-----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, Ij+Mbz87yGEZ6c/X783vQrOrvRqhLjw2ODiNtzy0fEgvIC3pa43x6BI7Es1Z3G7E 6M8zX591IYufmlJcg1jQKA== 0000950124-04-000753.txt : 20040309 0000950124-04-000753.hdr.sgml : 20040309 20040309121323 ACCESSION NUMBER: 0000950124-04-000753 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE BANK CORP CENTRAL INDEX KEY: 0001042729 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 383360865 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26719 FILM NUMBER: 04656580 BUSINESS ADDRESS: STREET 1: 5650 BYRON CENTER AVENUE S. W. CITY: WYOMING STATE: MI ZIP: 49509 BUSINESS PHONE: 616 406-3777 MAIL ADDRESS: STREET 1: 5650 BYRON CENTER AVENUE S. W. CITY: WYOMING STATE: MI ZIP: 49509 10-K 1 k82542e10vk.txt ANNUAL REPORT FOR THE FISCAL YEAR ENDED 12/31/2003 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________________ Commission File Number 000-26719 MERCANTILE BANK CORPORATION ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MICHIGAN 38-3360865 - ----------------------------------------------------------------------- ---------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number) 5650 BYRON CENTER AVENUE SW, WYOMING, MICHIGAN 49509 - ----------------------------------------------------------------------- ---------------------------------------------------- (Address of Principal Executive Offices) (Zip Code)
(616) 406-3777 ------------------------------------------------------------------------------- (Registrant's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK (Title of Class) 9.60% CUMULATIVE PREFERRED SECURITIES, $10 LIQUIDATION AMOUNT ---------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO ----- ----- The aggregate value of the common equity held by non-affiliates (persons other than directors and executive officers) of the Registrant, computed by reference to the average of the closing bid and asked prices of the common stock as of the last business day of the Registrant's most recently completed second quarter, was approximately $179.7 million. As of February 10, 2004, there were issued and outstanding 6,813,472 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders (Portions of Part III). PART I ITEM 1. BUSINESS THE COMPANY Mercantile Bank Corporation is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). Unless the text clearly suggests otherwise, references to "us," "we," "our," or "the company" include Mercantile Bank Corporation and its wholly-owned subsidiaries. As a bank holding company, we are subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). We were organized on July 15, 1997, under the laws of the State of Michigan, primarily for the purpose of holding all of the stock of Mercantile Bank of West Michigan ("our bank"), and of such other subsidiaries as we may acquire or establish. Our bank commenced business on December 15, 1997. MBWM Capital Trust I ("the trust"), a business trust subsidiary, was formed in September 1999. Mercantile Bank Mortgage Company initiated business in October 2000 as a subsidiary of our bank, and was reorganized as Mercantile Bank Mortgage Company, LLC ("our mortgage company"), on January 1, 2004. On February 7, 2002, Mercantile BIDCO, Inc. ("our BIDCO"), a subsidiary of our bank, was granted a license by the Michigan Office of Financial and Insurance Services to operate as a Michigan Business and Industrial Development Company under the Michigan BIDCO Act of 1986. Mercantile Insurance Center, Inc. ("our insurance company"), a subsidiary of our bank, commenced operations during 2002 to offer insurance products. Mercantile Bank Real Estate Co., L.L.C., ("our real estate company"), a subsidiary of our bank, was organized on July 21, 2003, principally to develop, construct and own a new facility to be constructed in downtown Grand Rapids which will serve as our bank's new main office and Mercantile Bank Corporation's headquarters. 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, three private placements of common stock during 2001, a public offering of common stock in August 2001 and a public offering of common stock in September 2003. Our expenses have generally been paid using the proceeds of the capital sales and dividends from our bank. Our principal source of future operating funds is expected to be dividends from our bank. We filed an election to become a financial holding company, pursuant to the Bank Holding Company Act, as amended by Title I of the Gramm-Leach-Bliley Act and implementing Federal Reserve Board regulations, which election became effective March 23, 2000. OUR BANK Our bank is a state banking company that operates under the laws of the State of Michigan, pursuant to a charter issued by the Michigan Office of Financial and Insurance Services. Our bank's deposits are insured to the maximum extent permitted by law by the Federal Deposit Insurance Corporation ("FDIC"). Our bank's primary service area is the Kent and Ottawa County areas of West Michigan, which includes the City of Grand Rapids, the second largest city in the State of Michigan. Our bank, through its main office located at 216 North Division Avenue, Grand Rapids, Michigan, its combination branch and retail loan center located at 4613 Alpine Avenue, Comstock Park, Michigan, its combination branch and operations center located at 5610 Byron Center Avenue SW, Wyoming, Michigan, its branch located at 4860 Broadmoor, Kentwood, Michigan, its branch located at 3156 Knapp Street NE, Grand Rapids, Michigan and its administration facility located at 5650 Byron Center Avenue SW, Wyoming, Michigan, provides commercial and retail banking services primarily to small- to medium-sized businesses based in and around Grand Rapids. Our bank also has a loan production office located at 675 E. 16th Street, Holland, Michigan. 2. Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans, and accepts checking, savings and time deposits. Our bank owns five automated teller machines ("ATM") that participate in the MAC, NYCE and PLUS regional network systems, as well as other ATM networks throughout the country. Our bank also enables customers to conduct certain loan and deposit transactions by telephone and personal computer. Courier service is provided to certain commercial customers, and safe deposit facilities are available at all branch locations. Our bank does not have trust powers. In December 2001, our bank entered into a joint brokerage services and marketing agreement with Raymond James Financial Services, Inc. to make available to its customers financial planning, retail brokerage, equity research, insurance and annuities, retirement planning, trust services and estate planning. THE TRUST In 1999 we formed the trust, a Delaware business trust. The trust's business and affairs are conducted by its property trustee, a Delaware trust company, and three individual administrative trustees who are employees and officers of the company. The trust was established for the purpose of issuing and selling its preferred securities and common securities, and used the proceeds from the sales of those securities to acquire subordinated debentures issued by the company. Substantially all of the net proceeds received by the company from the transaction were contributed to our bank as capital. Additional information regarding the trust is incorporated by reference to "Note 15 -- Subordinated Debentures" and "Note 17 -- Regulatory Matters" of the Consolidated Financial Statements included in this Annual Report on pages F-43 through F-45. OUR MORTGAGE COMPANY Our mortgage company's predecessor, Mercantile Bank 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 Mercantile Bank Mortgage Company. On the same date our bank also transferred its residential mortgage origination function to Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile Bank Mortgage Company was reorganized as Mercantile Bank Mortgage Company, LLC, a newly established limited liability company, which is 99% owned by our bank and 1% owned by our BIDCO. Mortgage loans originated and held by our mortgage company are serviced by our bank pursuant to a servicing agreement. OUR BIDCO Our BIDCO was granted a license by the Michigan Office of Financial and Insurance Services on February 7, 2002, to operate our BIDCO as a Michigan Business and Industrial Development Company. Our BIDCO, a non-depository Michigan financial institution, offers equipment lease financing, asset based loans, junior debt facilities and other financing where equity features may be part of the facility pricing. OUR INSURANCE COMPANY Our insurance company acquired an existing shelf insurance agency effective April 15, 2002. An Agency and Institution Agreement was entered into among our insurance company, our bank and Burnham Insurance Group for the purpose of providing programs of mass marketed personal lines of insurance. Insurance product offerings include private passenger automobile, homeowners, personal inland marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business and life insurance products, all of which are provided by and written through companies that have appointed Burnham Insurance Group as their agent. The insurance products are marketed through a central facility operated by the Michigan Bankers Insurance Association, members of which include the insurance subsidiaries of various Michigan-based financial institutions and Burnham Insurance Group. Our insurance company receives commissions based upon written premiums produced under the Agency and Institution Agreement. 3. OUR REAL ESTATE COMPANY Our real estate company was organized on July 21, 2003, principally to develop, construct and own a new facility to be constructed in downtown Grand Rapids which will serve as our bank's new main office and Mercantile Bank Corporation's headquarters. Our real estate company is 99% owned by our bank and 1% owned by our BIDCO. 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 inflation or avoid a recession. The policies of the Federal Reserve Board have a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities, and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. Our bank maintains reserves directly with the Federal Reserve Bank of Chicago to the extent required by law. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies. REGULATION AND SUPERVISION As a bank holding company under the Bank Holding Company Act, we are required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may 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 as to be a proper incident to banking. These non-banking activities include, among other things: operating a mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, nonoperating basis; and providing discount securities brokerage services for customers. With the exception of the respective activities of our mortgage company and our BIDCO discussed above, neither we nor any of our subsidiaries engages in any of the foregoing non-banking activities. In March 2000, our election to become a financial holding company, as permitted by the Bank Holding Company Act, as amended by Title I of 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 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. Other than the insurance agency activities of our insurance company, neither we nor our subsidiaries presently engage in any such expanded activity. 4. Our bank is subject to certain restrictions imposed by federal law and regulation. Among other things, 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 or bank holding company, if, after such acquisition, we would own or control more than 5% of the voting shares of the bank or bank holding company. Acquisitions of banking organizations across state lines are subject to certain restrictions imposed by Federal and state law and regulations. EMPLOYEES As of December 31, 2003, we and our bank employed 139 full-time and 40 part-time persons. Management believes that relations with employees are good. LENDING POLICY As a routine part of our business, we make loans and leases to businesses and individuals located within our market area. Our lending policy states that the function of the lending operation is twofold: to provide a means for the investment of funds at a profitable rate of return with an acceptable degree of risk, and to meet the credit needs of the creditworthy businesses and individuals who are our customers. We recognize that in the normal business of lending, some losses on loans and leases will be inevitable and should be considered a part of the normal cost of doing business. Our lending policy anticipates that priorities in extending loans and leases 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 and leases, including the ability to pay; the character of the customer; evidence of financial responsibility; purpose of the loan or lease; knowledge of collateral and its value; terms of repayment; source of repayment; payment history; and economic conditions. The lending policy further limits the amount of funds that may be loaned or leased 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 and lease to value limits for other types of collateral, such as accounts receivable and machinery and equipment. In addition, the policy provides general guidelines as to environmental analysis, loans to employees, executive officers and directors, problem loan and lease identification, maintenance of an allowance for loan and lease losses, loan and lease review and grading, mortgage and consumer lending, and other matters relating to our lending practices. 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 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 and its President and Chief Executive Officer; however, the $6.0 million lending authority is used only in rare circumstances where timing is of the essence. Generally, loan requests exceeding $2.5 million require approval by the Officers Loan Committee, and loan requests exceeding $3.0 million, up to the legal lending limit of approximately $29.7 million, require approval by the Board of Directors. In most circumstances we apply an in-house lending limit that is significantly less than our bank's legal lending limit. 5. LENDING ACTIVITY Commercial Loans. Our commercial lending group originates commercial loans and leases primarily in our market area. Commercial loans and leases are originated by 13 lenders, with almost 200 years of combined commercial lending experience, eight of whom have 15 years or more experience. Loans and leases 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 substantially all of the assets of the borrower, and have an interest rate tied to the national prime rate. Loans and leases 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. Commercial loans and leases typically 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 or lease 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 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 considerably less than our legal lending limit and avoiding certain types of commercial real estate financings. 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. Single-family residential real estate 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, 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 thus likely to be adversely affected by job loss, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying collateral. 6. Management believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans and that consumer loans are important to our efforts to serve the credit needs of the communities and customers that we serve. LOAN AND LEASE PORTFOLIO QUALITY We utilize a comprehensive grading system for our commercial loans and leases as well as residential mortgage and consumer loans. Administered as part of the loan and lease review program, all commercial loans and leases 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 and leases 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 and leases review program is primarily responsible for the administration of the grading system and ensuring adherence to established lending policies and procedures. The loan and lease review program is an integral part of maintaining our strong asset quality culture. The loan and lease review function works closely with senior management, although it functionally reports to the Board of Directors. All commercial loan and lease relationships exceeding $1.0 million are formally reviewed every twelve to eighteen months. Watch list credits are formally reviewed monthly. Credits between $0.5 million and $1.0 million are formally reviewed every two years, with a random sampling performed on credits under $0.5 million. Loans and leases are placed in a nonaccrual status when, in the opinion of management, uncertainty exists as to the ultimate collection of principal and interest. As of December 31, 2003, loans and leases placed in nonaccrual status totaled $0.2 million, or 0.02% of total loans. In addition, loans and leases past due 90 days or more and still accruing interest totaled $1.6 million, or 0.15% of total loans and leases. As of December 31, 2003, there were no other significant loans and leases where known information about credit problems of borrowers warranted the placing of the loans or leases in a nonaccrual status. Management is not aware of any potential problem credits that could have a material adverse effect on our operating results, liquidity, or capital resources. Additional detail and information relative to the loan and lease portfolio is incorporated by reference to Management's Discussion and Analysis of Financial Condition and Results of Operation ("Management's Discussion and Analysis") beginning on Page F-4 and Note 3 of the Consolidated Financial Statements on pages F-33 and F-34 included in this Annual Report. ALLOWANCE FOR LOAN AND LEASE LOSSES In each accounting period, the allowance for loan and lease losses ("allowance") is adjusted by management to the amount management believes is necessary to maintain the allowance at adequate levels. Through its loan and lease review and credit departments, management attempts to allocate specific portions of the allowance based on specifically identifiable problem loans and leases. Management's evaluation of the allowance 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 and leases in the same community over the past 15 years, composition of the loan and lease portfolio, third party analysis of the loan and lease administration processes and portfolio and general economic conditions. In addition, our bank's status as a relatively new banking organization, the rapid loan growth since inception and commercial lending emphasis is taken into account. Management believes that the present allowance is adequate, based on the broad range of considerations listed above. 7. The primary risks associated with commercial loans and leases 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 and lease customers, and periodically reviews existence of collateral and its value. The primary risk element considered by management with respect to each consumer and residential real estate loan is lack of timely payment. Management has a reporting system that monitors past due loans and has adopted policies to pursue its creditor's rights in order to preserve our bank's collateral position. Additional detail regarding the allowance is incorporated by reference to Management's Discussion and Analysis beginning on Page F-4 and Note 3 of the Consolidated Financial Statements of the Company on pages F-33 and F-34 included in this Annual Report. Although management believes the allowance 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. 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 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 portfolio investments in equity securities and to make equity investments in subsidiary corporations engaged in certain non-banking activities which may include real estate-related activities such as mortgage banking, community development, real estate appraisals, arranging equity financing for commercial real estate, and owning and operating real estate used substantially by 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 the 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. Among such permitted equity investments are shares of a subsidiary insurance agency, mortgage company, real estate company, or Michigan business and industrial development company, such as our insurance company, our mortgage company, our real estate company, or our BIDCO. Under another such 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. Additional detail and information relative to the securities portfolio is incorporated by reference to Management's Discussion and Analysis beginning at Page F-4 and Note 2 of the Consolidated Financial Statements on pages F-31 through F-33 included in this Annual Report. 8. 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 from numerous Michigan-based and out-of-state banks, savings banks, thrifts, credit unions and other financial institutions as well as from 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. Many of our primary 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. Most of these same 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, 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. SELECTED STATISTICAL INFORMATION Management's Discussion and Analysis beginning at Page F-4 in this Annual Report includes selected statistical information. RETURN ON EQUITY AND ASSETS Return on Equity and Asset information is included in Management's Discussion and Analysis beginning at Page F-4 in this Annual Report. AVAILABLE INFORMATION We maintain an internet website at www.mercbank.com. We make available on or through our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. ITEM 2. PROPERTIES Our bank leases a one story building in downtown Grand Rapids, Michigan for use as its main office. This building is of masonry construction and has approximately 11,000 square feet of usable space with on-site parking. The lease for this facility, which commenced in 1997, has an initial term of ten years and our bank has four, five-year renewal options. The address of this facility is 216 North Division Avenue, Grand Rapids, Michigan. Our bank designed and constructed a full service branch and retail loan facility in Alpine Township, a northwest suburb of Grand Rapids, which 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. 9. During 2001 our bank designed and constructed two facilities on a 4-acre parcel of land located in the City of Wyoming, a southwest suburb of Grand Rapids. The land had been purchased by our bank in 2000. The larger of the two buildings is a full service branch and operations facility which opened in September of 2001. The facility is two-stories, of masonry construction, and has approximately 25,000 square feet of usable space. The facility is owned by our bank, and has multiple drive-through lanes and ample parking space. The address of this facility is 5610 Byron Center Avenue SW, Wyoming, Michigan. The other building, a single-story facility of masonry construction with approximately 7,000 square feet of usable space, accommodates the company's and bank's administration function. This facility is also owned by the bank. The address of this facility is 5650 Byron Center Avenue SW, Wyoming, Michigan. During 2002 our bank designed and constructed a full service branch in the City of Kentwood, a southeast suburb of Grand Rapids, which opened in December of 2002. The land had been purchased by our bank in 2001. The facility is one story, of masonry construction, and has approximately 10,000 square feet of usable space. The facility is owned by our bank, and has multiple drive-through lanes and ample parking space. The address of this facility is 4860 Broadmoor, Kentwood, Michigan. During 2003 our bank designed and constructed a full service branch in the northeast quadrant of the City of Grand Rapids. The land had been purchased by our bank in 2002. The facility is one story, of masonry construction, and has approximately 3,500 square feet of usable space. The facility is owned by our bank, and has multiple drive-through lanes and ample parking space. The address of this facility is 3156 Knapp Street NE, Grand Rapids, Michigan. During 2003 our bank designed and started construction of a new four-story facility located approximately two miles north from the center of downtown Grand Rapids. This facility will serve as the new location for our bank's current downtown facility located on North Division Avenue, with all existing functions and employees at that location ultimately transferring to this new facility upon completion. Currently, the North Division Avenue facility serves as our bank's main office, and houses our bank's commercial lending and review function, a full service branch, portions of our bank's retail lending and business development function and our bank's brokerage operation. The new facility will also house our bank's loan operations function, which is currently located at our facility on Alpine Avenue NW, as well as the company's and bank's administration function currently located in Wyoming, Michigan. The facility will consist of approximately 55,000 square feet of usable space and contain multiple drive-through lanes with ample parking. Anticipated opening date is the latter part of 2005. The address is 1155 Front Street NW, Grand Rapids, Michigan. During 2003 our bank designed and started construction of a new two-story facility located in Holland, Michigan. This facility will serve as the new location for our bank's current loan production office located in Holland. In addition, the facility will serve as a full service banking center for the Holland area, including commercial lending, retail lending and a full service branch. The facility will consist of approximately 30,000 square feet of usable space and contain multiple drive-through lanes with ample parking. Anticipated opening date is the latter part of 2004. The address is 880 East 16th Street, Holland, Michigan. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 10. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Common Stock is quoted on the Nasdaq National Market under the symbol "MBWM". At February 1, 2004, there were 243 record holders of our common stock. In addition, we estimate that there were approximately 3,000 beneficial owners of our common stock who own their shares through brokers or banks. The following table shows the high and low bid prices for our common stock as reported by the Nasdaq National Market for the periods indicated, and the quarterly cash dividends paid by us during those periods. The prices do not include retail mark-up, mark-down or commission, but have been adjusted for the 5% stock dividends paid on February 3, 2003, and February 1, 2002.
HIGH LOW DIVIDEND --------- --------- -------- 2003 First Quarter............................ $ 26.65 $ 21.87 $ 0.08 Second Quarter........................... 28.82 23.85 0.08 Third Quarter............................ 34.31 28.05 0.08 Fourth Quarter........................... 37.30 31.55 0.08 2002 First Quarter............................ $ 19.52 $ 16.86 $ - Second Quarter........................... 22.02 18.57 - Third Quarter............................ 21.14 16.10 - Fourth Quarter........................... 22.76 17.86 -
Holders of our common stock are entitled to receive dividends that the Board of Directors may declare from time to time. We may only pay dividends out of funds that are legally available for that purpose. We are a holding company and substantially all of our assets are held by our subsidiaries. Our ability to pay dividends to our shareholders depends 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. On January 6, 2004, we declared a $0.09 per share cash dividend on our common stock, payable on March 10, 2004 to record holders as of February 10, 2004. We currently expect to continue to pay a quarterly cash dividend, although there can be no assurance that we will continue to do so. ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data on page F-3 in this Annual Report is incorporated here by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Management's Discussion and Analysis on pages F-4 through F-21 in this Annual Report is incorporated here by reference. 11. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the heading "Market Risk Analysis" on pages F-19 through F-21 in this Annual Report is incorporated here by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Notes to Consolidated Financial Statements and the Report of Independent Public Accountants on pages F-22 through F-48 in this Annual Report are incorporated here by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES As of December 31, 2003, an evaluation was performed under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2003. There have been no significant changes in our internal controls over financial reporting during the quarter ended December 31, 2003, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information presented under the captions "Information about Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial Ownership Compliance" in the definitive Proxy Statement of Mercantile for its April 22, 2004 Annual Meeting of Shareholders (the "Proxy Statement"), a copy of which will be filed with the Securities and Exchange Commission before the meeting date, is incorporated here by reference. We have a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee consist of Betty S. Burton, David M. Cassard, C. John Gill and David M. Hecht. The Board of Directors has determined that Mr. Cassard, a member of the Audit Committee, is qualified as an audit committee financial expert, as that term is defined in the rules of the Securities and Exchange Commission. Mr. Cassard is independent, as independence for audit committee members is defined in the listing standards of the Nasdaq Stock Market and the rules of the Securities and Exchange Commission. We have adopted a Code of Ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. The Code of Ethics is posted on our website (www.mercbank.com). We intend to post amendments to or waivers from our Code of Ethics, of the type referred to in Item 10 of Form 8-K, to the extent applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions, on our website. 12. ITEM 11. EXECUTIVE COMPENSATION The information presented under the captions "Director Compensation," "Compensation Committee Interlocks and Insider Participation," "Summary Compensation Table," "Option Grants in 2003," "Aggregated Stock Option Exercises in 2003 and Year End Option Values" and "Employment Agreements", in the Proxy Statement is incorporated here by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information presented under the captions "Stock Ownership of Certain Beneficial Owners and Management" and "Equity Plan Compensation Information" in the Proxy Statement is incorporated here by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information presented under the caption "Certain Transactions" in the Proxy Statement is incorporated here by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information presented under the caption "Fees to Independent Auditors for 2003 and 2002" in the Proxy Statement is incorporated here by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements. The following financial statements and report of independent public accountants of Mercantile Bank Corporation and its subsidiaries are filed as part of this report: Report of Independent Public Accountants dated January 22, 2004 Consolidated Balance Sheets --- December 31, 2003 and 2002 Consolidated Statements of Income for each of the three years in the period ended December 31, 2003 Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 2003 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003 Notes to Consolidated Financial Statements The financial statements, the notes to financial statements, and the report of independent public accountants listed above are incorporated by reference in Item 8 of this report. (2) Financial Statement Schedules Not applicable 13. (b) Reports on Form 8-K Dated October 7, 2003, pertaining to our press release issued on October 7, 2003 reporting financial results and earnings for the third quarter of 2003. (c) Exhibits: EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 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 3.2 Our Amended and Restated Bylaws dated as of January 16, 2003 are incorporated by reference to exhibit 3.2 of our Registration Statement on Form S-3 (Commission File No. 333-103376) that became effective on February 21, 2003 10.1 Our 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 our bank 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 Solutions, Inc. and our 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 Extension Agreement of Data Processing Contract between Fiserve Solutions, Inc. and our bank dated May 12, 2000 extending the agreement between Fiserve Solutions, Inc. and our 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 (Commission File No. 000-26719) 10.5 Extension Agreement of Data Processing Contract between Fiserve Solutions, Inc. and our bank dated November 22, 2002 extending the agreement between Fiserve Solutions, Inc. and our bank dated September 10, 1997, is incorporated by reference to exhibit 10.5 of our Form 10-K for the fiscal year ended December 31, 2002 (Commission File No. 000-26719) 10.6 Mercantile Bank of West Michigan Deferred Compensation Plan for Members of the Board of Directors (1999) is incorporated by reference to Exhibit 10.6 of the Registration Statement of the company and our trust on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999 10.7 Subordinated Indenture dated as of September 17, 1999 between the company 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 our trust on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that become effective on September 13, 1999 14. EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 10.8 Amended and Restated Trust Agreement dated as of September 17, 1999 among the company, 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 our trust on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999 10.9 Preferred Securities Guarantee Agreement between the company and Wilmington Trust Company dated September 17, 1999, is incorporated by reference to Exhibit 4.7 of the Registration Statement of the company and our trust on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999 10.10 Agreement as to Expenses and Liabilities dated as of September 17, 1999, between the company and our trust (included as Exhibit D to Exhibit 10.8) 10.11 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) 10.12 Amended and Restated Employment Agreement dated as of October 18, 2001, among the company, our bank and Gerald R. Johnson, Jr., is incorporated by reference to exhibit 10.21 of our Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 000-26719) (management contract or compensatory plan) 10.13 Amended and Restated Employment Agreement dated as of October 18, 2001, among the company, our bank and Michael H. Price, is incorporated by reference to exhibit 10.22 of our Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 000-26719) (management contract or compensatory plan) 10.14 Employment Agreement dated as of October 18, 2001, among the company, our bank and Robert B. Kaminski, is incorporated by reference to exhibit 10.23 of our Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 000-26719) (management contract or compensatory plan) 10.15 Employment Agreement dated as of October 18, 2001, among the company, our bank and Charles E. Christmas, is incorporated by reference to exhibit 10.23 of our Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 000-26719) (management contract or compensatory plan) 10.16 Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Gerald R. Johnson, Jr., is incorporated by reference to exhibit 10.21 of our Form 10-K for the fiscal year ended December 31, 2002 (management contract or compensatory plan) 10.17 Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Michael H. Price, is incorporated by reference to exhibit 10.22 of our Form 10-K for the fiscal year ended December 31, 2002 (management contract or compensatory plan) 15. EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 10.18 Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Robert B. Kaminski, is incorporated by reference to exhibit 10.23 of our Form 10-K for the fiscal year ended December 31, 2002 (management contract or compensatory plan) 10.19 Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Charles E. Christmas, is incorporated by reference to exhibit 10.24 of our Form 10-K for the fiscal year ended December 31, 2002 (management contract or compensatory plan) 10.20 Agreement between our bank and Visser Brothers Construction Inc. dated May 8, 2002, on Standard Form of Agreement Between Owner and Contractor where the basis of payment is a stipulated sum, is incorporated by reference to exhibit 10.25 of our Form 10-K for the fiscal year ended December 31, 2002 10.21 Mercantile Bank Corporation Independent Director Stock Option Plan, approved by the shareholders at the annual meeting on April 18, 2002, is incorporated by reference to exhibit 10.26 of our Form 10-K for the fiscal year ended December 31, 2002 10.22 Agreement between our real estate company and Visser Brothers, Inc. dated November 20, 2003, on Standard Form of Agreement Between Owner and Contractor where the basis of payment is a stipulated sum 10.23 Agreement between our bank and Rockford Construction Company, Inc., dated December 3, 2003, on Standard Form of Agreement Between Owner and Contractor where the basis of payment is a stipulated sum 21 Subsidiaries of the company 23 Consent of Independent Accountants 31 Rule 13a-14(a) Certifications 32.1 Section 1350 Chief Executive Officer Certification 32.2 Section 1350 Chief Financial Officer Certification (d) Financial Statements Not Included In Annual Report Not applicable 16. MERCANTILE BANK CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 F-1 MERCANTILE BANK CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 CONTENTS SELECTED FINANCIAL DATA..................................................................................... F-3 MANAGEMENT'S DISCUSSION AND ANALYSIS........................................................................ F-4 REPORT OF INDEPENDENT AUDITORS.............................................................................. F-22 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS............................................................................ F-23 CONSOLIDATED STATEMENTS OF INCOME...................................................................... F-24 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY............................................. F-25 CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................................. F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................. F-27
F-2 SELECTED FINANCIAL DATA
2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- (In thousands except per share data) CONSOLIDATED RESULTS OF OPERATIONS: Interest income $ 54,658 $ 47,632 $ 44,619 $ 36,835 $ 22,767 Interest expense 23,347 23,978 28,201 24,560 13,330 ---------- ---------- ---------- ---------- ---------- Net interest income 31,311 23,654 16,418 12,275 9,437 Provision for loan and lease losses 3,800 3,002 2,370 1,854 1,961 Noninterest income 4,361 3,053 1,879 1,192 847 Noninterest expense 18,071 12,781 9,454 7,515 5,888 ---------- ---------- ---------- ---------- ---------- Income before income tax expense and cumulative effect of change in accounting principle 13,801 10,924 6,473 4,098 2,435 Income tax expense 3,785 3,167 1,990 1,303 292 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle 10,016 7,757 4,483 2,795 2,143 Cumulative effect of change in accounting principle 0 0 0 0 (42) ---------- ---------- ---------- ---------- ---------- Net income $ 10,016 $ 7,757 $ 4,483 $ 2,795 $ 2,101 ========== ========== ========== ========== ========== CONSOLIDATED BALANCE SHEET DATA: Total assets $1,202,832 $ 921,855 $ 698,682 $ 512,746 $ 368,037 Cash and cash equivalents 16,564 28,117 19,938 18,102 13,650 Securities 121,510 96,893 78,818 60,457 41,957 Loans and leases, net of deferred fees 1,035,963 771,554 587,248 429,804 308,006 Allowance for loan and lease losses 14,379 10,890 8,494 6,302 4,620 Bank owned life insurance policies 16,441 14,876 3,991 0 0 Deposits 902,892 754,113 569,077 425,740 294,829 Securities sold under agreements to repurchase 49,545 50,335 36,485 32,151 26,607 Federal Home Loan Bank advances 90,000 15,000 0 0 0 Subordinated debentures 16,000 16,000 16,000 16,000 16,000 Shareholders' equity 130,201 79,834 71,463 31,854 27,968 CONSOLIDATED FINANCIAL RATIOS: Return on average assets 0.96% 0.97% 0.74% 0.63% 0.71% Return on average shareholders' equity 10.61% 10.30% 9.05% 9.48% 7.70% Nonperforming loans and leases to loans and leases 0.17% 0.10% 0.24% 0.02% 0.00% Allowance for loan and lease losses to loans 1.39% 1.41% 1.45% 1.47% 1.50% Tier 1 leverage capital 12.49% 10.72% 13.00% 8.59% 10.88% Tier 1 leverage risk-based capital 12.60% 10.85% 13.00% 8.59% 10.64% Total risk-based capital 13.84% 12.10% 14.25% 10.97% 13.67% PER SHARE DATA: Net Income: Basic before cumulative effect of change in accounting principle $ 1.73 $ 1.43 $ 1.11 $ 0.98 $ 0.75 Diluted before cumulative effect of change in accounting principle 1.69 1.41 1.10 0.97 0.74 Basic 1.73 1.43 1.11 0.98 0.73 Diluted 1.69 1.41 1.10 0.97 0.72 Book value at end of period 19.13 14.77 13.22 11.10 9.77 Dividends declared 0.32 NA NA NA NA NA -- Not Applicable
F-3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The following discussion contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about our company. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. We undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise. Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. INTRODUCTION This Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements contained herein. This discussion provides information about the consolidated financial condition and results of operations of Mercantile Bank Corporation and its subsidiaries, Mercantile Bank of West Michigan ("our bank") and MBWM Capital Trust I ("the trust"), and of Mercantile Bank Mortgage Company, LLC ("our mortgage company"), Mercantile BIDCO, Inc. ("our BIDCO"), Mercantile Bank Real Estate Co., L.L.C. ("our real estate company") and Mercantile Insurance Center, Inc. (our insurance company"), subsidiaries of our bank. Unless the text clearly suggests otherwise, references to "us," "we," "our," or "the company" include Mercantile Bank Corporation and its wholly-owned subsidiaries referred to above. We were incorporated on July 15, 1997 as a bank holding company to establish and own our bank. Our bank, after receiving all necessary regulatory approvals, began operations on December 15, 1997. Our bank has a strong commitment to community banking and offers a wide range of financial products and services, primarily to small- to medium-sized businesses, as well as individuals. Our bank's lending strategy focuses on commercial lending, and, to a lesser extent, residential mortgage and consumer lending. Our bank also offers a broad array of deposit products, including checking, savings, money market, and certificates of deposit, as well as security repurchase agreements. Our bank's primary market area is the Kent and Ottawa County areas of West Michigan, which includes the City of Grand Rapids, the second largest city in the State of Michigan. Our bank utilizes certificates of deposit from customers located outside of the primary market area to assist in funding the rapid asset growth our bank has experienced since inception. The trust, a business trust subsidiary of the company, was incorporated in 1999 for the purpose of issuing 1.6 million shares of 9.60% Cumulative Preferred Securities ("trust preferred securities") at $10.00 per trust preferred security. The proceeds from the September 1999 sale were used by the trust to purchase an equivalent amount of subordinated debentures of the company. The company, in turn, used a majority of the proceeds from the issuance of the subordinated debentures for a capital contribution to our bank. The only significant asset of the trust is the subordinated debenture of the company and the only significant liability of the trust is the trust preferred securities. The trust preferred securities are carried on the company's consolidated balance sheet as a liability and the interest expense is recorded on the company's consolidated statement of income. F-4 Our mortgage company's predecessor, Mercantile Bank Mortgage Company, was formed to increase the profitability and efficiency of the company's mortgage loan operations. Mercantile Bank Mortgage Company initiated business on October 24, 2000 from our bank's contribution of most of its residential mortgage loan portfolio and participation interests in certain commercial mortgage loans. On the same date our bank had also transferred its residential mortgage origination function to Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile Bank Mortgage Company was reorganized as Mercantile Bank Mortgage Company, LLC, a newly established limited liability company. Mortgage loans originated and held by our mortgage company are serviced by our bank pursuant to a servicing agreement. On February 7, 2002 our BIDCO was granted a license by the Michigan Office of Financial and Insurance Services to operate as a Michigan Business and Industrial Development Company. Our BIDCO, a non-depository Michigan financial institution, offers equipment lease financing, asset based loans, junior debt facilities and other financing where equity features may be part of the facility pricing. Our insurance company acquired, at nominal cost, an existing shelf insurance agency effective April 15, 2002. An Agency and Institution Agreement was entered into among our insurance company, our bank and Burnham Insurance Group for the purpose of providing programs of mass marketed personal lines of insurance. Insurance product offerings include private passenger automobile, homeowners, personal inland marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business and life insurance products, all of which are provided by and written through companies that have appointed Burnham Insurance Group as their agent. The insurance products are marketed through a central facility operated by the Michigan Bankers Insurance Association, members of which include the insurance subsidiaries of various Michigan-based financial institutions and Burnham Insurance Group. Our insurance company receives commissions based upon written premiums produced under the Agency and Institution Agreement. Our real estate company was organized on July 21, 2003, principally to develop, construct and own a new facility to be constructed in downtown Grand Rapids which will serve as our bank's new main office and Mercantile Bank Corporation's headquarters. FINANCIAL CONDITION We continued to experience significant asset growth during 2003. Assets increased from $921.9 million on December 31, 2002 to $1,202.8 million on December 31, 2003. This represents an increase in total assets of $280.9 million, or 30.5%. The increase in total assets was primarily comprised of a $260.9 million increase in net loans and a $24.6 million increase in securities. The increase in assets was primarily funded by a $148.8 million increase in deposits, a $75.0 million increase in Federal Home Loan Bank advances and a $50.4 million increase in shareholder's equity. EARNING ASSETS Average earning assets equaled 95.2% of average total assets during 2003, compared to 95.5% during 2002. Although we experienced significant asset growth during 2003, the asset composition remained relatively constant. The loan portfolio continued to comprise a majority of earning assets, followed by securities, federal funds sold, and short-term investments. F-5 Our loan and lease portfolio, which equaled 88.9% of average earnings assets during 2003, is primarily comprised of commercial loans and leases. Constituting 93.9% of average loans and leases and growing by $232.9 million during 2003, the commercial loan and lease portfolio represent loans to business interests generally located within our market area. Approximately 67% of the commercial loan and lease portfolio is primarily secured by real estate properties, with the remaining generally secured by other business assets such as accounts receivable, inventory, and equipment. The continued significant concentration of the loan and lease portfolio in commercial loans and leases and the rapid growth of this portion of our lending business are 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 for our senior management team, and our 13 commercial lenders have almost 200 years of combined commercial lending experience, eight of whom have 15 years or more experience. Of each of the loan categories that we originate, commercial loans and leases are most efficiently originated and managed, thus limiting overhead costs 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 lending, while averaging only 6.1% of average loans during 2003, also experienced excellent growth; however, while we expect the residential mortgage loan and consumer loan portfolios to increase in future periods, given our wholesale banking strategy, the commercial sector of the lending efforts and resultant assets are expected to remain the dominant loan portfolio category. The following tables present the maturity of total loans outstanding, as of December 31, 2003, according to scheduled repayments of principal on fixed rate loans and repricing frequency on variable rate loans. Floating rate loans that have reached interest rate floors are treated as fixed rate loans.
