-----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, MDKGuSAdOwyVNblX/Zz5+c8Nl57l/0myN4oljxATP0tzTuJAxYIeD8ayscztvuhU i3UDptwSegYy8oWvmkBGcg== 0000950124-99-001996.txt : 19990325 0000950124-99-001996.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950124-99-001996 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 333-33081 FILM NUMBER: 99571927 BUSINESS ADDRESS: STREET 1: 42 DEER RUN DRIVE CITY: ADA STATE: MI ZIP: 49301 BUSINESS PHONE: 6166760201 MAIL ADDRESS: STREET 1: 42 DEER RUN DRIVE CITY: ADA STATE: MI ZIP: 49301 10KSB40 1 FORM 10KSB40 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-KSB [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 Commission File No. 333-33081
MERCANTILE BANK CORPORATION (Name of small business issuer in its charter) MICHIGAN 38-3360865 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503 (Address of principal executive offices) (616) 242-9000 (Issuer's telephone number) Securities registered under Section 12(b) of the Act: NONE Securities registered under Section 12(g) of the Act: NONE Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenue for its most recent fiscal year was $10,656,000. The aggregate market value of voting stock of the registrant held by nonaffiliates was approximately $35,564,000 as of February 1, 1999; based on the average of the closing bid and asked prices ($16.75) on that date. As of March 1, 1999, 2,472,500 shares of Common Stock of the issuer were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Part III Portions of the Proxy Statement of the issuer for its April 15, 1999 Annual Meeting Transitional Small Business Disclosure Format YES NO X ------- ------- 2 PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY Mercantile Bank Corporation (the "Company") is a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). As a bank holding company, the Company is subject to regulation by the Federal Reserve Board. The Company was organized on July 15, 1997, under the laws of the State of Michigan, and formed Mercantile Bank of West Michigan (the "Bank"), which commenced business on December 15, 1997. The Company exists primarily for the purpose of holding all of the stock of the Bank, and of such other subsidiaries as the Company may acquire or establish. The expenses of the Company to date have generally been paid using the proceeds from its initial public stock offering, in October 1997, and the secondary public stock offering, in July 1998. The Company's principal source of future operating funds is expected to be dividends from the Bank. THE BANK The Bank is a state banking Company which operates under the laws of the State of Michigan, pursuant to a charter issued by the Financial Institutions Bureau of the State of Michigan. The Bank's deposits are insured to the maximum extent provided by the Federal Deposit Insurance Corporation. The Bank's primary service area is the Kent and Ottawa County areas of West Michigan, which includes the City of Grand Rapids, the second largest city in the State of Michigan. The Bank, through its office at 216 North Division Avenue, Grand Rapids, Michigan provides a wide variety of commercial banking services to individuals, businesses, governmental units, and other institutions. Its services include accepting time, demand and savings deposits, including regular checking accounts, NOW and money market accounts, and certificates of deposit. In addition, the Bank makes secured and unsecured commercial, construction, mortgage, and consumer loans, finances commercial transactions, and provides safe deposit facilities. The Bank has an automated teller machine ("ATM") which participates in the Magic Line system, a regional network, as well as other ATM networks throughout the country. The Bank also enables customers to conduct certain loan and deposit transactions by telephone and personal computer, and makes courier service available to certain commercial customers. The Bank does not have trust powers. 1. 3 EFFECT OF GOVERNMENT MONETARY POLICIES The earnings of the Company are affected by domestic economic conditions and the monetary and fiscal policies of the United States government, its agencies, and the Federal Reserve Board. The Federal Reserve Board's monetary policies have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to, among other things, curb inflation or avoid a recession. The policies of the Federal Reserve Board have a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities, and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies. The Bank maintains reserves directly with the Federal Reserve Bank of Chicago to the extent required by law. REGULATION AND SUPERVISION The Company, as a bank holding company under the Bank Holding Company Act, is required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act, and is subject to examination by the Federal Reserve Board. The Bank Holding Company Act limits the activities which may be engaged in by the Company and its subsidiary to those of banking and the management of banking organizations, and to certain non-banking activities, including those activities which the Federal Reserve Board may find, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board is empowered to differentiate between activities by a bank holding company, or a subsidiary thereof, and activities commenced by acquisition of a going concern. With respect to non-banking activities, the Federal Reserve Board has, by regulation, determined that certain non-banking activities are closely related to banking within the meaning of the Bank Holding Company Act. These activities include, among other things, operating a mortgage company, finance company, credit card company or factoring company, performing certain data processing operations, providing certain investment and financial advice, acting as an insurance agent for certain types of credit related insurance, leasing property on a full-payout, nonoperating basis; and, subject to certain limitations, providing discount securities brokerage services for customers. The Bank is subject to certain restrictions imposed by federal law on any extension of credit to the Company for investments in stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Federal law prevents the Company from borrowing from the Bank unless the loans are secured in designated amounts. 