547 429,804,105 308,006,476 Allowance for loan losses............... (7,462,092) (6,301,805) (4,620,469) ------------ ------------ ------------ Total loans, net..................... 500,648,455 423,502,300 303,386,007 Premises and equipment -- net........... 6,248,243 4,119,385 3,461,187 Accrued interest receivable............. 2,743,594 2,758,054 1,842,874 Other assets............................ 7,360,880 3,808,218 3,739,969 ------------ ------------ ------------ Total assets......................... $617,887,674 $512,746,362 $368,037,088 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing.................. $ 38,381,197 $ 27,368,257 $ 19,513,231 Interest-bearing..................... 481,840,849 398,372,056 275,315,741 ------------ ------------ ------------ Total........................... 520,222,046 425,740,313 294,828,972 Securities sold under agreements to repurchase........................... 34,787,643 32,151,391 26,607,289 Other borrowed money.................... 111,627 56,510 13,755 Accrued expenses and other liabilities.......................... 6,319,043 6,944,262 2,619,203 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures.............. 16,000,000 16,000,000 16,000,000 ------------ ------------ ------------ Total liabilities.................... 577,440,359 480,892,476 340,069,219 Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, none issued Common stock, no par value; 9,000,000 shares authorized; 3,112,702, 2,596,102 and 2,472,500 shares outstanding at June 30, 2001 (unaudited), December 31, 2000 and 1999................................. 36,684,120 29,935,401 28,181,798 Retained earnings....................... 3,320,457 1,628,277 587,639 Accumulated other comprehensive income (loss)............................... 442,738 290,208 (801,568) ------------ ------------ ------------ Total shareholders' equity........... 40,447,315 31,853,886 27,967,869 ------------ ------------ ------------ Total liabilities and shareholders' equity............................. $617,887,674 $512,746,362 $368,037,088 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 66 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------- --------------------------------------- 2001 2000 2000 1999 1998 ---- ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Interest income Loans, including fees.......... $19,426,045 $14,994,797 $33,056,700 $20,410,153 $ 9,007,668 Investment securities.......... 2,078,589 1,442,533 3,206,105 1,925,065 880,639 Federal funds sold............. 360,021 271,768 567,379 405,659 256,422 Short term investments......... 2,237 3,351 5,464 25,822 23,487 ----------- ----------- ----------- ----------- ----------- Total interest income........ 21,866,892 16,712,449 36,835,648 22,766,699 10,168,216 Interest expense Deposits....................... 13,278,622 9,553,238 21,619,499 12,039,907 5,140,788 Short term borrowings.......... 641,362 563,640 1,368,901 835,297 488,430 Long term borrowings........... 787,440 794,157 1,571,876 455,216 0 ----------- ----------- ----------- ----------- ----------- Total interest expense....... 14,707,424 10,911,035 24,560,276 13,330,420 5,629,218 ----------- ----------- ----------- ----------- ----------- NET INTEREST INCOME.............. 7,159,468 5,801,414 12,275,372 9,436,279 4,538,998 Provision for loan losses........ 1,180,000 945,000 1,854,000 1,960,900 2,571,800 ----------- ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 5,979,468 4,856,414 10,421,372 7,475,379 1,967,198 Noninterest income Service charges on accounts.... 226,158 158,640 346,131 201,796 82,170 Letter of credit fees.......... 150,728 116,036 391,143 267,753 159,064 Mortgage loan referral fees.... 178,412 68,890 174,579 208,042 209,667 Gain on the sale of loans...... 0 40,197 49,975 13,047 0 Gain (loss) on sale of securities................... 99,594 (275,321) (275,321) 0 128 Interest rate swap termination fee.......................... 0 275,000 275,000 0 0 Other income................... 120,065 105,749 230,395 156,905 37,149 ----------- ----------- ----------- ----------- ----------- Total noninterest income..... 774,957 489,191 1,191,902 847,543 488,178 Noninterest expense Salaries and benefits.......... 2,645,519 2,064,764 4,274,262 3,256,456 1,891,264 Occupancy...................... 252,391 261,073 510,357 412,531 304,231 Furniture and equipment........ 211,449 218,652 440,378 350,131 176,756 Data processing................ 196,408 203,120 435,433 335,079 170,990 Advertising.................... 126,000 109,000 196,763 157,973 110,431 Loan processing cost........... 37,389 37,238 74,855 63,582 153,835 Other expense.................. 866,090 786,994 1,583,659 1,312,203 756,916 ----------- ----------- ----------- ----------- ----------- Total noninterest expenses... 4,335,246 3,680,841 7,515,707 5,887,955 3,564,423 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE FEDERAL INCOME TAX AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE...................... $ 2,419,180 $ 1,664,764 $ 4,097,567 $ 2,434,967 $(1,109,047) Federal income tax expense....... 727,000 528,000 1,303,000 292,000 0 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE...................... 1,692,180 1,136,764 2,794,567 2,142,967 (1,109,047) Cumulative effect of change in accounting principle (net of taxes)......................... 0 0 0 (42,210) 0 ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS)................ $ 1,692,180 $ 1,136,764 $ 2,794,567 $ 2,100,757 $(1,109,047) =========== =========== =========== =========== =========== Earnings (loss) per share before cumulative effect of change in accounting principle: Basic........................ $ 0.58 $ 0.44 $ 1.08 $ 0.83 $ (0.55) =========== =========== =========== =========== =========== Diluted...................... $ 0.58 $ 0.44 $ 1.07 $ 0.82 $ (0.55) =========== =========== =========== =========== =========== Per share cumulative effect of change in accounting principle...................... $ 0.00 $ 0.00 $ 0.00 $ 0.02 $ 0.00 =========== =========== =========== =========== =========== Earnings (loss) per share: Basic........................ $ 0.58 $ 0.44 $ 1.08 $ 0.81 $ (0.55) =========== =========== =========== =========== =========== Diluted...................... $ 0.58 $ 0.44 $ 1.07 $ 0.80 $ (0.55) =========== =========== =========== =========== =========== Average shares outstanding....... 2,895,586 2,596,102 2,596,102 2,596,102 2,003,018 =========== =========== =========== =========== ===========
F-4 67 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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............... 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 Common stock sale............... 6,748,719 6,748,719 Comprehensive income: Net income (unaudited)........ 1,692,180 1,692,180 Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effect..................... 152,530 152,530 ----------- Total comprehensive income................... 1,844,710 ----------- ----------- ---------- ----------- BALANCES, JUNE 30, 2001......... $36,684,120 $ 3,320,457 $ 442,738 $40,447,315 =========== =========== ========== ===========
See accompanying notes to consolidated financial statements. F-5 68 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, --------------------------- --------------------------------------------- 2001 2000 2000 1999 1998 ------------ ------------ ------------- ------------- ------------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)....................... $ 1,692,180 $ 1,136,764 $ 2,794,567 $ 2,100,757 $ (1,109,047) Adjustments to reconcile net income (loss) to net cash from operating activities Depreciation and amortization......... 201,424 296,083 590,087 538,996 274,364 Provision for loan losses............. 1,180,000 945,000 1,854,000 1,960,900 2,571,800 Gain on sale of loans................. 0 (40,197) (49,975) (13,047) 0 (Gain)/loss on sale of securities..... (99,594) 275,321 275,321 0 (128) Net change in Accrued interest receivable......... 14,460 (340,263) (915,180) (695,042) (1,095,021) Other assets........................ (3,705,319) (353,451) (827,706) (2,869,730) (432,695) Accrued expenses and other liabilities....................... (625,219) 1,733,966 4,325,059 2,118,482 208,517 ------------ ------------ ------------- ------------- ------------- Net cash from operating activities...................... (1,342,068) 3,653,223 8,046,173 3,141,316 417,790 CASH FLOWS FROM INVESTING ACTIVITIES Loan originations and payments, net..... (78,326,155) (66,977,283) (121,920,318) (123,354,358) (171,857,839) Purchase of: Securities available for sale......... (17,169,816) (11,881,639) (19,816,814) (17,765,304) (28,320,575) Securities held to maturity........... (5,379,838) (4,763,302) (7,472,674) (7,056,858) 0 Federal Home Loan Bank stock.......... 0 0 0 (784,900) 0 Premises and equipment................ (2,344,810) (141,364) (1,098,833) (1,926,748) (1,082,815) Proceeds from: Sales of available for sale securities.......................... 5,361,961 6,718,120 6,718,120 0 1,000,313 Maturities and repayments of available for sale securities................. 10,337,140 1,761,543 3,497,789 6,526,816 6,203,087 Maturities and repayments of held to maturity securities................. 101,500 0 0 0 0 ------------ ------------ ------------- ------------- ------------- Net cash from investing activities...................... (87,420,018) (75,283,925) (140,092,730) (144,361,352) (194,057,829) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits................ 94,481,733 66,783,871 130,911,341 122,830,953 162,309,755 Proceeds from the sale of trust preferred securities.................. 0 0 0 16,000,000 0 Net proceeds from sale of common stock................................. 6,748,719 0 0 0 14,300,826 Net increase in other borrowed money.... 55,117 20,236 42,755 13,755 0 Fractional shares purchased............. 0 0 (326) 0 0 Net increase in securities sold under agreements to repurchase.............. 2,636,252 2,470,559 5,544,102 9,569,688 16,382,154 ------------ ------------ ------------- ------------- ------------- Net cash from financing activities...................... 103,921,821 69,274,666 136,497,872 148,414,396 192,992,735 ------------ ------------ ------------- ------------- ------------- Net change in cash and cash equivalents... $ 15,159,735 $ (2,356,036) $ 4,451,315 $ 7,194,360 $ (647,304) Cash and cash equivalents at beginning of period.................................. 18,101,671 13,650,356 13,650,356 6,455,996 7,103,300 ------------ ------------ ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 33,261,406 $ 11,294,320 $ 18,101,671 $ 13,650,356 $ 6,455,996 ============ ============ ============= ============= ============= Supplemental disclosures of cash flow information Cash paid during the year for: Interest.............................. $ 15,016,664 $ 9,000,105 $ 20,382,032 $ 11,796,860 $ 5,237,768 Federal income tax.................... 1,388,110 792,000 1,693,000 1,620,773 165,000 Cash received during the year for: Termination of interest rate swap..... 0 275,000 275,000 0 0
See accompanying notes to consolidated financial statements. F-6 69 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 accounting principles generally accepted in the United States of America, management makes F-7 70 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses and the fair values of financial instruments are particularly subject to change. CASH FLOW REPORTING: Cash and cash equivalents include cash on hand, demand deposits with other financial institutions, short-term investments (securities with daily put provisions) and federal funds sold. Cash flows are reported net for customer loan and deposit transactions, interest-bearing time deposits with other financial institutions and short-term borrowings with maturities of 90 days or less. SECURITIES: Securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities available for sale consist of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value and the related unrealized holding gain or loss is reported, net of related income tax effects, as a separate component of shareholders' equity, until realized. Other securities such as Federal Home Loan Bank stock are carried at cost. Premiums and discounts on securities are recognized in interest income using the interest method over the estimated life of the security. Gains and losses on the sale of securities available for sale are determined based upon amortized cost of the specific security sold. 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 F-8 71 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 financial instruments are recorded when they are funded. F-9 72 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2001, a new accounting standard requires 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. F-10 73 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- INVESTMENT SECURITIES The amortized cost and fair values of investment securities at the end of the period were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUES ----------- ---------- ----------- ----------- AVAILABLE FOR SALE June 30, 2001 U.S. Government agency debt obligations............... $ 2,964,547 $ 5,940 $ (4,547) $ 2,965,940 Mortgage-backed securities... 42,404,977 734,454 (81,194) 43,058,237 Municipal revenue bonds...... 1,000,000 16,085 0 1,016,085 ----------- -------- ----------- ----------- $46,369,524 $756,479 $ (85,741) $47,040,262 =========== ======== =========== =========== December 31, 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 =========== ======== =========== =========== December 31, 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 =========== ======== =========== =========== December 31, 1998 U.S. Treasury securities..... $ 4,506,774 $ 16,376 $ 0 $ 4,523,120 U.S. Government agency debt obligations............... 12,015,020 45,207 (29,437) 12,030,790 Mortgage-backed securities... 7,590,648 21,104 (5,415) 7,606,337 ----------- -------- ----------- ----------- $24,112,412 $ 82,687 $ (34,852) $24,160,247 =========== ======== =========== =========== HELD TO MATURITY June 30, 2001 Municipal general obligation bonds..................... $16,946,580 $584,394 $ (28,512) $17,502,462 Municipal revenue bonds...... 2,853,354 46,887 (4,257) 2,895,984 ----------- -------- ----------- ----------- $19,799,934 $631,281 $ (32,769) $20,398,446 =========== ======== =========== =========== December 31, 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 =========== ======== =========== =========== December 31, 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 =========== ======== =========== ===========
F-11 74 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and fair values of debt investment securities at June 30, 2001 (unaudited) and December 31, 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.