0-1 1-5 After 5 Year Years Years Total --------------- ---------------- ------------- ---------------- Construction and land development $ 66,327,000 $ 45,959,000 $ 5,363,000 $ 117,649,000 Real estate -- secured by 1-4 family properties 49,044,000 33,040,000 10,255,000 92,339,000 Real estate -- secured by multi-family properties 2,090,000 17,898,000 8,962,000 28,950,000 Real estate -- secured by nonresidential properties 142,692,000 305,449,000 36,939,000 485,080,000 Commercial 228,423,000 74,619,000 1,758,000 304,800,000 Leases 0 2,309,000 0 2,309,000 Consumer 1,830,000 2,938,000 68,000 4,836,000 --------------- ---------------- ------------- ---------------- $ 490,406,000 $ 482,212,000 $ 63,345,000 $ 1,035,963,000 =============== ================ ============= ================ Fixed rate loans $ 41,939,000 $ 481,152,000 $ 63,345,000 $ 586,436,000 Floating rate loans 448,467,000 1,060,000 0 449,527,000 --------------- ---------------- ------------- ---------------- $ 490,406,000 $ 482,212,000 $ 63,345,000 $ 1,035,963,000 =============== ================ ============= ================
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. F-6 The quality of our loan portfolio remains strong, with past due loans and net loan charge-offs well below banking industry averages during 2003. As of December 31, 2003, past due loans and nonaccrual loans and leases totaled $1.8 million, or 0.17% of total loans and leases. At December 31, 2002, past due and nonaccrual loans totaled $0.8 million, or 0.10% of total loans. Net loan and lease charge-offs during 2003 totaled $311,000, or 0.04% of average total loans and leases. During 2002 net loan and lease charge-offs totaled $606,000, or 0.09% of average total loans and leases. 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 unaffiliated commercial banks outside the immediate area, which are underwritten using the same loan criteria as though our bank was the originating bank. The following table summarizes changes in the allowance for loan and lease losses.
Years ended December 31, 2003 2002 2001 ---------------- -------------- --------------- Loans and leases outstanding at year-end $ 1,035,963,000 $ 771,554,000 $ 587,248,000 =============== ============== =============== Daily average balance of loans and leases outstanding $ 887,512,000 $ 669,781,000 $ 500,965,000 =============== ============== =============== Balance of allowance at beginning of year $ 10,890,000 $ 8,494,000 $ 6,302,000 Loans and leases charged-off: Commercial, financial and agricultural (471,000) (696,000) (247,000) Construction and land development 0 0 0 Leases 0 0 0 Residential real estate (26,000) 0 (4,000) Installment loans to individuals (99,000) (10,000) (1,000) ---------------- -------------- --------------- Total loans charged-off (596,000) (706,000) (252,000) Recoveries of previously charged-off loans and leases: Commercial, financial and agricultural 257,000 78,000 73,000 Construction and land development 0 0 0 Leases 0 0 0 Residential real estate 22,000 4,000 0 Installment loans to individuals 6,000 18,000 1,000 --------------- -------------- --------------- Total recoveries 285,000 100,000 74,000 --------------- -------------- --------------- Net charge-offs (311,000) (606,000) (178,000) Provision for loan and leases losses 3,800,000 3,002,000 2,370,000 --------------- -------------- --------------- Balance of the allowance at year-end $ 14,379,000 $ 10,890,000 $ 8,494,000 =============== ============== =============== Ratio of net charge-offs during period to average loans and leases outstanding during the period (0.04)% (0.09)% (0.04)% ============ ============ ============== Ratio of allowance to loans and leases outstanding at end of period 1.39% 1.41% 1.45% =========== =========== ==============
In each accounting period the allowance for loan and lease losses ("allowance") is adjusted to the amount believed necessary to maintain the allowance at adequate levels. Through the loan review and credit departments, we attempt to allocate specific portions of the allowance based on specifically identifiable problem loans and leases. The evaluation of the allowance is further based on, although not limited to, consideration of the internally prepared Loan Loss Reserve Analysis ("Reserve Analysis"), composition of the loan and lease portfolio, third party analysis of the loan and lease administration processes and portfolio and general economic conditions. In addition, the rapid commercial loan and lease growth is taken into account. F-7 The Reserve Analysis, used since the inception of our bank and completed monthly, applies reserve allocation factors to outstanding loan and lease balances to calculate an overall allowance dollar amount. For commercial loans and leases, which continue to comprise a vast majority of our total loans, reserve allocation factors are based upon the loan ratings as determined by our loan rating paradigm that is administered by our loan review function. For retail loans, reserve allocation factors are based upon the type of credit. Adjustments for specific loan relationships, including impaired loans, are made on a case-by-case basis. The reserve allocation factors are primarily based on the experience of senior management making similar loans in the same community for over 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. The following table illustrates the breakdown of the allowance balance to loan type (dollars in thousands).
2 0 0 3 2 0 0 2 ------- ------- Balance at End Percent of Loans Percent of Loans of Period in each Category in each Category Applicable to Amount to Total Loans Amount to Total Loans ------------- ------ -------------- ------ -------------- Commercial, financial and agricultural $ 12,220 79.0% $ 9,188 77.9% Construction and land development 1,571 11.4 1,143 13.5 Leases 26 0.2 11 0.1 Residential real estate 450 8.9 443 7.9 Installment loans to individuals 112 0.5 105 0.6 Unallocated 0 NA 0 NA --------- ------ --------- ------ $ 14,379 100.0% $ 10,890 100.0% ========= ====== ========= ======
The primary risk elements with respect to commercial loans and leases 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 commercial loan and lease customers, and we periodically review the existence of collateral and its value. The primary risk element 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 have adopted policies to pursue creditor's rights in order to preserve our bank's position. Although we believe that the allowance is adequate to sustain losses as they arise, there can be no assurance that our bank will not sustain losses in any given period that could be substantial in relation to, or greater than, the size of the allowance. The securities portfolio also experienced significant growth during 2003, increasing from $96.9 million on December 31, 2002 to $121.5 million at December 31, 2003. During 2003, the securities portfolio equaled 10.1% of average earning assets. 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. At December 31, 2003, the portfolio was comprised of high credit quality municipal general obligation and revenue bonds (37%), U.S. Government Agency issued and guaranteed mortgage-backed securities (31%), U.S. Government Agency issued bonds (28%) and Federal Home Loan Bank stock (4%). 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 (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Securities designated as available for sale are stated at fair value, with the unrealized gains and losses, net of income tax, reported as a separate component of shareholders' equity in accumulated other comprehensive income. The fair value of securities designated as available for sale at December 31, 2003 and 2002 was $71.4 million and $59.6 million, respectively. The net unrealized gain recorded at December 31, 2003 and 2002, was $0.3 million and $1.6 million, 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, 2003 and 2002, held to maturity securities had an amortized cost of $45.1 million and $36.5 million and a fair value of $47.1 million and $38.0 million, respectively. F-8 The following table shows by class of maturities as of December 31, 2003, the amounts and weighted average yields of investment securities (1):
Carrying Average Value Yield ----- ----- (Dollars in thousands) U.S. Treasury securities and obligations of U.S. Government agencies and corporations One year or less $ 0 NA Over one through five years 0 NA Over five through ten years 33,077,000 4.87% Over ten years 1,001,000 5.37 -------------- ------ 34,078,000 4.89 Obligations of states and political subdivisions One year or less 1,156,000 6.86 Over one through five years 4,709,000 6.79 Over five through ten years 8,746,000 6.88 Over ten years 30,501,000 6.77 -------------- ------ 45,112,000 6.79 Mortgage-backed securities 37,343,000 4.68 -------------- ------ $ 116,533,000 5.56% ============== ======
(1) Yields on tax-exempt securities are computed on a fully taxable-equivalent basis. Federal funds sold, consisting of excess funds sold overnight to correspondent banks, are used to manage daily liquidity needs and interest rate sensitivity. During 2003, the average balance of these funds equaled 0.5% of average earning assets. This level is well within our internal policy guidelines and is not expected to change significantly in the future. Cash and cash equivalents declined from $28.1 million at December 31, 2002, to $16.6 million on December 31, 2003, a decrease of $11.5 million. The decrease was primarily the result of a federal funds purchased position of $6.0 million at December 31, 2003 compared to a federal funds sold position of $4.5 million on December 31, 2002, and a smaller than average outgoing cash letter on the last day of 2003. In general, our commercial lending and wholesale funding focus results in relatively large day-to-day fluctuations of our cash and cash equivalent balances. The average balance of cash and cash equivalents during 2003 equaled $28.7 million. Net premises and equipment increased from $12.2 million at December 31, 2002, to $15.3 million on December 31, 2003, an increase of $3.1 million. The increase primarily reflects the land purchase and initial design and construction costs associated with our planned new main office in downtown Grand Rapids and our new banking facility in Holland. SOURCE OF FUNDS Our major source of funds is from deposits and Federal Home Loan Bank ("FHLB") advances. Total deposits increased from $754.1 million at December 31, 2002, to $902.9 million on December 31, 2003, an increase of $148.8 million, or 19.7%. Included within these numbers is the success we achieved in generating deposit growth from customers located within the market area during 2003. Local deposits increased from $241.6 million at December 31, 2002, to $311.3 million on December 31, 2003, an increase of $69.7 million, or 28.8. Despite this success in obtaining funds from local customers, the substantial asset growth has necessitated the continued acquisition of funds from depositors outside of the market area and FHLB advances. Out-of-area deposits increased from $512.5 million at December 31, 2002, to $591.6 million on December 31, 2003, an increase of $79.1 million, or 15.4%. FHLB advances increased from $15.0 million at December 31, 2002, to $90.0 million on December 31, 2003, an increase of $75.0 million. At December 31, 2003, local deposits and securities sold under agreements to repurchase ("repurchase agreements") equaled 34.4% of funding liabilities, compared to 35.6% on December 31, 2002. F-9 During 2003 we experienced significant 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 $20.0 million, or 20.2%. Leading the growth were noninterest-bearing demand accounts. Comprised primarily of business loan customers, noninterest-bearing demand accounts grew $14.2 million, or 22.7%, and equaled 6.6% of average total liabilities during 2003. Interest-bearing checking accounts increased $6.1 million, or 21.7%, and equaled 3.0% of average total liabilities during 2003. Money market deposit accounts decreased $0.3 million, or 3.5%, and equaled 0.9% of average total liabilities during 2003. Business loan customers also comprise the majority of interest-bearing checking and money market deposit accounts, although to a lesser extent than noninterest-bearing checking accounts. Pursuant to Federal law and regulations, incorporated businesses may not own interest-bearing checking accounts and transactions from money market accounts are limited. We anticipate continued growth of our check-writing deposit accounts as additional business loans are extended and through the efforts of our branch network and business development activities. During 2003, savings account balances recorded an increase of $32.2 million, or 46.4%, and equaled 12.1% of average total liabilities. Business loan customers also comprise the majority of savings account holders, although to a lesser extent than check-writing accounts. We anticipate an increase in savings account balances as additional business loans are extended and through the efforts of our branch network and business development activities. Certificates of deposit purchased by customers located within the market area increased during 2003, growing from $73.0 million at December 31, 2002, to $90.5 million on December 31, 2003, a growth rate of 24.0%. These deposits accounted for 9.8% of average total liabilities during 2003. The growth was primarily attributable to individuals and municipalities. The increase in local municipality certificates of deposit has been facilitated by our qualifying for funds from new municipal customers and additional funds from existing customers through a combination of our asset growth and increased profitability as measured by the municipalities' investment policy guidelines, and is a trend that we expect to continue. During 2003 certificates of deposit obtained from customers located outside of the market area increased by $79.1 million, and represented 58.5% of average total liabilities during 2003. At December 31, 2003, out-of-area deposits totaled $591.6 million. Out-of-area deposits consist primarily of certificates of deposit placed by deposit brokers for a fee, but also include certificates of deposit obtained from the deposit owners directly. The owners of the out-of-area deposits include individuals, businesses and governmental units located throughout the country. 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 most of 2003 rates paid on new out-of-area deposits were very similar to rates paid on new certificates of deposit issued to local customers. In addition, the overhead costs associated with the out-of-area deposits are considerably less than the overhead costs that would be incurred to administer a similar level of local deposits. Although local deposits have and are expected to increase as new business, governmental and consumer deposit relationships 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. Repurchase agreements decreased $0.8 million and equaled 4.8% of average total liabilities during 2003. As part of our sweep account program, collected funds from certain business noninterest-bearing checking accounts are invested in overnight 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 an interest-bearing checking deposit account. FHLB advances increased $75.0 million and equaled 4.9% of average total liabilities during 2003. FHLB advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit at December 31, 2003 totaled $156.8 million. We first started to use FHLB advances in late 2002, and expect to continue to use this funding source, along with out-of-area certificates of deposit, as part of our wholesale funding program. F-10 Shareholders' equity increased $50.4 million and equaled 9.0% of average assets during 2003. The increase was primarily attributable to the sale of common stock and net income from operations. In October we completed the sale of 1,374,606 shares of common stock through a public offering, raising $42.8 million net of issuance costs. Net income from operations totaled $10.0 million during 2003. Negatively impacting shareholders' equity during 2003 was the payment of cash dividends, which totaled $1.8 million. Shareholders' equity was also negatively impacted by a $0.8 million mark-to-market adjustment for available for sale securities as defined in SFAS No. 115, resulting from the changing interest rate environment during 2003. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 and 2002 SUMMARY We recorded strong earnings performance during 2003. Net income was $10.0 million, or $1.73 per basic share and $1.69 per diluted share. This earnings performance compares very favorably to net income of $7.8 million, or $1.43 per basic share and $1.41 per diluted share, recorded in 2002. The $2.2 million improvement in net income represents an increase of 29.1%, while diluted earnings per share were up 19.9%, with the difference primarily reflecting the impact of our common stock sale during 2003 and resulting increases in average common shares outstanding. The earnings improvement during 2003 over that of 2002 is primarily attributable to increased net interest income and improved operating efficiencies resulting from asset growth, strong credit culture, controlled overhead expenses and increased fee income. We expect our percentage rate of loan growth to exceed the banking industry average in 2004. The following table shows some of the key performance and equity ratios for the years ended December 31, 2003 and 2002.
2003 2002 ---- ---- Return on average total assets 1.0% 1.0% Return on average equity 10.6 10.3 Dividend payout ratio 18.4 NA Average equity to average assets 9.0 9.4
NET INTEREST INCOME Net interest income, the difference between revenue generated from earning assets and the interest cost of funding those assets, is our primary source of earnings. Interest income (adjusted for tax-exempt income) and interest expense totaled $55.4 million and $23.3 million during 2003, respectively, providing for net interest income of $32.1 million. This performance compares favorably to that of 2002 when interest income and interest expense were $48.2 million and $23.9 million, respectively, providing for net interest income of $24.3 million. In comparing 2003 with 2002, interest income increased 15.0%, interest expense was down 2.6% and net interest income increased 32.4%. The level of net interest income is primarily a function of asset size, as the weighted average interest rate received on earning assets is greater than the weighted average interest cost of funding sources; however, factors such as types of assets and liabilities, interest rate risk, common stock sales, liquidity, and customer behavior also impact net interest income as well as the net interest margin. The net interest margin improved slightly from 3.19% in 2002 to 3.22% in 2003, an increase of 0.9%. The following table depicts the average balance, interest earned and paid, and weighted average rate of our assets, liabilities and shareholders' equity during 2003, 2002 and 2001 (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 investment securities interest income and yield have been computed on a tax equivalent basis using a marginal tax rate of 34%. F-11
Years ended December 31, ---------------2 0 0 3----------- -------------2 0 0 2------------ ------------------2 0 0 1-------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ----------- ----------- ------- ----------- ----------- ---- ----------- ----------- ---------- Taxable securities $ 64,957 $ 2,978 4.59% $ 53,509 $ 3,023 5.65% $ 48,172 $ 3,245 6.74% Tax-exempt securities 40,695 2,730 6.71 29,956 2,056 6.86 19,566 1,362 6.96 ----------- ----------- ----------- ----------- ----------- ----------- Total securities 105,652 5,708 5.40 83,465 5,079 6.09 67,738 4,607 6.80 Loans and leases 887,512 49,700 5.60 669,781 43,032 6.42 500,965 39,852 7.95 Short-term investments 369 1 0.38 194 2 1.03 134 4 2.89 Federal funds sold 5,083 57 1.13 7,901 130 1.65 13,289 546 4.11 ----------- ----------- ----------- ----------- ----------- ----------- Total earning assets 998,616 55,466 5.55 761,341 48,243 6.34 582,126 45,009 7.73 Allowance for loan and lease losses (12,471) (9,620) (7,383) Cash and due from banks 23,285 18,568 13,697 Other non-earning assets 39,262 26,872 15,355 ----------- ----------- ----------- Total assets $ 1,048,692 $ 797,161 $ 603,795 =========== =========== =========== Interest-bearing demand deposits $ 28,406 $ 353 1.24% $ 22,354 $ 399 1.78% $ 15,923 $ 491 3.08% Savings deposits 82,754 1,446 1.75 58,679 1,381 2.35 42,334 1,614 3.81 Money market accounts 8,488 111 1.30 6,870 127 1.85 5,518 177 3.20 Time deposits 652,200 18,197 2.79 518,271 19,561 3.77 400,180 23,155 5.79 ----------- ----------- ----------- ----------- ----------- ----------- Total interest- bearing deposits 771,848 20,107 2.61 606,174 21,468 3.54 463,955 25,437 5.48 Short-term borrowings 49,480 712 1.44 44,395 899 2.03 34,662 1,186 3.42 Federal Home Loan Bank advances 46,630 921 1.98 1,014 20 1.97 0 0 0.00 Long-term borrowings 16,899 1,607 9.51 16,441 1,591 9.68 16,132 1,578 9.78 ----------- ----------- ----------- ----------- ----------- ----------- Total interest- bearing liabilities 884,857 23,347 2.64 668,024 23,978 3.59 514,749 28,201 5.48 ----------- ----------- ----------- Demand deposits 63,150 48,140 33,041 Other liabilities 6,319 5,692 6,450 ----------- ----------- ----------- Total liabilities 954,326 721,856 554,240 Average equity 94,366 75,305 49,555 ----------- ----------- ----------- Total liabilities and equity $ 1,048,692 $ 797,161 $ 603,795 =========== =========== =========== Net interest income $ 32,119 $ 24,265 $ 16,808 =========== =========== =========== Rate spread 2.91% 2.75% 2.25% ===== ===== ===== Net interest margin 3.22% 3.19% 2.89% ===== ===== =====
F-12
Years ended December 31, -------------2003 over 2002------------- -------------2002 over 2001------------- Total Volume Rate Total Volume Rate ----- ------ ---- ----- ------ ---- Increase (decrease) in interest income Taxable securities $ (44,000) $ 582,000 $ (626,000) $ (222,000) $ 336,000 $ (558,000) Tax exempt securities 673,000 722,000 (49,000) 694,000 713,000 (19,000) Loans 6,668,000 12,701,000 (6,033,000) 3,180,000 11,785,000 (8,605,000) Short term investments (1,000) 1,000 (2,000) (2,000) 1,000 (3,000) Federal funds sold (73,000) (39,000) (34,000) (416,000) (169,000) (247,000) ------------ ------------ ------------ ------------ ------------ ------------ Net change in tax-equivalent income 7,223,000 13,967,000 (6,744,000) 3,234,000 12,666,000 (9,432,000) Increase (decrease) in interest expense Interest-bearing demand deposits (46,000) 93,000 (139,000) (92,000) 157,000 (249,000) Savings deposits 66,000 477,000 (411,000) (233,000) 503,000 (736,000) Money market accounts (16,000) 26,000 (42,000) (50,000) 37,000 (87,000) Time deposits (1,365,000) 4,399,000 (5,764,000) (3,594,000) 5,742,000 (9,336,000) Short term borrowings (187,000) 94,000 (281,000) (287,000) 278,000 (565,000) Federal Home Loan Bank advances 901,000 901,000 0 20,000 20,000 0 Long term borrowings 16,000 44,000 (28,000) 13,000 30,000 (17,000) ----------- ----------- ------------ ----------- ----------- ------------ Net change in interest expense (631,000) 6,034,000 (6,665,000) 4,223,000 6,767,000 (10,990,000) ------------ ----------- ------------ ----------- ----------- ------------ Net change in tax-equivalent net interest income $ 7,854,000 $ 7,933,000 $ (79,000) $ 7,457,000 $ 5,899,000 $ 1,558,000 =========== =========== ============ =========== =========== ===========
Interest income is primarily generated from the loan portfolio, and to a lesser degree from securities, federal funds sold and short term investments. Interest income increased $7.2 million during 2003 from that earned in 2002, totaling $55.4 million in 2003 compared to $48.2 million in the previous year. The increase is due to the growth in earning assets, which more than offset the impact of a lower interest rate environment in 2003. Reflecting the lower interest rates, the yield on average earning assets decreased from 6.34% recorded in 2002 to 5.55% in 2003. The growth in interest income is attributable to an increase in earning assets. During 2003, earning assets averaged $998.6 million, a level substantially higher than the average earning assets of $761.3 million during 2002. Growth in average total loans and leases, totaling $217.7 million, comprised 91.7% of the increase in average earnings assets. Interest income generated from the loan and lease portfolio increased $6.7 million during 2003 over the level earned in 2002, comprised of an increase of $12.7 million from the growth in the loan and lease portfolio which was partially offset by a decrease of $6.0 million due to the decline in the yield earned on the loan portfolio to 5.60% from 6.42%. The decline in the loan and lease portfolio yield is primarily due to lower market interest rates during 2003 and a higher percentage of loans and leases at the lower floating rate pricing arrangement versus a higher fixed interest rate arrangement. Growth in the securities portfolio also added to the increase in interest income during 2003 over that of 2002. Average securities increased by $22.2 million in 2003, increasing from $83.5 million in 2002 to $105.7 million in 2003. The growth equated to an increase in interest income of $1.3 million, which was partially offset by a decrease of $0.7 million due to the decline in the yield earned on the securities portfolio to 5.40% from 6.09%. Interest income earned on federal funds sold decreased by $73,000 due to a $2.8 million decrease in the average balance and a lower yield during 2003. The lower yield on securities and federal funds sold is primarily the result of lower market interest rates during 2003. F-13 Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree repurchase agreements, FHLB advances and subordinated debentures. Interest expense decreased $0.6 million during 2003 from that paid in 2002, totaling $23.3 million in 2003 compared to $23.9 million in the previous year. The decline in interest expense is primarily attributable to the impact of a lower interest rate environment during 2003, which more than offset the impact of the increase in interest-bearing liabilities during 2003. Interest-bearing liabilities averaged $884.9 million during 2003, a level substantially higher than the average interest-bearing liabilities of $668.0 million during 2002. This growth resulted in increased interest expense of $6.0 million; however, a decrease in interest expense of $6.6 million was recorded during 2003 due to lower market interest rates on all interest-bearing liability categories except FHLB advances and subordinated debentures. The cost of average interest-bearing liabilities decreased from the 3.59% recorded in 2002 to 2.64% in 2003. Growth in average certificates of deposits, totaling $133.9 million, comprised 61.7% of the increase in average interest-bearing liabilities between 2003 and 2002. Average FHLB advances increased $45.6 million, or 21.0% of the increase in average interest-bearing liabilities. The certificate of deposit growth during 2003 equated to an increase in interest expense of $4.4 million; however, a decrease in interest expense of $5.8 million was recorded due to the decline in the average rate paid as higher-rate certificates of deposit matured and were either renewed or replaced with lower-costing certificates of deposit. FHLB advance growth during 2003 equated to an increase in interest expense of $0.9 million, with the average interest rate remaining virtually unchanged. Growth in average savings deposits, totaling $24.1 million, equated to an increase in interest expense of $0.5 million, while a decrease in interest expense of $0.4 million was recorded due to the decline in the average rate paid during 2003. Growth in average interest-bearing checking accounts and money market accounts, totaling $7.7 million, equated to an increase in interest expense of $0.1 million, while a decrease in interest expense of $0.2 million was recorded due to the decline in the average rate paid during 2003. Average short term borrowings, comprised of repurchase agreements and federal funds purchased, increased $5.1 million during 2003, resulting in increased interest expense of $0.1 million; however, a decrease of $0.3 million in interest expense was recorded due to the decline in the average rate paid. PROVISION FOR LOAN AND LEASE LOSSES Primarily reflecting continued significant loan and lease growth, the provision for loan and lease losses totaled $3.8 million during 2003, compared to the $3.0 million expensed during 2002. The allowance as a percentage of total loans outstanding as of December 31, 2003 was 1.39%, compared to 1.41% at year-end 2002. Loan and lease growth during 2003 equaled $264.4 million, compared to net loan and lease growth of $184.3 million during 2002. Net loan and lease charge-offs during 2003 totaled $311,000, or 0.04% of average total loans and leases. Net loan and lease charge-offs during 2002 totaled $606,000, or 0.09% of average total loans and leases. NONINTEREST INCOME Noninterest income, excluding net gains on sales of securities, totaled $4.0 million in 2003, an increase of 45.2% over the $2.8 million earned in 2002. Deposit and repurchase agreement service charges totaled $1.2 million in 2003, an increase of $0.2 million, or 28.7%, from the amount earned in 2002. The increase is primarily due to the growth in the number of deposit accounts, reduction of the deposit earnings credit rate and modest increases in the deposit fee structure. Reflecting increased volume of refinance activity resulting from the lower interest rate environment, fees earned on referring residential mortgage loan applicants to various third parties totaled $1.0 million in 2003, up from the $0.5 million earned in 2002. Noninterest income related to the cash surrender value of bank owned life insurance policies ("BOLI") totaled $0.8 million in 2003, up from the $0.4 million recorded in 2002. The increase is primarily due to the additional $10.5 million BOLI purchase in August 2002 and the impact of having a full twelve month accrual during 2003. F-14 In addition to providing interest income and secondary liquidity, our securities portfolio plays an integral role in managing our net interest margin. During 2003 we consummated several bond swap transactions, resulting in a net gain on the sales of securities of $321,000. We also consummated several bond swap transactions during 2002, resulting in a net gain on the sales of securities of $270,000. All of the bond swap transactions during 2003 and 2002 were consummated in reaction to declining interest rate environments occurring at the respective time periods of the sales, and against the backdrop of an expected increasing interest rate environment over the next one to four years. During 2003, we sold 25 mortgage-backed securities with an aggregate par value of $15.2 million, while in 2002 we sold 18 mortgage-backed securities with an aggregate par value of $13.5 million. Proceeds from the bond sales were reinvested into mortgage-backed securities containing different underlying interest rate risk characteristics than contained within the mortgage-backed securities that were sold. NONINTEREST EXPENSE Noninterest expense during 2003 totaled $18.1 million, an increase of 41.4% over the $12.8 million expensed in 2002. Of the $5.3 million growth in overhead costs, $3.6 million (67.9%) was in salaries and benefits, and primarily reflects the increase in full-time equivalent employees from 117 at year-end 2002 to 161 at year-end 2003, annual pay increases and an increase in the maximum dollar amount paid in the company-wide non-lender bonus program. Occupancy, furniture and equipment costs increased $0.6 million (31.7%) in 2003 over that expensed in 2002, primarily reflecting the opening of our Kentwood branch in December 2002, our Knapps Corner branch and retail loan production office in Holland, Michigan in May 2003. The remaining growth in overhead costs were generally due to general and administrative cost increases associated with an increased asset base. While the dollar volume of noninterest costs has increased, the growth of net interest income and fee income has increased by a much higher degree. Noninterest costs during 2003 were $5.3 million higher than the level of overhead costs expensed during 2002; however, net interest income and fee income increased a combined $9.0 million during the same time period. Monitoring and controlling our noninterest costs, while at the same time providing high quality service to our customers, is one of our priorities. The efficiency ratio, a banking industry standardized calculation that attempts to reflect the utilization of overhead costs, reflected slight deterioration during 2003 but remained well below banking industry averages. Computed by dividing noninterest expenses by net interest income plus noninterest income, the efficiency ratio was 50.7% during 2003, compared to 47.9% during 2002. The deterioration is primarily due to the increase in staff and the opening of the three offices noted above. FEDERAL INCOME TAX EXPENSE Federal income tax expense was $3.8 million in 2003, an increase of $0.6 million, or 19.5% over the $3.2 million expensed during 2002. The increase is primarily due to the growth in our pre-federal income tax profitability, which was only partially offset by a decline in our effective federal income tax rate from 29.0% in 2002 to 27.4% in 2003. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 SUMMARY We recorded strong earnings performance during 2002. Net income was $7.8 million, or $1.43 per basic share and $1.41 per diluted share. This earnings performance compares very favorably to net income of $4.5 million, or $1.11 per basic share and $1.10 per diluted share, recorded in 2001. The $3.3 million improvement in net income represents an increase of 73.0%, while diluted earnings per share were up 28.2%, with the difference reflecting the impact of our common stock sales during 2001 and resulting increases in average common shares outstanding. The earnings improvement during 2002 over that of 2001 is primarily attributable to increased net interest income and improved operating efficiencies resulting from asset growth, strong credit culture, controlled overhead expenses and increased fee income. F-15 NET INTEREST INCOME Net interest income, the difference between revenue generated from earning assets and the interest cost of funding those assets, is our primary source of earnings. Interest income (adjusted for tax-exempt income) and interest expense totaled $48.2 million and $23.9 million during 2002, respectively, providing for net interest income of $24.3 million. This performance compares favorably to that of 2001 when interest income and interest expense were $45.0 million and $28.2 million, respectively, providing for net interest income of $16.8 million. In comparing 2002 with 2001, interest income increased 7.1%, interest expense was down 14.9% and net interest income increased 44.6%. The level of net interest income is primarily a function of asset size, as the weighted average interest rate received on earning assets is greater than the weighted average interest cost of funding sources; however, factors such as types of assets and liabilities, interest rate risk, common stock sales, liquidity, and customer behavior also impact net interest income as well as the net interest margin. The net interest margin improved from 2.89% in 2001 to 3.19% in 2002, an increase of 10.4%. Interest income is primarily generated from the loan portfolio, and to a lesser degree from securities, federal funds sold and short term investments. Interest income increased $3.2 million during 2002 from that earned in 2001, totaling $48.2 million in 2002 compared to $45.0 million in the previous year. The increase is due to the growth in earning assets, which more than offset the impact of the declining interest rate environment in 2002. Reflecting the lower interest rates, the yield on average earning assets decreased from 7.73% recorded in 2001 to 6.34% in 2002. The growth in interest income is attributable to an increase in earning assets. During 2002, earning assets averaged $761.3 million, a level substantially higher than the average earning assets of $582.1 million during 2001. Growth in average total loans, totaling $168.8 million, comprised 94.2% of the increase in average earnings assets. Interest income generated from the loan portfolio increased $3.2 million during 2002 over the level earned in 2001, comprised of an increase of $11.8 million from the growth in the loan portfolio which was partially offset by a decrease of $8.6 million due to the decline in the yield earned on the loan portfolio to 6.42% from 7.95%. The decline in the loan portfolio yield is primarily due to decreased market interest rates during 2002. Growth in the securities portfolio also added to the increase in interest income during 2002 over that of 2001. Average securities increased by $15.8 million in 2002, increasing from $67.7 million in 2001 to $83.4 million in 2002. The growth equated to an increase in interest income of $1.0 million, which was partially offset by a decrease of $0.6 million due to the decline in the yield earned on the securities portfolio to 6.09% from 6.80%. Interest income earned on federal funds sold decreased by $0.4 million due to a $5.4 million decrease in the average balance and a lower yield during 2002. The lower yield on securities and federal funds sold is the result of decreased market interest rates during 2002. Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree repurchase agreements, subordinated debentures and Federal Home Loan Bank advances. Interest expense decreased $4.2 million during 2002 from that paid in 2001, totaling $23.9 million in 2002 compared to $28.2 million in the previous year. The decline in interest expense is primarily attributable to the impact of the declining interest rate environment during 2002, which more than offset the impact of the increase in interest-bearing liabilities during 2002. Interest-bearing liabilities averaged $668.0 million during 2002, a level substantially higher than the average interest-bearing liabilities of $514.7 million during 2001. This growth resulted in increased interest expense of $6.8 million; however, a decrease in interest expense of $11.0 million was recorded during 2002 due to lower market interest rates on all interest-bearing liability categories except trust preferred securities that have a fixed interest rate. The cost of average interest-bearing liabilities decreased from the 5.48% recorded in 2001 to 3.59% in 2002. F-16 Growth in average certificates of deposits, totaling $118.1 million, comprised 77.0% of the increase in average interest-bearing liabilities between 2002 and 2001. The certificate of deposit growth during 2002 equated to an increase in interest expense of $5.7 million; however, a decrease in interest expense of $9.3 million was recorded due to the decline in the average rate paid as higher-rate certificates of deposit matured and were either renewed or replaced with lower-costing certificates of deposit. Increases in repurchase agreements and other interest-bearing deposits added to interest expense; however, the decline in interest rates paid on these funding liabilities more than offset the increased costs due to dollar volume growth. Average repurchase agreements grew from $34.7 million in 2001 to $44.4 million in 2002. The growth equated to an increase in interest expense of $0.3 million; however, a decrease of $0.6 million in interest expense was recorded due to the decline in the average rate paid. Lower interest rates paid on interest-bearing checking accounts, savings deposits and money market accounts reduced, in aggregate, $1.1 million in interest expense during 2002, while the increase in dollar volume added $0.7 million in interest expense. PROVISION FOR LOAN AND LEASE LOSSES Primarily reflecting continued significant loan and lease growth, the provision for loan and lease losses totaled $3.0 million during 2002, compared to the $2.4 million expensed during 2001. The allowance as a percentage of total loans outstanding as of December 31, 2002 was 1.41%, compared to 1.45% at year-end 2001. Net loan and lease charge-offs during 2002 totaled $606,000, or 0.09% of average total loans and leases. Net loan and lease charge-offs during 2001 totaled $178,000, or 0.04% of average total loans and leases. NONINTEREST INCOME Noninterest income, excluding net gains on sales of securities, totaled $2.8 million in 2002, an increase of 66.4% over the $1.7 million earned in 2001. Deposit and repurchase agreement service charges totaled $915,000 in 2002, an increase of $386,000, or 73.0%, from the amount earned in 2001. The increase is primarily due to the growth in the number of deposit accounts, reduction of the deposit earnings credit rate and modest increases in the deposit fee structure. Reflecting increased volume of refinance activity resulting from the decreased interest rate environment, fees earned on referring residential mortgage loan applicants to various third parties totaled $534,000 in 2002, up from the $401,000 earned in 2001. Usage fees on credit and debit cards totaled $262,000 in 2002, up from the $166,000 earned in 2001. Letter of credit commitment fees totaled $307,000 during 2002, down from the $379,000 earned in 2001. Noninterest income related to cash surrender value of BOLI totaled $409,000 in 2002, up from the $99,000 recorded in 2001. The increase is primarily due to the additional $10.5 million BOLI purchase in August 2002 and the impact of having a full twelve month accrual of the $3.9 million in BOLI that were purchased at various time intervals during mid-2001. The BOLI policies represent a combination of whole life and term insurance. The purchase made in 2002 was done primarily to mitigate the impact of the rapidly increasing cost of employee medical and long term disability insurance policies resulting from increased premiums charged by our insurance carriers and the hiring of additional staff, while the 2001 purchases were done primarily to mitigate the interest cost of and provide a funding mechanism for our bank's non-qualified deferred compensation program. Our bank is the sole beneficiary of the term life insurance policies that are part of the BOLI purchased in 2002, while any payments made under the term life insurance portion of the BOLI purchased in 2001 may be shared between our bank and the officers' named beneficiaries. As part of the BOLI purchase in August 2002, our insurance company received a one-time insurance commission finders fee of $108,000. In addition to providing interest income and secondary liquidity, our securities portfolio plays an integral role in managing our net interest margin. During 2002 we consummated two bond swap transactions, resulting in a net gain on the sales of securities of $270,000. We also consummated two bond swap transactions during 2001, resulting in a net gain on the sales of securities of $207,000. All four bond swap transactions were consummated in reaction to the declining interest rate environment occurring at the respective time periods of the sales, and against the backdrop of an expected increasing interest rate environment over the next one to four years. During 2002, we sold 18 mortgage-backed securities with an aggregate par value of $13.5 million. Proceeds from the bond sales were reinvested into mortgage-backed securities containing different underlying interest rate risk characteristics than contained within the mortgage-backed securities that were sold. F-17 NONINTEREST EXPENSE Noninterest expense during 2002 totaled $12.8 million, an increase of 35.2% over the $9.5 million expensed in 2001. Of the $3.3 million growth in overhead costs, $2.1 million (63.6%) was in salaries and benefits, and primarily reflects the increase in full-time equivalent employees from 96 at year-end 2001 to 117 at year-end 2002, annual pay increases and an increase in the maximum dollar amount paid in the company-wide non-lender bonus program. Occupancy, furniture and equipment costs increased $0.7 million (59.3%) in 2002 over that expensed in 2001, primarily reflecting the opening of our new administrative office and the combined branch and operations center in the latter part of 2001. The remaining growth in overhead costs were generally due to general and administrative cost increases associated with an increased asset base. While the dollar volume of noninterest costs have increased, the growth of net interest income and fee income have increased by a much higher degree. Noninterest costs during 2002 were $3.3 million higher than the level of overhead costs expensed during 2001; however, net interest income and fee income increased a combined $8.4 million during the same time period. Monitoring and controlling our noninterest costs, while at the same time providing high quality service to our customers, is one of our priorities. The efficiency ratio, a banking industry standardized calculation that attempts to reflect the utilization of overhead costs, continued to show improvement during 2002. Computed by dividing noninterest expenses by net interest income plus noninterest income, the efficiency ratio was 47.9% during 2002. This level compares favorably to the efficiency ratio of 51.7% recorded during 2001, and reflects the improved efficiencies resulting from increased net interest income and fee income, and controlled overhead costs. FEDERAL INCOME TAX EXPENSE Federal income tax expense was $3.2 million in 2002, an increase of $1.2 million, or 59.1% over the $2.0 million expensed during 2001. The increase is primarily due to the growth in our pre-federal income tax profitability, which was only partially offset by a decline in our effective federal income tax rate from 30.7% in 2001 to 29.0% in 2002. CAPITAL RESOURCES Shareholders' equity is a noninterest-bearing source of funds that provides support for our asset growth. Shareholders' equity was $130.2 million and $79.8 million at December 31, 2003 and 2002, respectively. The $50.4 million increase during 2003 is primarily attributable to the sale of common stock and net income from operations. In October we completed the sale of 1,374,606 shares of common stock through a public offering, raising $42.8 million net of issuance costs. Net income from operations totaled $10.0 million during 2003. Negatively impacting shareholders' equity during 2003 was the payment of cash dividends, which totaled $1.8 million. Shareholders' equity was also negatively impacted by a $0.8 million mark-to-market adjustment for available for sale securities as defined in SFAS No. 115, resulting primarily from the changing interest rate environment during 2003. We and our bank are subject to regulatory capital requirements administered by the State of Michigan and federal banking agencies. Failure to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. Our and our bank's capital ratios as of December 31, 2003 and 2002 are disclosed under Note 17 on pages F-44 and F-45 of the Notes to Consolidated Financial Statements. Our ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. On January 6, 2003, we declared a 5% common stock dividend, payable on February 3, 2003 to record holders as of January 17, 2003. This represented the third straight year we had declared and paid a 5% stock dividend. Also, during 2003 we declared and paid a $0.08 per common share cash dividend in each calendar quarter, totaling $1.8 million. On January 6, 2004, we declared a $0.09 per common share cash dividend that will be paid on March 10, 2004 to shareholders of record on February 10, 2004. F-18 LIQUIDITY Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and investment securities. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and operate our company. Liquidity is primarily achieved through the growth of deposits (both local and out-of-area) and liquid assets such as securities available for sale, matured securities, and federal funds sold. Asset and liability management is the process of managing the balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity. Our liquidity strategy is to fund loan growth with deposits, repurchase agreements and other borrowed funds and to maintain an adequate level of short- and medium-term investments to meet typical daily loan and deposit activity. Although net deposit and repurchase agreement growth from depositors located in the market area increased by $68.9 million, or 19.1%, during 2003, the growth was not sufficient to meet the substantial loan growth of $264.4 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, 2003, out-of-area deposits totaled $591.6 million, or 62.1% of combined deposits and repurchase agreements, an increase in dollar volume from the $512.5 million outstanding, but a decline from the 63.7% level of combined deposits and repurchase agreements, as of December 31, 2002. As a member of the Federal Home Loan Bank of Indianapolis, our bank has access to the FHLB advance borrowing programs. As of December 31, 2003, advances totaled $90.0 million, compared to $15.0 million outstanding as of December 31, 2002. Based on available collateral at December 31, 2003, our bank could borrow up to $156.8 million. We have the ability to borrow money on a daily basis through correspondent banks using established federal funds purchased lines. During 2003, our federal funds purchased position averaged $3.6 million, compared to an average federal funds sold position of $5.1 million. At December 31, 2003, our established unsecured federal funds purchased lines totaled $35.0 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. At December 31, 2003, we had a total of $284.1 million in unfunded loan commitments and $57.9 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $210.5 million were commitments available as lines of credit to be drawn at any time as customers' cash needs vary, and $73.6 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. MARKET RISK ANALYSIS 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 our income primarily from the excess of interest collected on interest-earning assets over the interest paid on 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. F-19 Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. 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. The following table depicts our GAP position as of December 31, 2003 (dollars in thousands).
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------ ------ ----- ----- ----- Assets: Commercial loans (1) $ 415,721 $ 23,811 $ 443,925 $ 53,022 $ 936,479 Leases 2,309 2,309 Residential real estate loans 45,884 3,160 33,040 10,255 92,339 Consumer loans 1,577 253 2,938 68 4,836 Securities (2) 6,073 3,048 24,197 88,192 121,510 Short term investments 255 255 Allowance for loan and lease losses (14,379) (14,379) Other assets 59,483 59,483 ----------- ----------- ----------- ----------- ----------- Total assets 469,510 30,272 506,409 196,641 1,202,832 Liabilities: Interest-bearing checking 34,241 34,241 Savings 101,710 101,710 Money market accounts 8,290 8,290 Time deposits under $100,000 20,802 57,888 27,552 106,242 Time deposits $100,000 and over 123,040 288,719 164,071 575,830 Short term borrowings 55,545 55,545 Federal Home Loan Bank advances 10,000 35,000 45,000 90,000 Long term borrowings 1,114 16,000 17,114 Noninterest-bearing checking 76,579 76,579 Other liabilities 7,080 7,080 ----------- ----------- ----------- ----------- ----------- Total liabilities 354,742 381,607 236,623 99,659 1,072,631 Shareholders' equity 130,201 130,201 ----------- ----------- ----------- ----------- ----------- Total sources of funds 354,742 381,607 236,623 229,860 1,202,832 ----------- ----------- ----------- ----------- ----------- Net asset (liability) GAP $ 114,768 $ (351,335) $ 269,786 $ (33,219) =========== ============ =========== ============ Cumulative GAP $ 114,768 $ (236,567) $ 33,219 =========== ============ =========== Percent of cumulative GAP to total assets 9.5% (19.7)% 2.8% =========== ============ ===========
(1) Floating rate loans that are currently at interest rate floors are treated as fixed rate loans and are reflected using maturity date and not repricing frequency. (2) Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of December 31, 2003. F-20 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 our primary interest rate risk measurement technique. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates. Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest-sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and our strategies, among other factors. We conducted multiple simulations as of December 31, 2003, 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 our policy parameters established to manage and monitor interest rate risk.
Dollar Change In Percent Change In Interest Rate Scenario Net Interest Income Net Interest Income ---------------------- ------------------- ------------------- Interest rates down 200 basis points $ (949,000) (2.8)% Interest rates down 100 basis points (29,000) (0.1) No change in interest rates 554,000 1.6 Interest rates up 100 basis points 1,416,000 4.1 Interest rates up 200 basis points 2,300,000 6.7
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing, and deposit gathering strategies; client preferences; and other factors. F-21 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Mercantile Bank Corporation Wyoming, Michigan We have audited the accompanying consolidated balance sheets of Mercantile Bank Corporation as of December 31, 2003 and 2002 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, 2003. 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, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ Crowe Chizek and Company LLC -------------------------------- Crowe Chizek and Company LLC Grand Rapids, Michigan January 22, 2004 F-22 MERCANTILE BANK CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002 - --------------------------------------------------------------------------------
2003 2002 ---- ---- ASSETS Cash and due from banks $ 16,309,000 $ 23,404,000 Short term investments 255,000 213,000 Federal funds sold 0 4,500,000 --------------- --------------- Total cash and cash equivalents 16,564,000 28,117,000 Securities available for sale 71,421,000 59,614,000 Securities held to maturity (fair value of $47,102,000 at December 31, 2003 and $37,985,000 at December 31, 2002) 45,112,000 36,493,000 Federal Home Loan Bank stock 4,977,000 786,000 Total loans and leases 1,035,963,000 771,554,000 Allowance for loan and lease losses (14,379,000) (10,890,000) ---------------- ---------------- Total loans and leases, net 1,021,584,000 760,664,000 Premises and equipment, net 15,305,000 12,174,000 Bank owned life insurance policies 16,441,000 14,876,000 Accrued interest receivable 4,098,000 3,336,000 Other assets 7,330,000 5,795,000 --------------- -------------- Total assets $ 1,202,832,000 $ 921,855,000 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 76,579,000 $ 62,405,000 Interest-bearing 826,313,000 691,708,000 --------------- --------------- Total 902,892,000 754,113,000 Securities sold under agreements to repurchase 49,545,000 50,335,000 Federal funds purchased 6,000,000 0 Federal Home Loan Bank advances 90,000,000 15,000,000 Other borrowed money 1,114,000 576,000 Accrued expenses and other liabilities 7,080,000 5,997,000 Subordinated debentures 16,000,000 16,000,000 --------------- --------------- Total liabilities 1,072,631,000 842,021,000 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; 6,805,914 and 5,405,706 shares issued and outstanding at December 31, 2003 and 2002 118,560,000 75,530,000 Retained earnings 11,421,000 3,250,000 Accumulated other comprehensive income 220,000 1,054,000 --------------- --------------- Total shareholders' equity 130,201,000 79,834,000 --------------- --------------- Total liabilities and shareholders' equity $ 1,202,832,000 $ 921,855,000 =============== ===============
See accompanying notes to consolidated financial statements. F-23 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2003, 2002 and 2001 - --------------------------------------------------------------------------------
2003 2002 2001 ---- ---- ---- Interest income Loans and leases, including fees $ 49,700,000 $ 43,032,000 $ 39,852,000 Securities 4,900,000 4,468,000 4,217,000 Federal funds sold 57,000 130,000 546,000 Short-term investments 1,000 2,000 4,000 -------------- ------------- -------------- Total interest income 54,658,000 47,632,000 44,619,000 Interest expense Deposits 20,107,000 21,468,000 25,437,000 Federal Home Loan Bank advances 921,000 20,000 0 Short-term borrowings 712,000 899,000 1,186,000 Long-term borrowings 1,607,000 1,591,000 1,578,000 -------------- ------------- -------------- Total interest expense 23,347,000 23,978,000 28,201,000 -------------- ------------- -------------- NET INTEREST INCOME 31,311,000 23,654,000 16,418,000 Provision for loan and lease losses 3,800,000 3,002,000 2,370,000 -------------- ------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 27,511,000 20,652,000 14,048,000 Noninterest income Service charges on accounts 1,178,000 915,000 529,000 Mortgage loan referral fees 987,000 534,000 401,000 Increase in cash surrender value of bank owned life insurance policies 780,000 409,000 99,000 Gain on sale of securities 321,000 270,000 207,000 Letter of credit fees 189,000 307,000 379,000 Other income 906,000 618,000 264,000 -------------- ------------- -------------- Total noninterest income 4,361,000 3,053,000 1,879,000 Noninterest expense Salaries and benefits 11,371,000 7,771,000 5,712,000 Occupancy 1,386,000 1,069,000 627,000 Furniture and equipment 1,009,000 749,000 514,000 Data processing 822,000 571,000 446,000 Advertising 325,000 300,000 248,000 Other expense 3,158,000 2,321,000 1,907,000 -------------- ------------- -------------- Total noninterest expenses 18,071,000 12,781,000 9,454,000 -------------- ------------- -------------- INCOME BEFORE FEDERAL INCOME TAX EXPENSE 13,801,000 10,924,000 6,473,000 Federal income tax expense 3,785,000 3,167,000 1,990,000 -------------- ------------- -------------- NET INCOME $ 10,016,000 $ 7,757,000 $ 4,483,000 ============== ============= ============== Earnings per share: Basic $ 1.73 $ 1.43 $ 1.11 ======= ======= ======= Diluted $ 1.69 $ 1.41 $ 1.10 ======= ======= =======
See accompanying notes to consolidated financial statements. F-24 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2003, 2002 and 2001 - --------------------------------------------------------------------------------
Accumulated Other Total Common Retained Comprehensive Shareholders' Stock Earnings Income/(Loss) Equity ----- -------- ------------- ------ BALANCES, JANUARY 1, 2001 $ 29,936,000 $ 1,628,000 $ 290,000 $ 31,854,000 Sale of common stock, net of issuance costs, 2,306,600 shares 35,009,000 35,009,000 Payment of 5% stock dividend 4,461,000 (4,462,000) (1,000) Comprehensive income: Net income 4,483,000 4,483,000 Change in net unrealized gain on securities available for sale, net of tax effect 118,000 118,000 ---------------- Total comprehensive income 4,601,000 --------------- -------------- ------------- ---------------- BALANCES, DECEMBER 31, 2001 69,406,000 1,649,000 408,000 71,463,000 Payment of 5% stock dividend 6,155,000 (6,156,000) (1,000) Issuance costs associated with 2001 stock sale (37,000) (37,000) Stock option exercises, 578 shares 6,000 6,000 Comprehensive income: Net income 7,757,000 7,757,000 Change in net unrealized gain on securities available for sale, net of tax effect 646,000 646,000 ---------------- Total comprehensive income 8,403,000 --------------- -------------- ------------- ---------------- BALANCES, DECEMBER 31, 2002 $ 75,530,000 $ 3,250,000 $ 1,054,000 $ 79,834,000 Sale of common stock, net of issuance costs, 1,374,606 shares 42,818,000 42,818,000 Employee stock purchase plan, 1,880 shares 57,000 57,000 Dividend reinvestment plan, 3,699 shares 119,000 119,000 Stock option exercises, 30,397 shares 301,000 301,000 Stock tendered for stock option exercises, 10,374 shares (265,000) (265,000) Cash dividends (1,845,000) (1,845,000) Comprehensive income: Net income 10,016,000 10,016,000 Change in net unrealized gain on securities available for sale, net of tax effect (834,000) (834,000) ----------------- Total comprehensive income 9,182,000 --------------- -------------- ------------- ---------------- BALANCES, DECEMBER 31, 2003 $ 118,560,000 $ 11,421,000 $ 220,000 $ 130,201,000 =============== ============== ============= ================
See accompanying notes to consolidated financial statements. F-25 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2003, 2002 and 2001 - --------------------------------------------------------------------------------
2003 2002 2001 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,016,000 $ 7,757,000 $ 4,483,000 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 1,948,000 1,366,000 651,000 Provision for loan and lease losses 3,800,000 3,002,000 2,370,000 Gain on sale of securities (321,000) (270,000) (207,000) Net change in Accrued interest receivable (762,000) (525,000) (53,000) Bank owned life insurance policies (780,000) (409,000) (99,000) Other assets (1,377,000) (1,484,000) (1,224,000) Accrued expenses and other liabilities 1,083,000 579,000 (1,526,000) --------------- -------------- --------------- Net cash from operating activities 13,607,000 10,016,000 4,395,000 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of: Securities available for sale (58,388,000) (41,074,000) (38,542,000) Securities held to maturity (10,126,000) (11,783,000) (11,555,000) Federal Home Loan Bank stock (4,191,000) (1,000) 0 Proceeds from: Sales of securities available for sale 15,983,000 13,997,000 12,843,000 Maturities, calls and repayments of securities available for sale 29,153,000 20,493,000 19,240,000 Maturities, calls and repayments of securities held to maturity 1,495,000 1,255,000 102,000 Loan originations and payments, net (264,720,000) (184,912,000) (157,622,000) Purchases of premises and equipment, net (4,293,000) (3,527,000) (5,994,000) Purchases of bank owned life insurance policies (785,000) (10,476,000) (3,892,000) ---------------- -------------- --------------- Net cash from investing activities (295,872,000) (216,028,000) (185,420,000) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 148,779,000 185,036,000 143,337,000 Net proceeds from sale of common stock 42,818,000 (37,000) 35,009,000 Stock option exercises, net 36,000 6,000 0 Employee stock purchase plan 57,000 0 0 Cash dividend reinvestment plan 119,000 0 0 Cash paid in lieu of fractional shares on stock dividend 0 (1,000) (1,000) Cash dividends (1,845,000) 0 0 Net increase in Federal Home Loan Bank advances 75,000,000 15,000,000 0 Net increase in other borrowed money 6,538,000 337,000 182,000 Net increase/(decrease) in securities sold under agreements to repurchase (790,000) 13,850,000 4,334,000 ---------------- -------------- --------------- Net cash from financing activities 270,712,000 214,191,000 182,861,000 --------------- -------------- --------------- Net change in cash and cash equivalents (11,553,000) 8,179,000 1,836,000 Cash and cash equivalents at beginning of period 28,117,000 19,938,000 18,102,000 --------------- -------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,564,000 $ 28,117,000 $ 19,938,000 =============== ============== =============== Supplemental disclosures of cash flow information Cash paid during the year for Interest $ 23,261,000 $ 23,883,000 $ 29,717,000 Federal income tax 4,985,000 4,165,000 2,713,000
See accompanying notes to consolidated financial statements. F-26 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Mercantile Bank Corporation ("Mercantile") and its subsidiaries, Mercantile Bank of West Michigan ("Bank") and MBWM Capital Trust I ("Capital Trust"), and of Mercantile Bank Mortgage Company, LLC ("Mortgage Company"), Mercantile BIDCO, Inc. ("Mercantile BIDCO"), Mercantile Bank Real Estate Co., LLC ("Mercantile Real Estate") and Mercantile Insurance Center, Inc. ("Mercantile Insurance"), subsidiaries of our bank, after elimination of significant intercompany transactions and accounts. Nature of Operations: Mercantile was incorporated on July 15, 1997 to establish and own the 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 loans, commercial leases, residential mortgage loans, and installment loans. Substantially all loans and leases are secured by specific items of collateral including business assets, real estate and consumer assets. Commercial loans and leases are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both commercial and residential real estate. The Bank's loan accounts are primarily with customers located in western Michigan, within Kent County and Ottawa County. The Bank's retail deposits are also from 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. Capital Trust was formed in September 1999. All of the common securities of this special purpose trust are owned by Mercantile. Capital Trust exists solely to issue capital securities. Mercantile Bank Mortgage Company was formed during 2000. A subsidiary of the Bank, Mercantile Bank Mortgage Company had been established to increase the profitability and efficiency of the mortgage loan operations. Mercantile Bank 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 Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile Bank Mortgage Company was reorganized as Mercantile Bank Mortgage Company, LLC, a newly established limited liability company, which is 99% owned by the Bank and 1% owned by Mercantile BIDCO. Mortgage loans originated and held by the Mercantile Bank Mortgage Company are serviced by the Bank pursuant to a servicing agreement. On February 7, 2002, Mercantile BIDCO, a wholly-owned subsidiary of the Bank, was granted a license by the Michigan Office of Financial and Insurance Services to operate as a Michigan Business and Industrial Development Company, a non-depository Michigan financial institution. Mercantile BIDCO offers equipment lease financing, asset based loans, junior debt facilities and other financing where equity features may be part of the facility pricing. Mercantile Insurance was formed during 2002 through the acquisition of an existing shelf insurance agency. Insurance products are offered through an Agency and Institutions Agreement among Mercantile Insurance, the Bank and Burnham Insurance Group. The insurance products are marketed through a central facility operated by the Michigan Bankers Insurance Association, members of which include the insurance subsidiaries of various Michigan-based financial institutions and Burnham Insurance Group. Mercantile Insurance receives commissions based upon written premiums produced under the Agency and Institutions Agreement. Mercantile Real Estate was organized on July 21, 2003, principally to develop, construct, and own a new facility to be constructed in downtown Grand Rapids which will serve as our bank's new main office and Mercantile Bank Corporation's new headquarters. (Continued) F-27 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Mercantile filed an election to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act and implementing Federal Reserve Board regulations effective March 23, 2000. Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan and lease 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 fair value with unrealized holding gains or losses reported in other comprehensive income. 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 and Leases: Loans and leases 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 and lease 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 or lease is impaired or payments are past due over 90 days. Payments received on such loans and leases are reported as principal reductions. In all cases, loans and leases are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans and leases is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans and leases are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan and lease 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 and leases, but the entire allowance is available for any loan or lease that, in management's judgment, should be charged-off. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan or lease balance is confirmed. (Continued) F-28 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A loan or lease is impaired when full payment under the loan or lease 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 or lease is impaired, a portion of the allowance is allocated so that the loan or lease is reported, net, at the present value of estimated future cash flows using the loan's or leases' existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans and leases 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: Land is carried at cost. 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. 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 subordinated debentures are amortized over the term of the debentures. Foreclosed Assets: Assets acquired through or instead of foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key officers. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized. 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 Compensation: Employee compensation expense under stock option plans is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement 123, Accounting for Stock-Based Compensation.