2. 4 With respect to the acquisition of banking organizations, the Company is required to obtain the prior approval of the Federal Reserve Board before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of any voting shares of any bank, if, after such acquisition, it will own or control more than 5% of the voting shares of such bank. Acquisitions across state lines are subject to certain state and Federal Reserve Board restrictions. EMPLOYEES As of December 31, 1998, the Company and the Bank employed 32 full-time and 7 part-time persons. Management believes that the Bank's relations with its employees are good. LOAN POLICY As a routine part of business, the Bank makes loans to individuals and businesses located within the Bank's market area. The loan policy of the Bank states that the function of the lending operation is twofold: to provide a means for the investment of funds at a profitable rate of return with an acceptable degree of risk, and to meet the credit needs of the creditworthy businesses and individuals who are customers of the Bank. However, the Board of Directors of the Bank recognizes that in the normal business of lending, some losses on loans will be inevitable and should be considered a part of the normal cost of doing business. The Bank's loan policy anticipates that priorities in extending loans will change from time to time as interest rates, market conditions and competitive factors change. The policy sets forth guidelines on a nondiscriminatory basis for lending in accordance with applicable laws and regulations. The policy describes various criteria in granting loans, including the ability to pay; the character of the customer; evidence of financial responsibility; purpose of the loan; knowledge of collateral and its value; terms of repayment; source of repayment; payment history; and economic conditions. The Board of Directors has delegated significant lending authority to officers of the Bank. The Board of Directors believes this empowerment makes the Bank more responsive to its customers. The loan policy currently specifies lending authority for certain officers up to $1.0 million, and $1.5 million for the Bank's Chairman of the Board and its President and Chief Executive Officer. Loan requests exceeding $1.5 million, up to the legal lending limit of approximately $6.6 million, require approval by the Board of Directors. Generally, the Bank applies an in-house lending limit that is less than the legal lending limit. 3. 5 The loan policy also limits the amount of funds that may be loaned against specified types of collateral. For certain loans secured by real estate, the policy requires an appraisal of the property offered as collateral by a state certified independent appraiser. The policy also provides general guidelines for loan to value limits for other types of collateral. In addition, the loan policy provides general guidelines as to collateral, provides for environmental policy review, contains specific limitations with respect to loans to employees, executive officers and directors, provides for problem loan identification, establishes a policy for the maintenance of a loan loss reserve, provides for loan reviews and sets forth policies for mortgage lending and other matters relating to the Bank's lending practices. LENDING ACTIVITY Commercial Loans. The Bank's commercial lending group originates commercial loans primarily in the Bank's market area. Commercial loans are originated by seven lenders, including the Chairman of the Board and the President and Chief Executive Officer. The lending group has over 100 years of combined commercial lending experience. Loans are originated for general business purposes, including working capital, accounts receivable financing, machinery and equipment acquisition, and commercial real estate financing including new construction and land development. Working capital loans are often structured as a line of credit and are reviewed periodically in connection with the borrower's year end financial reporting. These loans generally are secured by all of the assets of the borrower, and have an interest rate tied to the national prime rate. Loans for machinery and equipment purposes typically have a maturity of five to seven years and are fully amortizing. Commercial real estate loans are usually written with a five year maturity and amortized over a 15 year period. Commercial real estate loans may have an interest rate that is fixed to maturity or float with a margin over the prime rate or a U.S. Treasury Index. The Bank evaluates many aspects of a commercial loan transaction in order to minimize credit and interest rate risk. Underwriting includes an assessment of management, products, markets, cash flow, capital, income and collateral. The analysis includes a review of historical and projected financial results. Appraisals are required by certified independent appraisers who are well known to the Bank on certain transactions where real estate is the primary collateral, and in some cases, where equipment is the primary collateral. In certain situations, for creditworthy customers, the Bank may accept title reports instead of requiring lenders' policies of title insurance. Commercial real estate lending involves more risk than residential lending because loan balances are greater and repayment is dependent upon the borrower's operation. The Bank attempts to minimize risk associated with these transactions by generally limiting its exposure to owner operated properties of well-known customers or new customers with an established profitable history. In many cases, risk is further reduced by (i) limiting the amount of credit to any one borrower to an amount less than the Bank's legal lending limit, and (ii) avoiding certain types of commercial real estate financings. 