HELD-TO-MATURITY AVAILABLE-FOR-SALE ------------------------------------ ------------------------------------ WEIGHTED WEIGHTED AVERAGE AMORTIZED FAIR AVERAGE AMORTIZED FAIR YIELD COST VALUE YIELD COST VALUE -------- ----------- ----------- -------- ----------- ----------- June 30, 2001 (Unaudited) Due in one year or less... NA $ 0 $ 0 6.35% $ 500,000 $ 503,565 Due from one to five years................... 6.62% 3,346,380 3,462,939 7.00 1,500,000 1,518,460 Due from five to ten years................... 6.96 5,157,926 5,401,026 6.23 993,818 992,970 Due after ten years....... 7.23 11,295,628 11,534,481 6.55 970,729 967,030 Mortgage-backed........... NA 0 0 6.77 42,404,977 43,058,237 ----------- ----------- ----------- ----------- $19,799,934 $20,398,446 6.76 $46,369,524 $47,040,262 =========== =========== =========== =========== December 31, 2000 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 0 0 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 2001 (unaudited), investment securities with an aggregated amortized cost of $5,262,368 were sold, resulting in an aggregate realized net gain of $99,594. 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 $39,347,116, $40,015,759 and $28,733,258 at June 30, 2001 (unaudited), December 31, 2000 and 1999, respectively. F-12 75 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- LOANS AND ALLOWANCE FOR LOAN LOSSES Loans were as follows:
JUNE 30, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 -------------------- -------------------- -------------------- -------------------- BALANCE % BALANCE % BALANCE % BALANCE % ------------ ----- ------------ ----- ------------ ----- ------------ ----- (UNAUDITED) Real Estate: Construction and land development..................... $ 42,934,475 8.5% $ 38,815,436 9.0% $ 37,224,847 12.1% $ 13,656,284 7.4% Secured by 1-4 family properties...................... 35,097,998 6.9 33,708,709 7.8 22,535,386 7.3 10,655,703 5.8 Secured by multi-family properties...................... 2,016,892 0.4 2,127,047 0.5 2,326,684 0.8 2,520,747 1.4 Secured by nonfarm nonresidential properties...................... 239,372,860 47.1 197,018,062 45.9 157,686,466 51.2 100,742,487 54.5 Commercial.......................... 181,473,660 35.7 151,344,028 35.2 83,908,726 27.2 55,071,347 29.8 Consumer............................ 7,214,662 1.4 6,790,823 1.6 4,324,367 1.4 2,098,034 1.1 ------------ ----- ------------ ----- ------------ ----- ------------ ----- $508,110,547 100.0% $429,804,105 100.0% $308,006,476 100.0% $184,744,602 100.0% ============ ===== ============ ===== ============ ===== ============ ===== DECEMBER 31, 1997 ------------------- BALANCE % ----------- ----- Real Estate: Construction and land development..................... $ 0 0.0% Secured by 1-4 family properties...................... 171,872 1.3 Secured by multi-family properties...................... 0 0.0 Secured by nonfarm nonresidential properties...................... 5,421,302 42.1 Commercial.......................... 7,278,664 56.5 Consumer............................ 14,925 0.1 ----------- ----- $12,886,763 100.0% =========== =====
Activity in the allowance for loan losses is as follows:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------- -------------------------------------------------- 2001 2000 2000 1999 1998 1997 ----------- ----------- ---------- ---------- ---------- -------- (UNAUDITED) (UNAUDITED) Beginning balance................... $6,301,805 $4,620,469 $4,620,469 $2,765,100 $ 193,300 $ 0 Provision charged to operating expense........................... 1,180,000 945,000 1,854,000 1,960,900 2,571,800 193,300 Charge-offs......................... (64,831) (46,384) (185,876) (108,531) 0 0 Recoveries.......................... 45,118 8,400 13,212 3,000 0 0 ---------- ---------- ---------- ---------- ---------- -------- Ending balance.................. $7,462,092 $5,527,485 $6,301,805 $4,620,469 $2,765,100 $193,300 ========== ========== ========== ========== ========== ========
Impaired loans were as follows:
2001 2000 1999 ----------- ------- ------- (UNAUDITED) Period end loans with no allocated allowance for loan losses.................................................... $ 0 $ 0 $ 0 Period end loans with allocated allowance for loan losses... 174,447 94,892 0 -------- ------- ------- $174,447 $94,892 $ 0 ======== ======= ======= Amount of the allowance for loan losses allocated........... $ 31,933 $20,000 $ 0 Average of impaired loans during the period................. 134,670 138,518 24,347
F-13 76 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Bank did not recognize any interest income on impaired loans during 2001 (unaudited), 2000, 1999 or 1998. Concentrations within the loan portfolio were as follows:
DECEMBER 31, --------------------------------------------------- JUNE 30, 2001 2000 1999 ------------------------ ------------------------ ------------------------ PERCENTAGE PERCENTAGE PERCENTAGE OF OF OF LOAN LOAN LOAN BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO ----------- ---------- ----------- ---------- ----------- ---------- (UNAUDITED) Commercial real estate loans to operators of non- residential buildings.......... $70,718,521 13.9% $62,089,376 14.4% $41,039,899 13.3%
NOTE 4 -- PREMISES AND EQUIPMENT -- NET Premises and equipment are as follows:
DECEMBER 31, ------------------------ JUNE 30, 2001 2000 1999 ------------- ---------- ---------- (UNAUDITED) Land and improvements................... $1,134,860 $1,134,548 $ 443,408 Buildings and leasehold improvements.... 2,137,815 2,128,353 2,111,049 Construction in process................. 2,108,240 220,797 0 Furniture and equipment................. 2,034,214 1,586,621 1,417,086 ---------- ---------- ---------- 7,415,129 5,070,319 3,971,543 Less: accumulated depreciation.......... 1,166,886 950,934 510,356 ---------- ---------- ---------- $6,248,243 $4,119,385 $3,461,187 ========== ========== ==========
F-14 77 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- DEPOSITS Deposits at period end are summarized as follows:
DECEMBER 31, ------------------------------------------------------------------ JUNE 30, 2001 2000 1999 1998 -------------------- -------------------- -------------------- -------------------- BALANCE % BALANCE % BALANCE % BALANCE % ------------ ----- ------------ ----- ------------ ----- ------------ ----- (UNAUDITED) Noninterest-bearing demand............. $ 38,381,197 7.4% $ 27,368,257 6.4% $ 19,513,231 6.6% $ 14,319,290 8.3% Interest-bearing checking........... 14,787,820 2.8 12,968,028 3.1 11,040,426 3.7 7,765,703 4.5 Money market......... 5,285,290 1.0 5,196,217 1.2 5,604,816 1.9 3,822,019 2.2 Savings.............. 40,621,340 7.8 36,331,140 8.6 39,737,096 13.5 28,796,603 16.8 Time, under $100,000........... 6,684,212 1.3 6,164,803 1.4 4,873,222 1.7 3,305,504 1.9 Time, $100,000 and over............... 46,673,333 9.0 38,681,764 9.1 22,573,206 7.7 16,718,705 9.7 ------------ ----- ------------ ----- ------------ ----- ------------ ----- 152,433,192 29.3 126,710,209 29.8 103,341,997 35.1 74,727,824 43.4 Out-of-area time, under $100,000..... 73,799,485 14.2 55,260,216 13.0 71,997,053 24.4 77,847,412 45.3 Out-of-area time, $100,000 and over.. 293,989,369 56.5 243,769,888 57.2 119,489,922 40.5 19,422,783 11.3 ------------ ----- ------------ ----- ------------ ----- ------------ ----- 367,788,854 70.7 299,030,104 70.2 191,486,975 64.9 97,270,195 56.6 ------------ ----- ------------ ----- ------------ ----- ------------ ----- $520,222,046 100.0% $425,740,313 100.0% $294,828,972 100.0% $171,998,019 100.0% ============ ===== ============ ===== ============ ===== ============ =====
Out-of-area certificates of deposit consist of certificates obtained from depositors outside of the primary market area. As of June 30, 2001 (unaudited), out-of-area certificates of deposit totaling $356,379,589, were obtained through brokers, with the remaining $11,409,256 obtained directly from the depositors. 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.
DECEMBER 31, ---------------------------- JUNE 30, 2001 2000 1999 ------------- ------------ ------------ (UNAUDITED) In one year........................... $330,456,548 $291,073,673 $203,685,797 In two years.......................... 62,740,303 49,585,317 13,534,313 In three years........................ 26,271,066 3,195,678 623,293 In four years......................... 1,678,482 22,003 1,090,000 In five years......................... 0 0 0 ------------ ------------ ------------ $421,146,399 $343,876,671 $218,933,403 ============ ============ ============
F-15 78 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table depicts the maturity distribution for certificates of deposit with balances of $100,000 or more.
DECEMBER 31, ---------------------------- JUNE 30, 2001 2000 1999 ------------- ------------ ------------ (UNAUDITED) Up to three months.................... $ 98,415,769 $ 64,938,960 $ 48,761,878 Three months to six months............ 79,743,615 65,612,880 53,506,644 Six months to twelve months........... 88,093,658 107,354,179 32,250,070 Over twelve months.................... 74,409,660 44,545,633 7,544,536 ------------ ------------ ------------ $340,662,702 $282,451,652 $142,063,128 ============ ============ ============
NOTE 6 -- SHORT-TERM BORROWINGS Information relating to short-term borrowings, comprised entirely of securities sold under agreements to repurchase, is summarized below:
DECEMBER 31, --------------------------------------- JUNE 30, 2001 2000 1999 1998 ------------- ----------- ----------- ----------- (UNAUDITED) Outstanding balance at year-end................ $34,787,643 $32,151,391 $26,607,289 $17,037,601 Average interest rate at year-end................ 3.49% 4.63% 4.22% 4.20% Average balance during the year.................... 31,691,277 29,190,780 20,229,314 10,305,728 Average interest rate during the year......... 4.08% 4.66% 4.13% 4.72% Maximum month end balance during the year......... 34,787,643 35,473,498 26,607,289 18,498,833
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. F-16 79 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- FEDERAL INCOME TAXES The consolidated provision for income taxes is as follows:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------- --------------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- ---------- ---------- ----------- (UNAUDITED) (UNAUDITED) Current.............. $1,118,573 $ 838,796 $1,913,297 $1,820,858 $ 399,852 Deferred benefit..... (391,573) (310,796) (610,297) (636,480) (1,147,247) Change in valuation allowance.......... 0 0 0 (892,378) 747,395 ---------- --------- ---------- ---------- ----------- Tax expense........ $ 727,000 $ 528,000 $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:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------- ------------------------------------ 2001 2000 2000 1999 1998 ----------- ----------- ---------- --------- --------- (UNAUDITED) (UNAUDITED) Statutory rates....... $ 822,521 $566,020 $1,393,173 $ 827,889 $(377,076) Increase (decrease) from Tax-exempt interest......... (110,473) (45,058) (110,102) (14,972) 0 Valuation allowance........ 0 0 0 (526,565) 365,813 Nondeductible expenses......... 14,952 7,038 19,929 5,648 11,263 --------- -------- ---------- --------- --------- Tax expense...... $ 727,000 $528,000 $1,303,000 $ 292,000 $ 0 ========= ======== ========== ========= =========
F-17 80 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities as of June 30, 2001 (unaudited), December 31, 2000 and 1999:
DECEMBER 31, JUNE 30, ------------------------ 2001 2000 1999 ----------- ---------- ---------- (UNAUDITED) Deferred tax assets Provision for loan losses................. $2,423,526 $2,023,051 $1,392,691 Start-up/pre-opening expenses............. 46,103 59,537 73,973 Deferred loan fees........................ 90,850 91,507 92,822 Unrealized loss on securities available for sale............................... 0 0 412,953 Deferred compensation..................... 38,638 19,213 4,677 Miscellaneous accruals.................... 0 0 5,500 ---------- ---------- ---------- 2,599,117 2,193,308 1,982,616 Deferred tax liabilities Unrealized gain on securities available for sale............................... 228,077 154,000 0 Accretion................................. 10,638 7,978 2,659 Depreciation.............................. 41,351 29,775 21,746 ---------- ---------- ---------- 280,066 191,753 24,405 ---------- ---------- ---------- Net deferred tax asset...................... $2,319,051 $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 2001 (unaudited), 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 after one year and expire ten years from the date of grant. At F-18 81 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2001 (unaudited) and December 31, 2000, there were 95,970 shares authorized for future grants.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------- --------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- --------- --------- --------- (UNAUDITED) (UNAUDITED) Stock options outstanding Beginning.................. 166,526 127,836 127,836 127,836 81,636 Granted.................... 0 8,660 38,690 0 46,200 --------- --------- --------- --------- --------- Ending.................. 166,526 136,496 166,526 127,836 127,836 ========= ========= ========= ========= ========= Options exercisable at period end.............. 120,486 83,736 114,186 80,236 52,674 --------- --------- --------- --------- --------- Minimum exercise price..... $ 9.52 $ 9.52 $ 9.52 $ 9.52 $ 9.52 Maximum exercise price..... 12.98 12.98 12.98 12.98 12.98 Average exercise price..... 11.01 11.01 11.01 10.95 10.95 Average remaining option term.................... 7.2 Years 7.2 Years 7.6 Years 8.0 Years 9.0 Years Estimated fair value of stock options granted:........... $ 36,805 $ 155,003 $ 172,510 Assumptions used: Risk-free interest rate.................. 6.58% 5.99% 4.56% Expected option life.... 10 Years 10 Years 7 Years Expected stock volatility............ 37% 37% 11% Expected dividends...... 0% 0% 0%
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 F-19 82 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) equivalent to the market value of underlying stock at the grant date. No compensation cost was actually recognized for stock options.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------- --------------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- ---------- ---------- ----------- (UNAUDITED) (UNAUDITED) 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......... $1,692,180 $1,136,764 $2,741,602 $2,065,991 $(1,299,991) Basic income (loss) per share before cumulative effect of change in accounting principle......... 0.58 0.44 1.06 0.80 (0.65) Diluted income (loss) per share before cumulative effect of change in accounting principle......... 0.58 0.44 1.05 0.79 (0.65) Pro-forma net income (loss)............ $1,622,170 $1,116,424 $2,741,602 $2,023,781 $(1,299,991) Pro-forma basic income (loss) per share............. 0.56 0.43 1.06 0.78 (0.65) Pro-forma diluted income (loss) per share............. 0.55 0.43 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 December 31, 2000 and 1999, respectively. At June 30, F-20 83 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2001 (unaudited), the Bank had approximately $7,170,000 in loan commitments to directors and executive officers, of which approximately $3,141,000 were outstanding.
DECEMBER 31, JUNE 30, -------------------------- 2001 2000 1999 ----------- ----------- ----------- (UNAUDITED) Beginning balance........................ $ 3,914,000 $ 5,063,000 $ 9,095,000 New loans................................ 427,000 2,035,000 876,000 Repayments............................... (1,132,000) (3,184,000) (4,908,000) ----------- ----------- ----------- Ending balance...................... $ 3,209,000 $ 3,914,000 $ 5,063,000 =========== =========== ===========
Related party deposits and repurchase agreements totaled approximately $14,808,000 at June 30, 2001 (unaudited), $13,173,000 at December 31, 2000 and $14,800,000 at December 31, 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. F-21 84 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Bank's maximum exposure to credit losses for loan commitments and standby letters of credit outstanding was as follows:
DECEMBER 31, JUNE 30, ---------------------------- 2001 2000 1999 ------------ ------------ ------------ (UNAUDITED) Commercial unused lines of credit..... $100,710,929 $ 87,121,094 $ 87,488,616 Unused lines of credit secured by 1-4 family residential properties....... 8,373,692 7,641,057 6,112,897 Credit card unused lines of credit.... 5,534,949 4,578,325 3,419,628 Other consumer unused lines of credit.............................. 2,523,366 2,062,084 3,126,906 Commitments to make loans............. 13,948,400 20,110,500 26,395,600 Standby letters of credit............. 38,274,236 36,889,288 28,963,217 ------------ ------------ ------------ $169,365,572 $158,402,348 $155,506,864 ============ ============ ============
Mercantile was required to have $839,000, $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 June 30, 2001 (unaudited), and December 31, 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 the six months ended June 30, 2001 and 2000 (unaudited) were $81,873 and $79,488. 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 June 30, 2001 (unaudited) and December 31, 2000 are as follows:
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) 2001.................................................. $ 81,870 $ 163,740 2002.................................................. 163,700 163,740 2003.................................................. 163,700 163,740 2004.................................................. 163,700 163,740 2005.................................................. 163,700 163,740 Thereafter............................................ 191,027 272,900 -------- ---------- $927,697 $1,091,600 ======== ==========
NOTE 11 -- BENEFIT PLANS Mercantile established a 401(k) benefit plan effective January 1, 1998, covering substantially all of its employees. Mercantile's 2001 (unaudited), 2000, 1999 and 1998 matching 401(k) contribution charged to expense was $79,805, $135,613, $85,080 and F-22 85 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $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 2001 (unaudited), 2000 and 1999 was $2,455, $2,085 and $625, respectively. NOTE 12 -- FAIR VALUES OF FINANCIAL INSTRUMENTS Carrying amount and estimated fair values of financial instruments were as follows.