2003 2002 2001 ---- ---- ---- Net income as reported $ 10,016,000 $ 7,757,000 $ 4,483,000 Deduct: Stock-based compensation expense determined under fair value based method 378,000 337,000 262,000 Pro forma net income 9,638,000 7,420,000 4,221,000 Basic earnings per share as reported $ 1.73 $ 1.43 $ 1.11 Pro forma basic earnings per share 1.67 1.37 1.05 Diluted earnings per share as reported $ 1.69 $ 1.41 $ 1.10 Pro forma diluted earnings per share 1.63 1.35 1.03
- -------------------------------------------------------------------------------- (Continued) F-29 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
2003 2002 2001 ---- ---- ---- Risk-free interest rate 3.25% 4.78% 4.58% Expected option life 7 Years 10 Years 10 Years Expected stock price volatility 22% 30% 32% Dividend yield 1% 0% 0%
Income Taxes: Income tax expense is the total 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 amounts for the temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financials instruments are recorded when they are funded. 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 Per Share: Basic earnings per share is based on weighted average common shares outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under stock options. Earnings per share are restated for all stock dividends, including the 5% stock dividend paid on February 3, 2003, February 1, 2002 and February 1, 2001. The fair value of shares issued in stock dividends is transferred from retained earnings to common stock. 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: During 2003, the Company adopted FASB Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, FASB Statement 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, and FASB Interpretation 46, Consolidation of Variable Interest Entities. Adoption of the new standards did not materially affect the Company's operating results or financial condition. Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. - -------------------------------------------------------------------------------- (Continued) F-30 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Derivatives: All derivative instruments are recorded at their fair values. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur. Operating Segments: While management monitors the revenue streams of the various products and services offered, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of Mercantile's financial service operations are considered by management to be aggregated in one reportable operating segment. NOTE 2 -- SECURITIES The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- 2003 - ---- U.S. Government agency debt obligations $ 34,014,000 $ 223,000 $ (159,000) $ 34,078,000 Mortgage-backed securities 37,074,000 414,000 (145,000) 37,343,000 --------------- ------------ -------------- ---------------- $ 71,088,000 $ 637,000 $ (304,000) $ 71,421,000 =============== ============ ============== ================ 2002 - ---- U.S. Government agency debt obligations $ 16,121,000 $ 217,000 $ 0 $ 16,338,000 Mortgage-backed securities 41,895,000 1,381,000 0 43,276,000 --------------- ------------ ------------- ---------------- $ 58,016,000 $ 1,598,000 $ 0 $ 59,614,000 =============== ============ ============= ================
- -------------------------------------------------------------------------------- (Continued) F-31 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 2 -- SECURITIES (Continued) The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
Gross Gross Carrying Unrecognized Unrecognized Fair Amount Gains Losses Value ------ ----- ------ ----- 2003 - ---- Municipal general obligation bonds $ 38,594,000 $ 1,829,000 $ (122,000) $ 40,301,000 Municipal revenue bonds 6,518,000 303,000 (20,000) 6,801,000 --------------- ------------ ------------- ---------------- $ 45,112,000 $ 2,132,000 $ (142,000) $ 47,102,000 =============== ============ ============= ================ 2002 - ---- Municipal general obligation bonds $ 29,578,000 $ 1,371,000 $ (90,000) $ 30,859,000 Municipal revenue bonds 6,915,000 211,000 0 7,126,000 --------------- ------------ ------------ ---------------- $ 36,493,000 $ 1,582,000 $ (90,000) $ 37,985,000 =============== ============ ============= ================
Securities with unrealized losses at year-end 2003 not recognized in income are as follows:
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss - ------------------------- ----- ---- ----- ---- ----- ---- U.S. Government agency debt obligations $ 5,827,000 $ 159,000 $ 0 $ 0 $ 5,827,000 $ 159,000 Mortgage-backed securities 12,975,000 145,000 0 0 12,975,000 145,000 Municipal general obligation bonds 4,318,000 118,000 1,082,000 4,000 5,400,000 122,000 Municipal revenue bonds 532,000 20,000 0 0 532,000 20,000 ----------- --------- ----------- -------- ------------- --------- $23,652,000 $ 442,000 $ 1,082,000 $ 4,000 $ 24,734,000 $ 446,000 =========== ========= =========== ======== ============= =========
Unrealized losses on securities have not been recognized into income because the issuers' bonds are of high credit quality, we have the intent and ability to hold for the foreseeable future and the decline in fair value is primarily due to increased market interest rates. The fair value is expected to recover as the bonds approach the maturity date. The amortized cost and fair values of debt securities at year-end 2003, 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, primarily mortgage backed securities, are shown separately. The maturities of securities and their weighted average yields at December 31, 2003 are shown in the following table. The yields for municipal securities are shown at their tax equivalent yield. - -------------------------------------------------------------------------------- (Continued) F-32 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 2 -- SECURITIES (Continued)
--------------Held-to-Maturity-------------- -----------Available-for-Sale------------ Weighted Weighted Average Carrying Fair Average Amortized Fair Yield Amount Value Yield Cost Value ----- ------ ----- ----- ---- ----- Due in one year or less 6.86% $ 1,156,000 $ 1,175,000 NA $ 0 $ 0 Due from one to five years 6.79 4,709,000 5,053,000 NA 0 0 Due from five to ten years 6.88 8,746,000 9,467,000 4.87% 33,014,000 33,077,000 Due after ten years 6.77 30,501,000 31,407,000 5.37 1,000,000 1,001,000 Mortgage-backed NA 0 0 4.68 37,074,000 37,343,000 ------------- ------------- ------------- -------------- 6.79% $ 45,112,000 $ 47,102,000 4.78% $ 71,088,000 $ 71,421,000 ============= ============= ============= ==============
During 2003, securities with an aggregate amortized costs basis of $15.7 million were sold, resulting in an aggregate realized gain of $324,000 and an aggregate realized loss of $3,000. During 2002, securities with an aggregate amortized cost basis of $13.7 million were sold, resulting in an aggregate realized gain of $270,000. During 2001, securities with an aggregate amortized cost basis of $12.8 million were sold, resulting in an aggregate realized gain of $234,000 and an aggregate realized loss of $27,000. At year-end 2003 and 2002, the amortized cost of securities issued by the state of Michigan and all its political subdivisions totaled $45.1 million and $36.5 million, with an estimated market value of $47.1 million and $38.0 million, respectively. Total securities of any one specific issuer, other than the U.S. Government and its agencies, did not exceed 10% of shareholders' equity. The carrying value of securities that are pledged to repurchase agreements and other deposits was $61.4 million and $58.2 million at December 31, 2003 and 2002, respectively. NOTE 3 -- LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES Year-end loans and leases are as follows:
Percent December 31, 2003 December 31, 2002 Increase/ Balance % Balance % (Decrease) ------- - ------- - ---------- Real Estate: Construction and land development $ 117,649,000 11.4% $ 103,900,000 13.5% 13.2% Secured by 1 -- 4 family properties 92,339,000 8.9 60,828,000 7.9 51.8 Secured by multi- family properties 28,950,000 2.8 13,025,000 1.7 122.3 Secured by nonresidential properties 485,080,000 46.8 357,431,000 46.3 35.7 Commercial 304,800,000 29.4 230,662,000 29.9 32.1 Leases 2,309,000 0.2 850,000 0.1 171.6 Consumer 4,836,000 0.5 4,858,000 0.6 (0.5) --------------- ------ --------------- ------- ------- $ 1,035,963,000 100.0% $ 771,554,000 100.0% 34.3% =============== ====== =============== ======= ======
- -------------------------------------------------------------------------------- (Continued) F-33 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 3 -- LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) Activity in the allowance for loan and lease losses is as follows:
2003 2002 2001 ---- ---- ---- Beginning balance $ 10,890,000 $ 8,494,000 $ 6,302,000 Provision for loan and lease losses 3,800,000 3,002,000 2,370,000 Charge-offs (596,000) (706,000) (252,000) Recoveries 285,000 100,000 74,000 --------------- --------------- ---------------- Ending balance $ 14,379,000 $ 10,890,000 $ 8,494,000 =============== =============== ================
2003 2002 ---- ---- Impaired loans and leases were as follows: Year-end loans with no allocated allowance for loan and lease losses $ 0 $ 402,000 Year-end loans with allocated allowance for loan and lease losses 1,785,000 394,000 --------------- ---------------- $ 1,785,000 $ 796,000 =============== ================ Amount of the allowance for loan and lease losses allocated $ 321,000 $ 80,000 Average of impaired loans during the year 581,000 782,000 Nonperforming loans and leases were as follows: Loans and leases past due over 90 days still accruing interest $ 1,552,000 $ 0 Nonaccrual loans and leases 233,000 796,000 --------------- ---------------- $ 1,785,000 $ 796,000 =============== ================
The Bank recognized interest income of $140,000 on impaired loans during 2003. The Bank did not recognize any interest income on impaired loans during 2002 or 2001. Nonperforming loans includes both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. Concentrations within the loan portfolio were as follows at year-end:
2 0 0 3 2 0 0 2 ------- ------- Percentage of Percentage of Balance Loan Portfolio Balance Loan Portfolio ------- -------------- ------- -------------- Commercial real estate loans to lessors of non-residential buildings $ 259,690,000 25.1% $179,688,000 23.3%
- -------------------------------------------------------------------------------- (Continued) F-34 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 4 - PREMISES AND EQUIPMENT, NET Year-end premises and equipment are as follows:
2003 2002 ---- ---- Land and improvements $ 5,745,000 $ 3,234,000 Buildings and leasehold improvements 8,183,000 7,009,000 Furniture and equipment 4,935,000 4,327,000 --------------- ---------------- 18,863,000 14,570,000 Less: accumulated depreciation 3,558,000 2,396,000 --------------- ---------------- $ 15,305,000 $ 12,174,000 =============== ================
Depreciation expense in 2003, 2002 and 2001 totaled $1,162,000, $910,000 and $556,000, respectively. NOTE 5 -- DEPOSITS Deposits at year-end are summarized as follows:
December 31, 2003 December 31, 2002 Percent ----------------- ----------------- Increase/ Balance % Balance % (Decrease) ------- - ------- - ---------- Noninterest-bearing demand $ 76,579,000 8.5% $ 62,405,000 8.3% 22.7% Interest-bearing checking 34,241,000 3.8 28,130,000 3.7 21.7 Money market 8,290,000 0.9 8,592,000 1.1 (3.5) Savings 101,710,000 11.3 69,461,000 9.2 46.4 Time, under $100,000 8,163,000 0.9 7,002,000 0.9 16.6 Time, $100,000 and over 82,288,000 9.1 66,005,000 8.8 24.7 ---------------- -------- ---------------- ------- -------- 311,271,000 34.5 241,595,000 32.0 28.8 Out-of-area time, under $100,000 98,079,000 10.9 85,557,000 11.4 14.6 Out-of-area time, $100,000 and over 493,542,000 54.6 426,961,000 56.6 15.6 ---------------- -------- ---------------- ------- -------- 591,621,000 65.5 512,518,000 68.0 15.4 ---------------- -------- ---------------- ------- -------- $ 902,892,000 100.0% $ 754,113,000 100.0% 19.7% ================ ======== ================ ======= ========
Out-of-area certificates of deposit consist of certificates obtained from depositors outside of the primary market area. As of December 31, 2003, out-of-area certificates of deposit totaling $572.0 million were obtained through deposit brokers, with the remaining $19.6 million obtained directly from the depositors. - -------------------------------------------------------------------------------- (Continued) F-35 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 5 -- DEPOSITS (Continued) The following table depicts the maturity distribution for time deposits at year-end.
2003 2002 ---- ---- In one year $ 490,450,000 $ 437,070,000 In two years 119,376,000 100,855,000 In three years 34,172,000 16,119,000 In four years 19,957,000 12,849,000 In five years 18,117,000 18,632,000 -------------- --------------- $ 682,072,000 $ 585,525,000 ============== ===============
The following table depicts the maturity distribution for certificates of deposit with balances of $100,000 or more at year-end.
2003 2002 ---- ---- Up to three months $ 123,040,000 $ 115,615,000 Three months to six months 142,231,000 110,401,000 Six months to twelve months 146,488,000 146,156,000 Over twelve months 164,071,000 120,794,000 -------------- --------------- $ 575,830,000 $ 492,966,000 ============== ===============
NOTE 6 -- SHORT-TERM BORROWINGS Information relating to short-term borrowings, comprised entirely of securities sold under agreements to repurchase, at year-end is summarized below:
2003 2002 ---- ---- Outstanding balance at year-end $ 49,545,000 $ 50,335,000 Weighted average interest rate at year-end 1.38% 1.54% Average daily balance during the year 45,865,000 43,468,000 Weighted average interest rate during the year 1.45% 2.03% Maximum month end balance during the year 55,270,000 52,000,000
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. Repurchase agreements were secured by securities with a market value of $60.4 million and $57.2 million at year-end 2003 and 2002, respectively. - -------------------------------------------------------------------------------- (Continued) F-36 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES At year-end, advances from the Federal Home Loan Bank were as follows.
2003 2002 ---- ---- Maturities January 2004 through September 2006, fixed rates from 1.54% to 3.21%, averaging 2.07% $ 90,000,000 $ 0 Maturities September 2003 through December 2004, fixed rates from 1.69% to 2.39%, averaging 1.97% 0 15,000,000 -------------- --------------- $ 90,000,000 $ 15,000,000 ============== ===============
Each advance is payable at its maturity date, and is subject to a prepayment fee if paid prior to the maturity date. The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of December 31, 2003 totaled $156.8 million. Maturities over the next five years are: 2004 $ 45,000,000 2005 35,000,000 2006 10,000,000 2007 0 2008 0
NOTE 8 - FEDERAL INCOME TAXES The consolidated provision for income taxes is as follows:
2003 2002 2001 ---- ---- ---- Current $ 5,153,000 $ 4,060,000 $ 2,838,000 Deferred benefit (1,253,000) (893,000) (848,000) Effect of restating deferred tax asset @ 35% (115,000) 0 0 --------------- -------------- --------------- Tax expense $ 3,785,000 $ 3,167,000 $ 1,990,000 ============== ============== ===============
- -------------------------------------------------------------------------------- (Continued) F-37 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 8 - FEDERAL INCOME TAXES (Continued) Income tax expense was less than the amount computed by applying the statutory federal income tax rate to income before income taxes. The reasons for the difference are as follows:
2003 2002 2001 ---- ---- ---- Statutory rates $ 4,830,000 $ 3,714,000 $ 2,201,000 Increase (decrease) from Tax-exempt interest (606,000) (429,000) (264,000) Life insurance (273,000) (139,000) (34,000) Effect of tax bracket surcharge (100,000) 0 0 Other (66,000) 21,000 87,000 --------------- -------------- --------------- Tax expense $ 3,785,000 $ 3,167,000 $ 1,990,000 ============== ============== ===============
The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities:
2003 2002 ---- ---- Deferred tax assets Allowance for loan losses $ 4,983,000 $ 3,619,000 Start-up/pre-opening expenses 6,000 8,000 Deferred loan fees 360,000 243,000 Deferred compensation 390,000 196,000 Other 27,000 18,000 -------------- --------------- 5,766,000 4,084,000 Deferred tax liabilities Unrealized gain on securities available for sale 113,000 543,000 Depreciation 383,000 173,000 Other 118,000 14,000 -------------- --------------- 614,000 730,000 -------------- --------------- Net deferred tax asset $ 5,152,000 $ 3,354,000 ============== ===============
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 at year-end 2003 or 2002. NOTE 9 -- STOCK OPTION PLANS Stock option plans are used to reward directors and employees and provide them with additional equity interest. Stock options granted to non-employee directors are at 125% of the market price on the date of grant, fully vest after five years and expire ten years from the date of grant. Stock options granted to employees are granted at the market price on the date of grant, generally fully vest after one year and expire ten years from the date of grant. At year-end 2003, there were 51,949 shares authorized for future option grants. Information about option grants follows. - -------------------------------------------------------------------------------- (Continued) F-38 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 9 -- STOCK OPTION PLANS (Continued) A summary of the activity in the plan is as follows.
2 0 0 3 2 0 0 2 2 0 0 1 ------- ------- ------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 271,935 $ 12.63 229,839 $ 11.14 183,552 $ 9.99 Granted 37,880 33.74 44,878 20.36 46,287 15.71 Exercised (30,397) 9.90 (578) 9.99 0 Forfeited or expired (1,274) 30.29 (2,204) 15.13 0 ----------- --------- ----------- -------- ---------- -------- Outstanding at end of year 278,144 $ 15.72 271,935 $ 12.63 229,839 $ 11.14 ========== ========= ========== ======== ========== ======== Options exercisable at year-end 227,052 218,792 176,958 ========== ========== ========== Fair value of options granted during year $ 8.34 $ 9.96 $ 7.84 ========== ========== ==========
Options outstanding at year-end 2003 were as follows:
Outstanding Exerciseable -------------------------------------------- ---------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Number Life Price Number Price - ------ ------ ---- ----- ------ ----- $ 8.00 - $10.00 92,287 4.7 Years $ 9.17 92,287 $ 9.17 $10.01 - $12.00 60,565 4.8 Years 11.30 60,565 11.30 $14.01 - $16.00 36,645 7.8 Years 15.12 36,645 15.12 $18.01 - $20.00 44,692 8.5 Years 19.50 37,030 19.60 $24.01 - $26.00 6,825 8.2 Years 24.52 525 24.52 $32.01 - $34.00 31,130 9.8 Years 32.35 0 NA $40.01 - $42.00 6,000 9.8 Years 40.45 0 NA ---------- --------- ---------- ------ Outstanding at year end 278,144 6.5 Years $ 15.72 227,052 $ 12.44 ========== ========= ==========
Options outstanding at year-end 2003, 2002 and 2001 were as follows:
2003 2002 2001 ---- ---- ---- Minimum exercise price $ 8.64 $ 8.64 $ 8.64 Maximum exercise price 40.45 24.52 18.91 Average remaining option term 6.5 Years 6.8 Years 7.3 Years
- -------------------------------------------------------------------------------- (Continued) F-39 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 10 -- 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 2003 and 2002, the Bank had $11.3 million and $7.1 million in loan commitments to directors and executive officers, of which $6.3 million and $3.0 million were outstanding at year-end 2003 and 2002, respectively, as reflected in the following table.
2003 2002 ---- ---- Beginning balance $ 2,951,000 $ 3,323,000 New loans 4,914,000 965,000 Repayments (1,594,000) (1,337,000) -------------- --------------- Ending balance $ 6,271,000 $ 2,951,000 ============== ===============
Related party deposits and repurchase agreements totaled $11.3 million at year-end 2003 and $16.4 million at year-end 2002. NOTE 11 -- 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 year-end 2003 and 2002, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties. - -------------------------------------------------------------------------------- (Continued) F-40 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 11 -- COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued) The Bank's maximum exposure to credit losses for loan commitments and standby letters of credit outstanding at year-end was as follows:
2003 2002 ---- ---- Commercial unused lines of credit $ 176,943,000 $ 131,161,000 Unused lines of credit secured by 1 -- 4 family residential properties 19,020,000 12,381,000 Credit card unused lines of credit 8,990,000 5,824,000 Other consumer unused lines of credit 5,569,000 4,415,000 Commitments to make loans 73,570,000 24,267,000 Standby letters of credit 57,918,000 39,338,000 ----------------- ----------------- $ 342,010,000 $ 217,386,000 ================= =================
The following instruments are considered financial guarantees under FASB Interpretation 45. These instruments are carried at fair value.
2 0 0 3 2 0 0 2 ------- ------- Contract Carrying Contract Carrying Amount Value Amount Value ------ ----- ------ ----- Standby letters of credit $ 57,918,000 $ 296,000 $ 39,338,000 $ 0
The Bank was required to have $4.5 million and $2.8 million of cash on hand or on deposit with the Federal Reserve Bank of Chicago to meet regulatory reserve and clearing requirements at year-end 2003 and 2002. These balances do not earn interest. The Bank leases its downtown Grand Rapids facility under an operating lease agreement. Total rental expense for the lease for 2003, 2002 and 2001 was $175,000, $170,000 and $165,000, respectively. Future minimum rentals under this lease, which expires on August 31, 2007, as of year-end 2003 are as follows: 2004 $ 179,000 2005 179,000 2006 179,000 2007 119,000 ------------- $ 656,000 =============
NOTE 12 -- BENEFIT PLANS Mercantile has a 401(k) benefit plan that covers substantially all of its employees. Mercantile's 2003, 2002 and 2001 matching 401(k) contribution charged to expense was $327,000, $239,000 and $173,000, respectively. The percent of Mercantile's matching contributions to the 401(k) is determined annually by the Board of Directors. The 401(k) benefit plan allows employee contributions up to 15% of their compensation, which are matched at 100% of the first 5% of the compensation contributed. Matching contributions are immediately vested. - -------------------------------------------------------------------------------- (Continued) F-41 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 12 -- BENEFIT PLANS (Continued) Mercantile has a deferred compensation plan in which all persons serving on the Board of Directors may defer all or portions of annual retainer and meeting fees, with distributions to be paid only upon termination of service as a director. The deferred amounts are categorized on Mercantile's financial statements as long term borrowings. Up until September 30, 2001, the deferred balances were paid interest at a rate equal to 75% of the prime rate, adjusted at the beginning of each calendar quarter. The deferred compensation plan was amended, effective October 1, 2001, to increase the interest rate from 75% of the prime rate to 100% of the prime rate. Interest expense for the plan during 2003, 2002 and 2001 was $15,000, $11,000 and $6,000, respectively. Mercantile has a non-qualified deferred compensation program in which selected officers may defer all or portions of salary and bonus payments. The deferred amounts are categorized on Mercantile's financial statements as other borrowed money. The deferred balances are paid interest at a rate equal to the prime rate, adjusted at the beginning of each calendar quarter. Interest expense for the plan during 2003, 2002 and 2001 was $22,000, $10,000 and $2,000, respectively. NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS Carrying amount and estimated fair values of financial instruments were as follows at year-end.
2 0 0 3 2 0 0 2 ------- ------- Carrying Fair Carrying Fair Values Values Values Values ------ ------ ------ ------ Financial assets Cash and cash equivalents $ 16,564,000 $ 16,564,000 $ 28,117,000 $ 28,117,000 Securities available for sale 71,421,000 71,421,000 59,614,000 59,614,000 Securities held to maturity 45,112,000 47,102,000 36,493,000 37,985,000 Federal Home Loan Bank stock 4,977,000 4,977,000 786,000 786,000 Loans, net 1,021,584,000 1,038,404,000 760,664,000 785,203,000 Bank owned life insurance policies 16,441,000 16,441,000 14,876,000 14,876,000 Accrued interest receivable 4,098,000 4,098,000 3,336,000 3,336,000 Financial liabilities Deposits 902,892,000 903,278,000 754,113,000 758,422,000 Securities sold under agreements to repurchase 49,545,000 49,545,000 50,335,000 50,335,000 Federal Home Loan Bank advances 90,000,000 90,305,000 15,000,000 15,000,000 Accrued interest payable 7,080,000 7,080,000 4,713,000 4,713,000 Subordinated debentures 16,000,000 22,593,000 16,000,000 20,050,000
Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable and payable, bank owned life insurance policies, demand deposits, securities sold under agreements to repurchase, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of subordinated debentures and Federal Home Loan Bank advances is based on current rates for similar financing. Fair value of off balance sheet items is estimated to be nominal. - -------------------------------------------------------------------------------- (Continued) F-42 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 14 -- EARNINGS PER SHARE The factors used in the earnings per share computation follow.
2003 2002 2001 ---- ---- ---- Basic Net income $ 10,016,000 $ 7,757,000 $ 4,483,000 ============== ============= ============== Weighted average common shares outstanding 5,781,570 5,405,703 4,022,972 -------------- ------------- -------------- Basic earnings per common share $ 1.73 $ 1.43 $ 1.11 ============== ============= ============== Diluted Net income $ 10,016,000 $ 7,757,000 $ 4,483,000 ============== ============= ============== Weighted average common shares outstanding for basic earnings per common share 5,781,570 5,405,703 4,022,972 Add: Dilutive effects of assumed exercises of stock options 138,105 97,620 60,965 -------------- ------------- -------------- Average shares and dilutive potential common shares 5,919,675 5,503,323 4,083,937 ============== ============= ============== Diluted earnings per common share $ 1.69 $ 1.41 $ 1.10 ============== ============= ==============
Stock options for 37,730, 44,878 and 46,287 shares of common stock were not considered in computing diluted earnings per common share for 2003, 2002 and 2001, respectively, because they were antidilutive. NOTE 15 -- SUBORDINATED DEBENTURES Capital Trust, a business trust subsidiary of Mercantile, sold 1.6 million Cumulative Preferred Securities ("trust preferred securities") at $10.00 per trust preferred security in a September 1999 offering. The proceeds from the sale of the trust preferred securities were used by MBWM Capital Trust I to purchase an equivalent amount of subordinated debentures from Mercantile. The trust preferred securities carry a fixed rate of 9.60%, have a stated maturity of 30 years, and, in effect, are guaranteed by Mercantile. The securities are redeemable at par after 5 years. Distributions on the trust preferred securities are payable quarterly on January 15, April 15, July 15 and October 15. The first distribution was paid on October 15, 1999. Under certain circumstances, distributions may be deferred for up to 20 calendar quarters. However, during any such deferrals, interest accrues on any unpaid distributions at the rate of 9.60% per annum. The trust preferred securities are carried on Mercantile's consolidated balance sheet as a liability, and the interest expense is recorded on Mercantile's consolidated statement of income. - -------------------------------------------------------------------------------- (Continued) F-43 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 16 -- SALE OF COMMON STOCK During 2003, Mercantile sold in aggregate approximately 1.4 million shares of common stock, raising $43.0 million net of issuance costs. Substantially all of the net proceeds were contributed to the Bank as capital to provide support for asset growth, fund investments in loans and securities and for general corporate purposes. During 2001, Mercantile sold in aggregate approximately 2.3 million shares of common stock, raising $35.0 million net of issuance costs. Substantially all of the net proceeds were contributed to the Bank as capital to provide support for asset growth, fund investments in loans and securities and for general corporate purposes. NOTE 17 - 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 an institution is adequately capitalized, regulatory approval is required to accept brokered deposits. If an institution is undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. At year end, actual capital levels (in thousands) and minimum required levels for Mercantile and the Bank were:
Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2003 Total capital (to risk weighted assets) Consolidated $ 160,360 13.8% $ 92,711 8.0% $ 115,888 10.0% Bank 156,950 13.6 92,556 8.0 115,695 10.0 Tier 1 capital (to risk weighted assets) Consolidated 145,981 12.6 46,356 4.0 69,533 6.0 Bank 142,571 12.3 46,278 4.0 69,417 6.0 Tier 1 capital (to average assets) Consolidated 145,981 12.5 46,756 4.0 58,444 5.0 Bank 142,571 12.2 46,703 4.0 58,378 5.0
- -------------------------------------------------------------------------------- (Continued) F-44 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 17 - REGULATORY MATTERS (Continued)
Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2002 Total capital (to risk weighted assets) Consolidated $ 105,671 12.1% $ 69,862 8.0% $ 87,328 10.0% Bank 102,810 11.8 69,728 8.0 87,160 10.0 Tier 1 capital (to risk weighted assets) Consolidated 94,781 10.9 34,931 4.0 52,397 6.0 Bank 91,920 10.6 34,864 4.0 52,296 6.0 Tier 1 capital (to average assets) Consolidated 94,781 10.7 35,355 4.0 44,193 5.0 Bank 91,920 10.4 35,313 4.0 44,142 5.0
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 2003, under the most restrictive of these regulations (to remain well capitalized), the Bank could distribute approximately $11.1 million to Mercantile as dividends without prior regulatory approval. The capital levels as of year-end 2003 and year-end 2002 include 1.6 million trust preferred securities issued by Capital Trust 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. At year-end 2003 and year-end 2002, all $16.0 million of the trust preferred securities were included as Tier 1 capital of Mercantile. - -------------------------------------------------------------------------------- (Continued) F-45 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 18 - OTHER COMPREHENSIVE INCOME/(LOSS) Other comprehensive income/(loss) components and related taxes were as follows.
2003 2002 2001 ---- ---- ---- Unrealized holding gains and losses on available-for-sale securities $ (1,586,000) $ 1,249,000 $ 386,000 Reclassification adjustments for gains and losses later recognized in income (321,000) (270,000) (207,000) --------------- ---------------- -------------- Net unrealized gains and losses (1,265,000) 979,000 179,000 Tax effect 431,000 (333,000) (61,000) -------------- ---------------- -------------- Other comprehensive income/(loss) $ (834,000) $ 646,000 $ 118,000 =============== =============== ==============
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings per Share Interest Net Interest Net ------------------ Income Income Income Basic Fully Diluted ------ ------ ------ ----- ------------- 2003 - ---- First quarter $ 12,675,000 $ 6,794,000 $ 2,233,000 $ 0.41 $ 0.40 Second quarter 13,433,000 7,511,000 2,540,000 0.47 0.46 Third quarter 13,854,000 8,057,000 2,228,000 0.40 0.39 Fourth quarter 14,696,000 8,949,000 3,015,000 0.45 0.44 2002 - ---- First quarter $ 11,040,000 $ 5,034,000 $ 1,604,000 $ 0.29 $ 0.30 Second quarter 11,639,000 5,735,000 1,716,000 0.32 0.31 Third quarter 12,318,000 6,282,000 2,156,000 0.40 0.39 Fourth quarter 12,635,000 6,603,000 2,281,000 0.42 0.41 2001 - ---- First quarter $ 10,856,000 $ 3,462,000 $ 915,000 $ 0.30 $ 0.30 Second quarter 11,011,000 3,698,000 777,000 0.23 0.23 Third quarter 11,530,000 4,352,000 1,338,000 0.29 0.29 Fourth quarter 11,222,000 4,906,000 1,453,000 0.29 0.28
- -------------------------------------------------------------------------------- (Continued) F-46 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 20 -- MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS Following are condensed parent company only financial statements.