4. 6 The Bank has no material foreign or agricultural loans, and no material loans to energy producing customers. Single-Family Residential Real Estate Loans. The Bank originates single-family residential real estate loans in its market area according to secondary market underwriting standards. These loans provide borrowers with a fixed or adjustable interest rate with terms up to 30 years. Consumer Loans. The Bank originates consumer loans for a variety of personal financial needs. Consumer loans include home equity lines of credit, new and used automobiles, boat loans, credit cards and overdraft protection for checking account customers. Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans and, except for home equity lines of credit, usually involve more credit risk than mortgage loans because of the type and nature of the collateral. While the Bank does not utilize a formal credit scoring system, the Bank believes its loans are underwritten carefully, with a strong emphasis on the amount of the down payment, credit quality, employment stability and monthly income. These loans are generally repaid on a monthly repayment schedule with the source of repayment tied to the borrower's periodic income. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and are thus likely to be adversely affected by job loss, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying collateral. The Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans and that consumer loans are important to its efforts to serve the credit needs of the communities and customers that it serves. LOAN PORTFOLIO QUALITY Loans are placed in a nonaccrual status when, in the opinion of management, uncertainty exists as to the ultimate collection of principal and interest. For the period ended December 31, 1998, no loans were placed in nonaccrual status. At December 31, 1998, there were no significant loans where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of the borrower to comply with present loan repayment terms and which, in management's judgment, may result in disclosure of such loans. Furthermore, management is not aware of any potential problem loans which could have a material effect on the Company's operating results, liquidity, or capital resources. Management is not aware of any other factors that would cause future net loan charge-offs, in total and by loan category, to significantly differ from those experienced by institutions of similar size. Additional detail and information relative to the loan portfolio is included in Management's Discussion and Analysis of Financial Condition and Results of Operations ("Management's Discussion and Analysis") beginning at Page F-4 and Note 3 to the Consolidated Financial Statements of the Company at Page F-23 of this Annual Report. 5. 7 ALLOWANCE FOR LOAN AND LEASE LOSSES In each accounting period, the allowance for loan and lease losses is adjusted by management to the amount management believes is necessary to maintain the allowance at adequate levels. Through the Bank's credit department, management will attempt to allocate specific portions of the allowance for loan losses based on specifically identifiable problem loans. Management's evaluation of the allowance is further based on consideration of actual loss experience, the present and prospective financial condition of borrowers, industry concentrations within the portfolio and general economic conditions. Management believes that the present allowance is adequate, based on the broad range of considerations listed above. The primary risk element considered by management with respect to each installment and residential real estate loan is lack of timely payment. Management has a reporting system that monitors past due loans and has adopted policies to pursue its creditor's rights in order to preserve the Bank's position. The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and lack of timely payment. Management has a policy of requesting and reviewing periodic financial statements from its commercial loan customers, and periodically reviews existence of collateral and its value. Additional detail regarding the allowance for loan and lease losses is included in Management's Discussion and Analysis beginning at Page F-4 and Note 3 to the Consolidated Financial Statements of the Company at Page F-23 of this Annual Report. Although management believes that the allowance for loan and lease losses is adequate to absorb losses as they arise, there can be no assurance that the Bank will not sustain losses in any given period which could be substantial in relation to, or greater than, the size of the allowance for loans and lease losses. INVESTMENTS The principal investment of the Company is its investment in the common stock of the Bank. Funds retained by the Company from time to time may be invested in various debt instruments, including but not limited to obligations of or guaranteed by the United States, general obligations of a state or political subdivision or agency thereof, banker's acceptances or certificates of deposit of United States commercial banks, or commercial paper of United States issuers rated in the highest category by a nationally-recognized investment rating service. Although the Company is permitted to make limited portfolio investments in equity securities and to make equity investments in subsidiary corporations engaged in certain non-banking activities which may include real estate-related activities, such as mortgage banking, community development, real estate appraisals, arranging equity financing for commercial real estate, and owning and operating real estate used substantially by the Bank or acquired for its future use, the Company has no present plans to make any such equity investment. The Company's Board of Directors may alter the Company's investment policy without shareholder approval. 