DECEMBER 31, JUNE 30, --------------------------------------------------------- 2001 2000 1999 --------------------------- --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUES VALUES VALUES VALUES VALUES VALUES ------------ ------------ ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Financial assets Cash and cash equivalents........ $ 33,261,406 $ 33,261,406 $ 18,101,671 $ 18,101,671 $ 13,650,356 $ 13,650,356 Securities available for sale........... 47,040,262 47,040,262 45,147,493 45,147,493 34,115,303 34,115,303 Securities held to maturity........... 19,799,934 20,398,446 14,524,341 14,942,311 7,056,492 6,982,329 Federal Home Loan Bank stock......... 784,900 784,900 784,900 784,900 784,900 784,900 Loans, net........... 500,648,455 526,904,000 423,502,300 424,690,000 303,386,007 294,581,000 Accrued interest receivable......... 2,743,594 2,743,594 2,758,054 2,758,054 1,842,874 1,842,874 Financial liabilities Deposits............. 520,222,046 523,455,000 425,740,313 424,359,000 294,828,972 295,078,734 Securities sold under agreements to repurchase......... 34,787,643 34,787,643 32,151,391 32,151,391 26,607,289 26,607,289 Accrued interest payable............ 6,319,043 6,319,043 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 12,968,584 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, F-23 86 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. NOTE 13 -- EARNINGS PER SHARE The factors used in the earnings per share computation follow.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------- --------------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- ---------- ---------- ----------- (UNAUDITED) (UNAUDITED) Basic Net income (loss)........... $1,692,180 $1,136,764 $2,794,567 $2,100,757 $(1,109,047) ========== ========== ========== ========== =========== Weighted average common shares outstanding........ 2,895,586 2,596,102 2,596,102 2,596,102 2,003,041 ---------- ---------- ---------- ---------- ----------- Basic earnings (loss) per common share.............. $ 0.58 $ 0.44 $ 1.08 $ 0.81 $ (0.55) ========== ========== ========== ========== =========== Diluted Net income (loss)........... $1,692,180 $1,136,764 $2,794,567 $2,100,757 $(1,109,047) ========== ========== ========== ========== =========== Weighted average common shares outstanding for basic earnings per common share..................... 2,895,586 2,596,102 2,596,102 2,596,102 2,003,018 Add: Dilutive effects of assumed exercises of stock options................... 48,759 5,751 7,229 27,627 0 ---------- ---------- ---------- ---------- ----------- Average shares and dilutive potential common shares... 2,944,345 2,601,853 2,603,331 2,623,729 2,003,018 ========== ========== ========== ========== =========== Diluted earnings (loss) per common share................ $ 0.58 $ 0.44 $ 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 F-24 87 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 the first quarter of 2001 Mercantile sold a combined 516,600 shares of common stock in two private placement offerings, raising $6.7 million in net proceeds. Mercantile contributed substantially all of the net proceeds to the Bank as capital. 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. 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. F-25 88 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ------- ----- -------- ------ -------- ------ June 30, 2001 (Unaudited) Total capital (to risk weighted assets) Consolidated........ $63,322 10.8% $46,829 8.0% $58,536 10.0% Bank................ 61,024 10.5 46,653 8.0 58,316 10.0 Tier 1 capital (to risk weighted assets) Consolidated........ 53,339 9.1 23,420 4.0 35,130 6.0 Bank................ 53,733 9.2 23,334 4.0 35,000 6.0 Tier 1 capital (to average assets) Consolidated........ 53,339 9.3 23,036 4.0 28,795 5.0 Bank................ 53,733 9.4 22,951 4.0 28,688 5.0 December 31, 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 December 31, 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
F-26 89 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Bank was categorized as well capitalized at June 30, 2001 (unaudited) and year-end 2000 and 1999. 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 June 30, 2001 (unaudited), 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 June 30, 2001 (unaudited), December 31, 2000 and December 31, 1999, approximately $13.3 million, $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.
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, ------------------------- ----------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- ---------- ----------- -------- (UNAUDITED) (UNAUDITED) Unrealized holding gains and losses on available-for-sale securities......... $330,700 $(71,562) 1,378,885 $(1,262,733) $ 53,866 Reclassification adjustments for gains and losses later recognized in income............. (99,594) 275,321 275,321 0 (128) -------- -------- ---------- ----------- -------- Net unrealized gains and losses......... 231,106 203,759 1,654,206 (1,262,733) 53,738 Tax effect............ (78,576) (69,278) (562,430) 429,329 (18,721) -------- -------- ---------- ----------- -------- Other comprehensive income (loss)......... $152,530 $134,481 $1,091,776 $ (833,404) $ 35,467 ======== ======== ========== =========== ========
F-27 90 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 18 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
EARNINGS PER SHARE BEFORE CUMULATIVE INCOME BEFORE EFFECT OF CUMULATIVE CHANGE IN EFFECT OF ACCOUNTING CHANGE IN PRINCIPLE INTEREST NET INTEREST ACCOUNTING NET --------------- INCOME INCOME PRINCIPLE INCOME BASIC DILUTED ----------- ------------ ------------- -------- ----- ------- 2001 First quarter...... $10,855,416 $3,461,743 $915,451 $915,451 $0.34 $0.34 Second quarter..... 11,011,476 3,697,725 776,729 776,729 0.25 0.25 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
F-28 91 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 19 -- MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS Following are condensed parent company only financial statements. CONDENSED BALANCE SHEETS
DECEMBER 31, JUNE 30, -------------------------- 2001 2000 1999 ----------- ----------- ----------- (UNAUDITED) ASSETS Cash and cash equivalents......... $ 455,868 $ 626,986 $ 671,235 Investment in subsidiaries........ 54,681,254 46,291,805 42,617,182 Other assets...................... 2,166,718 1,800,569 1,533,198 ----------- ----------- ----------- Total assets................... $57,303,840 $48,719,360 $44,821,615 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities....................... $ 361,675 $ 370,624 $ 358,896 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures........ 16,494,850 16,494,850 16,494,850 Shareholders' equity.............. 40,447,315 31,853,886 27,967,869 ----------- ----------- ----------- Total liabilities and shareholders' equity...... $57,303,840 $48,719,360 $44,821,615 =========== =========== ===========
F-29 92 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------- ------------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- ---------- ---------- ----------- (UNAUDITED) (UNAUDITED) Income Dividends from subsidiaries....... $ 791,753 $ 791,753 $1,583,506 $ 123,162 $ 0 Other................. 11,579 13,553 29,663 33,348 28,868 ---------- ---------- ---------- ---------- ----------- Total income....... 803,332 805,306 1,613,169 156,510 28,868 Expenses Interest expense...... 808,739 808,650 1,617,300 468,316 0 Other operating expenses........... 292,082 224,593 433,149 415,018 187,797 ---------- ---------- ---------- ---------- ----------- Total expenses..... 1,100,821 1,033,243 2,050,449 883,334 187,797 ---------- ---------- ---------- ---------- ----------- INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARIES.......... (297,489) (227,937) (437,280) (726,824) (158,929) Federal income tax expense............... (359,000) (324,000) (649,000) (420,000) 0 Equity in undistributed net income (loss) of subsidiary............ 1,630,669 1,040,701 2,582,847 2,407,581 (950,118) ---------- ---------- ---------- ---------- ----------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............. 1,692,180 1,136,764 2,794,567 2,142,967 (1,109,047) Cumulative effect of change in accounting principle (net of applicable taxes)..... 0 0 0 (42,210) 0 ---------- ---------- ---------- ---------- ----------- NET INCOME (LOSS)....... $1,692,180 $1,136,764 $2,794,567 $2,100,757 $(1,109,047) ========== ========== ========== ========== ===========
F-30 93 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------- ----------------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)............ $ 1,692,180 $ 1,136,764 $ 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............... (1,630,669) (1,040,701) (2,582,847) (2,407,581) 950,118 Capital investment into Mercantile Bank of West Michigan................. (6,606,250) 0 0 (14,828,112) (13,771,888) Change in other assets..... (366,149) 26,487 (267,371) (1,451,293) 44,640 Change in other liabilities.............. (8,949) (8,698) 11,728 347,396 (41,405) ----------- ----------- ----------- ------------ ------------ Net cash from operating activities............ (6,919,837) 113,852 (43,923) (16,238,833) (13,927,582) CASH FLOWS FROM FINANCING ACTIVITIES Fractional shares paid....... 0 0 (326) 0 0 Proceeds from the sale of trust preferred securities and issuance of debentures................. 0 0 0 16,494,850 0 Investment in common stock of MBWM Capital Trust I....... 0 0 0 (494,850) 0 Proceeds from sale of common stock...................... 6,748,719 0 0 0 14,300,826 ----------- ----------- ----------- ------------ ------------ Net cash from financing activities............ 6,748,719 0 (326) 16,000,000 14,300,826 ----------- ----------- ----------- ------------ ------------ Net change in cash and cash equivalents.................. (171,118) 113,852 (44,249) (238,833) 373,244 Cash and cash equivalents at beginning of period.......... 626,986 671,235 671,235 910,068 536,824 ----------- ----------- ----------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 455,868 $ 785,087 $ 626,986 $ 671,235 $ 910,068 =========== =========== =========== ============ ============
F-31 94 ------------------------------------------------------ ------------------------------------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 1 Selected Consolidated Financial Data.............................. 5 Risk Factors........................ 7 Use of Proceeds..................... 11 Capitalization...................... 12 Market for Common Stock............. 13 Dividend Policy..................... 13 Forward-Looking Statements.......... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 15 Business............................ 40 Description of Capital Stock........ 50 Underwriting........................ 56 Legal Matters....................... 58 Experts............................. 58 Where You Can Find More Information....................... 58 Incorporation of Certain Information by Reference...................... 58 Index to Consolidated Financial Statements........................ F-1
- - YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND OUR UNDERWRITERS HAVE NOT, AUTHORIZED ANY PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. - - WE ARE NOT, AND OUR UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. - - YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. - - THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 1,200,000 SHARES [MERCANTILE LOGO] MERCANTILE BANK CORPORATION COMMON STOCK ------------------------- PROSPECTUS , 2001 ------------------------- STIFEL, NICOLAUS & COMPANY INCORPORATED HOWE BARNES INVESTMENTS, INC. TUCKER ANTHONY SUTRO CAPITAL MARKETS ------------------------------------------------------ ------------------------------------------------------ 95 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses payable in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of such expenses will be paid by us. The amounts shown are estimates, except for the SEC registration fee. SEC Registration Fee........................................ $ 5,831.00 NASD fee.................................................... 2,832.00 Nasdaq fee.................................................. 14,000.00 Printing and Mailing Expenses............................... 50,000.00 Accounting Fees............................................. 35,000.00 Transfer and Registrar's Fees............................... 3,000.00 Legal Fees and Expenses..................................... 90,000.00 Blue Sky Fees and Expenses.................................. 2,000.00 Miscellaneous............................................... 9,337.00 ----------- Total.................................................. $212,000.00 ===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Indemnification Sections 561-571 of the Michigan Business Corporation Act, as amended, grant us broad powers to indemnify any person in connection with legal proceedings brought against that person by reason of their present or past status as an officer or director of our company, provided that the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The Michigan Business Corporation Act also gives us broad powers to indemnify defined persons against expenses and reasonable settlement payments in connection with any action by or in the right of our company, provided the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests, except that no indemnification may be made if that person is adjudged to be liable to us unless and only to the extent the court in which that action was brought determines upon application that, despite the adjudication, but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for reasonable expenses as the court deems proper. In addition, to the extent that any specified person is successful in the defense of any defined legal proceeding, we are required by the Michigan Business Corporation Act to indemnify him against expenses, including attorneys' fees, that are actually and reasonably incurred by him in connection with the proceeding. Our Articles of Incorporation provide that we shall indemnify our present and past directors, officers, and such other persons as the Board of Directors may authorize to the full extent permitted by law. Our Bylaws contain indemnification provisions concerning third party actions as well as actions in the right of the company. The Bylaws provide that we shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or II-1 96 investigative (other than an action by or in the right of the company) by reason of the fact that he or she is or was a director or officer of the company or while serving as such a director or officer, is or was serving at the request of the company as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorney's fees), judgments, penalties, fees and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the company or its shareholders and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Federal Deposit Insurance Corporation regulations impose limitations on indemnification payments which could restrict, in certain circumstances, payments by us or the Bank to our respective directors or officers otherwise permitted under the Michigan Business Corporation Act or the Michigan Banking Code. With respect to derivative actions, the Bylaws provide that we shall indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the company to procure a judgment in its favor by reason of the fact that he or she is or was a director or officer of the company, or while serving as such a director or officer, is or was serving at the request of the company as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorney's fees) and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the company or its shareholders. No indemnification is provided in the Bylaws in respect of any claim, issue or matter in which such person has been found liable to us except to the extent that a court of competent jurisdiction determines upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the company pursuant to the provisions discussed above or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. Under an insurance policy maintained by our company, our directors and officers are insured within the limits and subject to the limitations of the policy, against specified expenses in connection with the defense of specified claims, actions, suits or proceedings, and specified liabilities which might be imposed as a result of claims, actions, suits or proceedings, which may be brought against them by reason of being or having been directors and officers of our company. Limitation of Director Liability The Michigan Business Corporation Act permits corporations to limit the personal liability of their directors in certain circumstances. Our Articles of Incorporation provide that our directors shall not be personally liable to us or our shareholders for monetary II-2 97 damages for breach of the director's fiduciary duty. However, they do not eliminate or limit the liability of a director for any breach of a duty, act or omission for which the elimination or limitation of liability is not permitted by the Michigan Business Corporation Act, currently including, without limitation, the following: (1) breach of the director's duty of loyalty to us or our shareholders; (2) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of the law; (3) illegal loans, distributions of dividends or assets, or stock purchases as described in Section 551(1) of the Michigan Business Corporation Act; and (4) transactions from which the director derived an improper personal benefit. ITEM 16. EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 1.1 Form of Underwriting Agreement(1) 4.1 Articles III (Capital Stock) of our Articles of Incorporation are incorporated by reference to exhibit 3.1 of our Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 4.2 Specimen Stock Certificate is incorporated by reference to exhibit 4.1 of our registration statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 5.1 Opinion of Dickinson Wright PLLC regarding legality(1) 10.1 1997 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of our 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 us and Division Avenue Partners, L.L.C. dated August 16, 1997, is incorporated by reference to exhibit 10.2 of our 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 our 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 our 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., the company and the Bank dated December 1, 1998, is incorporated by reference to exhibit 10.5 of our Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 (Commission File No. 333-33081) (management contract or compensatory plan)
II-3 98
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 10.6 Employment Agreement among Michael H. Price, the company and the Bank dated December 1, 1998, is incorporated by reference to exhibit 10.6 of our 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 the company 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 us 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 the company 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 us, 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 the company 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 us and Wilmington Trust Company dated September 17, 1999, is incorporated by reference to exhibit 4.7 of the Registration Statement of the company 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 us 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 us, the Bank and Gerald R. Johnson, Jr., is incorporated by reference to exhibit 10.12 of our 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 us, the Bank and Michael H. Price, is incorporated by reference to exhibit 10.13 of our 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 is incorporated by reference to exhibit 10.14 of our Form 10-K for the fiscal year ended December 31, 2000 (Commission File No. 000-26719) (management contract or compensatory plan)
II-4 99
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 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 is incorporated by reference to exhibit 10.15 of our Form 10-K for the fiscal year ended December 31, 2000 10.16 Amended and Restated Employment Agreement dated as of October 12, 2000, among us, the Bank and Gerald R. Johnson, Jr. is incorporated by reference to exhibit 10.16 of our Form 10-K for the fiscal year ended December 31, 2000 (management contract or compensatory plan) 10.17 Amended and Restated Employment Agreement dated as of October 12, 2000, among us, the Bank and Michael H. Price is incorporated by reference to exhibit 10.17 of our Form 10-K for the fiscal year ended December 31, 2000 (management contract or compensatory plan) 10.18 Employment Agreement dated as of October 12, 2000, among us, the Bank and Robert B. Kaminski is incorporated by reference to exhibit 10.18 of our Form 10-K for the fiscal year ended December 31, 2000 (management contract or compensatory plan) 10.19 Employment Agreement dated as of October 12, 2000, among us, the Bank and Charles E. Christmas is incorporated by reference to exhibit 10.19 of our Form 10-K for the fiscal year ended December 31, 2000 (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 is incorporated by reference to exhibit 10.20 of our Form 10-K for the fiscal year ended December 31, 2000 21.1 Subsidiaries of the company is incorporated by reference to exhibit 21 of our Form 10-K for the fiscal year ended December 31, 2000 23.1 Consent of Crowe, Chizek and Company LLP(1) 23.2 Consent of Dickinson Wright PLLC (included in opinion filed as exhibit 5.1) 24.1 Power of Attorney (included on signature page of this registration statement)
- ------------------------- (1) Filed with this registration statement ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of II-5 100 the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) We hereby undertake that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of these securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 101 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Grand Rapids, State of Michigan on July 12, 2001. MERCANTILE BANK CORPORATION By: /s/ GERALD R. JOHNSON, JR. ---------------------------------------- Gerald R. Johnson, Jr., Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerald R. Johnson, Jr. and Michael H. Price and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on July 12, 2001. /s/ BETTY S. BURTON /s/ SUSAN K. JONES - --------------------------------------- --------------------------------------- Betty S. Burton, Director Susan K. Jones, Director /s/ DAVID M. CASSARD /s/ LAWRENCE W. LARSEN - --------------------------------------- --------------------------------------- David M. Cassard, 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, Chief Operating Officer and Director /s/ C. JOHN GILL /s/ DALE J. VISSER - --------------------------------------- --------------------------------------- C. John Gill, Director Dale J. Visser, Director /s/ DOYLE A. HAYES /s/ DONALD WILLIAMS, SR. - --------------------------------------- --------------------------------------- Doyle A. Hayes, Director Donald Williams, Sr., Director /s/ DAVID M. HECHT /s/ ROBERT M. WYNALDA - --------------------------------------- --------------------------------------- David M. Hecht, Director Robert M. Wynalda, Director /s/ GERALD R. JOHNSON /s/ CHARLES E. CHRISTMAS - --------------------------------------- --------------------------------------- Gerald R. Johnson, Jr., Chairman of the Charles E. Christmas, Senior Vice Board, Chief Executive Officer and President, Chief Financial Officer and Director (principal executive officer) Treasurer (principal financial and accounting officer)
II-7 102 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT - ----------- ------- 1.1 Form of Underwriting Agreement(1) 4.1 Articles III (Capital Stock) of our Articles of Incorporation are incorporated by reference to exhibit 3.1 of our Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 4.2 Specimen Stock Certificate is incorporated by reference to exhibit 4.1 of our registration statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997 5.1 Opinion of Dickinson Wright PLLC regarding legality(1) 10.1 1997 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of our 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 us and Division Avenue Partners, L.L.C. dated August 16, 1997, is incorporated by reference to exhibit 10.2 of our 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 our 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 our 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., the company and the Bank dated December 1, 1998, is incorporated by reference to exhibit 10.5 of our 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, the company and the Bank dated December 1, 1998, is incorporated by reference to exhibit 10.6 of our 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 the company 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.