CONDENSED BALANCE SHEETS 2003 2002 ---- ---- ASSETS Cash and cash equivalents $ 1,408,000 $ 845,000 Investment in subsidiaries 143,296,000 93,479,000 Other assets 2,350,000 2,445,000 --------------- ---------------- Total assets $ 147,054,000 $ 96,769,000 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities $ 358,000 $ 440,000 Subordinated debentures 16,495,000 16,495,000 Shareholders' equity 130,201,000 79,834,000 --------------- ---------------- Total liabilities and shareholders' equity $ 147,054,000 $ 96,769,000 =============== ================
CONDENSED STATEMENTS OF INCOME 2003 2002 2001 ---- ---- ---- Income Dividends from subsidiaries $ 3,455,000 $ 1,583,000 $ 1,583,000 Other 14,000 18,000 22,000 -------------- ------------- -------------- Total income 3,469,000 1,601,000 1,605,000 Expenses Interest expense 1,617,000 1,617,000 1,617,000 Other operating expenses 611,000 512,000 543,000 -------------- ------------- -------------- Total expenses 2,228,000 2,129,000 2,160,000 -------------- ------------- -------------- INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARIES 1,241,000 (528,000) (555,000) Federal income tax expense (benefit) (724,000) (702,000) (698,000) Equity in undistributed net income of subsidiary 8,051,000 7,583,000 4,340,000 -------------- ------------- -------------- NET INCOME $ 10,016,000 $ 7,757,000 $ 4,483,000 ============== ============= ==============
- -------------------------------------------------------------------------------- (Continued) F-47 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 - -------------------------------------------------------------------------------- NOTE 20 -- MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS 2003 2002 2001 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,016,000 $ 7,757,000 $ 4,483,000 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed income of subsidiary (8,051,000) (7,583,000) (4,340,000) Capital investment into Mercantile Bank of West Michigan (42,600,000) 0 (34,500,000) Change in other assets 95,000 17,000 (662,000) Change in other liabilities (82,000) 60,000 10,000 --------------- ------------- -------------- Net cash from operating activities (40,622,000) 251,000 (35,009,000) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from sale of common stock 42,818,000 (37,000) 35,009,000 Stock option exercises, net 36,000 6,000 0 Employee stock purchase plan 57,000 0 0 Dividend reinvestment plan 119,000 0 0 Cash dividends (1,845,000) 0 0 Fraction shares paid 0 (1,000) (1,000) -------------- -------------- --------------- Net cash from financing activities 41,185,000 (32,000) 35,008,000 -------------- -------------- -------------- Net change in cash and cash equivalents 563,000 219,000 (1,000) Cash and cash equivalents at beginning of period 845,000 626,000 627,000 -------------- ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,408,000 $ 845,000 $ 626,000 ============== ============= ==============
- -------------------------------------------------------------------------------- F-48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 26, 2004. MERCANTILE BANK CORPORATION /s/ Gerald R. Johnson, Jr. -------------------------- Gerald R. Johnson, Jr. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 26, 2004.. /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, Director, President and Chief Operating Officer /s/ C. John Gill /s/ Dale J. Visser - ---------------- ------------------ C. John Gill, Director Dale J. Visser, Director /s/ Doyle A. Hayes /s/ Donald Williams - ------------------ ------------------- Doyle A. Hayes, Director Donald Williams, Director /s/ David M. Hecht /s/ Charles E. Christmas - ------------------ ------------------------ David M. Hecht, Director Charles E. Christmas, Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer) /s/ Gerald R. Johnson, Jr. - -------------------------- Gerald R. Johnson, Jr., Chairman of the Board and Chief Executive Officer (principal executive officer)
EXHIBIT INDEX EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 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 3.2 Our Amended and Restated Bylaws dated as of January 16, 2003 are incorporated by reference to exhibit 3.2 of our Registration Statement on Form S-3 (Commission File No. 333-103376) that became effective on February 21, 2003 10.1 Our 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 our bank 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 Solutions, Inc. and our 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 Extension Agreement of Data Processing Contract between Fiserve Solutions, Inc. and our bank dated May 12, 2000 extending the agreement between Fiserve Solutions, Inc. and our 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 (Commission File No. 000-26719) 10.5 Extension Agreement of Data Processing Contract between Fiserve Solutions, Inc. and our bank dated November 22, 2002 extending the agreement between Fiserve Solutions, Inc. and our bank dated September 10, 1997, is incorporated by reference to exhibit 10.5 of our Form 10-K for the fiscal year ended December 31, 2002 (Commission File No. 000-26719) 10.6 Mercantile Bank of West Michigan Deferred Compensation Plan for Members of the Board of Directors (1999) is incorporated by reference to Exhibit 10.6 of the Registration Statement of the company and our trust on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999 10.7 Subordinated Indenture dated as of September 17, 1999 between the company 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 our trust on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that become effective on September 13, 1999 10.8 Amended and Restated Trust Agreement dated as of September 17, 1999 among the company, 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 our trust on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999 EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 10.9 Preferred Securities Guarantee Agreement between the company and Wilmington Trust Company dated September 17, 1999, is incorporated by reference to Exhibit 4.7 of the Registration Statement of the company and our trust on Form SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that became effective on September 13, 1999 10.10 Agreement as to Expenses and Liabilities dated as of September 17, 1999, between the company and our trust (included as Exhibit D to Exhibit 10.8) 10.11 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) 10.12 Amended and Restated Employment Agreement dated as of October 18, 2001, among the company, our bank and Gerald R. Johnson, Jr., is incorporated by reference to exhibit 10.21 of our Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 000-26719) (management contract or compensatory plan) 10.13 Amended and Restated Employment Agreement dated as of October 18, 2001, among the company, our bank and Michael H. Price, is incorporated by reference to exhibit 10.22 of our Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 000-26719) (management contract or compensatory plan) 10.14 Employment Agreement dated as of October 18, 2001, among the company, our bank and Robert B. Kaminski, is incorporated by reference to exhibit 10.23 of our Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 000-26719) (management contract or compensatory plan) 10.15 Employment Agreement dated as of October 18, 2001, among the company, our bank and Charles E. Christmas, is incorporated by reference to exhibit 10.23 of our Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 000-26719) (management contract or compensatory plan) 10.16 Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Gerald R. Johnson, Jr., is incorporated by reference to exhibit 10.21 of our Form 10-K for the fiscal year ended December 31, 2002 (management contract or compensatory plan) 10.17 Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Michael H. Price, is incorporated by reference to exhibit 10.22 of our Form 10-K for the fiscal year ended December 31, 2002 (management contract or compensatory plan) 10.18 Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Robert B. Kaminski, is incorporated by reference to exhibit 10.23 of our Form 10-K for the fiscal year ended December 31, 2002 (management contract or compensatory plan) 10.19 Amendment to Employment Agreement dated as of October 17, 2002, among the company, our bank and Charles E. Christmas, is incorporated by reference to exhibit 10.24 of our Form 10-K for the fiscal year ended December 31, 2002 (management contract or compensatory plan) EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 10.20 Agreement between our bank and Visser Brothers Construction Inc. dated May 8, 2002, on Standard Form of Agreement Between Owner and Contractor where the basis of payment is a stipulated sum, is incorporated by reference to exhibit 10.25 of our Form 10-K for the fiscal year ended December 31, 2002 10.21 Mercantile Bank Corporation Independent Director Stock Option Plan, approved by the shareholders at the annual meeting on April 18, 2002, is incorporated by reference to exhibit 10.26 of our Form 10-K for the fiscal year ended December 31, 2002 10.22 Agreement between our real estate company and Visser Brothers, Inc. dated November 20, 2003, on Standard Form of Agreement Between Owner and Contractor where the basis of payment is a stipulated sum 10.23 Agreement between our bank and Rockford Construction Company, Inc., dated December 3, 2003, on Standard Form of Agreement Between Owner and Contractor where the basis of payment is a stipulated sum 21 Subsidiaries of the company 23 Consent of Independent Accountants 31 Rule 13a-14(a) Certifications 32.1 Section 1350 Chief Executive Officer Certification 32.2 Section 1350 Chief Financial Officer Certification EX-10.22 3 k82542exv10w22.txt AGREEMENT DATED NOVEMBER 20, 2003 EXHIBIT 10.22 1997 EDITION AIA DOCUMENT A101-1997 Standard Form of Agreement Between Owner and Contractor where the basis of payment is a STIPULATED SUM AGREEMENT made as of the Twentyth day of November in the year Two thousand and Three (In words, indicate day, month and year) BETWEEN the Owner: Mercantile Bank Real Estate Co. LLC (Name, address and other information) 5650 Byron Center Ave. Wyoming, MI 49509 and the Contractor: Visser Brothers, Inc. (Name, address and other information) 1946 Turner NE Grand Rapids, MI 49504 The Project is: Mercantile Bank of West Michigan (Name and location) Corporate Office and Downtown Branch 310 Leonard Street NW Grand Rapids, MI 49503 The Architect is: Concept Design Group (Name, address and other information) 89 Monroe Center, Suite 400 Grand Rapids, MI 49503 The Owner and Contractor agree as follows. This document has important legal consequences. Consultation with an attorney is encouraged with respect to its completion or modification. AIA Document A201-1997, General Conditions of the Contract for Construction, is adopted in this document by reference. Do not use with other general conditions unless this document is modified. This document has been approved and endorsed by The Associated General Contractors of America. [LOGO] (C)1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 - -------------------------------------------------------------------------------- Copyright 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1967, 1974, 1977, 1987, (C) 1997 by The American Institute of Architects. Reproduction of the material herein or substantial quotation of its provisions without written permission of the AIA violates the copyright laws of the United States and will subject the violator to legal prosecution. WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 1 ARTICLE 1 THE CONTRACT DOCUMENTS The Contract Documents consist of this Agreement, Conditions of the Contract (General, Supplementary and other Conditions), Drawings, Specifications, Addenda issued prior to execution of this Agreement, other documents listed in this Agreement and Modifications issued after execution of this Agreement; these form the Contract, and are as fully a part of the Contract as if attached to this Agreement or repeated herein. The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations or agreements, either written or oral. An enumeration of the Contract Documents, other than Modifications, appears in Article 8. ARTICLE 2 THE WORK OF THIS CONTRACT The Contractor shall fully execute the Work described in the Contract Documents, except to the extent specifically indicated in the Contract Documents to be the responsibility of others. ARTICLE 3 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION 3.1 The date of commencement of the Work shall be the date of this Agreement unless a different date is stated below or provision is made for the date to be fixed in a notice to proceed issued by the Owner. (Insert the date of commencement if it differs from the date of this Agreement or, if applicable, state that the date will be fixed in a notice to proceed.) If, prior to the commencement of the Work, the Owner requires time to file mortgages, mechanic's liens and other security interests, the Owner's time requirement shall be as follows: 3.2 The Contract Time shall be measured from the date of commencement. November 19, 2003 3.3 The Contractor shall achieve Substantial Completion of the entire Work not later than days from the date of commencement, or as follows: (Insert number of calendar days. Alternatively, a calendar date may be used when coordinated with the date of commencement. Unless stated elsewhere in the Contract Documents, insert any requirements for earlier Substantial Completion of certain portions of the Work.) January 30, 2005 Per Exhibit "C" , subject to adjustments of this Contract Time as provided in the Contract Documents. (Insert provisions, if any, for liquidated damages relating to failure to complete on time or for bonus payments for early completion of the Work.) [LOGO] (C)1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 2 ARTICLE 4 CONTRACT SUM 4.1 The Owner shall pay the Contractor the Contract Sum in current funds for the Contractor's performance of the Contract. The Contract Sum shall be Seven million three hundred sixty four thousand three hundred sixty three dollars Dollars($ 7,364,363).00 subject to additions and deduction as provided in the Contract Documents. 4.2 The Contract Sum is based upon the following alternates, if any, which are described in the Contract Documents and are hereby accepted by the Owner: (State the numbers or other identification of accepted alternates. If decisions on other alternates are to be made by the Owner subsequent to the execution of this Agreement, attach a schedule of such other alternates showing the amount for each and the date when that amount expires.) See Exhibit "B" Final Contract Adjustment Schedule 4.3 Unit prices, if any, are as follows: See Exhibit "B" "B" Final Contract Sum for Mercantile Bank of West Michigan 310 Leonard Street ARTICLE 5 PAYMENTS 5.1 PROGRESS PAYMENTS 5.1.1 Based upon Applications for Payment submitted to the Architect by the Contractor and Certificates for Payment issued by the Architect, the Owner shall make progress payments on account of the Contract Sum to the Contractor as provided below and elsewhere in the Contract Documents. 5.1.2 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month, or as follows: 5.1.3 Provided that an Application for Payment is received by the Architect not later than the thirtieth day of a month, the Owner shall make payment to the Contractor not later than the thirtieth day of the following month. If an Application for Payment is received by the Architect after the application date fixed above, payment shall be made by the Owner not later than thirty (30) days after the Architect receives the Application for Payment. 5.1.4 Each Application for Payment shall be based on the most recent schedule of values submitted by the Contractor in accordance with the Contract Documents. The schedule of values shall allocate the entire Contract Sum among the various portions of the Work. The schedule of values shall be prepared in such form and supported by such data to substantiate its accuracy as the Architect may require. This schedule, unless objected to by the Architect, shall be used as a basis for reviewing the Contractor's Applications for Payment. [LOGO] (C)1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 3 5.1.5 Applications for Payment shall indicate the percentage of completion of each portion of the Work as of the end of the period covered by the Application for Payment. 5.1.6 Subject to other provisions of the Contract Documents, the amount of each progress payment shall be computed as follows: .1 Take that portion of the Contract Sum properly allocable to completed Work as deter mined by multiplying the percentage completion of each portion of the Work by the share of the Contract Sum allocated to that portion of the Work in the schedule of values, less retainage of five percent ( 5 %). Pending final determination of cost to the Owner of changes in the Work, amounts not in dispute shall be included as provided in Subparagraph 7.3.8 of AIA Document A201-1997; .2 Add that portion of the Contract Sum properly allocable to materials and equipment delivered and suitably stored at the site for subsequent incorporation in the completed construction (or, if approved in advance by the Owner, suitably stored off the site location agreed upon in writing), less retainage of five percent( 5 %); .3 Subtract the aggregate of previous payments made by the Owner; and .4 Subtract amounts, if any, for which the Architect has withheld or nullified a Certificate for Payment as provided in Paragraph 9.5 of AIA Document A201-1997. 5.1.7 The progress payment amount determined in accordance with Subparagraph 5.1.6 shall be further modified under the following circumstances: .1 Add, upon Substantial Completion of the Work, a sum sufficient to increase the total payments to the full amount of the Contract Sum, less such amounts as the Architect shall determine for incomplete Work, retainage applicable to such work and unsettled claims; and (Subparagraph 9.8.5 of AIA Document A201-1997 requires release of applicable retainage upon Substantial Completion of Work with consent of surety, if any.) .2 Add, if final completion of the Work is thereafter materially delayed through no fault of the Contractor, any additional amounts payable in accordance with Subparagraph 9.10.3 of AIA Document A201-1997. 5.1.8 Reduction or limitation of retainage, if any, shall be as follows: (If it is intended, prior to Substantial Completion of the entire Work, to reduce or limit the retainage resulting from the percentages inserted in Clauses 5.1.6.1 and 5.1.6.2 above, and this is not explained elsewhere in the Contract Documents, insert here provisions for such reduction or limitation.) 5.1.9 Except with the Owner's prior approval, the Contractor shall not make advance payments to suppliers for materials or equipment which have not been delivered and stored at the site. 5.2 FINAL PAYMENT 5.2.1 Final payment, constituting the entire unpaid balance of the Contract Sum, shall be made by the Owner to the Contractor when: .1 the Contractor has fully performed the Contract except for the Contractor's responsibility to correct Work as provided in Subparagraph 12.2.2 of AIA Document A201-1997, and to satisfy other requirements, if any, which extend beyond final payment; and .2 a final Certificate for Payment has been issued by the Architect. [LOGO] (C)1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 4 5.2.2 The Owner's final payment to the Contractor shall be made no later than 30 days after the issuance of the Architect's final Certificate for Payment, or as follows: ARTICLE 6 TERMINATION OR SUSPENSION 6.1 The Contract may be terminated by the Owner or the Contractor as provided in Article 14 of AIA Document A201-1997. 6.2 The Work may be suspended by the Owner as provided in Article 14 of ALA Document A201-1997. ARTICLE 7 MISCELLANEOUS PROVISIONS 7.1 Where reference is made in this Agreement to a provision of AIA Document A201-1997 or another Contract Document, the reference refers to that provision as amended or supplemented by other provisions of the Contract Documents. 7.2 Payments due and unpaid under the Contract shall bear interest from the date payment is due at the rate stated below, or in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located. (Insert rate of interest agreed upon, if any.) (Usury laws and requirements under the Federal Truth in Lending Act, similar state and local consumer credit laws and other regulations at the Owner's and Contractor's principal places of business, the location of the Project and elsewhere may affect the validity of this provision. Legal advice should be obtained with respect to deletions or modifications, and also regarding requirements such as written disclosures or waivers.) 7.3 The Owner's representative is: (Name, address and other information) Bob Kaminski 5650 Byron Center Ave. Wyoming, MI 49509 7.4 The Contractor's representative is: (Name, address and other information) Jahn deBlecourt 1946 Turner NE Grand Rapids, MI 49504 7.5 Neither the Owner's nor the Contractor's representative shall be changed without ten days' written notice to the other party. 7.6 Other provisions: [LOGO] (C)1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 5 ARTICLE 8 ENUMERATION OF CONTRACT DOCUMENTS 8.1 The Contract Documents, except for Modifications issued after execution of this Agreement, are enumerated as follows: 8.1.1 The Agreement is this executed 1997 edition of the Standard Form of Agreement Between Owner and Contractor, AIA Document A101-1997. 8.1.2 The General Conditions are the 1997 edition of the General Conditions of the Contract for Construction, AIA Document A201-1997. 8.1.3 The Supplementary and other Conditions of the Contract are those contained in the Project Manual dated , and are as follows: Document Title Pages See Exhibit "A" Supplement conditions to AIA A201 general conditions of the contract for constructions, 1997 edition Exhibit "D" 8.1.4 The Specifications are those contained in the Project Manual dated as in Subparagraph 8.1.3, and are as follows: (Either list the Specifications here or refer to an exhibit attached to this Agreement.) Section Title Pages See Exhibit "A" 8.1.5 The Drawings are as follows, and are dated unless a different date is shown below: (Either list the Drawings here or refer to an exhibit attached to this Agreement.) Number Title Date See Exhibit "A" [LOGO] (C)1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 6 8.1.6 The Addenda, if any, are as follows: Number Date Pages See Attached Exhibit "A" Portions of Addenda relating to bidding requirements are not part of the Contract Documents unless the bidding requirements are also enumerated in this Article 8. 8.1.7 Other documents, if any, forming part of the Contract Documents are as follows: (List here any additional documents that are intended to form part of the Contract Documents. AIA Document A201-1997 provides that bidding requirements such as advertisement or invitation to bid, Instructions to Bidders, sample forms and the Contractor's bid are not part of the Contract Documents unless enumerated in this Agreement. They should be listed here only if intended to be part of the Contract Documents.) See Attached "Exhibit "A" This Agreement is entered into as of the day and year first written above and is executed in at least three original copies, of which one is to be delivered to the Contractor, one to the Architect for use in the administration of the Contract, and the remainder to the Owner. /s/ Robert B. Kaminski /s/ Bruce Visser ------------------------------- ----------------------------- OWNER (Signature) CONTRACTOR (Signature) Robert B. Kaminski E.V.P. C.O.O. Bruce Visser C.E.O. ------------------------------- ----------------------------- (Printed name and title) (Printed name and title) Of The Owner's Member Visser Brothers Inc. CAUTION: You should sign an original AIA document or a licensed reproduction. Originals contain the AIA logo printed in red; licensed reproductions are those produced in accordance with the Instructions to this document. [LOGO] (C)1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 7 EXHIBIT "A" - CONTRACT DOCUMENT INDEX PAGE 1 OF 3 EXHIBIT "A" - CONTRACT DOCUMENT INDEX SPECIFICATION SHEET INDEX TITLE INFORMATION FOR BIDDERS BID FORM DIVISION 1 - GENERAL REQUIREMENTS 00700 A.I.A General Conditions 00800 1987 Edition Supplementary Conditions 01000 Special Conditions 01027 Applications for Payment 01030 Alternates 01031 Unit Pricing 01035 Modification Procedures 01040 Project Coordination 01041 Cleaning and Debris Control 01045 Cutting and Patching 01050 Field Engineering 01095 Reference Standards and Definitions 01200 Project Meetings 01300 Submittals 01400 Quality Control Services 01500 Temporary Facilities and Utilities 01520 Temporary Barriers and Fencing 01600 Materials and Equipment 01631 Product Substitutions 01700 Project Close-Out 01740 Warranties and Bonds DIVISION 2 - SITE WORK 02100 Demolition 02110 Site Clearing 02200 Earthwork 02511 Hot-Mixed Asphalt Paving 02520 Portland Cement Concrete Paving 02650 Domestic Water Service 02715 Sanitary Sewer 02720 Storm Sewer 02800 Irrigation 02825 Wood Fence and Gates 02900 Landscaping DIVISION 3 - CONCRETE 03300 Cast-in-Place Concrete 03340 Pre-cast Concrete Plank DIVISION 4 - MASONRY 04200 Masonry DIVISION 5 - METALS 05120 Structural Steel 05220 Steel Joists and Joist Girders 05310 Steel Deck 05400 Cold-Formed Metal Framing 05500 Metal Fabrication DIVISION 6 - WOOD AND PLASTICS 06100 Rough Carpentry 06402 Interior Architectural Woodwork DIVISION 7 - THERMAL AND MOISTURE PROTECTION 07100 Water-Proofing 07210 Building Insulation 07240 Exterior Insulation and Finish Systems 07412 Metal Wall Panels 07533 TPO Sheet Roofing & Roof Insulation 07600 Flashing and Sheet Metal 07610 Prefinished Metal Roofing 07901 Joint Sealants DIVISION 8 - DOORS AND WINDOWS 08111 Standard Steel Doors and Frames 08200 Wood And Plastic Doors 08211 Flush Wood Doors 08340 Security Grill 08400 Glass Doors and Wails 08410 Aluminum Entrances, Storefronts Windows and Curtain Walls 08710 Door Hardware 08800 Glazing DIVISION 9 - FINISHES 09250 Gypsum Drywall 09265 Shaft Wall Assemblies 09300 Tile 09510 Acoustical Canopies 09511 Acoustical Panel Ceiling Systems 09660 Resilient Tile Flooring 09678 Resilient Wall Base and Accessories 09680 Carpet 09900 Painting 09950 Wall Coverings DIVISION 10 - SPECIALTIES 10110 Marker boards 10270 Raised Access Floor 10350 Flag Poles 10500 Plastic Laminate Wood Lockers 10155 Toilet Compartments 10520 Fire Extinguishers, Cabinets and Accessories 10650 Operable Partitions 10800 Toilet and Bath Accessories EXHIBIT "A" - CONTRACT DOCUMENT INDEX PAGE 2 OF 3 DIVISION 11 - Equipment 11010 Window Washing Lifeline Anchors 11020 Security Systems and Equipment 11030 Financial Equipment 11130 Audio - Visual - Communication Equipment 11150 Parking Control Equipment 11452 Residential Appliances DIVISION 12 - Furnishings 12505 Furniture and Fixture Installation 12670 Entrance Mats DIVISION 14 - CONVEYOR SYSTEMS 14240 Electric Traction Elevator DIVISION I5 - MECHANICAL 15010 General Provisions 15100 Basic Materials & Methods 15180 Insulation 15200 Water Supply System 15300 Drainage System 15400 Plumbing Fixtures 15450 Gas Piping System 15550 Fire Protection 15700 Liquid Heat Transfer 15750 Snowmelt System 15800 Air Distribution 15900 Temperature Controls DIVISION 16 - ELECTRICAL 16010 General Provisions 16050 General Installation Procedures 16070 Testing 16110 Raceway 16113 Cable Tray 16130 Boxes and Fittings 16135 Steel Channel 16140 Conditions 16150 Fuses 16170 Wiring Devices 16200 Engine Generator Sets 16205 Transfer Switches 16300 Electrical Services 16340 Switchboards 16350 Grounding 16430 Panel boards 16450 Grounding 16500 Lighting 16540 Lamps 16601 Lightning Protection 16700 Systems 16720 Fire Alarms and Detection System 16740 Telephone 16750 Building Security 16900 Motor Controls 16930 Lighting and Outlet Controls DRAWING SHEET INDEX T1.1 Title Sheet, General Notes, Abbreviations, Genera] Information, Symbol Legend SP1 Specifications SP2 Specifications C1 Site Demolition Plan (Fleis & Vandenbrink) C2 Site Plan (Fleis & Vandenbrink) C3 Site Plan Details (Fleis & Vandenbrink) C4.1 Architectural Site Details C4.2 Architectural Site Details C4.3 Architectural Site Details L1.1 Landscaping Plan L1.2 Landscaping Detail A1.0 Lower Floor Plan A1.1 First Floor Plan A1.2 Second Floor Plan A1.3 Third Floor Plan A1.4 Fourth Floor Plan A1.5 Roof Plan A1.6 Enlarged Toilet Room Plans A1.7 Enlarged Toilet Room Plans A2.1 Door Schedules & Details A2.2 Door Schedules & Details A2.3 Door Details A2.4 Interior Finish Schedules & Specifications A2.5 Interior Finish Schedules A2.6 Interior Finish Schedules A2.7 Lower Floor Finish Plan A2.8 1st Floor Finish Plan A2.9 2nd Floor Finish Plan A2.10 3rd Floor Finish Plan A2.11 4th Floor Finish Plan A3.0 Lower Reflected Ceiling Plan A3.1 First Floor Reflected Ceiling Plan A3.2 Second Floor Reflected Ceiling Plan A3.3 Third Floor Reflected Ceiling Plan A3.4 Fourth Floor Reflected Ceiling Plan A4.1 Interior Elevations A4.2 Interior Elevations A4.3 Interior Elevations A4.4 Interior Elevations A4.5 Interior Elevations A4.6 Interior Elevations A4.7 Interior Elevations A4.8 Interior Elevations A4.9 Interior Elevations EXHIBIT "A" - CONTRACT DOCUMENT INDEX PAGE 3 OF 3 A5.1 Exterior Elevation (West) A5.2 Exterior Elevation (East) A5.3 Exterior Elevations (North) A5.4 Exterior Elevations (South) A5.5 Cast Stone Details A6.1 Building Section (longitudinal) A6.2 Building Section (East/West) A6.3 Building Sections (East/West) A6.4 Building Sections A7.1 Exterior Details A7.2 Exterior Details A7.3 Exterior Details A7.4 Exterior Details A7.5 Exterior Details A7.6 Exterior Details A8.1 Details A8.2 Details A8.3 Details A8.4 Details A8.5 Details A8.6 Details A8.7 Details A9.1 Stair & Elevator Sections A9.2 Enlarged Stair Plans F1.0 Lower Floor Furniture Plan F1.1 First Floor Furniture Plan F1.2 Second Floor Furniture Plan F1.3 Third Floor Furniture Plan F1.4 Fourth Floor Furniture Plan S1.1 Foundation Plan S2.1 Foundation Details S2.2 Foundation Details S2.3 Structural Notes & Details S3.1 First Floor Framing Plan S3.2 Second Floor Framing Plan S3.3 Third Floor Framing Plan S3.4 Fourth Floor Framing Plan S3.5 Roof Framing Plan S3.6 Light Gauge Framing Plan S3.7 Stair Framing Plans S4.1 Framing Details S4.2 Framing Details S4.3 Framing Details S4.4 Framing Details P1.0 Lower Floor Plumbing Plan P1.1 First Floor Plumbing Plan P1.2 Second Floor Plumbing Plan P1.3 Third Floor Plumbing Plan P1.4 Fourth Floor Plumbing Plan M1.0 Lower Floor Mechanical Plan M1.1 First Floor Mechanical Plan M1.2 Second Floor Mechanical Plan M1.3 Third Floor Mechanical Plan M1.4 Fourth Floor Mechanical Plan M1.5 Snowmelt Tubing Plan M2.0 Mechanical Details M3.0 Mechanical Schedules E1.0 Lower Floor Lighting Plan E1.1 First Floor Lighting Plan E1.2 Second Floor Lighting Plan E1.3 Third Floor Lighting Plan E1.4 Fourth Floor Lighting Plan E2.0 Lower Floor Power Plan E2.1 First Floor Power Plan E2.2 Second Floor Power Plan E2.3 Third Floor Power Plan E2.4 Fourth Floor Power Plan E3.0 Roof Electrical Plan E4.0 Lighting Fixture Legends E5.0 One-Line Diagram E6.0 Electrical Site Plan ADDENDUM INDEX
Addendum Number Date Sheet attachments - --------------- ---- ----------------- Addendum #1 September 23, 2003 1 to 2 SK1 & SK2 Addendum #2 October 02, 2003 1 to 9 & SK2.1 to SK2.11 Spec. 15180 (1 to 5) Mechanical Insulation Addendum #3 October 08, 2003 1 to 7 SK3.1 to SK3.9 Mechanical Piping Diagram & Plumbing Spec. 15950 (1 to 3) Mechanical Testing Adjustment and Balancing
EXHIBIT INDEX Exhibit "A" Contract Legal Document Index Exhibit "D" 8.13 supplemental Conditions to AIA Exhibit "B" Final Contract Sum for Mercantile Bank of A201 General conditions of the West Michigan, 310 Leonard Street Contract for Construction, 1997 Exhibit "C" Proposed Construction Schedule Edition
EXHIBIT "B" Final Contract Sum for Mercantile Bank of West Michigan, 310 Leonard Street December 2, 2003 ORIGINAL BASE BID AMOUNT FROM OCTOBER 14, 2003 $7,312,000.00 ALTERNATES DELETE BIRCH Provide Poplar; running trim jambs, base, cornice boards, and coves change to poplar, except for handrails. ($ 30,500.00) DELETE FIRE PUMP A. If a fire pump is not required by the city of Grand Rapids: 1 . Delete all references to the fire pump and any associated electrical work. 2. Reduce the emergency generator size to 750 kw (this must still be confirmed by the Electrical Contractor in conjunction with the Fire Protection Contractor and the Generator Supplier). 3. See attached sketch SKE2 (portion of the one-line diagram). ($ 42,400.00) ADD TWO OPERABLE WALL SYSTEM IN BASEMENT CONFERENCE ROOMS Supporting track provide in base bid give cost of wall system only $ 19,200.00 ADD EXIT DOORS TO OPERABLE PARTITIONS IN THE BASEMENT 1 . Add A (3x7) door into each operable portions between the meeting room. $ 3,860.00 ADD STAIRWAY INDEPENDENT HEATING AND COOLING Mechanical 1 . Delete VA terminal units and associated ductwork serving Stair #1. Install 4-pipe air-handling unit equal to York Model 36YSHW above 4th floor ceiling space. Nominal 3-ton cooling capacity with supply duct routed into mechanical chase. Provide supply registers at 3rd, 2nd, and 1st floor landings, 12"x10", ducted into return unit. Hot and chilled water to be tapped from mains in chase. Thermostat control in 1st floor landing. 2. Provide surface mounted cabinet style fancoil unit at 4th floor ceiling of Stair #2. Equal to York Model YCHBC03, with hot and chilled water to be tapped from mains in chase. Thermostat control in 1st floor landing. Electrical 1. Provide a 20A, 120V circuit for each of the VAV terminal units added to both stairwells. Circuits 43, 4A & 41, 4B for the respective stair well. See mechanical items attached. 2. Provide a single 20A, 120V circuit for the four (4) motorized dampers in the southwest stairwell. Circuit 45, 4A. $ 6,246.00 ADD SMOKE DAMPERS TO SHAFT ENCLOSURE PENETRATIONS. $ 7,741.00 ADD DUCT FOR DATA ROOM VENTILATION Provide ventilation air duct into Data Room 213, 6" diameter duct with balancing damper, 60-CFM total. Verify exact routing with Architect prior to installation. $ 370.00
Page 1 of 3 SUBSTITUTE ACCUFORM Gascketed composite panels for dry joint riverside composite panels as specified. Architectural glass and metals to provide system. ($ 8,812.00) SUBSTITUTE SP-1 Aluminum panels for composite panel by Riverside. Architectural Glass and Metals to provide system. $ 13,300.00 VOS GLASS TO PROVIDE TEMPERED GLASS PER CODE. Voluntary Alternate from original bid form. ($ 10,000.00) SUB CONTRACTORS ADDS AND SUBTRACTIONS BRICK FENCE PIERS left off original masonry bid from JK Masonry Inc, quantified in post bid Meeting $ 91,500.00 APPLIANCES left off the original bid form in clarifications and price quantified in post bid meeting $ 12,750.00 WINDOW WASHING ANCHORS double billed on Visser brothers work and Van Dellen Steel supply. ($ 22,450.00) SUBSTITUTE PEERBOLT AND D&K PLUMBING in lieu of Riteway Plumbing and Heating ($ 98,210.00) SUBSTITUTE RITSUMA INTERIORS Associates in lieu of Bouma Construction Company to do the Gypsum board, insulation, studs, acoustical ceiling, and EIFS system. ($ 14,500.00) STANDARD DUCT CLEANING by Peerbolt not included in their original bid $ 17,033.00 CAST IRON increase by D&K after reviewing their bid $ 10,250.00 Substitute Van Wall Fire Protection in lieu of River City Fire Protection. $ 4,640.00 ASBESTOS ABATEMENT VINYL TILE found below carpet during the testing phase removed by Pitsch Companies per state and federal regulations. $ 29,625.00 INSULATION CONTAINING ASBESTOS on the under side of the concrete deck at the building overhang found during the demolition phase removed by Pitsch Companies per state and federal regulations. $ 27,720.00 ALLOWANCES CONCRETE TEMPORARY HEATING The foundation, concrete slabs and concrete wall will have to be installed during winter. The allowance for this work will be. $ 10,000.00 BUILDING TEMPORARY HEATING Figured the owner would start paying for temporarily heating the building as soon as you have wrap it with Tyvek/air infiltration barrier and provided a dry roof. The allowance for this work will be. $ 20,000.00 GAS AND ELECTRICAL fees and services charges, or meter cost are not apart of your bid and an allowance for these cost will be. $ 5,000.00 ALL WATER, STORM SEWER, SANITARY SEWER, AND SOIL EROSION fees, service charges and meter cost are included in the contract sum. ALL BUILDING PERMITS are included in the contract sum. - --------------------------------------------------------------------------------------------------- FINAL CONTRACT SUM $7,364,363.00
Page 2 of 3 UNIT PRICING GIVE UNIT PRICE FOR REMOVING AND DISPOSING OF UNSUITABLE SOIL OFFSITE AND REPLACING SOIL BACKFILL MATERIAL AS SELECTED BY SOILS ENGINEER. BACKFILL WITH APPROVED MATERIAL. Under parking Lot $ 14.00 /cu.yd Under Foundations & footing $ 14.00 /cu.yd Under Utility Trenches $ 14.00 /cu.yd Fractured and cobbled Strata layer above bedrock encountered below foundations that will have to be removed $ 22.00 /cu.yd Additional fractured and cobbled Strata layer above mean bedrock line (as shown on document) encountered between test holes $ 15.00 /cu.yd Additional bedrock above mean Bedrock line (as shown on document) encountered between test holes $ 25.00 /cu.yd Additional bedrock Utility trenches not shown on foundation plan S1.1 $ 32.00 /cu.yd GIVE UNIT PRICE FOR BRICK PIERS AND METAL FENCE Brick piers (foundation, cast stone, Brick, and Block) $ 1,764.00 /ea. Steel Fencing Price per section $63.00 /lin. Foot Two Brick piers and Gate section (foundation, cast stone, steel gate, Hardware Electrical light fixture, Brick, and Block) $ 6,100.00 /ea. GIVE UNIT PRICE FOR INSTALLING ELECTRICAL AND DATA BOXES AND POWER AS CALLED OUT BELOW: Provide Under floor Power and Data box in Basement floor $ 255.00 /ea. Provide Under Floor Power Floor Outlet in Basement Floor $ 225.00 /ea. Provide Under Floor Power Floor Outlet in First Floor $ 225.00 /ea. Provide Under Floor Power and Data box in First Floor $ 255.00 /ea. Provide Under Floor Power and Data box in 2nd, 3rd, or, 4th Floor $ 255.00 /ea. Provide Under Floor Power Floor Outlet in 2nd, 3rd, or, 4th Floor $ 225.00 /ea. Provide Power Wall Outlet in Pour concrete wall $ 50.00 /ea. Provide Power Wall Outlet in Block wall $ 50.00 /ea. Provide Power Wall Outlet in stud wall $ 50.00 /ea. Provide Data/telephone double Wall Box in stud wall and conduit to nearest accessible ceiling $ 30.00 /ea.