6. 8 The Bank may invest its funds in a wide variety of debt instruments and may participate in the federal funds market with other depository institutions. Subject to certain exceptions, the Bank is prohibited from investing in equity securities. Under one such exception, in certain circumstances and with the prior approval of the FDIC, the Bank could invest up to 10% of its total assets in the equity securities of a subsidiary corporation engaged in certain real estate-related activities. The Bank has no present plans to make such an investment. Real estate acquired by the Bank in satisfaction of or foreclosure upon loans may be held by the Bank, subject to a determination by a majority of the Bank's Board of Directors at least annually of the advisability of retaining the property, for a period not exceeding 60 months after the date of acquisition, or such longer period as the Commissioner of the Michigan Financial Institutions Bureau may approve. The Bank is also permitted to invest an aggregate amount not in excess of two-thirds of the capital and surplus of the Bank in such real estate as is necessary for the convenient transaction of its business. The Bank's Board of Directors may alter the Bank's investment policy without shareholder approval. Detail for the securities portfolio is included in Management's Discussion and Analysis beginning at Page F-4 as well as in Note 2 to the Consolidated Financial Statements of the Company at Page F-22 of this Annual Report. COMPETITION All phases of the business of the Bank are highly competitive. The Bank competes with numerous financial institutions, including other commercial banks in Kent County, Michigan, including the City of Grand Rapids. The Bank, along with other commercial banks, competes with respect to its lending activities, and competes in attracting demand deposits, with savings banks, savings and loan associations, insurance companies, small loan companies, credit unions and with the issuers of commercial paper and other securities, such as various mutual funds. Many of these institutions are substantially larger and have greater financial resources than the Bank. The competitive factors among financial institutions can be classified into two categories; competitive rates and competitive services. Interest rates are widely advertised and thus competitive, especially in the area of time deposits. From a service standpoint, financial institutions compete against each other in types and quality of services. The Bank is generally competitive with other financial institutions in its area with respect to interest rates paid on time and savings deposits, charges on deposit accounts, and interest rates charged on loans. With respect to services, the Bank offers a customer service oriented atmosphere which management believes is better suited to its customers than that offered by other institutions in the local market. SELECTED STATISTICAL INFORMATION Management's Discussion and Analysis beginning at Page F-4 of this Annual Report includes selected statistical information. 7. 9 RETURN ON EQUITY AND ASSETS Return on Equity and Asset information is included in Management's Discussion and Analysis beginning at Page F-4 of this Annual Report. ITEM 2. DESCRIPTION OF PROPERTY The Bank leases a one story building, with approximately 11,000 square feet of usable space, in downtown Grand Rapids, Michigan for use as its main office. The executive offices of the Company are located in the same building. The building lease has an initial term of ten years, with four, five year renewal options. During 1998 the Bank purchased land in Alpine Township for the purpose of constructing an additional facility, which is expected to have approximately 8,000 square feet of usable space. This new building is expected to contain a full service branch with multiple drive-through lanes and house the Bank's operations and accounting departments. Completion is scheduled for the summer of 1999. ITEM 3. LEGAL PROCEEDINGS As a depository of funds, the Bank could occasionally be named as a defendant in lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Such litigation is incidental to the Bank's business. No litigation is pending in which the Company, or the Bank, is likely to experience loss or exposure which would materially affect the Company's equity, financial position, or liquidity as presented herein. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 8. 10 EXECUTIVE OFFICERS OF THE REGISTRANT Name and Position Age ----------------- --- Gerald R. Johnson, Jr. 52 Chairman of the Board and Chief Executive Officer Michael H. Price 42 President and Chief Operating Officer Robert B. Kaminski 37 Senior Vice President and Secretary Charles E. Christmas 33 Chief Financial Officer, Treasurer, and Compliance Officer Each of the persons named above has held the designated office with the Company since 1997, except for Mr. Christmas, who joined the Company in 1998 and held the position of Vice President of Finance, Treasurer and Compliance Officer before being promoted to Chief Financial Officer, Treasurer and Compliance Officer effective January 1, 1999. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of Mercantile Bank Corporation is quoted on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. ("OTC Bulletin Board") under the ticker symbol "MBWM." At December 31, 1998, there were approximately 87 record holders of the Company's Common Stock. The Company has paid no dividends since its formation in 1997. The following table shows the high and low bid prices by quarter during the period from the date of the Company's initial public stock offering (October 23, 1997) through December 31, 1998. The quotations reflect bid prices as reported by the OTC Bulletin Board and do not include retail mark-up, mark-down or commission. 9. 11
BID PRICES HIGH LOW ---- --- CALENDAR YEAR 1998 First Quarter.............................................................................$18.50 $10.25 Second Quarter............................................................................$19.00 $14.50 Third Quarter.............................................................................$17.12 $15.50 Fourth Quarter............................................................................$16.75 $12.37 CALENDAR YEAR 1997 Fourth Quarter (October 23, 1997 through December 31, 1997)............................. $11.75 $9.75
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS Management's Discussion and Analysis beginning at Page F-4 of this Annual Report is incorporated here by reference. ITEM 7. FINANCIAL STATEMENTS The Consolidated Financial Statements beginning at Page F-14 of this Annual Report are incorporated here by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information listed under the caption "Information about Directors, Nominees and Executive Officers" in the Proxy Statement of the Company for its April 15, 1999 Annual Meeting furnished to the Commission as Exhibit 20 to this Annual Report is incorporated here by reference. The Company does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 so information regarding compliance with Section 16(a) is not applicable. 10. 12 ITEM 10. EXECUTIVE COMPENSATION The information presented under the captions "Summary Compensation Table," "Options Granted in 1998," "Aggregated Stock Option Exercises in 1998 and Year End Option Values" and "Employment Agreements" in the Proxy Statement of the Company for its April 15, 1999 Annual Meeting furnished to the Commission as Exhibit 20 to this Annual Report is incorporated here by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information presented under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement of the Company for its April 15, 1999 Annual Meeting furnished to the Commission as Exhibit 20 to this Annual Report is incorporated here by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information listed under the caption "Certain Transactions" in the Proxy Statement of the Company for its April 15, 1999 Annual Meeting furnished to the Commission as Exhibit 20 to this Annual Report is incorporated here by reference. 11. 13 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit No. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's Registration Statement on Form SB-2 (Commission File no. 333-33081) that became effective on October 23, 1997 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997 10.1 1997 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997 (Management contract or compensatory plan) 10.2 Lease Agreement between the Company and Division Avenue Partners, L.L.C. dated August 16, 1997, is incorporated by reference to exhibit 10.2 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective October 23, 1997 10.3 Agreement between the Company and Visser Brothers Construction Inc. dated November 16,1998, on modified Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is also the Constructor 10.4 Employment Agreement dated December 1, 1998 between the Company, the Bank and Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of the Company (Management contract or compensatory plan) 10.5 Employment Agreement dated December 1, 1998 between the Company, the Bank and Michael H. Price, President and Chief Operating Officer of the Company (Management contract or compensatory plan) 20 Proxy Statement of the Company for its April 15, 1999 Annual Meeting. Except for the portions of the Proxy Statement that are expressly incorporated by reference in this Annual Report on Form 10-KSB, the Proxy Statement of the Company shall not be deemed filed as a part thereof
12. 14 21 Subsidiaries of the Company is incorporated by reference to Exhibit 21 of the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (Commission File No. 333-33081) 27 Financial Data Schedule
(b) Reports on Form 8-K The Company has not filed any reports on Form 8-K during the last quarter of the period covered by this Report. 13. 15 MERCANTILE BANK CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 F-1 16 MERCANTILE BANK CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 CONTENTS SELECTED FINANCIAL DATA.................................................. F-3 MANAGEMENT'S DISCUSSION AND ANALYSIS..................................... F-4 REPORT OF INDEPENDENT AUDITORS........................................... F-14 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS......................................... F-15 CONSOLIDATED STATEMENTS OF INCOME................................... F-16 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME..................... F-17 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY.......... F-18 CONSOLIDATED STATEMENTS OF CASH FLOWS............................... F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-20 F-2 17 SELECTED FINANCIAL DATA