II-8 103
EXHIBIT NO. EXHIBIT - ----------- ------- 10.8 Subordinated Indenture dated as of September 17, 1999 between us 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 the company 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 us, 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 the company 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 us and Wilmington Trust Company dated September 17, 1999, is incorporated by reference to exhibit 4.7 of the Registration Statement of the company 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 us 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 us, the Bank and Gerald R. Johnson, Jr., is incorporated by reference to exhibit 10.12 of our 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 us, the Bank and Michael H. Price, is incorporated by reference to exhibit 10.13 of our 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 is incorporated by reference to exhibit 10.14 of our Form 10-K for the fiscal year ended December 31, 2000 (Commission File No. 000-26719) (management contract or compensatory plan) 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 is incorporated by reference to exhibit 10.15 of our Form 10-K for the fiscal year ended December 31, 2000 10.16 Amended and Restated Employment Agreement dated as of October 12, 2000, among us, the Bank and Gerald R. Johnson, Jr. is incorporated by reference to exhibit 10.16 of our Form 10-K for the fiscal year ended December 31, 2000 (management contract or compensatory plan)
II-9 104
EXHIBIT NO. EXHIBIT - ----------- ------- 10.17 Amended and Restated Employment Agreement dated as of October 12, 2000, among us, the Bank and Michael H. Price is incorporated by reference to exhibit 10.17 of our Form 10-K for the fiscal year ended December 31, 2000 (management contract or compensatory plan) 10.18 Employment Agreement dated as of October 12, 2000, among us, the Bank and Robert B. Kaminski is incorporated by reference to exhibit 10.18 of our Form 10-K for the fiscal year ended December 31, 2000 (management contract or compensatory plan) 10.19 Employment Agreement dated as of October 12, 2000, among us, the Bank and Charles E. Christmas is incorporated by reference to exhibit 10.19 of our Form 10-K for the fiscal year ended December 31, 2000 (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 is incorporated by reference to exhibit 10.20 of our Form 10-K for the fiscal year ended December 31, 2000 21.1 Subsidiaries of the company is incorporated by reference to exhibit 21 of our Form 10-K for the fiscal year ended December 31, 2000 23.1 Consent of Crowe, Chizek and Company LLP(1) 23.2 Consent of Dickinson Wright PLLC (included in opinion filed as exhibit 5.1) 24.1 Power of Attorney (included on signature page of this registration statement)
- ------------------------- (1) Filed with this registration statement II-10 EX-1.1 2 k63607ex1-1.txt FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 1,200,000 Shares(1) MERCANTILE BANK CORPORATION COMMON STOCK (no par value) UNDERWRITING AGREEMENT July __, 2001 STIFEL, NICOLAUS & COMPANY, INCORPORATED as Representative of the Several Underwriters named in Schedule I hereto 501 North Broadway, 9th Floor St. Louis, Missouri 63102 Ladies and Gentlemen: Mercantile Bank Corporation, a Michigan corporation (the "Company"), proposes to issue and sell to the several underwriters listed on Schedule I hereto (the "Underwriters"), pursuant to the terms of this Agreement, 1,200,000 shares of the Company's Common Stock, no par value (the "Common Stock"), the terms of which are more fully described in the Prospectus (as hereinafter defined). The aforementioned 1,200,000 shares of Common Stock to be sold to the Underwriters are herein called the "Firm Shares." Solely for the purpose of covering over-allotments in the sale of the Firm Shares, the Company further proposes to issue and sell to the Underwriters, at their option, up to an additional 180,000 shares of Common Stock (the "Option Shares") upon exercise of the over-allotment option granted in Section 1 hereof. The Firm Shares and any Option Shares are herein collectively referred to as the "Shares." You are acting as representative of the Underwriters and in such capacity are sometimes herein referred to as the "Representative." The Company hereby confirms as follows its agreement with each of the Underwriters in connection with the proposed purchase of the Shares. 1. SALE, PURCHASE AND DELIVERY OF SHARES; DESCRIPTION OF SHARES. (a) On the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Company hereby agrees to issue and sell to each of the Underwriters and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price of $[______] per share (the "Purchase Price"), the respective number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. In accordance with Section 9 hereof, the Representative may by notice to the - ------------------ (1) Plus an option to purchase 180,000 shares from Mercantile Bank Corporation to cover over-allotments. 2 Company amend Schedule I to add, eliminate or substitute names set forth therein (other than to eliminate the name of the Representative) and to amend the number of Firm Shares to be purchased by any firm or corporation listed thereon, provided that the total number of Firm Shares listed on Schedule I shall equal 1,200,000. In addition, on the basis of the representations, warranties and agreements herein contained and subject to the terms and conditions herein set forth, the Company hereby grants to the Underwriters, severally and not jointly, an option to purchase all or any portion of the 180,000 Option Shares, and upon the exercise of such option in accordance with this Section 1, the Company hereby agrees to issue and sell to the Underwriters, severally and not jointly, all or any portion of the Option Shares at the same Purchase Price per share paid for the Firm Shares. If any Option Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company that proportion (subject to adjustment as you may determine to avoid fractional shares) of the number of Option Shares to be purchased that the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 9 hereof) bears to 1,200,000. The option hereby granted (the "Option") shall expire 30 days after the date upon which the Registration Statement (as hereinafter defined) becomes effective and may be exercised only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Firm Shares. The Option may be exercised in whole or in part at any time (but not more than once) by you giving notice (confirmed in writing) to the Company setting forth the number of Option Shares as to which the Underwriters are exercising the Option and the time, date and place for payment and delivery of the certificates for such Option Shares. Such time and date of payment and delivery for the Option Shares (the "Option Closing Date") shall be determined by you, but shall not be earlier than two nor later than five full business days after the exercise of such Option, nor in any event prior to the Closing Date (as hereinafter defined). The Option Closing Date may be the same as the Closing Date. Payment of the Purchase Price and delivery of the certificates for the Firm Shares shall be made at the offices of Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Suite 2600, Chicago, Illinois 60601, or such other place as shall be agreed to by you and the Company, at 10:00 a.m., St. Louis time, on __________, 2001, or at such other time not more than five full business days thereafter as the Company and you shall determine (the "Closing Date"). The Company shall deliver or cause to be delivered to you for the account of the Underwriters the certificates for the Firm Shares against payment to or upon the order of the Company of the Purchase Price by wire transfer or certified or bank cashier's check, in same day funds for the Firm Shares. If the Underwriters exercise the option to purchase any or all of the Option Shares, payment of the Purchase Price and delivery of certificates for such Option Shares shall be made on the Option Closing Date at the Underwriters' counsel's offices, or at such other place as the Company and you shall determine. Such payments shall be made to an account designated by the Company by wire transfer or certified or bank cashier's check, in same day funds in the amount of the Purchase Price therefor, against delivery by or on behalf of the Company to you for the respective accounts of the several Underwriters of the certificates for the Option Shares to be purchased by the Underwriters. Certificates for Shares to be purchased by the Underwriters shall be delivered in fully registered form in such authorized denominations and registered in such names as you shall 2 3 request in writing not later than 12:00 noon, St. Louis time, two business days prior to the Closing Date and, if applicable, the Option Closing Date. Certificates for Shares to be purchased by the Underwriters shall be made available to you for inspection, checking and packaging at such office as you may designate in writing not later than 1:00 p.m., St. Louis time, on the last business day prior to the Closing Date and, if applicable, on the last business day prior to the Option Closing Date. Time shall be of the essence, and delivery of the certificates for the Shares at the time and place specified pursuant to this Agreement is a further condition of the obligations of each Underwriter hereunder. 2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to, and agrees with, each of the Underwriters that: (i) The reports filed with the Securities and Exchange Commission (the "Commission") by the Company under the Securities Exchange Act of 1934, as amended (the "1934 Act") and the rules and regulations thereunder (the "1934 Act Regulations") at the time they were filed with the Commission, complied as to form in all material respects with the requirements of the 1934 Act and the 1934 Act Regulations and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (ii) The Company has prepared and filed with the Commission a registration statement on Form S-2 (File Number 333-_____) for the registration of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), including the related prospectus subject to completion, and one or more amendments to such registration statement may have been so filed, in each case in conformity in all material respects with the requirements of the 1933 Act, and the rules and regulations promulgated thereunder (the "1933 Act Regulations"). Copies of such registration statement, including any amendments thereto, each Preliminary Prospectus (as defined herein) contained therein and the exhibits, financial statements and schedules to such registration statement, as finally amended and revised, have heretofore been delivered by the Company to the Representative. After the execution of this Agreement, the Company will file with the Commission (A) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the 1933 Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A of the 1933 Act Regulations ("Rule 430A") or permitted by Rule 424(b) of the 1933 Act Regulations ("Rule 424(b)") and as have been provided to and not objected to by the Representative prior to (or as are agreed to by the Representative subsequent to) the execution of this Agreement, or (B) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the 1933 Act, an amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective, a copy of which amendment has been furnished to and not objected to by the Representative prior to (or is agreed to by the 3 4 Representative subsequent to) the execution of this Agreement. The Company will not file any amendment to the Registration Statement or any amended Preliminary Prospectus or any amendment thereto, of which you have not been previously furnished a copy or to which you or counsel for the Underwriters shall reasonably object. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective under the 1933 Act, including (1) all financial schedules and exhibits thereto, (2) all documents (or portions thereof) incorporated by reference therein filed under the 1934 Act, and (3) any information omitted therefrom pursuant to Rule 430A and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto, including the prospectus subject to completion, if any, included in the Registration Statement and each prospectus filed pursuant to Rule 424(a) under the 1933 Act; and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b)(1) or (4) or, if no prospectus is required to be filed pursuant to Rule 424(b)(1) or (4), the prospectus included in the Registration Statement, in each case including the financial schedules and all documents (or portions thereof) incorporated by reference therein under the 1934 Act. The date on which the Registration Statement becomes effective is hereinafter referred to as the "Effective Date." (iii) The documents incorporated by reference in the Preliminary Prospectus or Prospectus or from which information is so incorporated by reference, when they became effective or were filed with the Commission, as the case may be, complied with the requirements of the 1934 Act and the 1934 Act Regulations and any future documents incorporated by reference so filed, when they are filed, will comply with the requirements of the 1934 Act and the 1934 Act Regulations; no such incorporated document contained or will contain any untrue statement of fact or omit to state any fact required to be stated therein or necessary to make the statements therein not misleading, and when read together and with the other information in the Preliminary Prospectus or Prospectus, as the case may be, at the time the Registration Statement became or becomes effective and at the Closing Date and any Option Closing Date, did not or will not, as the case may be, contain an untrue statement of fact or omit to state any fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (iv) No order preventing or suspending the use of any Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) has been issued by the Commission, any state or other jurisdiction or other regulatory body, nor has the Commission, any state or other jurisdiction or other regulatory body, to the knowledge of the Company, threatened to issue such an order or instituted proceedings for that purpose. Each Preliminary Prospectus, at the time of filing thereof, (A) complied in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and (B) did not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by any of 4 5 the Underwriters expressly for inclusion in the Prospectus beneath the heading "Underwriting" (such information referred to herein as the "Underwriters' Information"). Each Preliminary Prospectus and the Prospectus will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system, except to the extent permitted by Regulation S-T. (v) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the Company's knowledge, threatened by the Commission, any state or other jurisdiction or other regulatory body. At the Effective Date and at all times subsequent thereto, up to and including the Closing Date and, if applicable, the Option Closing Date, the Registration Statement and any post-effective amendment thereto (A) complied and will comply in all material respects with the requirements of the 1933 Act, and the 1933 Act Regulations and (B) did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading; provided, however, that this representation and warranty does not apply to Underwriters' Information. At the Effective Date and at all times when the Prospectus is required to be delivered in connection with offers and sales of Shares, including, without limitation, the Closing Date and, if applicable, the Option Closing Date, the Prospectus, as amended or supplemented, (A) complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and (B) did not contain and will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty does not apply to Underwriters' Information. Since the date that the Registration Statement was filed with the Commission, no event has or will have occurred which should have been set forth in an amendment or supplement to the Registration Statement which has not then been set forth in such an amendment or supplement. The Registration Statement will be identical to the electronically transmitted copy thereof filed with the Commission pursuant to its EDGAR system, except to the extent permitted by Regulation S-T. (vi) The Company is duly organized, validly existing and in good standing under the laws of the State of Michigan, with full corporate and other power and authority to own, lease and operate its properties and conduct its business as described in and contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) and as currently being conducted and is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). (vii) The Company has three direct and indirect subsidiaries, Mercantile Bank of West Michigan (the "Bank"), Mercantile Bank Mortgage Company (the "Mortgage Company") and MBWM Capital Trust I (the "Trust") (collectively, the "Subsidiaries"). The Company does not own or control, directly or indirectly, more than 5% of any class of equity security of any corporation, association or other entity other than the Subsidiaries. The Bank is a bank duly organized, validly existing and in good 5 6 standing under the laws of the State of Michigan. The Mortgage Company is duly organized, validly existing and in good standing as a corporation under the laws of the State of Michigan. The Trust is duly organized, validly existing and in good standing as a business trust under the laws of the State of Delaware. Each such Subsidiary has full corporate and other power and authority to own, lease and operate its properties and to conduct its business as described in and contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and as currently being conducted. The deposit accounts of the Bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount provided by law; and no proceedings for the modification, termination or revocation of any such insurance are pending or, to the knowledge of the Company, threatened. (viii) The Company and the Bank maintain insurance of the types and in the amounts required by the rules and regulations of the FRB and the Michigan bank regulators and, to the best knowledge of the Company, consistent with insurance coverage maintained by similar companies and businesses, all of which insurance is in full force and effect. (ix) The Company and each of the Subsidiaries is duly qualified to transact business as a foreign corporation, bank or business trust, as the case may be, and is in good standing in each other jurisdiction in which it owns or leases property or conducts its business so as to require such qualification except where the failure to so qualify would, individually or in the aggregate, not have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis. All of the issued and outstanding shares of capital stock or equity securities, as the case may be, of the Subsidiaries (A) have been duly authorized and are validly issued, (B) are fully paid and nonassessable except to the extent such shares or interests may be deemed assessable under 12 U.S.C. Section 1831o or under applicable state banking laws, and (C) except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are wholly owned, directly or indirectly, by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, restriction upon voting or transfer, preemptive rights, claim or equity. (x) The capital stock of the Company conforms to the description thereof contained in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus). The outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and no such shares were issued in violation of the preemptive or similar rights of any security holder of the Company. No person has any preemptive or similar right to purchase any shares of capital stock of the Company. Except in each case as disclosed in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) or issued or issuable pursuant to compensatory plans or other programs disclosed in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus), there are no outstanding rights, options or warrants to acquire any capital stock, equity securities or other ownership interests of the Company or the Subsidiaries, and there are no outstanding 6 7 instruments or securities convertible into or exchangeable for any capital stock, equity securities or other ownership interests of the Company or the Subsidiaries and no restrictions upon the voting or transfer of any capital stock of the Company pursuant to the Company's Articles of Incorporation or bylaws or any agreement or other instrument to which the Company is a party or by which the Company is bound. (xi) The Company has all requisite power and authority to issue, sell and deliver the Shares in accordance with and upon the terms and conditions set forth in this Agreement, the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus). All corporate action required to be taken by the Company for the authorization, issuance, sale and delivery of the Shares in accordance with such terms and conditions has been validly and sufficiently taken. The Shares, when delivered and paid for in accordance with this Agreement, will be duly and validly issued and outstanding, fully paid and nonassessable, will not be issued in violation of or subject to any preemptive or similar rights, and will conform to the description thereof in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus). None of the Shares, immediately prior to delivery, will be subject to any security interest, lien, mortgage, pledge, encumbrance, restriction upon voting or transfer, preemptive rights, claim, equity or other defect. (xii) The Company and the Subsidiaries have complied in all material respects with all federal, state and local statutes, regulations, ordinances and rules as now in effect and applicable to the ownership and operation of their properties or the conduct of their businesses