Page 3 of 3 EXHIBIT "C" PROPOSED CONSTRUCTION SCHEDULE NEW MERCANTILE BANK - DOWNTOWN BRANCH [GRAPH] OWNER OCCUPANCY DATE: 1/28/05 Revised: Wed 10/29/03 EXHIBIT "D" Page 1 of 8 8.13 SUPPLEMENTAL CONDITIONS TO AIA A201 GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION, 1997 EDITION (Mercantile Bank Real Estate Company, L.L.C. - Triangle, 2002 Bond Construction) SUPPLEMENTAL CONDITIONS TO AIA A201 GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION, 1997 EDITION THIS SUPPLEMENT modifies the "General Conditions of the Contract for Construction", AIA Document A201, 1997 Edition. ARTICLE 2 2.3.1 Delete the word "persistently" in the first sentence of Subparagraph 2.3.1. 2.4.1 Delete the first two sentences of Subparagraph 2.4.1, and substitute the following in lieu thereof: "If the Contractor defaults or neglects to carry out the Work in accordance with the Contact Documents and fails within a seven-day-period after receipt of written notice from the Owner to commence and continue correction of such default or neglect with diligence and promptness, the Owner may, without prejudice to other remedies the Owner may have, commence and continue to carry out the Work." ARTICLE 3 3.2.1 Add the following language at the end of Subparagraph 3.2.1: "If the Contractor performs any construction activity knowing it involves a recognized error, inconsistency or omission in the Contract Documents without providing such notice to the Architect and Owner, the Contractor shall assume appropriate responsibility for such performance and shall bear an appropriate amount of the attributable costs for construction." See Paragraph 3.2.1 (1987 Ed.). 3.3.1 Add the words "by the Owner" after the word "instructed" in the last sentence of Subparagraph 3.3.1. The sentence should now read: "If the Contractor is then instructed by the Owner to proceed with the required means, methods, techniques, sequences or procedures without acceptance of changes proposed by the Contractor, the Owner shall be solely responsible for any resulting loss or damage." EXHIBIT "D" Page 2 of 8 3.3.4 Add the following provisions as a new Subparagraph 3.3.4: "The Contractor shall not be relieved of obligations to perform the Work in accordance with the Contract Documents either by activities or duties of the Architect in the Architect's administration of the Contract, or by tests, inspections or approvals required or performed by persons other than Contractor." See Paragraph 3.3 (1987 Ed.). 3.3.5 Add the following provision as a new Subparagraph 3.3.5: "At the earliest possible time after the commencement of the Work on the Project site, the Contractor shall have benchmarks verified or established by a state-licensed land surveyor, shall locate the Project on the Project site, establishing necessary reference marks and axis from which the Work accurately can progress, shall furnish Architect evidence of such verification and shall report at once any errors discovered during the process of such verification." 3.3.6 Add the following provision as a new Subparagraph 3.3.6: "If any of the Work is required to be inspected or approved by any public authority, the Contractor shall cause such inspection or approval to be performed. The cost of the inspection shall be paid by Owner. No inspection performed or failed to be performed by the Owner hereunder shall be a waiver of any of the Contractor's obligations hereunder or be construed as an approval or acceptance of the Work or any part thereof." 3.3.7 Add the following provision as a new Subparagraph 3.3.7: "The Contractor acknowledges that it is the Contractor's responsibility to hire all personnel for the proper and diligent prosecution of the Work and the Contractor shall use its best efforts to maintain labor peace for the duration of the Project. In the event of a labor dispute, the Contractor shall not be entitled to any increase in the Contract Sum." 3.7.1 Add the following language at the end of Subparagraph 3.7.1: "The Contractor shall procure directly or through Sub-Contractors all certificates of inspection, use, occupancy, permits and licenses, pay all charges and fees and give all notices necessary and incidental to the Work. Certificates of inspection, use and occupancy shall be delivered to the Owner upon completion of the Work in sufficient time for occupation of the project in accordance with the approved schedule for the Work. The costs of such items shall be reimbursable expenses." EXHIBIT "D" Page 3 of 8 3.7.3 Delete Subparagraph 3.7.3 and substitute the following in lieu thereof: "It shall be the obligation of the Contractor to review the Contract Documents to determine and to notify the Owner and the Architect of any discrepancy between building codes and regulations of which the Contractor has knowledge or should have knowledge by exercising the care required of a Contractor. The Contractor shall not violate any zoning, setback or other locational requirements of applicable laws, codes and ordinances, or of any recorded covenants of which the Contractor has knowledge or should have knowledge by exercising the care required of a Contractor. If the Contractor observes that portions of the Contract Documents are at variance with applicable laws, statutes, ordinances, building codes, rules or regulations, the Contractor promptly shall notify the Owner and Architect in writing, and necessary changes shall be accomplished by appropriate modification." 3.9.1 Add the following language at the end of Subparagraph 3.9.1: "The Contractor's superintendent shall be satisfactory to the Owner in all respects, and Owner shall have the right to require Contractor to dismiss from the Project any superintendent whose performance is not satisfactory to Owner, and to replace such superintendent with a superintendent satisfactory to Owner. The Contractor shall not replace the superintendent without the consent of the Owner except with another superintendent satisfactory to the Owner in all respects." 3.9.2 Add the following provision as a new Subparagraph 3.9.2: "The list of all supervisory personnel, including the project manager and superintendent, that the Contractor intends to use on the Project and a chain-of-command organizational chart shall be submitted to the Owner for approval. The Contractor shall not engage supervisory personnel or utilize an organization and chain-of-command other than as approved by Owner in writing, and shall not change such personnel or form of organization without the written approval of the Owner." 3.10.4 Add the following provision as a new Subparagraph 3.10.4: "The Contractor shall prepare at least monthly a progress report in a form, in sufficient detail, and of a character approved by the Owner and Owner's lender, if any, for the Project. The progress report shall specify, among other things, an estimated percentage of completion, whether the Project is on schedule, and if not, the reasons therefor and the new schedule, as well as the projected Work to be completed in the next succeeding month. Accompanying the progress report shall be an updated current Project schedule, and a listing and the status of all Change Orders, modifications, bulletins and other relevant documents." EXHIBIT "D" Page 4 of 8 3.11.1 Insert immediately after the word "Work" in the last sentence Subparagraph 3.11.1 the following: ", signed by the Contractor, certifying that they show complete "as-built" conditions, stating sizes, kind of materials, vital piping, conduit locations and similar matters." 3.12.11 Add the following provision as a new Subparagraph 3.12.11: "Shop drawings for Architectural, Structural, Mechanical and Electrical work shall be submitted for approval to the Architect." 3.18.1 Delete the following clause found in the first sentence of Subparagraph 3.18.1: . . "and to the extent claims, damages, losses or expenses are not covered by Project Management Protective Liability insurance purchased by the Contractor in accordance with Paragraph 11.3." ARTICLE 4 4.2.4 Substitute the phrase "shall endeavor to" with the word "may," and add the words "directly or" after the words "each other." The clause should read ". . . the Owner and Contractor may communicate with each other directly or through the Architect. . . ." 4.2.6 Amend the introductory clause of the second sentence to read: "Whenever the Architect considers it necessary or advisable [for implementation of the intent of the Contract Documents], . . ." 4.2.8 Delete. See sub-paragraph 7.2.1 instead. 4.3.10 Delete. 4.4.2 Add the phase "in whole or in part" at the end of bullet point (3) in Subparagraph 4.4.2. 4.4.3 Amend the last sentence of Subparagraph 4.4.3 to read: "The Architect shall be solely responsible for paying any person retained by the Architect unless the Owner agrees to pay before the person(s) is retained by the Architect." 4.4.5 Substitute the words "and arbitration" with the word "litigation" at the end of the Subparagraph 4.4.5. EXHIBIT "D" Page 5 of 8 4.4.6 Delete the words "and arbitration" in bullet point (1); and substitute the word "Mediation" everywhere else where the word "Arbitration" is used in Subparagraph 4.4.6. 4.5.2 Add the clause "or other mutually acceptable mediation tribunal" at the end of the second sentence of Subparagraph 4.5.2. 4.6 Delete the entire Paragraph of 4.6, including its subparagraphs. ARTICLE 5 5.2.1 Add the following at the end of Subparagraph 5.2.1: "Notwithstanding the foregoing, Contractor may not substitute any Subcontractor for any of the subcontractors previously identified in the bid process without the express written consent of Owner." 5.3.2 Add the following provision as a new Subparagraph 5.3.2: "The Contractor shall not enter into any subcontract, contract, agreement, purchase order or other arrangement ("Arrangement") for the furnishing of any portion of the materials, services, equipment or Work with any party or entity if such party or entity is an Affiliated Entity (as defined below), unless such Arrangement has been approved by the Owner, after full disclosure in writing by the Contractor to the Owner of such affiliation or relationship and all details relating to the proposed Arrangement. The term "Affiliated Entity" means any entity related to or affiliated with the Contractor or with respect to which the Contractor has direct or indirect ownership or control, including, without limitation, any entity owned in whole or part by the Contractor; any holder of more than 10% of the issued and outstanding shares of, or the holder of any interest in, the Contractor; any entity in which any officer, director, employee, partner or shareholder (or member of the family of any of the foregoing persons) of the Contractor or any entity owned by the Contractor as a direct or indirect interest, which interest includes, but is not limited to, that of a partner, employee, agent or shareholder." ARTICLE 8 8.3.1. Delete the words "and arbitration" and add the following sentence at the end of Subparagraph 8.3.1: "No such Change Order extending the Contract Time shall result in any increased payments to the Contractor for overhead, extended overhead or for any other mounts of any nature except if the scope and character of the Work is changed." 8.3.2. Add the following sentence at the end of Subparagraph 8.3.2: EXHIBIT "D" Page 6 of 8 "A copy of any claim for extension shall be delivered to the Owner, and the Contractor shall immediately take all steps reasonably possible to lessen the adverse impact of such delay on Owner." 8.3.3 Add the following sentence at the end of Subparagraph 8.3.3: "In no event shall Owner be liable for delay damages to the extent such delay was caused by or attributable to Contractor or any Subcontractor." ARTICLE 9 9.1.2. Add the following provision as new Subparagraph 9.1.2: "Notwithstanding anything to the contrary contained in the Contract Documents, the Owner may withhold any payment to the Contractor hereunder if and for so long as the Contractor fails to perform any of its obligations hereunder or otherwise is in default under any of the Contract Documents; provided, however, that any such holdback shall be limited to an amount sufficient in the reasonable opinion of the Owner and the Architect to cure any such default or failure of performance by the Contractor." 9.3.1. Add after the word "Architect" the first time it appears in Subparagraph 9.3.1 the words "and Owner". 9.3.3 Delete the words ", to the best of the Contractor's knowledge, information and belief," from the second sentence of Subparagraph 9.3.3. 9.5.3 Add the following provision as a new Subparagraph 9.5.3: "If the Contractor disputes any determination by the Architect with regard to any Certificate of Payment, the Contractor nevertheless shall expeditiously continue to prosecute the Work." 9.5.4. Add the following provision as a new Subparagraph 9.5.4: "The Owner shall not be deemed to be in breach of this Contract by reason of the withholding of any payment, the withholding of which is authorized by any provision of the Contract Documents, provided the Architect has approved the Owner's action or the Work for which payment is being withheld shall have been rejected by any governmental authority or the Owner." 9.8.1. Insert after the words "Contract Documents," in Subparagraph 9.8.1 the words "and when required occupancy permits, if any, have been issued". Also add the following provision at the end of Subparagraph 9.8.1: EXHIBIT "D" Page 7 of 8 "The Contractor is responsible for the warranty of all Work, whether performed by it or by its Subcontractors at any tier." ARTICLE 11 11.1.1 Add the following sentence at the end of Subparagraph 11.1.1: "Such coverages shall be maintained by insurance carriers acceptable to Owner in all respects." ARTICLE 12 12.2.1. Add after the word "Architect", the first time it appears in Subparagraph 12.2.1, the phrase ", the Owner or any governmental authority." 12.2.2.1 Delete the third sentence. ARTICLE 13 13.5.3. Add immediately after the word "expense", the clause: ", including the cost of retesting for verification of compliance if necessary, until the Architect certifies that the Work in question does comply with the requirements of the Contract Documents shall be at the Contractor's expense, and all such costs shall not be included in computing the Contract Sum." 13.7.2. Add the following provision as a new Subparagraph 13.7.2: "Notwithstanding any provision of Subparagraph 13.7.1 to the contrary, no applicable statute of limitations shall be deemed to have commenced with respect to any portion of the Work which is not in accordance with the requirements of the Contract Documents, which would not be visible or apparent upon conducting a reasonable investigation, and which is not discovered by the Owner until after the date which, but for this Subparagraph 13.7.2, would be the date of commencement of the applicable statute of limitations; the applicable statute of limitations instead shall be deemed to have commenced on the date of such discovery by the Owner." ARTICLE 14 14.4.2 and 14.4.3. Substitute Subparagraphs 14.4.2 and 14.4.3 with the following language: "The Owner may, at its option, terminate this Contract in whole or from time to time in part at any time by written notice thereof to the Contractor. Upon any such termination, Contractor agrees to waive any claims for contract damages, including loss of anticipated profits, on account thereof, and as the sole right and EXHIBIT "D" Page 8 of 8 remedy of Contractor, Owner shall pay Contractor in accordance with (c) and (d) below. The provisions of the Contract, which by their nature survive final acceptance of the Work, shall remain in full force and effect after such termination to the extent provided in such provisions. (a) Upon receipt of any such notice, Contractor shall, unless the notice directs otherwise, immediately discontinue the Work on that date and to the extent specified in the notice; place no further orders or subcontracts for materials, equipment, services, or facilities, except as may be necessary for completion of such portion of the Work as is not discontinued; promptly make every reasonable effort to procure cancellation upon terms satisfactory to Owner of all orders and subcontracts to the extent they relate to the performance of the discontinued portion of the Work and shall thereafter do only such Work as may be necessary to preserve and protect work already in progress and to protect materials, plants and equipment on the Site or in transit thereto. (b) Upon such termination, the obligations of the Contract shall continue as to portions of the Work already performed and as to bona fide obligations assumed by Contractor prior to the date of termination. (c) Upon termination, Contractor shall be entitled to be paid the full cost of all Work properly done by Contractor to the date of termination not previously paid for, less sums already received by Contractor on account of the portion of the Work performed. If at the date of such termination Contractor has properly prepared or fabricated off the Site any goods for subsequent incorporation in the Work, and if Contractor delivers such goods to the Site or to such other place as the Owner shall reasonably direct, then Contractor shall be paid for such goods or materials. (d) The Contractor shall be reimbursed for any charges incurred by the Contractor or Subcontractors or Suppliers for preparation of their work such as preparation of shop drawings, mobilization costs, restocking charges, or retrieval of materials previously delivered to the site or acquired specifically for the Project but not yet incorporated into the Work." CHANGE OWNER [ ] ORDER ARCHITECT [ ] AIA DOCUMENT G701 CONTRACTOR [ ] FIELD [ ] OTHER [ ] - ------------------------------------------------------------------------------------------------------------ PROJECT: Mercantile Bank of West Michigan CHANGE ORDER NUMBER: #01 (Name, address) 310 Leonard Street, N.W. Grand Rapids, Michigan 49503 DATE: January 27, 2004 TO CONTRACTOR: Visser Brothers Construction Company ARCHITECT'S PROJECT NO: 0211-05 (Name, address) 1945 Turner Ave, NW Grand Rapids, Michigan 49504 CONTRACT DATE: November 12, 2003 CONTRACT FOR: General Construction - ------------------------------------------------------------------------------------------------------------
The Contract is changed as follows: ITEM #01 - REVISE THREE (3) STAIR STRINGERS IN STAIR #1 AT THE BASEMENT FROM TS12X2X1/4 TO TS12X4X1/2. 1. Refer to attached letter dated January 19, 2004 from Visser Brothers Construction. Add $315.00 ------- ================================================================================ ATTACHMENTS: (List attached documents that support description) NO DRAWINGS WERE REISSUED WITH THIS CHANGE ORDER Not valid until signed by the Owner, Architect and Contractor.
The original Guaranteed Maximum Price was $ 7,364,363.00 Net change by previously authorized Change Orders $ 0.00 The Guaranteed Maximum Price prior to this Change Order was $ 7,364,363.00 The Guaranteed Maximum Price will be increased by this Change Order in the $ 315.00 amount of $ 7,364,678.00 The new Guaranteed Maximum Price including this Change Order will be .. The Contract Time will be unchanged by .................................. (0) Days. The date of Substantial Completion as of the date of this Change Order therefore is January 30, 2005.
NOTE: This summary does not reflect changes in the Contract Sum, Contract Time or Guaranteed Maximum Price that have been authorized by Construction Change Directive. ARCHITECT CONTRACTOR OWNER Concept Design Group Visser Brothers Construction Mercantile Bank of West Michigan Company - ----------------------------------- -------------------------------- -------------------------------- Address Address Address 89 Monroe Center NW 1945 Turner Ave, NW 5650 Byron Center Ave. - ----------------------------------- -------------------------------- -------------------------------- Grand Rapids, MI 49503 Grand Rapids, MI 49504 Wyoming, MI 49509
/s/ William Granzow /s/ Jahn de Blecourt /s/ Robert Kaminski - ------------------- -------------------- ------------------- BY William Granzow BY Jahn de Blecourt BY Robert Kaminski DATE 1-26-04 DATE 1-27-04 DATE 1-27-04 [VISSER BROTHERS, INC. LOGO] Monday, January 19, 2004 Concept Design Group 89 Monroe Center Grand Rapids, Mi. 49503 ATTN: TODD MAZUREK RE: ADDITION TO CONTRACT MERCANTILE BANK - DOWNTOWN BANK Dear Todd: Per your request, we submit the cost from Van Dellen Steel to change the basement stair stinger size shown on S 3.7 from TS 12 x 2 x 1/2 to TS 12 x 4 x 1/2: Van Dellen Steel $300.00 5% O/P 15.00 ------- ADD: $315.00
Please let me know as soon as possible if we are to proceed with this change. Sincerely, /s/ Jahn de Blecourt Jahn de Blecourt EX-10.23 4 k82542exv10w23.txt AGREEMENT DATED DECEMBER 3, 2003 EXHIBIT 10.23 1997 EDITION AIA DOCUMENT A101-1997 Standard Form of Agreement Between Owner and Contractor where the basis of payment is a STIPULATED SUM AGREEMENT made as of the Third day of December in the year 2004 (In words, indicate day, month and year) BETWEEN the Owner: Mercantile Bank of West Michigan (Name, address and other information) 5650 Byron Center Avenue Wyoming, MI 49509 and the Contractor: Rockford Construction Company, Inc. (Name, address and other information) 8165 Graphic Drive Belmont, MI 49306 The Project is: Mercantile Bank of West Michigan (Name and location) Holland Main Office 880 East 16th Street Holland, MI The Architect is: Concept Design Group (Name, address and other information) 89 Monroe Center Grand Rapids, MI 49503 The Owner and Contractor agree as follows. This document has important legal consequences. Consultation with an attorney is encouraged with respect to its completion or modification. AIA Document A201-1997, General Conditions of the Contract for Construction, is adopted in this document by reference. Do not use with other general conditions unless this document is modified. This document has been approved and endorsed by The Associated General Contractors of America. [LOGO] (C) 1997 AIA (R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 - -------------------------------------------------------------------------------- Copyright 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1967, 1974, 1977, 1987, (C) 1997 by The American Institute of Architects. Reproduction of the material herein or substantial quotation of its provisions without written permission of the AIA violates the copyright laws of the United States and will subject the violator to legal prosecution. WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 1 ARTICLE 1 THE CONTRACT DOCUMENTS The Contract Documents consist of this Agreement, Conditions of the Contract (General, Supplementary and other Conditions), Drawings, Specifications, Addenda issued prior to execution of this Agreement, other documents listed in this Agreement and Modifications issued after execution of this Agreement; these form the Contract, and are as fully a part of the Contract as if attached to this Agreement or repeated herein. The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations or agreements, either written or oral. An enumeration of the Contract Documents, other than Modifications, appears in Article 8. ARTICLE 2 THE WORK OF THIS CONTRACT The Contractor shall fully execute the Work described in the Contract Documents, except to the extent specifically indicated in the Contract Documents to be the responsibility of others. ARTICLE 3 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION 3.1 The date of commencement of the Work shall be the date of this Agreement unless a different date is stated below or provision is made for the date to be fixed in a notice to proceed issued by the Owner. (Insert the date of commencement if it differs from the date of this Agreement or, if applicable, state that the date will be fixed in a notice to proceed.) If, prior to the commencement of the Work, the Owner requires time to file mortgages, mechanic's liens and other security interests, the Owner's time requirement shall be as follows: 3.2 The Contract Time shall be measured from the date of commencement. December 5, 2003 3.3 The Contractor shall achieve Substantial Completion of the entire Work not later than September 10, 2004 days from the date of commencement, or as follows: (Insert number of calendar days. Alternatively, a calendar date may be used when coordinated with the date of commencement. Unless stated elsewhere in the Contract Documents, insert any requirements for earlier Substantial Completion of certain portions of the Work.) Per Exhibit "C" , subject to adjustments of this Contract Time as provided in the Contract Documents. (Insert provisions, if any, for liquidated damages relating to failure to complete on time or for bonus payments for early completion of the Work.) [LOGO] (C) 1997 AIA (R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 2 ARTICLE 4 CONTRACT SUM 4.1 The Owner shall pay the Contractor the Contract Sum in current funds for the Contractor's performance of the Contract. The Contract Sum shall be Three million, eighty one thousand, seven hundred seventy two Dollars($3,081,772 ), 30 dollars and thirty cents subject to additions and deductions as provided in the Contract Documents. 4.2 The Contract Sum is based upon the following alternates, if any, which are described in the Contract Documents and are hereby accepted by the Owner: (State the numbers or other identification of accepted alternates. If decisions on other alternates are to be made by the Owner subsequent to the execution of this Agreement, attach a schedule of such other alternates showing the amount for each and the date when that amount expires.) See Attached Contract Sum Exhibit "B" 4.3 Unit prices, if any, are as follows: See Attached Bid Form Exhibit "B" ARTICLE 5 PAYMENTS 5.1 PROGRESS PAYMENTS 5.1.1 Based upon Applications for Payment submitted to the Architect by the Contractor and Certificates for Payment issued by the Architect, the Owner shall make progress payments on account of the Contract Sum to the Contractor as provided below and elsewhere in the Contract Documents. 5.1.2 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month, or as follows: 5.1.3 Provided that an Application for Payment is received by the Architect not later than the Thirtieth day of a month, the Owner shall make payment to the Contractor not later than the Thirtieth day of the Following month. If an Application for Payment is received by the Architect after the application date fixed above, payment shall be made by the Owner not later than Thirty (30) days after the Architect receives the Application for Payment. 5.1.4 Each Application for Payment shall be based on the most recent schedule of values submitted by the Contractor in accordance with the Contract Documents. The schedule of values shall allocate the entire Contract Sum among the various portions of the Work. The schedule of values shall be prepared in such form and supported by such data to substantiate its accuracy as the Architect may require. This schedule, unless objected to by the Architect, shall be used as a basis for reviewing the Contractor's Applications for Payment. [LOGO] (C) 1997 AIA (R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 3 5.1.5 Applications for Payment shall indicate the percentage of completion of each portion of the Work as of the end of the period covered by the Application for Payment. 5.1.6 Subject to other provisions of the Contract Documents, the amount of each progress payment shall be computed as follows: .1 Take that portion of the Contract Sum properly allocable to completed Work as determined by multiplying the percentage completion of each portion of the Work by the share of the Contract Sum allocated to that portion of the Work in the schedule of values, less retainage of Five percent (5 %). Pending final determination of cost to the Owner of changes in the Work, amounts not in dispute shall be included as provided in Subparagraph 7.3.8 of AIA Document A201-1997; .2 Add that portion of the Contract Sum properly allocable to materials and equipment delivered and suitably stored at the site for subsequent incorporation in the completed construction (or, if approved in advance by the Owner, suitably stored off the site at a location agreed upon in writing), less retainage of Five percent (5 %); .3 Subtract the aggregate of previous payments made by the Owner; and .4 Subtract amounts, if any, for which the Architect has withheld or nullified a Certificate for Payment as provided in Paragraph 9.5 of AIA Document A201-1997. 5.1.7 The progress payment amount determined in accordance with Subparagraph 5.1.6 shall be further modified under the following circumstances: .1 Add, upon Substantial Completion of the Work, a sum sufficient to increase the total payments to the full amount of the Contract Sum, less such amounts as the Architect shall determine for incomplete Work, retainage applicable to such work and unsettled claims; and (Subparagraph 9.8.5 of AIA Document A201-1997 requires release of applicable retainage upon Substantial Completion of Work with consent of surety, if any.) .2 Add, if final completion of the Work is thereafter materially delayed through no fault of the Contractor, any additional amounts payable in accordance with Subparagraph 9.10.3 of AIA Document A201-1997. 5.1.8 Reduction or limitation of retainage, if any, shall be as follows: (If it is intended, prior to Substantial Completion of the entire Work, to reduce or limit the retainage resulting from the percentages inserted in Clauses 5.1.6.1 and 5.1.6.2 above, and this is not explained elsewhere in the Contract Documents, insert here provisions for such reduction or limitation.) 5.1.9 Except with the Owner's prior approval, the Contractor shall not make advance payments to suppliers for materials or equipment which have not been delivered and stored at the site. 5.2 FINAL PAYMENT 5.2.1 Final payment, constituting the entire unpaid balance of the Contract Sum, shall be made by the Owner to the Contractor when: .1 the Contractor has fully performed the Contract except for the Contractor's responsibility to correct Work as provided in Subparagraph 12.2.2 of AIA Document A201-1997, and to satisfy other requirements, if any, which extend beyond final payment; and .2 a final Certificate for Payment has been issued by the Architect. [LOGO] (C) 1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 4 5.2.2 The Owner's final payment to the Contractor shall be made no later than 30 days after the issuance of the Architect's final Certificate for Payment, or as follows: ARTICLE 6 TERMINATION OR SUSPENSION 6.1 The Contract may be terminated by the Owner or the Contractor as provided in Article 14 of AIA Document A201-1997. 6.2 The Work may be suspended by the Owner as provided in Article 14 of AIA Document A201-1997. ARTICLE 7 MISCELLANEOUS PROVISIONS 7.1 Where reference is made in this Agreement to a provision of AIA Document A201-1997 or another Contract Document, the reference refers to that provision as amended or supplemented by other provisions of the Contract Documents. 7.2 Payments due and unpaid under the Contract shall bear interest from the date payment is due at the rate stated below, or in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located. (Insert rate of interest agreed upon, if any.) (Usury laws and requirements under the Federal Truth in Lending Act, similar state and local consumer credit laws and other regulations at the Owners and Contractor's principal places of business, the location of the Project and elsewhere may affect the validity of this provision. Legal advice should be obtained with respect to deletions or modifications, and also regarding requirements such as written disclosures or waivers.) 