1998 1997 ---- ---- (In thousands except per share data) CONSOLIDATED RESULTS OF OPERATIONS: Interest income 10,168 154 Interest expense 5,629 14 ------ --- Net interest income 4,539 140 Provision for loan losses 2,572 193 Noninterest income 488 0 Noninterest expense 3,564 351 ------ --- Income (loss) before income tax expense (1,109) (404) Income tax expense 0 0 ------ ---- Net income (loss) (1,109) (404) CONSOLIDATED BALANCE SHEET DATA: Total assets 216,237 24,109 Cash and cash equivalents 6,456 7,103 Securities available for sale 24,160 2,998 Loans, net of deferred loan fees 184,745 12,887 Allowance for loan losses 2,765 193 Deposits 171,998 9,688 Securities sold under agreements to repurchase 17,038 655 Shareholders' equity 26,701 13,473 CONSOLIDATED FINANCIAL RATIOS: Return on average assets (0.86%) (21.8%) Return on average shareholders' equity (6.40%) (30.9%) Nonperforming loans to loans 0.00% 0.00% Allowance for loan losses to loans 1.50% 1.50% Tier 1 leverage capital 13.83% 69.72% Tier 1 leverage risk-based capital 11.79% 77.04% Total risk-based capital 13.01% 78.12% PER SHARE DATA: Net Income: Basic (0.58) (0.27) Diluted (0.58) (0.27) Book value at end of period 10.80 9.01 Dividends declared NA NA NA - Not Applicable
F-3 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements contained herein. This discussion provides information about the consolidated financial condition and results of operations of Mercantile Bank Corporation ("Company") and its wholly-owned subsidiary, Mercantile Bank of West Michigan ("Bank"). The Company was incorporated on July 15, 1997 as a bank holding company to establish and own the Bank. In October 1997, in connection with the organization of the Company and Bank, the Company sold 1,495,000 shares of common stock in an underwritten, initial public offering. The Company funded the capital of the Bank and paid certain expenses from the net proceeds of the public offering. The Bank, after receiving all necessary regulatory approvals, began operations on December 15, 1997. The Bank has a strong commitment to community banking and offers a wide range of financial products and services, primarily to small- to medium-sized businesses, as well as individuals. The Bank's lending strategy focuses on commercial lending, and, to a lesser extent, residential mortgage and consumer lending. The Bank also offers a broad array of deposit products, including checking, savings, money market, and certificates of deposit, as well as security repurchase agreements. The Bank's primary market area is the Kent and Ottawa County areas of West Michigan, which includes the City of Grand Rapids, the second largest city in the State of Michigan. FORWARD-LOOKING STATEMENTS The following discussion contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company and Bank. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise. Future Factors include changes in interest rates and interest rate relationships; demand for products and services: the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. FINANCIAL CONDITION The Company experienced significant asset growth during 1998, its first full year of operations. Assets of the Company increased from $24.1 million on December 31, 1997 to $216.2 million on December 31, 1998. This represents an increase in total assets of $192.1 million, which was primarily comprised of a $171.8 million increase in loans and a $21.2 million increase in investment securities. The increase in assets was primarily funded by a $162.3 million increase in deposits, a $16.4 million increase in securities sold under agreements to repurchase (repurchase agreements), and an increase of $13.2 million in shareholders' equity. While the Company expects continued asset growth, it is anticipated that the growth will occur at a slower rate. F-4 19 EARNING ASSETS The Company's loan portfolio, which equaled 84% of average earnings assets during 1998, is primarily comprised of commercial loans. Averaging over 93% of average loans and growing by $159.3 million during 1998, the commercial loan portfolio represents loans to business interests generally located within the Company's market area. Approximately two-thirds of the commercial loans are primarily secured by real estate properties, with the remaining generally secured by other business assets such as accounts receivable, inventory, and equipment. There are no significant industry concentrations within the commercial loan portfolio. The concentration and rapid growth in commercial loans is in keeping with the Company's strategy of focusing a substantial amount of its efforts on commercial banking. Business lending is an area of expertise for all of the Company's senior management team and commercial lending staff. Residential mortgage and consumer lending, while averaging under 7% of average loans during 1998, also experienced excellent growth. As the significant rapid growth of the commercial loan portfolio gradually slows, residential mortgage and consumer loans are anticipated to increase as a percentage of total loans; however, the Company's strategy for growth and profitability is expected to result in the commercial sector of the lending efforts and resultant assets continuing to be the dominant portfolio category. The following table presents the maturity of total loans outstanding, other than residential mortgages and personal loans, as of December 31, 1998, according to scheduled repayments of principal.