as described in and contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) and as currently being conducted, except in each case where any such noncompliance would not have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis. Neither the Company nor any non-banking Subsidiary engages directly or indirectly in any activity prohibited by the Board of Governors of the Federal Reserve System (the "FRB") or the BHC Act or the regulations promulgated thereunder. Neither the Company nor any Subsidiary is subject to a directive from the Commission, the FDIC, the FRB, Michigan Bank Regulators or any other governmental authority to make any material changes in the method of conducting its business and no such directive is pending or threatened by such authorities. The Company knows of no material spill, discharge, leak, emission, ejection, escape, dumping or release of any kind onto the properties owned by the Company or into the environment surrounding those properties, of any toxic or hazardous substances as defined under any federal, state or local regulations, laws or statutes, except for those releases permissible under such regulations, laws or statutes or otherwise allowable under applicable permits and except for such releases which would not have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Company and the Subsidiaries on a consolidated basis. (xiii) The Company and the Subsidiaries have all material permits, easements, consents, licenses, franchises and other governmental and regulatory authorizations from all appropriate federal, state, local or other public authorities 7 8 ("Permits") as are necessary to own and lease their properties and conduct their businesses in the manner described in and contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and as currently being conducted in all material respects. All such Permits are in full force and effect and each of the Company and the Subsidiaries are in all material respects complying therewith, and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination thereof or will result in any other material impairment of the rights of the holder of any such Permit, subject in each case to such qualification as may be adequately disclosed in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus). Such Permits contain no restrictions that would materially impair the ability of the Company or the Subsidiaries to conduct their businesses in the manner consistent with their past practices. Neither the Company nor the Subsidiaries has received notice or otherwise has knowledge of any proceeding or action relating to the revocation or modification of any such Permit. (xiv) Neither the Company nor any of the Subsidiaries is in breach or violation of their corporate charter, by-laws or other governing documents in any material respect. Neither the Company, nor any of the Subsidiaries, and to the knowledge of the Company no other party is, in violation, breach or default (with or without notice or lapse of time or both) in the performance or observance of any term, covenant, agreement, obligation, representation, warranty or condition contained in (A) any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license, Permit or any other agreement or instrument to which it is a party or by which it or any of its properties may be bound, which such breach, violation or default could have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis, and to the knowledge of the Company, no other party has asserted that the Company or any of the Subsidiaries is in such violation, breach or default (provided that the foregoing shall not apply to defaults by borrowers from the Bank), or (B) except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus), any order, decree, judgment, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, having jurisdiction over the Company or the Subsidiaries or any of their respective properties the breach, violation or default of which could have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis. (xv) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) do not and will not conflict with, result in the creation or imposition of any material lien, claim, charge, encumbrance or restriction upon any property or assets of the Company or the Subsidiaries or the Shares pursuant to, constitute a breach or violation of, or constitute a default under, with or without notice or lapse of time or both, any of the terms, provisions or conditions of the charter or by-laws of the Company or the Subsidiaries, any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license, Permit or any other agreement or instrument to which the 8 9 Company or the Subsidiaries is a party or by which any of them or any of their respective properties may be bound or any order, decree, judgment, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, having jurisdiction over the Company or the Subsidiaries or any of their respective properties which conflict, creation, imposition, breach, violation or default would have either singly or in the aggregate a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis. No authorization, approval, consent or order of or filing, registration or qualification with, any person (including, without limitation, any court, governmental body or authority) is required in connection with the transactions contemplated by this Agreement, the Registration Statement and the Prospectus (or the Preliminary Prospectus), except such as have been obtained under the 1933 Act and from The Nasdaq Stock Market relating to the listing of the Shares, and such as may be required under state securities laws or Interpretations or Rules of the National Association of Securities Dealers, Inc. ("NASD") in connection with the purchase and distribution of the Shares by the Underwriters. (xvi) The Company has all requisite corporate power and authority to enter into this Agreement and this Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by general principles of equity and by bankruptcy or other laws relating to or affecting creditors' rights generally and except as any indemnification or contribution provisions thereof may be limited under applicable securities laws. (xvii) The Company and the Subsidiaries have good and marketable title in fee simple to all real property and good title to all personal property owned by them and material to their business, in each case free and clear of all security interests, liens, mortgages, pledges, encumbrances, restrictions, claims, equities and other defects except such as are referred to in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) or such as do not materially affect the value of such property in the aggregate and do not materially interfere with the use made or proposed to be made of such property; and all of the leases under which the Company and the Subsidiaries hold real or personal property are valid, existing and enforceable leases and in full force and effect with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real or personal property, and neither the Company nor any of the Subsidiaries is in default in any material respect of any of the material terms or provisions of any such leases. (xviii) Crowe, Chizek and Company LLP, who have certified certain of the consolidated financial statements of the Company and the Subsidiaries including the notes thereto, included in the Registration Statement and Prospectus, are independent certified public accountants within the meaning of the Code of Professional Conduct of the American Institute of Certified Public Accountants and are independent public accountants with respect to the Company and the Subsidiaries, as required by the 1933 Act and the 1933 Act Regulations. 9 10 (xix) The consolidated financial statements including the notes thereto, included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) with respect to the Company and the Subsidiaries comply in all material respects with the 1933 Act and the 1933 Act Regulations and present fairly the consolidated financial position of the Company and the Subsidiaries as of the dates indicated and the consolidated results of operations, cash flows and shareholders' equity of the Company and the Subsidiaries for the periods specified and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. The selected consolidated financial data concerning the Company and the Subsidiaries included in the Registration Statement and the Prospectus (or such Preliminary Prospectus) comply in all material respects with the 1933 Act and the 1933 Act Regulations, present fairly the information set forth therein, and have been compiled on a basis consistent with that of the consolidated financial statements of the Company and the Subsidiaries in the Registration Statement and the Prospectus (or such Preliminary Prospectus). The other financial, statistical and numerical information included in the Registration Statement and the Prospectus (or such Preliminary Prospectus) are accurate in all material respects, comply in all material respects with the 1933 Act and the 1933 Act Regulations, present fairly the information shown therein, and to the extent applicable have been compiled on a basis consistent with the consolidated financial statements of the Company and the Subsidiaries included in the Registration Statement and the Prospectus (or such Preliminary Prospectus). (xx) The Company and the Bank make and keep accurate books and records reflecting their respective assets and maintain internal accounting controls which provide reasonable assurance that (i) transactions are executed with management's authorization; (ii) transactions are recorded as necessary to permit preparation of the Company's consolidated financial statements and to maintain accountability for the assets of the Company and the Subsidiaries; (iii) access to the assets of the Company and the Subsidiaries is permitted only in accordance with management's authorization; and (iv) the reported accountability of the assets of the Company and the Subsidiaries is compared with existing assets at reasonable intervals. (xxi) The Company and the Bank maintain insurance of the types and in the amounts required by rules and regulations of FRB and the Michigan Bank Regulators and, to the best knowledge of the Company, consistent with insurance coverage maintained by similar companies and businesses, all of which insurance is in full force and effect. (xxii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus), except as otherwise stated therein: (A) neither the Company nor the Subsidiaries has sustained any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree which is material to the condition (financial 10 11 or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis; (B) there has not been any material adverse change in, or any development which is reasonably likely to have a material adverse effect on, the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis, whether or not arising in the ordinary course of business; (C) neither the Company nor the Subsidiaries has incurred any liabilities or obligations, direct or contingent, or entered into any material transactions, other than in the ordinary course of business, which is material to the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis; (D) the Company has not declared or paid any cash dividend, and neither the Company nor the Subsidiaries has become delinquent in the payment of principal or interest on any outstanding borrowings; (E) there has not been any change in the capital stock, equity securities, long-term debt, obligations under capital leases or, other than in the ordinary course of business, short-term borrowings of the Company or the Subsidiaries; and (F) there has not occurred any other event and there has arisen no set of circumstances required by the 1933 Act or the 1933 Act Regulations to be disclosed in the Registration Statement or Prospectus which has not been so set forth in the Registration Statement or such Prospectus as fairly and accurately summarized therein. (xxiii) Except as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus), no charge, investigation, action, suit or proceeding is pending or, to the knowledge of the Company, threatened, against or affecting the Company or the Subsidiaries or any of their respective properties before or by any court or any regulatory, administrative or governmental official, commission, board, agency or other authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could reasonably be expected to have a material adverse effect on the consummation of this Agreement or the transactions contemplated herein or the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis or which is required to be disclosed in the Registration Statement or the Prospectus (or such Preliminary Prospectus) and is not so disclosed. (xxiv) There are no contracts or other documents required to be filed as exhibits to the Registration Statement by the 1933 Act or the 1933 Act Regulations which have not been filed as exhibits or incorporated by reference to the Registration Statement, 11 12 or that are required to be summarized in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) that are not so summarized. (xxv) The Company has not taken, directly or indirectly, any action designed to result in or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company in connection with the sale or resale of the Shares in violation of the Commission's rules and regulations, including, but not limited to, Regulation M, and the Company is not aware of any such action taken or to be taken by any affiliate of the Company. (xxvi) The Company and the Subsidiaries own, or possess adequate rights to use, all patents, copyrights, trademarks, service marks, trade names and other rights necessary to conduct the businesses now conducted by them in all material respects or as described in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) and neither the Company nor any of the Subsidiaries has received any notice of infringement or conflict with asserted rights of others with respect to any patents, copyrights, trademarks, service marks, trade names or other rights which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis, and the Company does not know of any basis for any such infringement or conflict. (xxvii) Except as adequately disclosed in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus), no labor dispute involving the Company or the Subsidiaries exists or, to the knowledge of the Company, is imminent which might be expected to have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis or which is required to be disclosed in the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus). Neither the Company nor any of the Subsidiaries has received notice of any existing or threatened labor dispute by the employees of any of its principal suppliers, customers or contractors which might be expected to have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis. (xxviii) The Company and the Subsidiaries have timely and properly prepared and filed all necessary federal, state, local and foreign tax returns which are required to be filed and have paid all taxes shown as due thereon and have paid all other taxes and assessments to the extent that the same shall have become due, except such as are being contested in good faith or where the failure to so timely and properly prepare and file would not have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis. The Company has no knowledge of any tax deficiency which has been or might be assessed against the Company or the Subsidiaries which, if the subject of an unfavorable decision, ruling or finding, would have a material 12 13 adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis. (xxix) Each of the material contracts, agreements and instruments listed, described, or referred to in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) and each contract, agreement and instrument filed as an exhibit to the Registration Statement is in full force and effect and is the legal, valid and binding agreement of the Company or the Subsidiaries, enforceable against the Company or the respective Subsidiary, as the case may be, in accordance with its terms, except as the enforcement thereof may be limited by general principles of equity, regardless of whether considered in a proceeding at law or in equity, and by/or subject to bankruptcy, insolvency, reorganization or other similar laws relating to or affecting the rights of creditors' rights generally and, in the case of the Bank, by the provisions of the Federal Deposit Insurance Act ("FDIA") affecting the rights of creditors of depository institutions the deposits of which are insured by the FDIC. Except as disclosed in the Prospectus (or such Preliminary Prospectus), to the knowledge of the Company, no other party to any such agreement is (with or without notice or lapse of time or both) in breach or default in any material respect thereunder. (xxx) No relationship, direct or indirect, exists between or among the Company or the Subsidiaries, on the one hand, and the directors, officers, trustees, shareholders, customers or suppliers of the Company or the Subsidiaries, on the other hand, which is required to be described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) which is not adequately described therein. (xxxi) No person has the right to request or require the Company or the Subsidiaries to register any securities for offering and sale under the 1933 Act by reason of the filing of the Registration Statement with the Commission or the issuance and sale of the Shares, except as adequately disclosed in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus). (xxxii) The Shares have been approved for quotation on The Nasdaq National Market subject to official notice of issuance. (xxxiii) Except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus), there are no contractual encumbrances or restrictions or material legal restrictions required to be described therein, on the ability of the Subsidiaries (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to the Company, (B) to make any loans or advances to, or investments in, the Company or (C) to transfer any of its property or assets to the Company. (xxxiv) The Company is not an "investment company," or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). 13 14 (xxxv) The Company has not distributed and will not distribute prior to the Closing Date any prospectus in connection with the offering of the Shares, other than a Preliminary Prospectus, the Prospectus, the Registration Statement and the other materials permitted by the 1933 Act and the 1933 Act Regulations and reviewed by or on behalf of the Representative. (xxxvi) Neither the Company nor any Subsidiary has any liability under any "pension plan," as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The employee benefit plans, including employee welfare benefit plans, of the Company and each of the Subsidiaries, if any (the "Employee Plans"), have been operated in material compliance with the applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), all regulations, rulings and announcements promulgated or issued thereunder and all other applicable governmental laws and regulations (except to the extent such noncompliance would not, in the aggregate, have a material adverse effect upon the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis). No reportable event under Section 4043(c) of ERISA has occurred with respect to any Employee Plan of the Company or the Subsidiaries for which the reporting requirements have not been waived by the Pension Benefit Guaranty Corporation. No prohibited transaction under Section 406 of ERISA, for which an exemption does not apply, has occurred with respect to any Employee Plan of the Company or any of the Subsidiaries. There are no pending or, to the knowledge of the Company, threatened, claims by or on behalf of any Employee Plan, by any employee or beneficiary covered under any such Employee Plan or by any governmental authority or otherwise involving such Employee Plans or any of their respective fiduciaries (other than for routine claims for benefits). All Employee Plans that are group health plans have been operated in material compliance with the group health plan continuation coverage requirements of Section 4980B of the Code. (xxxvii) Other than as contemplated by this Agreement and as disclosed in the Registration Statement, the Company has not incurred any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated herein. (xxxviii) No report or application filed by the Company or any of the Subsidiaries with the Commission, the FRB, Michigan Bank Regulators or any other state or federal regulatory authority, as of the date it was filed or amended, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading when made or failed to comply in all material respects with the applicable requirements of the FRB, the Commission or any other state or federal regulatory authority, as the case may be. (xxxix) None of the Company, the Subsidiaries or, to the best knowledge of the Company, any other person associated with or acting on behalf of the Company or the Subsidiaries, including, without limitation, any director, officer, agent, or employee of any of the Subsidiaries or the Company has, directly or indirectly, while acting on behalf of such Company or Subsidiary (i) used any corporate funds for unlawful 14 15 contributions, gifts, entertainment, or other unlawful expenses relating to political activity; (ii) made any unlawful contribution to any candidate for foreign or domestic office, or to any foreign or domestic government officials or employees or other persons charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof or to foreign or domestic political parties or campaigns from corporate funds, or failed to disclose fully any contribution in violation of law; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other payment of funds of the Company or a Subsidiary or retained any funds which constitute a violation of any law, rule or regulation or which was or is required to be disclosed in the Registration Statement or the Prospectus pursuant to the requirements of the 1933 Act or the 1933 Act Regulations. (xl) Except as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus), there is no factual basis for any action, suit or other proceeding involving the Company nor the Subsidiaries or any of their material assets for any failure of the Company or any of the Subsidiaries, or any predecessor thereof, to comply with any requirements of federal, state or local regulation relating to air, water, solid waste management, hazardous or toxic substances, or the protection of health or the environment; except where such action, suit or other proceeding would not have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis. Except as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus) or as would not have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis, none of the property owned or leased by the Company, any of the Subsidiaries or the Partnership is contaminated with any waste or hazardous substances, and neither the Company nor any of the Subsidiaries may be deemed an "owner or operator" of a "facility" or "vessel" which owns, possesses, transports, generates or disposes of a "hazardous substance" as those terms are defined in ss.9601 of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. ss.9601 et seq. (xli) Neither the Company nor any Subsidiary has any agreement or understanding with any person (A) concerning the future acquisition by the Company or the Bank of a controlling interest in either entity or (B) concerning the future acquisition by any person of a controlling interest in the Company or any Subsidiary, in either case that is required by the 1933 Act or the 1933 Act Regulations to be disclosed by the Company that is not disclosed in the Prospectus (or if the Prospectus is not in existence, the Preliminary Prospectus). 