7.3 The Owner's representative is: Bob Kaminiski (Name, address and other information) Senior V.P. Mercantile Bank of West Michigan 7.4 The Contractor's representative is: Mike Van Gessel (Name, address and other information) President Rockford Construction Co. 7.5 Neither the Owner's nor the Contractor's representative shall be changed without ten days' written notice to the other party. 7.6 Other provisions: [LOGO] (C) 1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 5 ARTICLE 8 ENUMERATION OF CONTRACT DOCUMENTS 8.1 The Contract Documents, except for Modifications issued after execution of this Agreement, are enumerated as follows: 8.1.1 The Agreement is this executed 1997 edition of the Standard Form of Agreement Between Owner and Contractor, AIA Document A101-1997. 8.1.2 The General Conditions are the 1997 edition of the General Conditions of the Contract for Construction, AIA Document A201-1997. 8.1.3 The Supplementary and other Conditions of the Contract are those contained in the Project Manual dated October 22, 2003, and are as follows: Document Title Pages See Exhibit "A", INCLUDING EXHIBIT "D" 8.1.4 The Specifications are those contained in the Project Manual dated as in Subparagraph 8.1.3, and are as follows: (Either list the Specifications here or refer to an exhibit attached to this Agreement.) Section Title Pages See Exhibit "A" 8.1.5 The Drawings are as follows, and are dated October 22, 2003 unless a different date is shown below: (Either list the Drawings here or refer to an exhibit attached to this Agreement.) Number Title Date See Exhibit "A" (C) 1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 6 8.1.6 The Addenda, if any, are as follows: Number Date Pages See Exhibit "A" Portions of Addenda relating to bidding requirements are not part of the Contract Documents unless the bidding requirements are also enumerated in this Article 8. 8.1.7 Other documents, if any, forming part of the Contract Documents are as follows: (List here any additional documents that are intended to form part of the Contract Documents. AIA Document A201-1997 provides that bidding requirements such as advertisement or invitation to bid, Instructions to Bidders, sample forms and the Contractor's bid are not part of the Contract Documents unless enumerated in this Agreement. They should be listed here only if intended to be part of the Contract Documents.) See Exhibit "A" This Agreement is entered into as of the day and year first written above and is executed in at least three original copies, of which one is to be delivered to the Contractor, one to the Architect for use in the administration of the Contract, and the remainder to the Owner. /S/ Michael Price /S/ Mike VanGessel - ------------------------------- ------------------------------------ OWNER (Signature) CONTRACTOR (Signature) 12/11/03 Michael Price Mike VanGessel - ------------------------------- ------------------------------------ (Printed name and title) (Printed name and title) President President Mercantile Bank of Rockford Construction Co. West Michigan CAUTION: You should sign an original AIA document or a licensed reproduction. Originals contain the AIA logo printed in red; licensed reproductions are those produced in accordance with the Instructions to this document. [LOGO] (C) 1997 AIA(R) AIA DOCUMENT A101-1997 OWNER-CONTRACTOR AGREEMENT The American Institute of Architects 1735 New York Avenue, N.W. Washington, D.C. 20006-5292 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT THE VIOLATOR TO LEGAL PROSECUTION. 7 EXHIBIT "A" - CONTRACT LEGAL DOCUMENT INDEX SPECIFICATION INDEX DIVISION 1 - GENERAL REQUIREMENTS 00700 A.I.A General Conditions 00800 1997 Edition Supplementary Conditions 01000 Special Conditions 01027 Applications for Payment 01030 Alternates 01031 Unit Pricing 01035 Modification Procedures 01040 Project Coordination 01041 Cleaning and Debris Control 01045 Cutting and Patching 01050 Field Engineering 01095 Reference Standards and Definitions 01200 Project Meetings 01300 Submittals 01400 Quality Control Services 01410 Sitework Quality Controls 01500 Temporary Facilities and Utilities 01520 Temporary Barriers and Fencing 01600 Materials and Equipment 01631 Product Substitutions 01700 Project Close-Out 01740 Warranties and Bonds DIVISION 2 - SITE WORK 02100 Demolition 02110 Site Clearing 02200 Earthwork 02511 Hot-Mixed Asphalt Paving 02520 Portland Cement Concrete Paving 02650 Domestic Water Service 02715 Sanitary Sewer 02720 Storm Sewer 02800 Irrigation 02900 Landscaping DIVISION 3 - CONCRETE 03300 Cast-in-Place Concrete DIVISION 4 - MASONRY 04200 Masonry DIVISION 5 - METALS 05120 Structural Steel 05220 Steel Joists and Joist Girders 05310 Steel Deck 05400 Light Gauge Trusses 05500 Metal Fabrication DIVISION 6 - WOOD AND PLASTICS 06100 Rough Carpentry 06402 Interior Architectural Woodwork DIVISION 7 - THERMAL AND MOISTURE PROTECTION 07100 Water-Proofing 07210 Building Insulation 07240 Exterior Insulation and Finish Systems 07412 Metal Wall Panels 07533 TPO Sheet Roofing & Roof Insulation 07600 Flashing and Sheet Metal 07610 Prefinished Metal Roofing 07901 Joint Sealants DIVISION 8 - DOORS AND WINDOWS 08111 Standard Steel Doors and Frames 08200 Wood And Plastic Doors 08211 Flush Wood Doors 08410 Aluminum Entrances, Storefronts Windows and Curtain Walls 08710 Door Hardware 08800 Glazing DIVISION 9 - FINISHES 09250 Gypsum Drywall 09265 Shaft Wall Assemblies 09300 Tile 09511 Acoustical Panel Ceiling Systems 09660 Resilient Tile Flooring 09678 Resilient Wall Base and Accessories 09680 Carpet 09900 Painting 09950 Wall Coverings DIVISION 10 - SPECIALTIES 10270 Raised Access Floor 10350 Flag Poles 10155 Toilet Compartments 10520 Fire Extinguishers, Cabinets and Accessories 10800 Toilet and Bath Accessories DIVISION 11 - EQUIPMENT 11020 Security Systems and Equipment 11030 Financial Equipment 11452 Residential Appliances DIVISION 12 - FURNISHINGS 12505 Furniture and Fixture Installation 12670 Entrance Mats DIVISION 14 - CONVEYOR SYSTEMS 14240 Hydraulic Elevator DIVISION 15 - MECHANICAL 15010 General Provisions 15100 Basic Materials & Methods Page 1 of 3 15180 Insulation 15200 Water Supply 15300 Drainage System 15400 Plumbing Fixtures 15550 Fire Protection 15600 Heat Generation 15700 Liquid Heat Transfer 15750 Snowmelt System 15800 Air Distribution 15900 Temperature Controls 15950 Testing, Adjusting, and Balancing DIVISION 16 -ELECTRICAL 16010 General Provisions 16050 General Installation Procedures 16070 Testing 16110 Raceway 16120 Cable Tray 16130 Boxes and Fittings 16135 Steel Channel 16140 Conditions 16150 Fuses 16170 Wiring Devices 16200 Engine Generator Sets 16205 Transfer Switches 16300 Electrical Services 16320 High Voltage Load Interrupter Switchgear 16340 Switchboards 16350 Grounding 16370 Pad Mount Transformer 16430 Panelboards 16500 Lighting 16540 Lamps 16601 Lightning Protection 16700 Systems 16710 Master Antenna System 16720 Fire Alarm and Detection System 16740 Telephone 16750 Building Security 16900 Motor Controls 16930 Lighting and Outlet Controls SHEET INDEX T1.1 Title Sheet, General Notes, Abbreviations, General Information, Symbol Legend CIVIL DRAWINGS (FLEIS & VENDENBRINK) C1 Existing Conditions C2 Overall Development C3 Enlarged Site Plan C4 Grading Plan C5 Plan and Profile C6 Site Detail and Sections C4.1 Architectural Site Details L1.1 Landscaping PI ARCHITECTURAL DRAWINGS A1.0 Lower Floor Plan A1.1 First Floor Plan A1.2 Second Floor Plan A1.3 Roof Plan A1.4 Enlarged Plans A1.5 Enlarged Stair Plans A2.1 Door Schedules & Details A2.2 Door Details A2.3 Interior Finish Schedules & Specifications A3.0 Lower Reflected Ceiling Plan A3.1 First Floor Reflected Ceiling Plan A3.2 Second Floor Reflected Ceiling Plan A4.1 Interior Elevations A4.2 Interior Elevations A4.3 Interior Elevations A5.1 Exterior Elevations A5.2 Exterior Elevations A6.1 Building Sections A6.2 Building Sections A7.1 Exterior Wall Sections A7.2 Exterior Wall Sections A7.3 Exterior Wall Sections A8.1 Exterior Details A8.2 Millwork Details A8.3 Millwork Details A8.4 Interior Details A9.1 Stair Details A9.2 Elevation Details STRUCTURAL DRAWINGS (CLASSIC ENGINEERING) S1.1 Foundation Plan S2.1 Foundation Details & Structural Notes S2.2 Foundation Details S3.1 First Floor Framing Plan S3.2 Second Floor Framing Plan S3.3 Roof Framing Plan S3.4 Roof Light Gauge Framing Plan S4.1 Framing Details S4.2 Framing Details & Schedules PLUMBING DRAWINGS (CLASSIC ENGINEERING) P1.0 Lower Floor Plumbing Plan P1.1 First Floor Plumbing Plan P1.2 Second Floor Plumbing Plan Page 2 of 3 MECHANICAL DRAWINGS (CLASSIC ENGINEERING) M1.0 Lower Floor Mechanical Plan M1.1 First Floor Mechanical Plan M1.2 Second Floor Mechanical Plan M2.1 First Floor Piping Plan M2.2 Second Floor Piping Plan M3.1 Snowmelt Piping Plan M4.0 Mechanical Schedules M5.0 Mechanical Schedules ELECTRICAL DRAWINGS (CLASSIC ENGINEERING) E1.0 Lower Floor Lighting Plan E1.1 First Floor Lighting Plan E1.2 Second Floor Lighting Plan E2.0 Lower Floor Power Plan E2.1 First Floor Power Plan E2.2 Second Floor Power Plan E3.0 Roof electrical Plan E4.0 Electrical One-Line Diagram E5.0 Electrical Site Plan E5.1 Electrical Photometric Plan ADDENDUM INDEX Addendum Number Date Sheet attachments Addendum #1 November 5, 2003 Sheets SKAD1.1 and SKAD1.2 EXHIBIT INDEX Exhibit "A" Contract Legal Document Index Exhibit "B" Final Contract Sum for Holland Main Office, 880 16th Street Exhibit "C" Proposed Construction Schedule Exhibit "D" 8.13 supplemental Conditions to AIA A201 General conditions of the Contract for Construction, 1997 Edition Page 3 of 3 EXHIBIT "B" FINAL CONTRACT SUM FOR THE HOLLAND MAIN OFFICE, 880 16TH STREET DECEMBER 04, 2003 BASE BID FROM 11/12/03 BID FORM $2,970,000.00 ALTERNATES DELETE BIRCH Provide Poplar; running trim jambs, base, cornice boards, and coves change to poplar, except for handrails. ($ 11,700.00) DUMBWAITER Cost of Dumbwaiter not included in base bid as clarified on original bid form $ 37,900.00 METAL PANELS Cost to substitute Architectural Glass and Metals in lieu of ARS Metal roof, composite panels, & cornice work $ 52,000.00 PERMITS Building Permits is not included in the contract sum. The Permit cost are -$9,335 as included in bid +$4,829.5 actual cost ($ 4,505.50) WATER FEES All Domestic Trunkage Water fees, service charges and meter cost are not included in the Base Bid. The cost for this work will be. $ 24,577.80 ALTERNATE E-1 Electrical secondary service. 1. The Electrical Contractor shall provide an alternate bid (Alternate #E-1) for secondary service to this facility. See attached sketches SKAD1.1 and SKAD1.2. ($ 9,000.00) ALLOWANCES Concrete Temporary Heating The foundation, concrete slabs and concrete wall will have to be installed during winter. The allowance for this work will be. $ 6,500.00 BUILDING TEMPORARY HEATING Figured the owner would start paying for temporarily heating the building as soon as you have wrap it with Tyvek/air infiltration barrier and provided a dry roof. The allowance for this work will be. $ 10,000.00 GAS fees and services charges, or meter cost are not apart of your bid and an allowance for these cost will be. $ 3,000.00 ELECTRICAL fees and services charges, or meter cost are not apart of your bid and an allowance for these cost will be. $ 3,000.00
ALL STORM SEWER, SANITARY SEWER, AND SOIL EROSION fees, service charges and meter cost are included in the contract sum. ALL MECHANICAL AND ELECTRICAL PERMITS are included in the contract sum. FINAL CONTRACT SUM $3,081,772.30 Page 1 of 2 UNIT PRICING GIVE UNIT PRICE FOR REMOVING AND DISPOSING OF ASBESTOS, IN ACCORDANCE WITH ALL FEDERAL, STATE, AND LOCAL LAWS, RULES, AND REGULATIONS. NOT OTHERWISE STATED IN DEMOLITION SPECIFICATION - #02100 On piping joints $25.00 /joint On piping $ 7.00 /linear foot GIVE UNIT PRICE FOR REMOVING AND DISPOSING OF UNSUITABLE SOIL OFFSITE AND REPLACING SOIL BACKFILL MATERIAL AS SELECTED BY SOILS ENGINEER. BACKFILL WITH APPROVED MATERIAL. Under parking Lot Under $10.75 /cu.yd Foundations & footing $13.00 /cu.yd Under Utility Trenches $10.75 /cu.yd FEES FOR ADDITIONAL WORK FOR ADDITIONAL WORK PERFORMED UPON AUTHORIZATION OF THE OWNER. 1. Our own work: Actual cost to us of labor and materials plus a fee of; Five (5)% 2. Sub-Contractor's work: Sub-Contractor's price to us plus a fee of; Six (6)% Page 2 of 2 ROCKFORD CONSTRUCTION CO. Merchantile Bank of West Michigan 880 East 16th Street, Holland Exhibit C [ROCKFORD CONSTRUCTION CO. GRAPH OF TIME SCHEDULE FOR BID AND CONTRACTING PHASE, DEMOLITION AND SITE PREPARATION, CONSTRUCTION, AND PROJECT CLOSEOUT AND OCCUPANCY] Page 1 ROCKFORD CONSTRUCTION CO. Merchantile Bank of West Michigan 880 East 16th Street, Holland Exhibit C [ROCKFORD CONSTRUCTION CO. GRAPH OF TIME SCHEDULE FOR BID AND CONTRACTING PHASE, DEMOLITION AND SITE PREPARATION, CONSTRUCTION, AND PROJECT CLOSEOUT AND OCCUPANCY] Page 2 ROCKFORD CONSTRUCTION CO. Merchantile Bank of West Michigan 880 East 16th Street, Holland Exhibit C [ROCKFORD CONSTRUCTION CO. GRAPH OF TIME SCHEDULE FOR BID AND CONTRACTING PHASE, DEMOLITION AND SITE PREPARATION, CONSTRUCTION, AND PROJECT CLOSEOUT AND OCCUPANCY] Page 3 EXHIBIT "D" Page 1 of 8 8.13 SUPPLEMENTAL CONDITIONS TO AIA A201 GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION, 1997 EDITION (Mercantile Bank Real Estate Company, L.L.C. - Triangle, 2002 Bond Construction) SUPPLEMENTAL CONDITIONS TO AIA A201 GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION, 1997 EDITION THIS SUPPLEMENT modifies the "General Conditions of the Contract for Construction", AIA Document A201, 1997 Edition. ARTICLE 2 2.3.1 Delete the word "persistently" in the first sentence of Subparagraph 2.3.1. 2.4.1 Delete the first two sentences of Subparagraph 2.4.1, and substitute the following in lieu thereof: "If the Contractor defaults or neglects to carry out the Work in accordance with the Contact Documents and fails within a seven-day-period after receipt of written notice from the Owner to commence and continue correction of such default or neglect with diligence and promptness, the Owner may, without prejudice to other remedies the Owner may have, commence and continue to carry out the Work." ARTICLE 3" 3.2.1 Add the following language at the end of Subparagraph 3.2.1: "If the Contractor performs any construction activity knowing it involves a recognized error, inconsistency or omission in the Contract Documents without providing such notice to the Architect and Owner, the Contractor shall assume appropriate responsibility for such performance and shall bear an appropriate amount of the attributable costs for construction." See Paragraph 3.2.1 (1987 Ed.). 3.3.1 Add the words "by the Owner" after the word "instructed" in the last sentence of Subparagraph 3.3.1. The sentence should now read: "If the Contractor is then instructed by the Owner to proceed with the required means, methods, techniques, sequences or procedures without acceptance of changes proposed by the Contractor, the Owner shall be solely responsible for any resulting loss or damage." EXHIBIT "D" Page 2 of 8 3.3.4 Add the following provisions as a new Subparagraph 3.3.4: "The Contractor shall not be relieved of obligations to perform the Work in accordance with the Contract Documents either by activities or duties of the Architect in the Architect's administration of the Contract, or by tests, inspections or approvals required or performed by persons other than Contractor." See Paragraph 3.3 (1987 Ed.). 3.3.5 Add the following provision as a new Subparagraph 3.3.5: "At the earliest possible time after the commencement of the Work on the Project site, the Contractor shall have benchmarks verified or established by a state-licensed land surveyor, shall locate the Project on the Project site, establishing necessary reference marks and axis from which the Work accurately can progress, shall furnish Architect evidence of such verification and shall report at once any errors discovered during the process of such verification." 3.3.6 Add the following provision as a new Subparagraph 3.3.6: "If any of the Work is required to be inspected or approved by any public authority, the Contractor shall cause such inspection or approval to be performed. The cost of the inspection shall be paid by Owner. No inspection performed or failed to be performed by the Owner hereunder shall be a waiver of any of the Contractor's obligations hereunder or be construed as an approval or acceptance of the Work or any part thereof." 3.3.7 Add the following provision as a new Subparagraph 3.3.7: "The Contractor acknowledges that it is the Contractor's responsibility to hire all personnel for the proper and diligent prosecution of the Work and the Contractor shall use its best efforts to maintain labor peace for the duration of the Project. In the event of a labor dispute, the Contractor shall not be entitled to any increase in the Contract Sum." 3.7.1 Add the following language at the end of Subparagraph 3.7.1: "The Contractor shall procure directly or through Sub-Contractors all certificates of inspection, use, occupancy, permits and licenses, pay all charges and fees and give all notices necessary and incidental to the Work. Certificates of inspection, use and occupancy shall be delivered to the Owner upon completion of the Work in sufficient time for occupation of the project in accordance with the approved schedule for the Work. The costs of such items shall be reimbursable expenses." EXHIBIT "D" Page 3 of 8 3.7.3 Delete Subparagraph 3.7.3 and substitute the following in lieu thereof: "It shall be the obligation of the Contractor to review the Contract Documents to determine and to notify the Owner and the Architect of any discrepancy between building codes and regulations of which the Contractor has knowledge or should have knowledge by exercising the care required of a Contractor. The Contractor shall not violate any zoning, setback or other locational requirements of applicable laws, codes and ordinances, or of any recorded covenants of which the Contractor has knowledge or should have knowledge by exercising the care required of a Contractor. If the Contractor observes that portions of the Contract Documents are at variance with applicable laws, statutes, ordinances, building codes, rules or regulations, the Contractor promptly shall notify the Owner and Architect in writing, and necessary changes shall be accomplished by appropriate modification." 3.9.1 Add the following language at the end of Subparagraph 3.9.1: "The Contractor's superintendent shall be satisfactory to the Owner in all respects, and Owner shall have the right to require Contractor to dismiss from the Project any superintendent whose performance is not satisfactory to Owner, and to replace such superintendent with a superintendent satisfactory to Owner. The Contractor shall not replace the superintendent without the consent of the Owner except with another superintendent satisfactory to the Owner in all respects." 3.9.2 Add the following provision as a new Subparagraph 3.9.2: "The list of all supervisory personnel, including the project manager and superintendent, that the Contractor intends to use on the Project and a chain-of-command organizational chart shall be submitted to the Owner for approval. The Contractor shall not engage supervisory personnel or utilize an organization and chain-of-command other than as approved by Owner in writing, and shall not change such personnel or form of organization without the written approval of the Owner." 3.10.4 Add the following provision as a new Subparagraph 3.10.4: "The Contractor shall prepare at least monthly a progress report in a form, in sufficient detail, and of a character approved by the Owner and Owner's lender, if any, for the Project. The progress report shall specify, among other things, an estimated percentage of completion, whether the Project is on schedule, and if not, the reasons therefor and the new schedule, as well as the projected Work to be completed in the next succeeding month. Accompanying the progress report shall be an updated current Project schedule, and a listing and the status of all Change Orders, modifications, bulletins and other relevant documents." EXHIBIT "D" Page 4 of 8 3.11.1 Insert immediately after the word "Work" in the last sentence Subparagraph 3.11.1 the following: ", signed by the Contractor, certifying that they show complete "as-built" conditions, stating sizes, kind of materials, vital piping, conduit locations and similar matters." 3.12.11 Add the following provision as a new Subparagraph 3.12.11: "Shop drawings for Architectural, Structural, Mechanical and Electrical work shall be submitted for approval to the Architect." 3.18.1 Delete the following clause found in the first sentence of Subparagraph 3.18.1: . . "and to the extent claims, damages, losses or expenses are not covered by Project Management Protective Liability insurance purchased by the Contractor in accordance with Paragraph 11.3." ARTICLE 4 4.2.4 Substitute the phrase "shall endeavor to" with the word "may," and add the words "directly or" after the words "each other." The clause should read ". . . the Owner and Contractor may communicate with each other directly or through the Architect. . . ." 4.2.6 Amend the introductory clause of the second sentence to read: "Whenever the Architect considers it necessary or advisable [for implementation of the intent of the Contract Documents], . . ." 4.2.8 Delete. See sub-paragraph 7.2.1 instead. 4.3.10 Delete. 4.4.2 Add the phase "in whole or in part" at the end of bullet point (3) in Subparagraph 4.4.2. 4.4.3 Amend the last sentence of Subparagraph 4.4.3 to read: "The Architect shall be solely responsible for paying any person retained by the Architect unless the Owner agrees to pay before the person(s) is retained by the Architect." 4.4.5 Substitute the words "and arbitration" with the word "litigation" at the end of the Subparagraph 4.4.5. EXHIBIT "D" Page 5 of 8 4.4.6 Delete the words "and arbitration" in bullet point (1); and substitute the word "Mediation" everywhere else where the word "Arbitration" is used in Subparagraph 4.4.6. 4.5.2 Add the clause "or other mutually acceptable mediation tribunal" at the end of the second sentence of Subparagraph 4.5.2. 4.6 Delete the entire Paragraph of 4.6, including its subparagraphs. ARTICLE 5 5.2.1 Add the following at the end of Subparagraph 5.2.1: "Notwithstanding the foregoing, Contractor may not substitute any Subcontractor for any of the subcontractors previously identified in the bid process without the express written consent of Owner." 5.3.2 Add the following provision as a new Subparagraph 5.3.2: "The Contractor shall not enter into any subcontract, contract, agreement, purchase order or other arrangement ("Arrangement") for the furnishing of any portion of the materials, services, equipment or Work with any party or entity if such party or entity is an Affiliated Entity (as defined below), unless such Arrangement has been approved by the Owner, after full disclosure in writing by the Contractor to the Owner of such affiliation or relationship and all details relating to the proposed Arrangement. The term "Affiliated Entity" means any entity related to or affiliated with the Contractor or with respect to which the Contractor has direct or indirect ownership or control, including, without limitation, any entity owned in whole or part by the Contractor; any holder of more than 10% of the issued and outstanding shares of, or the holder of any interest in, the Contractor; any entity in which any officer, director, employee, partner or shareholder (or member of the family of any of the foregoing persons) of the Contractor or any entity owned by the Contractor as a direct or indirect interest, which interest includes, but is not limited to, that of a partner, employee, agent or shareholder." ARTICLE 8 8.3.1. Delete the words "and arbitration" and add the following sentence at the end of Subparagraph 8.3.1: "No such Change Order extending the Contract Time shall result in any increased payments to the Contractor for overhead, extended overhead or for any other mounts of any nature except if the scope and character of the Work is changed." 8.3.2. Add the following sentence at the end of Subparagraph 8.3.2: EXHIBIT "D" Page 6 of 8 "A copy of any claim for extension shall be delivered to the Owner, and the Contractor shall immediately take all steps reasonably possible to lessen the adverse impact of such delay on Owner." 8.3.3 Add the following sentence at the end of Subparagraph 8.3.3: "In no event shall Owner be liable for delay damages to the extent such delay was caused by or attributable to Contractor or any Subcontractor." ARTICLE 9 9.1.2. Add the following provision as new Subparagraph 9.1.2: "Notwithstanding anything to the contrary contained in the Contract Documents, the Owner may withhold any payment to the Contractor hereunder if and for so long as the Contractor fails to perform any of its obligations hereunder or otherwise is in default under any of the Contract Documents; provided, however, that any such holdback shall be limited to an amount sufficient in the reasonable opinion of the Owner and the Architect to cure any such default or failure of performance by the Contractor." 9.3.1. Add after the word "Architect" the first time it appears in Subparagraph 9.3.1 the words "and Owner". 9.3.3 Delete the words ", to the best of the Contractor's knowledge, information and belief," from the second sentence of Subparagraph 9.3.3. 9.5.3 Add the following provision as a new Subparagraph 9.5.3: "If the Contractor disputes any determination by the Architect with regard to any Certificate of Payment, the Contractor nevertheless shall expeditiously continue to prosecute the Work." 9.5.4. Add the following provision as a new Subparagraph 9.5.4: "The Owner shall not be deemed to be in breach of this Contract by reason of the withholding of any payment, the withholding of which is authorized by any provision of the Contract Documents, provided the Architect has approved the Owner's action or the Work for which payment is being withheld shall have been rejected by any governmental authority or the Owner." 9.8.1. Insert after the words "Contract Documents," in Subparagraph 9.8.1 the words "and when required occupancy permits, if any, have been issued". Also add the following provision at the end of Subparagraph 9.8.1: EXHIBIT "D" Page 7 of 8 "The Contractor is responsible for the warranty of all Work, whether performed by it or by its Subcontractors at any tier." ARTICLE 11 11.1.1 Add the following sentence at the end of Subparagraph 11.1.1: "Such coverages shall be maintained by insurance carriers acceptable to Owner in all respects." ARTICLE 12 12.2.1. Add after the word "Architect", the first time it appears in Subparagraph 12.2.1, the phrase ", the Owner or any governmental authority." 12.2.2.1 Delete the third sentence. ARTICLE 13 13.5.3. Add immediately after the word "expense", the clause: ", including the cost of retesting for verification of compliance if necessary, until the Architect certifies that the Work in question does comply with the requirements of the Contract Documents shall be at the Contractor's expense, and all such costs shall not be included in computing the Contract Sum." 13.7.2. Add the following provision as a new Subparagraph 13.7.2: "Notwithstanding any provision of Subparagraph 13.7.1 to the contrary, no applicable statute of limitations shall be deemed to have commenced with respect to any portion of the Work which is not in accordance with the requirements of the Contract Documents, which would not be visible or apparent upon conducting a reasonable investigation, and which is not discovered by the Owner until after the date which, but for this Subparagraph 13.7.2, would be the date of commencement of the applicable statute of limitations; the applicable statute of limitations instead shall be deemed to have commenced on the date of such discovery by the Owner." ARTICLE 14 14.4.2 and 14.4.3. Substitute Subparagraphs 14.4.2 and 14.4.3 with the following language: "The Owner may, at its option, terminate this Contract in whole or from time to time in part at any time by written notice thereof to the Contractor. Upon any such termination, Contractor agrees to waive any claims for contract damages, including loss of anticipated profits, on account thereof, and as the sole right and EXHIBIT "D" Page 8 of 8 remedy of Contractor, Owner shall pay Contractor in accordance with (c) and (d) below. The provisions of the Contract, which by their nature survive final acceptance of the Work, shall remain in full force and effect after such termination to the extent provided in such provisions. (a) Upon receipt of any such notice, Contractor shall, unless the notice directs otherwise, immediately discontinue the Work on that date and to the extent specified in the notice; place no further orders or subcontracts for materials, equipment, services, or facilities, except as may be necessary for completion of such portion of the Work as is not discontinued; promptly make every reasonable effort to procure cancellation upon terms satisfactory to Owner of all orders and subcontracts to the extent they relate to the performance of the discontinued portion of the Work and shall thereafter do only such Work as may be necessary to preserve and protect work already in progress and to protect materials, plants and equipment on the Site or in transit thereto. (b) Upon such termination, the obligations of the Contract shall continue as to portions of the Work already performed and as to bonafide obligations assumed by Contractor prior to the date of termination. (c) Upon termination, Contractor shall be entitled to be paid the full cost of all Work properly done by Contractor to the date of termination not previously paid for, less sums already received by Contractor on account of the portion of the Work performed. If at the date of such termination Contractor has properly prepared or fabricated off the Site any goods for subsequent incorporation in the Work, and if Contractor delivers such goods to the Site or to such other place as the Owner shall reasonably direct, then Contractor shall be paid for such goods or materials. (d) The Contractor shall be reimbursed for any charges incurred by the Contractor or Subcontractors or Suppliers for preparation of their work such as preparation of shop drawings, mobilization costs, restocking charges, or retrieval of materials previously delivered to the site or acquired specifically for the Project but not yet incorporated into the Work." CHANGE OWNER ORDER ARCHITECT CONTRACTOR FIELD AIA DOCUMENT G701 OTHER PROJECT: Mercantile Bank CHANGE ORDER NUMBER: 1 880 East 16th Street Holland, MI DATE: January 2, 2004 PROJECT NO: 03209 TO CONTRACTOR: Rockford Construction Company CONTRACT DATE: December 3, 2003 8165 Graphic Drive, PO Box 450 Belmont, MI CONTRACT FOR: General Construction The Contract is changed as follows: 1. Asbestos containing materials survey Add: $750.00 6% O&P Add: $ 45.00 TOTAL ADD: $795.00 NOT VALID UNTIL SIGNED BY THE OWNER, AND CONTRACTOR: The original (Contract Sum) was............................. $ 3,081,772.30 Net Change by previously authorized Change Orders........... $ 0.00 The (Contract Sum) prior to Change Order was................ $ 3,081,772.30 The (Contract Sum) will be (increased) by this Change Order in the amount of...................... $ 795.00 The new (Contract Sum) including this Change Order will be.. $ 3,082,567.30