3. OFFERING BY THE UNDERWRITERS. After the Registration Statement becomes effective or, if the Registration Statement is already effective, after this Agreement becomes effective, the Underwriters propose to offer the Firm Shares for sale to the public upon the terms and conditions set forth in the Prospectus. The Underwriters may from time to time thereafter 15 16 reduce the public offering price and change the other selling terms, provided the proceeds to the Company shall not be reduced as a result of such reduction or change. The Underwriters may reserve and sell such of the Shares purchased by the Underwriters as the Underwriters may elect to dealers chosen by them (the "Selected Dealers") at the public offering price set forth in the Prospectus less the applicable Selected Dealers' concessions set forth therein, for re-offering by Selected Dealers to the public at the public offering price. The Underwriters may allow, and Selected Dealers may re-allow, a concession set forth in the Prospectus to certain other brokers and dealers. 4. CERTAIN COVENANTS OF THE COMPANY. The Company covenants with the Underwriters as follows: (a) The Company shall use its best efforts to cause the Registration Statement and any amendments thereto, if not effective at the time of execution of this Agreement, to become effective as promptly as possible. If the Registration Statement has become or becomes effective pursuant to Rule 430A and information has been omitted therefrom in reliance on Rule 430A, then, the Company will prepare and file in accordance with Rule 430A and Rule 424(b) copies of the Prospectus or, if required by Rule 430A, a post-effective amendment to the Registration Statement (including the Prospectus) containing all information so omitted and will provide evidence satisfactory to the Representative of such timely filing. (b) The Company shall notify you immediately, and confirm such notice in writing: (i) when the Registration Statement, or any post-effective amendment to the Registration Statement, has become effective, or when the Prospectus or any supplement to the Prospectus or any amended Prospectus has been filed; (ii) of the receipt of any comments or requests from the Commission relating in any way to the Registration Statement, any Preliminary Prospectus and the Prospectus; (iii) of any request of the Commission to amend or supplement the Registration Statement, any Preliminary Prospectus or the Prospectus or for additional information; and (iv) of the issuance by the Commission or any state or other regulatory body of any stop order or other order suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or suspending the qualification of any of the Shares for offering or sale in any jurisdiction or the institution or threat of institution of any proceedings for any of such purposes. The Company shall use its best efforts to prevent the issuance of any such stop order or of any other such order and if any such order is issued, to cause such order to be withdrawn or lifted as soon as possible. (c) The Company shall furnish to the Underwriters, from time to time without charge, as soon as available, as many copies as the Underwriters may reasonably request of 16 17 (i) the registration statement as originally filed and of all amendments thereto, in executed form, including exhibits, whether filed before or after the Registration Statement becomes effective, (ii) all exhibits and documents incorporated therein or filed therewith, (iii) all consents and certificates of experts in executed form, (iv) the Preliminary Prospectus and all amendments and supplements thereto, and (v) the Prospectus, and all amendments and supplements thereto. (d) During the time when a prospectus is required to be delivered under the 1933 Act, the Company shall comply to the best of its ability with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Shares as contemplated herein and in the Prospectus. The Company shall not file any amendment to the Registration Statement and shall not make any amendment or supplement to the Preliminary Prospectus or to the Prospectus of which you shall not previously have been advised in writing and provided a copy a reasonable time prior to the proposed filings thereof or to which you or counsel for the Underwriters shall reasonably object. If it is necessary, in the Company's reasonable opinion or in the reasonable opinion of the Company's counsel, to amend or supplement the Registration Statement or the Prospectus in connection with the distribution of the Shares, the Company shall forthwith amend or supplement the Registration Statement or the Prospectus, as the case may be, by preparing and filing with the Commission (provided the Underwriters or counsel for the Underwriters does not reasonably object), and furnishing to you such number of copies as you may reasonably request of an amendment or amendments of, or a supplement or supplements to, the Registration Statement or the Prospectus, as the case may be (in form and substance reasonably satisfactory to you and counsel for the Underwriters). If any event shall occur as a result of which it is necessary to amend or supplement the Prospectus to correct an untrue statement of a material fact or to include a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if for any reason it is necessary at any time to amend or supplement the Prospectus to comply with the 1933 Act and the 1933 Act Regulations, the Company shall, subject to the second sentence of this subsection (d), forthwith at their cost and expense amend or supplement the Prospectus by preparing and filing with the Commission, and furnishing to you, such number of copies as you may reasonably request of an amendment or amendments of, or a supplement or supplements to, the Prospectus (in form and substance satisfactory to you and counsel for the Underwriters) so that, as so amended or supplemented, the Prospectus shall not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (e) The Company shall cooperate with you and counsel for the Underwriters in order to qualify the Shares for offering and sale under the securities or blue sky laws, if required, of such jurisdictions as you may reasonably request and shall continue such qualifications in effect so long as may be advisable for distribution of the Shares; provided, however, that the Company shall not be required to qualify to do business as a foreign corporation or file a general consent to service of process in any jurisdiction in connection with the foregoing. The Company shall file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above. The Company will notify you immediately of, and confirm in writing, the suspension of qualification of the Shares or threat thereof in any jurisdiction. 17 18 (f) The Company shall make generally available to their security holders in the manner contemplated by Rule 158 of the 1933 Act Regulations and furnish to you as soon as practicable, but in any event not later than 16 months after the Effective Date, a consolidated earnings statement of the Company in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, conforming with the requirements of Section 11(a) of the 1933 Act and Rule 158. (g) The Company shall use the net proceeds from the sale of the Shares to be sold by the Company hereunder in the manner specified in the Prospectus under the caption "Use of Proceeds." (h) For five years from the Effective Date, the Company shall furnish to the Representative copies of all reports and communications (financial or otherwise) furnished by the Company to the holders of the Shares as a class, copies of all reports and financial statements filed with or furnished to the Commission (other than portions for which confidential treatment has been obtained from the Commission) or with any national securities exchange or The Nasdaq Stock Market or other self-regulatory organization and such other documents, reports and information concerning the business and financial conditions of the Company as the Representative may reasonably request, other than such documents, reports and information for which the Company has the legal obligation not to reveal to the Representative. (i) For a period of 90 days from the Effective Date, the Company shall not, directly or indirectly, offer for sale, sell or agree to sell or otherwise dispose of any Shares (other than pursuant to this Agreement) or any securities of the Company that are substantially similar to the Shares, including any guarantee of such beneficial interests or substantially similar securities, or securities convertible into, exercisable or exchangeable for, or are the voting equivalent of, the Shares or that represent the right to receive any such beneficial interest or substantially similar securities, without your prior written consent. (j) The Company shall use its best efforts to obtain approval for the inclusion of the Shares on The Nasdaq National Market, or in lieu thereof on a national securities exchange, and to remain so quoted for at least five years from the Effective Date or for such shorter period as may be specified in a written consent of the Representative. (k) The Company will promptly provide you with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Shares under the 1933 Act or relating to any documents incorporated by reference into the Registration Statement or the Prospectus. (l) Subsequent to the date of this Agreement and through the date which is the later of (i) the day following the date on which the Underwriters' option to purchase the Option Shares shall expire or (ii) the day following the Option Closing Date with respect to any Option Shares that the Underwriters shall elect to purchase, except as described in or contemplated by the Prospectus, neither the Company nor any of the Subsidiaries shall take any action (or refrain from taking any action) which will result in the Company or the Subsidiaries incurring any material liability or obligation, direct or contingent, or enter into any material transaction, except in the ordinary course of business, or take or refrain from taking any action 18 19 which will cause or result in any material adverse change in the financial position, capital stock, or any material increase in long-term debt, obligations under capital leases or short-term borrowings of the Company and the Subsidiaries on a consolidated basis. (m) The Company shall not, for a period of 180 days after the date hereof, without the prior written consent of the Representative, purchase, redeem or call for redemption, or prepay or give notice of prepayment (or announce any redemption or call for redemption, or any repayment or notice of prepayment) of the Company's securities. (n) The Company shall not take, directly or indirectly, any action designed to result in or which constitutes or which might reasonably be expected to (i) cause or result in stabilization or manipulation of the price of any security of the Company in connection with the sale or resale of the Shares or (ii) otherwise violate the Commission's Regulation M, and the Company is not aware of any such action taken or to be taken by any affiliate of the Company. (o) Prior to the Closing Date (and, if applicable, the Option Closing Date), the Company will not issue any press release or other communication directly or indirectly or hold any press conference with respect to the Company, the Subsidiaries or the offering of the Shares without your prior written consent. (p) The Company and the Subsidiaries shall conduct their businesses in compliance with all applicable federal and state laws, rules, regulations, decisions, directives and orders (including, without limitation, the applicable provisions of the 1933 Act, the 1933 Act Regulations, the 1934 Act, the 1934 Act Regulations, the BHC Act, the Federal Deposit Insurance Corporation Improvement Act, the FRB and the corporate and banking laws of the State of Michigan, as applicable). (q) The Company and the Subsidiaries will maintain and keep accurate books and records reflecting their assets and maintain internal accounting controls which provide reasonable assurance that (1) transactions are executed in accordance with management's authorization, (2) transactions are recorded as necessary to permit the preparation of the Company's consolidated financial statements and to maintain accountability for the assets of the Company and its Subsidiaries, and (3) access to the assets of the Company and its Subsidiaries is permitted. 5. PAYMENT OF EXPENSES. Whether or not this Agreement is terminated or the sale of the Shares to the Underwriters is consummated, the Company covenants and agrees that it will pay or cause to be paid (directly or by reimbursement) all costs and expenses incident to the performance of its obligations under this Agreement, including: (a) the preparation, printing, filing, delivery and shipping of the initial registration statement, the Preliminary Prospectus or Prospectuses, the Registration Statement and the Prospectus and any amendments or supplements thereto, and the printing, delivery and shipping of this Agreement and any other underwriting documents (including, without limitation, underwriters' questionnaires, underwriters' powers of attorney, agreements among underwriters and selected dealers agreements); 19 20 (b) all fees, expenses and disbursements of the Company's counsel and accountants; (c) all fees and expenses incurred in connection with the qualification of the Shares under the securities or blue sky laws of such jurisdictions as you may request, including all filing fees, if any, and fees and disbursements of counsel for the Underwriters in connection therewith, including, without limitation, in connection with the preparation of the Preliminary and Final Blue Sky Memoranda and any legal investment surveys and any supplements thereto; (d) all fees and expenses incurred in connection with filings made with the NASD; (e) any applicable fees and other expenses incurred in connection with the inclusion of the Shares in The Nasdaq National Market; (f) the cost of furnishing to you copies of the initial registration statements, any Preliminary Prospectus, the Registration Statement and the Prospectus and all amendments or supplements thereto; (g) the costs and charges of any transfer agent or registrar and the fees and disbursements of counsel for any transfer agent or registrar; (h) all costs and expenses (including stock transfer taxes) incurred in connection with the printing, issuance and delivery of the Shares to the Underwriters; (i) all other costs and expenses incident to the performance of the obligations of the Company hereunder that are not otherwise specifically provided for in this Section 5. If the sale of Shares contemplated by this Agreement is not completed due to termination pursuant to the terms hereof (other than pursuant to Section 9 hereof), the Company will pay you your accountable out-of-pocket expenses in connection herewith or in contemplation of the performance of your obligations hereunder, including without limitation travel expenses, reasonable fees, expenses and disbursements of counsel or other out-of-pocket expenses incurred by you in connection with any discussion of the offering of the Shares or the contents of the Registration Statement, any investigation of the Company and the Subsidiaries or any preparation for the marketing, purchase, sale or delivery of the Shares, in each case following presentation of reasonably detailed invoices therefor. If the sale of Shares contemplated by this Agreement is completed, the Company shall not be responsible for payment of fees or disbursements of counsel for the Underwriters other than in accordance with paragraph (c) above, or for the reimbursement of any expenses of the Underwriters. 6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters to purchase and pay for the Firm Shares and, following exercise of the option granted by the Company in Section 1 of this Agreement, the Option Shares, are subject, in your sole discretion, to the accuracy of and compliance with the representations and warranties and agreements of the Company herein as of the date hereof and as of the Closing Date (or in the 20 21 case of the Option Shares, if any, as of the Option Closing Date), to the accuracy of the written statements of the Company made pursuant to the provisions hereof, to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) If the Registration Statement or any amendment thereto filed prior to the Closing Date has not been declared effective prior to the time of execution hereof, the Registration Statement shall become effective not later than 10:00 a.m., St. Louis time, on the first business day following the time of execution of this Agreement, or at such later time and date as you may agree to in writing. If required, the Prospectus and any amendment or supplement thereto shall have been timely filed in accordance with Rule 424(b) and Rule 430A under the 1933 Act and Section 4(a) hereof. No stop order suspending the effectiveness of the Registration Statement or any amendment or supplement thereto shall have been issued under the 1933 Act or any applicable state securities laws and no proceedings for that purpose shall have been instituted or shall be pending, or, to the knowledge of the Company or the Underwriters, shall be contemplated by the Commission or any state authority. Any request on the part of the Commission or any state authority for additional information (to be included in the Registration Statement or Prospectus or otherwise) shall have been disclosed to you and complied with to your satisfaction and to the satisfaction of counsel for the Underwriters. (b) No Underwriter shall have advised the Company at or before the Closing Date (and, if applicable, the Option Closing Date) that the Registration Statement or any post-effective amendment thereto, or the Prospectus or any amendment or supplement thereto, contains an untrue statement of a fact which, in your opinion, is material or omits to state a fact which, in your opinion, is material and is required to be stated therein or is necessary to make statements therein (in the case of the Prospectus or any amendment or supplement thereto, in light of the circumstances under which they were made) not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement and the Shares, and the authorization and form of the Registration Statement and Prospectus, other than financial statements and other financial data, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information relating thereto that they may reasonably request to enable them to pass upon such matters. (d) Dickinson Wright PLLC, counsel for the Company, shall have furnished to you their signed opinion, dated the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to counsel for the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing and in good standing under the laws of the State of Michigan, and is duly registered as a bank holding company under the BHC Act. Each of the Subsidiaries is validly existing and in good standing under the laws of its jurisdiction of incorporation or organization. To the best of such counsel's knowledge and information after due inquiry, the Subsidiaries are not required to be authorized to do business in any other jurisdiction. Each of the Company and the Subsidiaries has full corporate power and authority to own or lease its properties and to conduct its business as such business is described in the 21 22 Prospectus. To the best of such counsel's knowledge, all outstanding shares of capital stock of the Bank and the Mortgage Company have been duly authorized and validly issued and are fully paid and nonassessable except to the extent such shares may be deemed assessable under 12 U.S.C. Section 1831o or Sections 77 and 201 of the Michigan Banking Code, and, to the best of such counsel's knowledge, except as disclosed in the Prospectus, there are no outstanding rights, options or warrants to purchase any such shares or securities convertible into or exchangeable for any such shares. (ii) The capital stock of the Company conforms to the description thereof contained in the Prospectus in all material respects. To the best of such counsel's knowledge, the equity capitalization of the Company as of June 30, 2001 is as set forth under the caption "Capitalization" in the Prospectus, and the outstanding capital stock of the Company has been duly authorized and validly issued, and is fully paid and nonassessable and is not in violation of or subject to any other rights to subscribe for or purchase any securities. The form of certificates to evidence the Shares has been approved by the Company and is in due and proper form and complies with all applicable requirements. To the best of such counsel's knowledge, there are no outstanding rights, options or warrants to purchase, no other outstanding securities convertible into or exchangeable for, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company except as described in the Prospectus. (iii) All necessary corporate action required to be taken by the Company for the authorization, issuance, sale and delivery of the Shares in accordance with the terms and conditions set forth in this Agreement have been duly authorized, validly and sufficiently taken. The Shares have been duly and validly authorized, and when issued and sold in accordance with this Agreement, the Shares will be fully paid and nonassessable. The Shares have been approved for quotation on The Nasdaq National Market subject to official notice of issuance. There are no preemptive or other rights to subscribe for or to purchase, and other than as disclosed in the Prospectus no restrictions upon the voting or transfer of, any shares of capital stock or equity securities of the Company or the Subsidiaries pursuant to the corporate charter, by-laws or other governing documents of the Company or the Subsidiaries, or, to the best of such counsel's knowledge, any agreement or other instrument to which either Company or any of the Subsidiaries is a party or by which either Company or any of the Subsidiaries may be bound. (iv) The Company has all requisite corporate power to enter into and perform its obligations under this Agreement, and this Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the enforcement hereof or thereof may be limited by general principles of equity, regardless of whether considered in a proceeding at law of in equity, and by bankruptcy or other laws relating to or affecting creditors rights generally and except as the indemnification and contribution provisions hereof may be limited under applicable laws and certain remedies may not be available in the case of a non-material breach. 22 23 (v) To the best of such counsel's knowledge, neither the Company nor any of the Subsidiaries is in breach or violation of, or default under, with or without notice or lapse of time or both, its corporate charter, by-laws or governing document to the extent, in each case, that any violation, conflict or default would reasonable be expected to have a material adverse effect on the Company and the Subsidiaries taken as a whole. The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated by this Agreement, (A) do not violate or conflict with their respective organic documents, and (B) to the best of such counsel's knowledge, do not conflict with, or constitute a material default or result in the imposition of any material lien, charge, encumbrance or restriction upon any property or assets of the Company or the Subsidiaries, or constitute a material breach or violation of, or constitute a material default under, with or without notice or lapse of time or both, any material contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, or other agreement to which the Company or any Subsidiary is a party or by which any of them or any of their respective properties may be bound, or, to the best of such counsel's knowledge, any order, decree, judgment, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, known to such counsel having jurisdiction over the Company or the Subsidiaries or any of their respective properties, to the extent, in each case, that any such violation, conflict, default or lien would reasonably be expected to have a material adverse effect on the Company and the Subsidiaries taken as a whole. (vi) To the best of such counsel's knowledge, holders of securities of the Company either do not have any right that, if exercised, would require the Company to cause such securities to be included in the Registration Statement or have waived such right. To the best of such counsel's knowledge, neither the Company nor any of the Subsidiaries is a party to any agreement or other instrument which grants rights for or relating to the registration of any securities of the Company. (vii) Except as set forth in the Registration Statement and the Prospectus, to the best of such counsel's knowledge, (i) no action, suit or proceeding at law or in equity is pending or threatened in writing to which the Company or the Subsidiaries is or is threatened to be made a party, and (ii) no action, suit or proceeding is pending or threatened in writing against or affecting the Company or the Subsidiaries or any of their properties, before or by any court or governmental official, commission, board or other administrative agency, authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could reasonably be expected to have a material adverse effect on the consummation of this Agreement or the issuance and sale of the Shares as contemplated herein or the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis or which is required to be disclosed in the Registration Statement or the Prospectus and is not so disclosed. (viii) No authorization, approval, consent or order of or filing, registration or qualification with, any person, court, governmental body or authority is required in connection with the transactions contemplated by this Agreement, the Registration Statement and the Prospectus, except such as have been obtained under the 23 24 1933 Act, the Securities Exchange Act of 1934, state securities laws, and except such as may be required under Interpretations or Rules of the NASD, in connection with the purchase and distribution of the Shares by the Underwriters and from the Nasdaq National Market relating to the listing of the Shares. (ix) The Registration Statement and the Prospectus and any amendments or supplements thereto (other than the financial statements or other financial data included therein or omitted therefrom and Underwriters' Information as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations as of their respective dates of effectiveness or issuance; the conditions for use of Form S-2 have been satisfied and, as of the date they were filed with the Commission, the documents incorporated by reference into the Prospectus complied as to form in all material respects with the requirements of the 1934 Act and the 1934 Act Regulations. (x) To the best of such counsel's knowledge, there are no contracts, agreements, leases or other documents of a character required to be disclosed in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not so disclosed or filed. (xi) The statements under the captions "Capitalization," "Business -- Regulation and Supervision" and "Description of Capital Stock" in the Prospectus, insofar as such statements constitute a summary of legal and regulatory matters, documents or instruments referred to therein, are accurate descriptions of the matters purported to be summarized therein in all material respects and fairly present the information called for with respect to such legal matters, documents and instruments. (xii) Such counsel has been advised by the staff of the Commission that the Registration Statement has become effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made within the time period required by Rule 424(b); to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for a stop order are pending or threatened by the Commission. (xiii) Except as described in or contemplated by the Prospectus, to the best of such counsel's knowledge, there are no contractual encumbrances or restrictions, or material legal restrictions required to be described therein on the ability of (A) the Company or the Bank to pay dividends or make any other distributions on its capital stock or to pay indebtedness owed to the Company, (B) the Subsidiaries to make any loans or advances to, or investments in, the Company or (C) the Subsidiaries to transfer any of their property or assets to the Company. (xiv) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, the Company will not be, an "investment company," or an entity "controlled" by an "investment company" as defined in the Investment Company Act. 24 25 (xv) To the best of such counsel's knowledge, (A) the respective businesses and operations of the Company and the Subsidiaries as described in the Prospectus comply in all material respects with the requirements of the BHC Act, the Federal Deposit Insurance Act, and the Michigan Banking Code, and all rules and regulations respectively promulgated under each such statute (collectively "Banking Laws"), except in those instances where non-compliance would not reasonably be expected to materially impair the ability of the Company and the Subsidiaries to conduct their businesses; and (B) the Company and the Subsidiaries possess and are operating in all material respects in compliance with the terms, provisions and conditions of all Permits (as defined herein) that are required under Banking Laws to conduct their businesses as described in the Prospectus and which are material to the Company and the Subsidiaries on a consolidated basis, except in those instances where the loss thereof or non-compliance therewith would not reasonably be expected to have a material adverse effect on the financial condition, earnings, affairs, business or results of operations of the Company and the Subsidiaries on a consolidated basis; (C) all Permits referred to in clause (B) are valid and in full force and effect; (D) no action, suit or proceeding is pending or overtly threatened which may lead to the revocation, termination, suspension or non-renewal of any Permit referred to in clause (B), except in those instances where the loss thereof or non-compliance therewith would not materially impair the ability of the Company or the Subsidiaries to conduct their respective businesses. In giving the above opinion, such counsel may state that, insofar as such opinion involves factual matters, they have relied upon certificates of officers of the Company including, without limitation, certificates as to the identity of any and all material contracts, indentures, mortgages, deeds of trust, loans or credit agreements, notes, leases, franchises, licenses or other agreements or instruments, and all material permits, easements, consents, licenses, franchises and government regulatory authorizations, for purposes of paragraphs (viii), (x), (xii), (xiii), and (xvi) hereof, and certificates of public officials. Such counsel shall also confirm that, in connection with the preparation of the Registration Statement and Prospectus, such counsel has participated in conferences (including telephone conferences) with officers and representatives of the Company and with their independent public accountants and with you and your counsel, at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed in detail the contents of the Registration Statement and Prospectus and the documents incorporated therein by reference (without taking further action to verify independently the statements made in the Registration Statement and the Prospectus, and without assuming responsibility for the accuracy or completeness of such statements, except to the extent expressly provided in paragraphs (ii) and (xi) above), and nothing has come to the attention of such counsel that would lead such counsel to believe (A) that the Registration Statement or any amendment thereto (except for the financial statements and related schedules and statistical data included therein or omitted therefrom or Underwriters' Information, as to which such counsel need express no opinion), at the time the Registration Statement or any such amendment became effective, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (B) that the Prospectus or any amendment or supplement thereto and the documents incorporated therein by reference (except for the financial 25 26 statements and related schedules and statistical data included therein or omitted therefrom or Underwriters' Information, as to which such counsel need express no opinion), at the time the Registration Statement became effective (or, if the term "Prospectus" refers to the prospectus first filed pursuant to Rule 424(b) of the 1933 Act Regulations, at the time the Prospectus was issued), at the time any such amended or supplemented Prospectus was issued, at the Closing Date and, if applicable, the Option Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (C) that there is any amendment to the Registration Statement required to be filed that has not already been filed. (e) Vedder, Price, Kaufman & Kammholz, counsel for the Underwriters, shall have furnished you their signed opinion, dated the Closing Date or the Option Closing Date, as the case may be, with respect to the sufficiency of all corporate procedures and other legal matters relating to this Agreement, the validity of the Shares, the Registration Statement, the Prospectus and such other related matters as you may reasonably request and there shall have been furnished to such counsel such documents and other information as they may request to enable them to pass on such matters. In giving such opinion, Vedder, Price, Kaufman & Kammholz may rely as to matters of fact upon statements and certifications of officers of the Company and of other appropriate persons and may rely as to matters of law, other than the law of the United States and the State of Illinois, and upon the opinions of Dickinson Wright PLLC herein. (f) On the date of this Agreement and on the Closing Date (and, if applicable, any Option Closing Date), the Underwriters shall have received from Crowe, Chizek and Company LLP a letter, dated the date of this Agreement and the Closing Date (and, if applicable, the Option Closing Date), respectively, in form and substance satisfactory to the Underwriters, confirming that they are independent public accountants with respect to the Company and the Subsidiaries, within the meaning of the 1933 Act and the 1933 Act Regulations, and stating in effect that: (i) In their opinion, the consolidated financial statements of the Company audited by them and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations. (ii) On the basis of the procedures specified by the American Institute of Certified Public Accountants as described in SAS No. 71, "Interim Financial Information," inquiries of officials of the Company responsible for financial and accounting matters, and such other inquiries and procedures as may be specified in such letter, which procedures do not constitute an audit in accordance with U.S. generally accepted auditing standards, nothing came to their attention that caused them to believe that, if applicable, the unaudited interim consolidated financial statements of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations or are not in conformity with U.S. generally accepted accounting principles applied on a basis substantially consistent, except as noted in the Registration Statement, 26 27 with the basis for the audited consolidated financial statements of the Company included in the Registration Statement. (iii) On the basis of limited procedures, not constituting an audit in accordance with U.S. generally accepted auditing standards, consisting of a reading of the unaudited interim financial statements and other information referred to below, a reading of the latest available unaudited condensed consolidated financial statements of the Company, inspection of the minute books of the Company since the date of the latest audited financial statements of the Company included or incorporated by reference in the Registration Statement, inquiries of officials of the Company responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the capital stock of the Company, any increase in the consolidated debt of the Company or any decrease in the consolidated total assets or shareholders equity of the Company or any changes, decreases or increases in other items specified by the Underwriters, in each case as compared with amounts shown in the latest unaudited interim consolidated statement of financial condition of the Company included or incorporated by reference in the Registration Statement except in each case for changes, increases or decreases which the Registration Statement specifically discloses have occurred or may occur or which are described in such letter; and (B) for the period from the date of the latest unaudited interim consolidated financial statements included or incorporated by reference in the Registration Statement to the specified date referred to in Clause (iii)(A), there were any decreases in the consolidated interest income, net interest income or net income of the Company or in the per share amount of net income of the Company or any changes, decreases or increases in any other items specified by the Underwriters, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Underwriters, except in each case for increases or decreases which the Registration Statement discloses have occurred or may occur or which are described in such letter. (iv) In addition to the audit referred to in their report included or incorporated by reference in the Registration Statement and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (ii) and (iii) above, they have carried out certain specified procedures, not constituting an audit in accordance with U.S. generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Underwriters which are derived from the general accounting records and consolidated financial statements of the Company which appear in the Registration Statement, and have compared such amounts, percentages and financial information with the accounting records and the material derived from such records and consolidated financial statements of the Company and have found them to be in agreement. 27 28 In the event that the letters to be delivered on the date hereof, on the Closing Date (and, if applicable, any Option Closing Date) referred to above set forth any such changes, decreases or increases as specified in Clauses (iii)(A) or (iii)(B) above, or any exceptions from such agreement specified in Clause (iv) above, it shall be a further condition to the obligations of the Underwriters that the Representative shall have determined, after discussions with officers of the Company responsible for financial and accounting matters, that such changes, decreases, increases or exceptions as are set forth in such letters do not (x) reflect a material adverse change in the items specified in Clause (iii)(A) above as compared with the amounts shown in the latest unaudited consolidated statement of financial condition of the Company included or incorporated by reference in the Registration Statement, (y) reflect a material adverse change in the items specified in Clause (iii)(B) above as compared with the corresponding periods of the prior year or other period specified by the Representative, or (z) reflect a material adverse change in items specified in Clause (iv) above from the amounts shown in the Preliminary Prospectus distributed by the Underwriters in connection with the offering contemplated hereby or from the amounts shown in the Prospectus. (g) At the Closing Date and, if applicable, the Option Closing Date, you shall have received certificates of the chief executive officer and the chief financial and accounting officer of the Company, which certificates shall be deemed to be made on behalf of the Company dated as of the Closing Date and, if applicable, the Option Closing Date, evidencing satisfaction of the conditions of Section 6(a) and stating that (i) the representations and warranties of the Company set forth in Section 2(a) hereof are accurate as of the Closing Date and, if applicable, the Option Closing Date, and that the Company has complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to such Closing Date and, if applicable, the Option Closing Date; (ii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change in the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis; (iii) since such dates there has not been any material transaction entered into by the Company or the Subsidiaries other than transactions in the ordinary course of business; and (iv) they have carefully examined the Registration Statement and the Prospectus as amended or supplemented and nothing has come to their attention that would lead them to believe that either the Registration Statement or the Prospectus, or any amendment or supplement thereto as of their respective effective or issue dates, contained, and the Prospectus as amended or supplemented at such Closing Date (and, if applicable, the Option Closing Date), contains any untrue statement of a material fact, or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) covering such other matters as you may reasonably request. The officers' certificate of the Company shall further state that no stop order affecting the Registration Statement is in effect or, to their knowledge, threatened. (h) The NASD, upon review of the terms of the public offering of the Shares, shall not have objected to the Underwriters' participation in such offering. (i) Prior to the Closing Date and, if applicable, the Option Closing Date, the Company shall have furnished to you and counsel for the Underwriters all such other documents, certificates and opinions as they have reasonably requested. 