The Contract Time will be (unchanged) by (0) days. The date of Substantial Completion as of the date of this Change Order therefore is NOTE: This summary does not reflect changes in the Contract Sum, Contract Time or Guaranteed Maximum Price which have been authorized by Construction Change Directive. CONCEPT DESIGN GROUP Rockford Construction Co., Inc. Mercantile Bank CONTRACTOR OWNER 89 MONROE CENTER 8165 Graphic Drive NE 880 East 16th Street ADDRESS ADDRESS GR MI 49503 Belmont, MI 49306 Holland, MI /s/ WILLIAM GRANZO BY THOMAS MCGOVERN BY ROBERT KAMINSKI ---------------- -------------- 1-8-04 DATE 1-12-03 DATE 1-23-04 Invoice #A-231082 APPLICATION AND CERTIFICATE FOR PAYMENT AIA DOCUMENT G702 (Instructions on reverse side) PAGE ONE OF PAGE TO OWNER: Rockford Construction PROJECT: Mercantile Bank, Holland APPLICATION NO. 3 Distribution to: 8165 Graphic Drive, N. E., P. O. Box 450 890 E. 16th Street PERIOD TO: 12-30-03 - OWNER Belmont, Michigan 49306 PROJECT NOS.:03209 - ARCHITECT - CONTRACTOR FROM CONTRACTOR: Pitsch Companies VIA. ARCHITECT: CONTRACT DATE: - 675 Richmond, N. W. - Grand Rapids, Michigan 49504 CONTRACT FOR: Asbestos services
CONTRACTOR'S APPLICATION FOR PAYMENT Application is made for payment, as shown below. In connection with the Contract, Continuation Sheet, AIA Document G7O3, is attached. 1. ORIGINAL CONTRACT SUM.................................... $ 0 2. Net change EXTRAS........................................ $ 750.00 3. CONTRACT SUM TO DATE (Line 1 + 2)........................ $ 750.00 4. TOTAL COMPLETED & STORED TO DATE......................... $ 750.00 (Column G on G703) 5. RETAINAGE: a._______% of Completed & Work $ 75.00 (Columns D + E on G703) b._______% of Stored Material $________ (Column F on G703) Total Retainage(Line 5a + 5b or Total in Column 1 of G703............................ $ 75.00 6. TOTAL EARNED LESS RETAINAGE.............................. $ 675.00 (Line 4 less Line 5 Total) 7. LESS PREVIOUS CERTIFICATES FOR PAYMENT (Line 6 from prior Certificate).......................... $ 0 8. CURRENT PAYMENT DUE...................................... $ 675.00 9. BALANCE TO FINISH, INCLUDING RETAINAGE (Line 3 less Line 6) $ 75. 00
CHANGE ORDER SUMMARY ADDITIONS DEDUCTIONS Total change approved in previous months by Owner Total approved this Month TOTALS NET CHANGES by Change Order
The undersigned Contractor certifies that to the best of the Contractor's knowledge, Information and belief the Work covered by this Application for Payment has been complete in accordance with the Contract Documents, that all amounts have been paid by if Contractor for Work for which previous Certificates for Payment were Issued, and payments received from the Owner, and that current payment shown herein is now due. CONTRACTOR: Pitsch Companies By: /s/ LEWIS PITSCH Date: December 30, 2003 ------------------------ Lewis Pitsch, Vice President State of: Michigan County of: Kent Subscribed and sworn to before me this 30th day of December, 2003 /s/ David S. Cole Notary Public: David S. Cole My Commission expires: August 27, 2003 ARCHITECT'S CERTIFICATE FOR PAYMENT In accordance with the Contract Documents, based on on-site observations and the data comprising this application, the Architect certifies to the Owner that to the best of the Architect's knowledge, Information and belief the Work has progressed as indicated the quality of the Work is in accordance with the Contract Documents, and the Contractor is entitled to payment of the AMOUNT CERTIFIED. AMOUNT CERTIFIED................................. $ 195,252.76 ------------ (Attach explanation if amount certified differs from the amount applied. Initial all figures on this Application and on the Continuation Sheet that are changed to conform with the amount certified.) ARCHITECT: By: /s/ WILLIAM GRANZOW Date: 02-06-04 ------------------------------ ---------------- This Certificate is not negotiable. The AMOUNT CERTIFIED is payable only to the Contractor named herein. Issuance, payment and acceptance of payment are without prejudice to any rights of the Owner or Contractor under this Contract. AIA DOCUMENT G702 - APPLICATION AND CERTIFICATE FOR PAYMENT - 1992 EDITION - AIA (R) - (C) 1992 - THE AMERICAN INSTITUTE OF ARCHITECTS. [LOGO] 1735 NEW YORK AVENUE NW, WASHINGTON DC. [ILLEGIBLE] - WARNING: Unlicensed Photocopying violates U.S. copyright laws and will subject the violator to legal prosecution. CAUTION: You should use an original AIA document which has this caution printed in red. An original assures that changes will not be obscured as may occur when documents are reproduction. CONTINUATION SHEET AIA DOCUMENT G703 (Instructions on reverse side) PAGE 1 OF 1 AIA Document G702, APPLICATION AND CERTIFICATE FOR PAYMENT, APPLICATION NO.: containing Contractor's signed Certification, is attached. APPLICATION DATE: In tabulations below amounts are stated to the nearest dollar. PERIOD TO: Use Column I on Contracts where variable retainage for line Items may apply. ARCHITECT'S PROJECT NO.:
A B C D E F G H I - ------------------------------------------------------------------------------------------------------------------------ WORK COMPLETED MATERIALS TOTAL -------------------------- PRESENTLY COMPLETED BALANCE FROM PREVIOUS STORED AND STORED TO RETAINAGE ITEM SCHEDULED APPLICATION (NOT IN TO DATE % FINISH (IF VARIABLE NO. DESCRIPTION OF WORK VALUE (D+E) THIS PERIOD D OR E) (D+E+F) (G + C) (C-G) RATE) - ---- ------------------- --------- ------------- ----------- --------- ---------- -------- ------- ----------- Asbestos survey 300.00 0 300.00 0 300.00 100 0 30 Sample Testing 150.00 0 150.00 0 150.00 100 0 15 Asbestos removal 300.00 0 300.00 0 300.00 100 0 30 750.00 0 750.00 0 750.00 100 0 75.00
AIA DOCUMENT-IT G703 - CONTINUATION SHEET FOR G702 - 1992 EDITION - AIA [LOGO] -(R) (c)1992 - THE AMERICAN INSTITUTE OF ARCHITECTS. 1735 NEW YORK AVENUE, NW WASHINGTON. DC. 20006-5292 - WARNING: Unlicensed photocopying violates U.S. copyright Laws and will subject the violator to legal prosecution. CAUTION: You should use an original AIA document which has this caution printed in red. An original assures that changes will not be obscured as may occur when documents are reproduced. CHANGE OWNER ORDER ARCHITECT CONTRACTOR FIELD AIA DOCUMENT G701 OTHER PROJECT: Mercantile Bank CHANGE ORDER NUMBER: 2 880 East 16th Street Holland, MI DATE: January 2, 2004 PROJECT NO: 03209 TO CONTRACTOR: Rockford Construction Company CONTRACT DATE: December 3, 2003 8165 Graphic Drive, PO Box 450 Belmont, MI CONTRACT FOR: General Construction The Contract is changed as follows: 1. placing sand over gas lines in an area 50' x 60' x 5 Add: $6,100.00 6% O&P Add: $ 366.00 TOTAL ADD: $6,466.00 NOT VALID UNTIL SIGNED BY THE OWNER, AND CONTRACTOR: The original (Contract Sum) was...................................................... $ 3,081,772.30 Net Change by previously authorized Change Orders.................................... $ 795.00 The (Contract Sum) prior to Change Order was......................................... $ 3 082,567.30 The (Contract Sum) will be (increased) by this Change Order in the amount of......... $ 6,466.00 The new (Contract Sum) including this Change Order will be........................... $ 3,089,033.30 The Contract Time will be (unchanged) by (0) days. The date of Substantial Completion as of the date of this Change Order therefore is
NOTE: This summary does not reflect changes in the Contract Sum, Contract Time or Guaranteed Maximum Price which have been authorized by Construction Change Directive. Concept Design Group Rockford Construction Co., Inc. Mercantile Bank - -------------------- CONTRACTOR OWNER 89 MONROE CENTER 8165 Graphic Drive NE 880 East 16th Street ADDRESS ADDRESS GR MI 49506 Belmont, MI 49306 Holland, MI /s/ WILLIAM GRANZOW BY THOMAS MCGOVERN BY ROBERT KAMINSKI --------------- --------------- --------------- 1-8-04 DATE 1-28-04 DATE 1-23-04 RON MEYER & ASSOCIATES 1367 76th Avenue EXCAVATING, INC. Zeeland, MI 49484 Phone: 616-688-5751 FAX: 616-688-5771 E-mail: ronmeyer@drenthe.net December 30, 2003 Tom McGovern Rockford Construction Co., Inc. P.O. Box 450 Belmont, MI 49306 Re: Mercantile Bank - Holland, MI I would like to request a change order in the amount of Six Thousand One Hundred and 00/100 dollars ($6,100,00) for placing sand over gas lines in an area 50' x 60' x 5'. Sincerely, /s/ Mike Meyer Mike Meyer Estimator CHANGE OWNER ORDER ARCHITECT CONTRACTOR FIELD AIA DOCUMENT G701 OTHER PROJECT: Mercantile Bank CHANGE ORDER NUMBER: 3 880 East 16th Street Holland, MI DATE: January 19, 2004 PROJECT NO: 03209 TO CONTRACTOR: Rockford Construction Company CONTRACT DATE: December 3, 2003 8165 Graphic Drive, PO Box 450 Belmont, Ml CONTRACT FOR: General Construction The Contract is changed as follows: 1. Proposal Request #6 / 2-01-02 Add: $ 8,480.00 6% O&P Add: $ 388.80 TOTAL: $ 8,868.80 NOT VALID UNTIL SIGNED BY THE OWNER, ARCHITECT AND CONTRACTOR: The original (Contract Sum) was ........................................................... $ 3,081,772.30 Net Change by previously authorized Change Orders ......................................... $ 7,261.00 The (Contract Sum) prior to Change Order was .............................................. $ 3,089,033.30 The (Contract Sum) will be (increased) by this Change Order in the amount of .............. $ 8,868.80 The new (Contract Sum) including this Change Order will be ................................ $ 3,097,902.10
The Contract Time will be (unchanged) by ( 0 ) days. The date of Substantial Completion as of the date of this Change Order therefore is NOTE: This summary does not reflect changes in the Contract Sum, Contract Time or Guaranteed Maximum Price which have been authorized by Construction Change Directive. Concept Design Group Rockford Construction Co., Inc. Mercantile Bank ARCHITECT CONTRACTOR OWNER 89 Monroe Center 8165 Graphic Drive NE 880 East 16th Street ADDRESS ADDRESS ADDRESS Grand Rapids, MI 49503 Belmont MI 49306 Holland. MI BY /s/ WILLIAM GRANZOW BY /s/ THOMAS MCGOVERN BY /s/ ROBERT KAMINSKI ------------------- ------------------- ------------------- DATE 1-26-04 DATE 1-26-04 DATE 1-27-04 PROPOSAL OWNER [ ] REQUEST ARCHITECT [ ] CONTRACTOR [X] FIELD [ ] AIA DOCUMENT G709 OTHER [ ] PROJECT: MERCANTILE BANK OF WEST MICHIGAN (name, address) Holland Main Office PROPOSAL REQUEST NO: 06 Grand Rapids, Michigan OWNER: Mercantile Bank of West DATE: January 8, 2004 Michigan 5650 Byron Center Ave. Wyoming, MI. 49509 ARCHITECTS PROJECT NO: 0304-11 TO: (Contractor) Rockford Construction. CONTRACT FOR: General Construction 8165 Graphic Drive Belmont, MI. 49306 CONTRACT DATE: December 5, 2003
Please submit an itemized quotation for changes in the Contract Sum and/or Time incidental to proposed modifications to the Contract Documents described herein. The following sheets have been revised and are included in this request: C2, C3, C4 and C5. THIS IS NOT A CHANGE ORDER NOR A DIRECTION TO PROCEED WITH THE WORK DESCRIBED HEREIN. Description: (written description on the work) ITEM #1 SITE WORK 1. Revise size of Storm Water Management Area to be size, depth and volume as indicated on sheet C2. 2. Add release pipe on south end of Storm Water Management Area as indicated on sheet C2. 3. Add 8" valve & box at East side of property as indicated on Sheet C3. 4. Delete 72 If 2" copper water service lead. Add 95 If 2" copper water service lead from different location as indicated on sheet C3. Note location of existing water service to be abandoned / removed by the City. 5. Adjust existing manhole at new pass through area as indicated on sheet C3. 6. Note generator enclosure revised to correspond to architectural drawings. 7. Revise location of storm lead to be to the North of stair #1 as Indicated on sheet C4. 8. Change pitch of sanitary sewer to be 0.5% as indicated on sheets C4 and C5. Add/Deduct/No Change $ 8,480.00 --- ARCHITECT: Concept Design Group, 89 Monroe Centre, Grand Rapids, MI 49503 By: William Granzow, AIA Concept Design Group 89 Monroe Centre NW Suite 400 Grand Rapids, MI 49503 (616) 771-0909 tel (616) 771-0912 fax bill@conceptdesigngroup.com CHANGE OWNER ORDER ARCHITECT CONTRACTOR FIELD AIA DOCUMENT G701 OTHER PROJECT: Mercantile Bank CHANGE ORDER NUMBER: 4 880 East 16th Street Holland, Ml DATE: January 23, 2004 PROJECT NO: 03209 TO CONTRACTOR: Rockford Construction Company CONTRACT DATE: December 3, 2003 8165 Graphic Drive, PO Box 450 Belmont, Ml CONTRACT FOR: General Construction The Contract is changed as follows: 1. Allowance to remedy Unsuitable Soils per letter and Fax from MES dated January 19th, and January 20th (attached). The pricing will be established via Time and Material per the attached unit pricing. Rockford Construction and Ron Meyer will implement these remedies as directed by owner's consultants...primarily MES. Unit volumes will be identified and confirmed daily by on-site team. On the 15th of each month, the daily volumes will be totaled via on-site meeting. Ron Meyer will then bill for the respective work on the 25th. All parties understand that there may be unusual circumstances that may not fit perfectly with-in the unit pricing. As they occur on-site team will remedy and document. Add: $200,000.00 6% O&P Add: $ 12,000.00 Total: $212,000.00 NOT VALID UNTIL SIGNED BY THE OWNER, ARCHITECT AND CONTRACTOR: The original (Contract Sum) was ....................................................... $ 3,081,772.30 Net Change by previously authorized Change Orders ..................................... $ 16,129.80 The (Contract Sum) prior to Change Order was .......................................... $ 3,097,902.10 The (Contract Sum) will be (increased) by this Change Order in the amount of .......... $ 212,000.00 The new (Contract Sum) including this Change Order will be ............................ $ 3,309,902.10
The Contract Time will be (unchanged) by ( 0 ) days. The date of Substantial Completion as of the date of this Change Order therefore is NOTE: This summary does not reflect changes in the Contract Sum, Contract Time or Guaranteed Maximum Price which have been authorized by Construction Change Directive. Concept Design Group Rockford Construction Co., Inc. Mercantile Bank ARCHITECT CONTRACTOR OWNER 89 Monroe Center 8165 Graphic Drive NE 880 East 16th Street ADDRESS ADDRESS ADDRESS Grand Rapids, MI 49503 Belmont, MI 49306 Holland, MI BY WILLIAM GRANZOW BY THOMAS MCGOVERN BY ROBERT KAMINSKI --------------- --------------- --------------- DATE 1-26-04 DATE 1-28-04 DATE 1-27-04 RON MEYER & ASSOCIATES 1357 78(th) Avenue EXCAVATING, INC. Zeeland, MI 49464 Phone: 816 688-5751 FAX: 818 688-5771 E-mail: romeyer@drenthe.net January 21,2004 Tom McGovem Rockford Construction Company Re: Mercantile Bank The following would be the prices to perform the recommendations of Midwest Engineering Services, Inc.: 1. Frozan soil and unstable subgrade removed and stockpiled on site (cubic yard) - $4.60 cyd. 2. Frozen soil and unstable subgrade removed and hauled off site (per load) - $161.00 per load, with backhaul $86.25 per load. 3. Geogrid BX 1100 placed (square yard) - $4.25 syd. 4. Geotextile ProPex 4553 placed (square yard) - $1.50 syd, 5. MDOT Class II sand placed and compacted to 95% of maximum density by modified proctor method (ASTM D1557). Above project quantities currently on plans (cubic yard) - $8.00 cyd. 6. Three (3) inch maximum crushed concrete (cubic yard) - $28.00 cyd. 7. 4" Tile - $3.00 linear foot 8. Re-compact clay that has been put on pile we will not price until pile is thawed and some drying has occurred. It will be 2 years before soil dries. Per original bid quantities, sand for utility trench and backfill of building: 1' Building Floor Quantity - 400 cyd 1' Sand for Subgrade Parking- 2,500 cyd Utility Trenches & Building Backfill 4,250 cyd Total 7,250 cyd
Sand imported during weight restrictions $17.50 cyd. Respectfully submitted, /s/ Ronald Meyer Ronald Meyer President MIDWEST ENGINEERING SERVICES, INC. geotechnical - environmental - materials engineers [MES LOGO] 565 48th Street S.E. Grand Rapids, Ml 49548 616-534-8277 FAX 616-534-1891 www.midwesteng.com January 19, 2004 Mr. Robert Kaminski Vice President Mercantile Bank 5650 Byron Center Avenue Wyoming, MI 49509 Subject: Proposed Mercantile Bank Unstable Soils Holland, Michigan Project No. 9-35224 Gentlemen: Midwest Engineering Services, Inc. (MES) offers the following information and recommendations concerning the unstable soils at the Holland, Michigan Mercantile Bank site. MES has been on site numerous times during the last two weeks for meetings with the owner's representative, architect, project manager, and excavator, concerning the stripping and filling operations for the proposed project with freezing temperatures and moisture conditions of the soil. The topsoil has been stripped for the building area and most of the drives and parking lots. Excavation of the basement has started with the excavated soils stockpiled on site. It was the excavator's intent to use the excavated soils for the fill required to raise the parking/drive areas. The excavated soil consists of silty fine sand (moist to wet) and silty clay (moist). In an attempt to proceed with fill operations, Ron Meyer Excavating proofrolled an area Southeast of the proposed building near the area on the site plan designated as wetland. Peat and very soft organic clay was encountered and removed in a limited area, (only a limited area at the time because of freezing temperatures). Approximately 137 cubic yards of peat and clay was removed with an excavator and dozer up to a depth of approximately 4 feet below the existing subgrade over an area just over 3000 square feet. After proofrooling the exposed soils, it was recommended by MES that if the clay soils were to be used for the fill, that the soils should be placed in 6 inch lifts and compacted without the vibrator being used on the vibratory roller. After several lifts were placed, the subgrade became unstable, as indicated by __________________________________________________ CORPORATE OFFICE: WAUKESHA, WI 262-970-0764 APPLETON, WI CHIPPEWA FALLS, WI GREEN BAY, WI RIPON, WI CHAMPAIGN, IL CHICAGO, IL O'FALLON, IL MERRILLVILLE, IN ST. LOUIS, MO Mercantile Bank Unstable Soils Holland, Michigan Project No. 9-35224 Page 2 the rolling action under the weight of the roller and front-end loader, probably attributed to the high moisture conditions on both the subgrade and fill soils. Other areas on the site are also becoming unstable due to construction traffic. It appears that the silty fine sand layer present below the topsoil is saturated and the underlying clay strata are confining the moisture. The compaction efforts and construction traffic appear to be causing the subgrade soils to become unstable. Due to the high moisture conditions of the subgrade soils and site soils available for fill, it is not likely that the moisture content of the existing soils can be significantly lowered due to seasonal temperatures and precipitation. MES recommends the following for constructing the fill and providing an access road to the building. 1. Precautions should be taken to minimize frost penetration. 2. Areas to receive fill should be stripped of topsoil, frost and unsuitable soils as defined in MES Subsurface Exploration and Foundation Evaluation Report No. 9-33031, dated July 21, 2003. 3. After stripping, the existing subgrade should be proofrolled to determine if the existing subgrade is stable enough to receive fill. 4. If the existing subgrade is stable, engineered fill may be placed to bring the area to planned grades. Engineered fill should consist of MDOT Class II sand imported to the site as the on-site soils do not meet the requirements for Class II granular materials. 5. If the existing subgrade is not stable, the following options may be considered: A. (1) Remove unstable soils to a stable subgrade or a maximum depth of 2.5 feet below bottom of proposed road gravel grade. (2) If the overexcavated subgrade at the new depth is stable, proceed with engineered fill. (3) If the overexcavated subgrade at the new depth is still unstable, place geogrid BX1100 with or without geofabric ProPex 4553 below the geogrid per the manufacturers recommended procedures. MES only anticipates the need for ProPex 4553 if the subgrade consists of wet silty sand, where the subgrade and fill will need the benefits of the geofabric to keep the soils separated. [MIDWEST ENGINEERING SERVICES, INC. LOGO] Mercantile Bank Unstable Soils Holland, Michigan Project No. 9-35224 Page 3 B. If the existing subgrade is lower than 2.5' below bottom of road gravel grade, proceed as detailed in item A. (3) above. Where it is desired to have construction access drives, the MDOT Class II engineered fill should be placed to 6" below proposed bottom of gravel grade and then filled with 6 inches of 3" maximum size crushed concrete. Where it is not desired to have access, the engineered fill may be placed to bottom of proposed road gravel grade. It is understood that the client desires to have MES monitor the extra work and that extra work should be based on the following quantities, as agreed upon in the field each day by Rockford Construction Company, Ron Meyers Excavating and MES: 1. Frozen soil and unstable subgrade removed and stockpiled on site (cubic yard). 2. Frozen soil and unstable subgrade removed and hauled off site (cubic yard). 3. Geogrid BX 1100 placed (square yard). 4. Geotextile ProPex 4553 placed (square yard). 5. MDOT Class II sand placed and compacted to 95% of maximum density by modified proctor method (ASTM D1557). Above project quantities currently on plans (cubic yard). 6. Three (3) inch maximum crushed concrete (cubic yard). After you have had the opportunity of reading this letter, please call at any time with any questions or comments you may have. MES appreciates the opportunity to be of service on this project. Respectfully Submitted, MIDWEST ENGINEERING SERVICES, INC. /s/ Mark S. Frank Mark S. Frank, P.E. Branch Manager Cc: Bill Granzow; Concept Design Group Tom McGovern; Rockford Construction Company Tim Dora; Rockford Construction Company Jerry Van Den Beldt, Construction Consultants [MIDWEST ENGINEERING SERVICES, INC. LOGO] MIDWEST ENGINEERING SERVICES, INC. Geotechnical - Environmental - Materials Engineers 565 48th Street, SE Grand Rapids, MI 49548 616-534-8277 FAX 616-534-1891 [MIDWEST ENGINEERING SERVICES, INC. LOGO] FAX TRANSMITTAL ATTENTION: ___________________________ DATE: 1/20/04 COMPANY: ___________________________ TIME: __________________________ FAX NO: ___________________________ FROM: Mark Frank PAGES SENT: 3 --------- (Including Cover) If transmission was not received properly, please call (616)534-8277. Thank you. REMARKS: Attn: BOB KAMINSKI JERRY VANDENBELT BILL GRANZOW KYLE WILSON TOM MCGOVERN TIM DORA Subgrade Soils for parking/drives /s/ MARK S FRANK ----------------------- MES is: [X] Sending by FAX only [ ] Sending original by [ ] Sending as requested mail For your: [ ] Action [ ] Approval [X] Information/Records [ ] Review and comment [ ] Distribution [ ] Revision and resubmittal Unstable Subgrade @ 12" to 30" Below Bottom of Road Gravel (Clay Subgrade) [GRAPH] Unstable Subgrade @ 12" to 30" Below Bottom of Road Gravel (Silty Fine Sand Subgrade) [GRAPH] MES MIDWEST ENGINEERING SERVICES, INC. Project: Proposed Mercantile Bank of West Michigan GEOTECHNICAL, ENVIRONMENTAL, AND MATERIAL ENGINEERS Location: Holland, Michigan MES Project Number; 9-35224
STABLE SUBGRADE @ 12" BELOW BOTTOM OF ROAD GRAVEL [GRAPH] STABLE SUBGRADE @ 12" TO 30" BELOW BOTTOM OF ROAD GRAVEL [GRAPH] MES MIDWEST ENGINEERING SERVICES, INC. Project: Proposed Mercantile Bank of West Michigan GEOTECHNICAL, ENVIRONMENTAL, AND MATERIAL ENGINEERS Location: Holland, Michigan MES Project Number: 9-35224
CHANGE OWNER ORDER ARCHITECT CONTRACTOR FIELD AIA DOCUMENT G701 OTHER PROJECT: Mercantile Bank CHANGE ORDER NUMBER: 5 880 East 16th Street Holland, MI DATE: January 23, 2004 PROJECT NO: 03209 TO CONTRACTOR: Rockford Construction Company CONTRACT DATE: December 3, 2003 8165 Graphic Drive, PO Box 450 Belmont, MI CONTRACT FOR: General Construction The Contract is changed as follows: 1. ANR Requirements to use gravel instead of sand over gas lines (850 tons @ $11 a ton = $9,350.00 + 6% O&P $561.00] = $9,911.00 - $6,466.00 [from change order 2] = $3,445.00) Add: $ 3,445.00 TOTAL: $ 3,445.00 NOT VALID UNTIL SIGNED BY THE OWNER, ARCHITECT AND CONTRACTOR: The original (Contract Sum) was........................................ $ 3,081,772.30 Net Change by previously authorized Change Orders ...................... $ 228,129.80 The (Contract Sum) prior to Change Order was ........................... $ 3,309,902.10 The (Contract Sum) will be (increased) by this Change Order in the amount of .............................. $ 3,445.00 The new (Contract Sum) including this Change Order will be ...................................................... $ 3,313,347.10 The Contract Time will be (unchanged) by ( 0 ) days. The date of Substantial Completion as of the date of this Change Order therefore is
NOTE: This summary does not reflect changes in the Contract Sum, Contract Time or Guaranteed Maximum Price which have been authorized by Construction Change Directive. Concept Design Group Rockford Construction Co., Inc. Mercantile Bank - -------------------------- ------------------------------- ----------------- ARCHITECT CONTRACTOR OWNER 89 Monroe Center 8165 Graphic Drive NE 880 East 16th Street - -------------------------- ------------------------------- ----------------- ADDRESS ADDRESS ADDRESS Grand Rapids, MI, 49503 Belmont, MI 49306 Holland, MI - -------------------------- ------------------------------- ----------------- BY /s/ WILLIAM GRANZOW BY /s/ THOMAS MCGOVERN BY /s/ ROBERT KAMINSKI ----------------------- ----------------------------- -------------------- DATE 1-26-04 DATE 1-26-04 DATE 1-27-04
CHANGE OWNER ORDER ARCHITECT CONTRACTOR FIELD AlA DOCUMENT G701 OTHER PROJECT: Mercantile Bank CHANGE ORDER NUMBER: 2 880 East 16th Street Holland, MI DATE: January 12, 2004 PROJECT NO: 03209 TO CONTRACTOR: Rockford Construction Company CONTRACT DATE: December 3, 2003 8165 Graphic Drive, PO Box 450 Belmont, MI CONTRACT FOR: General Construction The Contract is changed as follows: 1. Placing sand over gas lines in an area 50'x 60'x 5' Add: $6,100.00 6% O&P Add: $ 366.00 Total Add: $6,466.00 NOT VALID UNTIL SIGNED BY THE OWNER, ARCHITECT AND CONTRACTOR: The original (Contract Sum) was ................................................... $3,081,772.30 Net Change by previously authorized Change Orders ................................. $ 795.00 The (Contract Sum) prior to Change Order was ...................................... $3,082,567.30 The (Contract Sum) will be (increased) by this Change Order in the amount of...... $ 6,466.00 The new (Contract Sum) including this Change Order will be ................................................................... $3,089,033.30 The Contract Time will be (unchanged) by (0) days. The date of Substantial Completion as of the date of this Change Order therefore is
NOTE: This summary does not reflect changes in the Contract Sum, Contract Time or Guaranteed Maximum Price which have been authorized by Construction Change Directive. Ron Meyer & Associates 1357 70(th) Avenue Excavating, Inc. Zooland, Ml 49484 Phone: 816 658-5761 FAX: 616 888-5771 E-mail: ronmeyer@drenthe.net December 30, 2003 Torn McGovem Rockford Construction Co., Inc. P.O. Box 450 Belmont, Ml 49306 Re: Mercantile Bank - Holland, Ml I would like to request a change order in the amount of Six Thousand One Hundred and 00/100 dollars ($6,100.00) for placing sand over gas lines in an area 50' x 60' x 5'. Sincerely, /s/ Mike Meyer Mike Meyer Estimator Laura July - Gravel over ANR gas lines - Change Order 2 Page 1 From: Tom McGovern To: Granzow, Bill; July, Laura; Ramey, Jim Date: 1/12/04 5:25PM Subject: Gravel over ANR gas lines - Change Order 2 We have been asked to place gravel instead of sand. Th new price from Ron Meyer is $9350 plus 6% (850 tons at $11/ton). Laura: Please modify the change order and fax to Jim Ramey at Concept Designs. Thanks Tom CC: Dora, Tim EX-21 5 k82542exv21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF MERCANTILE BANK CORPORATION Mercantile Bank of West Michigan, a Michigan banking corporation Wholly-owned bank subsidiary of Mercantile Bank Corporation MBWM Capital Trust I A Delaware business trust subsidiary of Mercantile Bank Corporation Mercantile Bank Mortgage Company, LLC, a Michigan limited liability company 99% owned by Mercantile Bank of West Michigan and 1% owned by Mercantile BIDCO, Inc. Mercantile BIDCO, Inc, a Michigan Business and Industrial Development Company Wholly-owned subsidiary of Mercantile Bank of West Michigan Mercantile Insurance Center, Inc, a Michigan business corporation Wholly-owned subsidiary of Mercantile Bank of West Michigan Mercantile Bank Real Estate Co., LLC, a Michigan limited liability company 99% owned by Mercantile Bank of West Michigan and 1% owned by Mercantile BIDCO, Inc. All of the subsidiaries named above were organized under the laws of the State of Michigan except for MBWM Capital Trust I which was organized under the laws of the State of Delaware. EX-23 6 k82542exv23.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of Mercantile Bank Corporation on Form S-8 (Registration Nos. 333-52620, 333-91434, 333-99853 and 333-103242) and Form S-3 (Registration Nos. 333-59154, 333-103376, 333- 108929, and 333-107814) of our report dated January 22, 2004 on the 2003 consolidated financial statements of Mercantile Bank Corporation, which report is included in the 2003 Annual Report on Form 10-K of Mercantile Bank Corporation for the year ended December 31, 2003. /s/ Crowe Chizek and Company LLC -------------------------------- Crowe Chizek and Company LLC Grand Rapids, Michigan March 5, 2004 EX-31 7 k82542exv31.txt CERTIFICATIONS PURSUANT TO RULE 13A-14(A) EXHIBIT 31 RULE 13a-14(a) CERTIFICATIONS I, Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of Mercantile Bank Corporation, certify that: 1. I have reviewed this report on Form 10-K of Mercantile Bank Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2004 /s/ Gerald R. Johnson, Jr. ---------------------------------- Gerald R. Johnson, Jr. Chairman and Chief Executive Officer I, Charles E. Christmas, Senior Vice President, Chief Financial Officer and Treasurer of Mercantile Bank Corporation, certify that: 1. I have reviewed this report on Form 10-K of Mercantile Bank Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2004 /s/ Charles E. Christmas ------------------------------------ Charles E. Christmas. Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 8 k82542exv32w1.txt SECTION 1350 CHIEF EXECUTIVE OFFICER CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the annual report on Form 10-K for the year ended December 31, 2003 (the "Form 10-K") of Mercantile Bank Corporation (the "Issuer"). I, Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of the Issuer, certify that: (i) the Form 10-K fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: February 26, 2004 /s/ Gerald R. Johnson, Jr. ------------------------------------ Gerald R. Johnson, Jr. Chairman and Chief Executive Officer EX-32.2 9 k82542exv32w2.txt SECTION 1350 CHIEF FINANCIAL OFFICER CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the annual report on Form 10-K for the year ended December 31, 2003 (the "Form 10-K") of Mercantile Bank Corporation (the "Issuer"). I, Charles E. Christmas, Senior Vice President, Chief Financial Officer and Treasurer of the Issuer, certify that: (i) the Form 10-K fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: February 26, 2004 /s/ Charles E. Christmas ---------------------------- Charles E. Christmas Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----