28 29 All opinions, certificates, letters and other documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you. Any certificate signed by any officer of the Company and delivered to you pursuant hereto shall also be deemed to be a representation and warranty of the Company to the Underwriters as to the statements made therein. The Company shall furnish you with conformed copies of such opinions, certificates, letters and other documents as you shall reasonably request. If any of the conditions referred to in this Section 6 shall not have been fulfilled when and as required by this Agreement, this Agreement and all of the Underwriters' obligations hereunder may be terminated by you on notice to the Company at, or at any time before, the Closing Date or the Option Closing Date, as applicable. Any such termination shall be without liability of the Underwriters to the Company. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to jointly and severally indemnify and hold harmless each Underwriter, each of its directors, officers and agents, and each person, if any, who controls any Underwriter within the meaning of the 1933 Act against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and reasonable attorney fees and expenses), joint or several, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact made by the Company contained in Section 2 of this Agreement (or any certificate delivered by the Company pursuant to Sections 6(h), 6(i) and 6(l) hereof) or the registration statement as originally filed or the Registration Statement, any Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto, (ii) any blue sky application or other document executed by the Company specifically for that purpose or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify any of the Shares under the securities laws thereof (any such application, document or information being hereinafter referred to as a "Blue Sky Application"), (iii) any omission or alleged omission to state a material fact in the registration statement as originally filed or the Registration Statement, the Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application required to be stated therein or necessary to make the statements therein not misleading, and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and attorney fees), joint or several, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) the enforcement of this indemnification provision or the contribution provisions of Section 7(d); and shall reimburse each such indemnified party for any reasonable legal or other expenses as incurred, but in no event less frequently than 30 days after each invoice is submitted, incurred by them in connection with investigating or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action, notwithstanding the possibility that payments for such expenses might later be held to be improper, in which case such payments shall be promptly refunded; provided, however, that the Company shall not be liable in any such case to the extent, but only to the extent, that any such losses, claims, damages, liabilities and expenses arise out of or are based upon any untrue 29 30 statement or omission or allegation thereof that has been made therein or omitted therefrom in reliance upon and in conformity with the Underwriters' Information; and provided further, that the indemnification contained in this paragraph with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or of any person controlling any Underwriter) to the extent any such losses, claims, damages, liabilities or expenses directly results from the fact that such Underwriter sold Shares to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus (as amended or supplemented if any amendments or supplements thereto shall have been furnished to you in sufficient time to distribute same with or prior to the written confirmation of the sale involved), if required by law, and if such loss, claim, damage, liability or expense would not have arisen but for the failure to give or send such person such document. The foregoing indemnity agreement is in addition to any liability the Company may otherwise have to any such indemnified party, but it is not intended that any such indemnified party shall be entitled to duplicate recovery hereunder. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, each of its directors, each of its officers and each person, if any, who controls the Company within the meaning of the 1933 Act, to the same extent as required by the foregoing indemnity from the Company to each Underwriter, but only with respect to the Underwriters' Information. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to any such indemnified party, but it is not intended that any such indemnified party shall be entitled to duplicate recovery hereunder. (c) If any action or claim shall be brought or asserted against any indemnified party or any person controlling an indemnified party in respect of which indemnity may be sought from the indemnifying party, such indemnified party or controlling person shall promptly notify the indemnifying party in writing, and the indemnifying party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all expenses; provided, however, that the failure so to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under such paragraph, and further, shall only relieve it from liability under such paragraph to the extent prejudiced thereby. Any indemnified party or any such controlling person shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such indemnified party or such controlling person unless (i) the employment thereof has been specifically authorized by the indemnifying party in writing, (ii) the indemnifying party has failed to assume the defense or to employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both such indemnified party or such controlling person and the indemnifying party and such indemnified party or such controlling person shall have been advised by such counsel that there may be one or more legal defenses available to it that are different from or in addition to those available to the indemnifying party (in which case, if such indemnified party or controlling person notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party or such controlling person) it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses 30 31 of more than one separate firm of attorneys at any time and for all such indemnified party and controlling persons, which firm shall be designated in writing by the indemnified party (and, if such indemnified parties are Underwriters, by you, as Representative). Each indemnified party and each controlling person, as a condition of such indemnity, shall use reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. The indemnifying party shall not be liable for any settlement of any such action effected without its written consent, but if there shall be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. An indemnifying party shall not, without the prior written consent of each indemnified party, settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnity may be sought hereunder (whether or not such indemnified party or any person who controls such indemnified party within the meaning of the 1933 Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes a release of each such indemnified party reasonably satisfactory to each such indemnified party and each such controlling person from all liability arising out of such claim, action, suit or proceeding or unless the indemnifying party shall confirm in a written agreement with each indemnified party, that notwithstanding any federal, state or common law, such settlement, compromise or consent shall not alter the right of any indemnified party or controlling person to indemnification or contribution as provided in this Agreement. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraphs (a), (b) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares (before deducting expenses) received by the Company bear to the total underwriting discounts, commissions and compensation received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this paragraph (d) were 31 32 determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in the first sentence of this paragraph (d) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by such Underwriter and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriters has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each person who controls an Underwriter within the meaning of the 1933 Act shall have the same rights to contribution as such Underwriter, and each person who controls the Company within the meaning of the 1933 Act, each officer of the Company and each director of the Company shall have the same rights to contribution as the Company subject in each case to the preceding sentence. The obligations of the Company under this paragraph (d) shall be in addition to any liability which the Company may otherwise have and the obligations of the Underwriters under this paragraph (d) shall be in addition to any liability that the Underwriters may otherwise have, but it is not intended that any such indemnified party shall be entitled to duplicate recovery hereunder. (e) The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling an Underwriter or by or on behalf of the Company, or such directors or officers (or any person controlling the Company), (ii) acceptance of any Shares and payment therefor hereunder and (iii) any termination of this Agreement. A successor of any Underwriter or of the Company, such directors or officers (or of any person controlling an Underwriter or the Company) shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. 8. TERMINATION. You shall have the right to terminate this Agreement at any time at or prior to the Closing Date or, with respect to the Underwriters' obligation to purchase the Option Shares, at any time at or prior to the Option Closing Date, without liability on the part of the Underwriters to the Company, if: (a) The Company shall have failed, refused, or been unable to perform any agreement on its part to be performed under this Agreement, or any of the conditions referred to in Section 6 shall not have been fulfilled, when and as required by this Agreement; (b) The Company or any of the Subsidiaries shall have sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree 32 33 which in the judgment of the Representative materially impairs the investment quality of the Shares; (c) There has been since the respective dates as of which information is given in the Registration Statement or the Prospectus, any materially adverse change in, or any development which, in the reasonable judgment of the Representative, is reasonably likely to have a material adverse effect on, the condition (financial or otherwise), earnings, affairs, business, prospects, or results of operations of the Company and the Subsidiaries on a consolidated basis, whether or not arising in the ordinary course of business; (d) There has occurred any outbreak or escalation of hostilities or other calamity or crisis or material change in general economic, political or financial conditions, or internal conditions, the effect of which on the financial markets of the United States is such as to make it, in the reasonable judgment of the Representative, impracticable to market the Shares or enforce contracts for the sale of the Shares; (e) Trading generally on the New York Stock Exchange, the American Stock Exchange or The Nasdaq Stock Market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, by any of said exchanges or market system or by the Commission or any other governmental authority; (f) A banking moratorium shall have been declared by either federal or Michigan authorities; or (g) Any action shall have been taken by any government in respect of its monetary affairs which, in the reasonable judgment of the Representative, has a material adverse effect on the United States securities markets so as to make it, in the reasonable judgment of the Representative, impracticable to market the Shares or enforce contracts for the sale of the Shares. If this Agreement shall be terminated pursuant to this Section 8, the Company shall not then be under any liability to the Underwriters except as provided in Sections 5 and 7 hereof. 9. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters shall default in its or their obligations to purchase Shares hereunder, the other Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase; provided, however, that the non-defaulting Underwriters shall be under no obligation to purchase Shares to the extent that the number of such Shares is more than 110% of such non-defaulting Underwriter's underwriting commitment set forth in Schedule I hereto. In the event that the non-defaulting Underwriters are not obligated under the above paragraph to purchase the Shares which the defaulting Underwriter or Underwriters agreed but failed to purchase, the Representative may in its discretion arrange for one or more of the Underwriters or for another party or parties to purchase such Shares on the terms contained herein. If within one business day after such default the Representative does not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of one business 33 34 day within which to procure another party or parties satisfactory to the Representative to purchase such Shares on such terms. In the event that the Representative or the Company do not arrange for the purchase of any Shares to which a default relates as provided above, this Agreement shall be terminated. If the remaining Underwriters or substituted underwriters are required hereby or agree to take up all or a part of the Shares of a defaulting Underwriter or Underwriters as provided in this Section 9, (i) you shall have the right to postpone the Closing Date for a period of not more than five full business days, in order to effect any changes that, in the opinion of counsel for the Underwriters or the Company, may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or agreements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which, in its opinion, may thereby be made necessary and (ii) the respective numbers of Shares to be purchased by the remaining Underwriters or substituted underwriters shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall relieve any defaulting Underwriter of any liability it may have for damages occasioned by its default hereunder. Any termination of this Agreement pursuant to this Section 9 shall be without liability on the part of any non-defaulting Underwriter or the Company, except for expenses to be paid or reimbursed pursuant to Section 5 and except for the provisions of Section 7. 10. EFFECTIVE DATE OF AGREEMENT. If the Registration Statement is not effective at the time of execution of this Agreement, this Agreement shall become effective on the Effective Date at the time the Commission declares the Registration Statement effective. The Company shall immediately notify the Underwriters when the Registration Statement becomes effective. If the Registration Statement is effective at the time of execution of this Agreement, this Agreement shall become effective at the earlier of 11:00 a.m. St. Louis time, on the first full business day following the day on which this Agreement is executed, or at such earlier time as the Representative shall release the Shares for initial public offering. The Representative shall notify the Company immediately after it has taken any action which causes this Agreement to become effective. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you or by you, as Representative of the several Underwriters, by notifying the Company, except that the provisions of Sections 5 and 7 shall at all times be effective. 11. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The representations, warranties, indemnities, agreements and other statements of the Company and their officers set forth in or made pursuant to this Agreement and the agreements of the Underwriters contained in Section 7 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Company or controlling persons of the Company, or by or on behalf of the Underwriters or controlling persons of the Underwriters or any termination or cancellation of this Agreement and shall survive delivery of and payment for the Shares. 34 35 12. NOTICES. Except as otherwise provided in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, mailed by registered or certified mail, return receipt requested, or transmitted by any standard form of telecommunication and confirmed. Notices to the Company shall be sent to 216 North Division Avenue, Grand Rapids, Michigan 49503, Attention: Gerald R. Johnson, Jr. (with a copy to Dickinson Wright PLLC, 500 Woodward Avenue, Suite 4000, Detroit, Michigan 48226, Attention: Jerome M. Schwartz, Esq.) and notices to the Underwriters shall be sent to Stifel, Nicolaus & Company, Incorporated, 501 North Broadway, 9th Floor, St. Louis, Missouri 63102, Attention: Patrick R. Koster (with a copy to Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois 60601, Attention: Jennifer R. Evans, Esq.). In all dealings with the Company under this Agreement, Stifel, Nicolaus & Company, Incorporated shall act as representative of and on behalf of the several Underwriters, and the Company shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of the Underwriters, made or given by Stifel, Nicolaus & Company, Incorporated on behalf of the Underwriters, as if the same shall have been made or given in writing by the Underwriters. 13. PARTIES. The Agreement herein set forth is made solely for the benefit of the Underwriters and the Company and, to the extent expressed, directors, trustees and officers of the Company, any person controlling the Company or the Underwriters, and their respective successors and assigns. No other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, in his status as such purchaser, from the Underwriters of the Shares. 14. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Missouri, without giving effect to the choice of law or conflicts of law principles thereof. 15. AUTHORITY. Any certificate signed by an authorized officer of the Company and delivered to the Representative or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. 16. COUNTERPARTS. This Agreement may be executed by facsimile and in one or more counterparts, and when a counterpart has been executed by each party hereto all such counterparts taken together shall constitute one and the same Agreement. signatures appear on the following page 35 36 If the foregoing is in accordance with the your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this shall become a binding agreement between the Company and you in accordance with its terms. Very truly yours, MERCANTILE BANK CORPORATION By:_______________________________ Gerald R. Johnson, Jr. Chairman and Chief Executive Officer CONFIRMED AND ACCEPTED, as of _____________, 2001. STIFEL, NICOLAUS & COMPANY, INCORPORATED By:__________________________ Patrick R. Koster First Vice President For itself and as Representative of the several Underwriters named in Schedule I hereto. 37 SCHEDULE I UNDERWRITERS
Number of Firm Shares ----------- Stifel, Nicolaus & Company, Incorporated....................... Howe Barnes Investments, Inc................................... Tucker Anthony Sutro Capital Markets........................... --------- Total....................................................... 1,200,000 =========
I-1 38 EXHIBIT A LIST OF SUBSIDIARIES Mercantile Bank of West Michigan Mercantile Bank Mortgage Company MBWM Capital Trust I A-1 EX-5.1 3 k63607ex5-1.txt OPINION/CONSENT OF DICKINSON WRIGHT PLLC 1 EXHIBIT 5.1 Dickinson Wright PLLC 500 Woodward Avenue, Suite 4000 Detroit, Michigan 48226 Phone No. 313-223-3500 Facsimile No. 313-223-3598 July 13, 2001 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C 20549 Re: Mercantile Bank Corporation Registration Statement on Form S-2 Ladies and Gentlemen: We are acting as counsel to Mercantile Bank Corporation, a Michigan corporation (the "Company"), in connection with the filing with the Securities and Exchange Commission of a Registration Statement on Form S-2 (the "Registration Statement") under the Securities Act of 1933. The Registration Statement relates to shares of the Company's common stock that the Company proposes to issue and sell (the "Common Stock") as provided for in the Registration Statement. In connection with this opinion, we have examined originals, or copies, certified or otherwise identified to our satisfaction, of the Registration Statement, the Articles of Incorporation and the By-Laws of the Company, as well as such other corporate records, documents and other papers as we deemed necessary to examine for purposes of this opinion. We have assumed the authenticity, accuracy and completeness of all documents submitted to us as originals, the conformity to authentic original documents of all documents submitted to us as certified, conformed or photostatic copies and the genuineness of all signatures. Based on the foregoing, we are of the opinion that the Common Stock, when issued and sold by the Company as contemplated by the Registration Statement, will be legally issued, fully paid and non-assessable. Our opinion expressed above is limited to the Federal securities laws and the laws of the State of Michigan currently in effect. We consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the prospectus included in the Registration Statement. Very truly yours, /s/ Dickinson Wright PLLC EX-23.1 4 k63607ex23-1.txt CONSENT OF CROWE, CHIZEK AND COMPANY LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use of our report dated January 19, 2001, except Note 15, which is dated March 22, 2001, on the consolidated financial statements of Mercantile Bank Corporation as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, included within the Registration Statement on Form S-2 and Prospectus of Mercantile Bank Corporation. We also consent to the use of our name as "Experts" in the Prospectus. /s/ Crowe, Chizek and Company LLP Grand Rapids, Michigan July 11, 2001 -----END PRIVACY-ENHANCED MESSAGE-----