0-1 1-5 After 5 Year Years Years Total ---- ----- ----- ----- Construction and land development - fixed rate $ 2,387,606 $ 3,940,409 $4,780,688 $ 11,108,703 Construction and land development - variable rate 2,547,581 2,547,581 Real estate - secured by nonfarm nonresidential properties - fixed rate 1,195,799 81,248,005 1,934,056 84,377,860 Real estate - secured by nonfarm nonresidential properties - variable rate 18,462,661 18,462,661 Commercial - fixed rate 929,624 23,794,327 463,999 25,187,950 Commercial - variable rate 29,883,397 29,883,397 ----------- ------------ ---------- ------------- $55,406,668 $108,982,741 $7,178,743 $ 171,568,152 =========== ============ ========== =============
The Company's credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to provide effective loan portfolio administration. The credit policies and procedures are meant to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, the Company must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur quickly because of changing economic conditions. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuring in the future, are included on the internal "Watch List." Senior management reviews this list regularly and adjusts for changing conditions. Since inception of the Company no scheduled loan payments have been 90 days or more past due, and no loans have been placed in nonaccrual status or charged-off. In each accounting period, the allowance for loan and lease losses is adjusted by management to the amount management believes is necessary to maintain the allowance at adequate levels. Through its credit department, management will attempt to allocate specific portions of the allowance for loan losses based on specifically identifiable problem loans. Management's evaluation of the allowance is further based on consideration of actual loss experience, the present and prospective financial condition of borrowers, industry concentrations within the portfolio and general economic conditions. Management believes that the present allowance is adequate, based on the broad range of considerations listed above. F-5 20 The following table illustrates the breakdown of the allowance balance to loan type (dollars in thousands).
1998 1997 ---- ---- Balance at End Percent of Loans Percent of Loans of Period in each Category in each Category Applicable to Amount to Total Loans Amount to Total Loans ------------- ------ -------------- ------ -------------- Commercial, financial and agricultural $ 2,612 84.3% $ 193 98.6% Real estate - construction 57 7.4 Real estate - mortgage 57 7.2 1.3 Installment loans to individuals 39 1.1 .1 Unallocated N/A N/A ------- ----- ----- ----- $ 2,765 100.0% $ 193 100.0% ======= ===== ===== =====
The primary risk element considered by management with respect to each installment and residential real estate loan is lack of timely payment. Management has a reporting system that monitors past due loans and has adopted policies to pursue its creditor's rights in order to preserve the Bank's position. The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and lack of timely payment. Management has a policy of requesting and reviewing periodic financial statements from its commercial loan customers, and periodically reviews existence of collateral and its value. Although management believes that the allowance for loan and lease losses is adequate to absorb losses as they arise, there can be no assurance that the Bank will not sustain losses as they arise, there can be no assurance that the Bank will not sustain losses in any given period which could be substantial in relation to, or greater than, the size of the allowance for loans and lease losses. The investment securities portfolio also experienced significant growth during 1998, increasing from $3.0 million on December 31, 1997 to $24.2 million at December 31, 1998. The Company maintains the portfolio at levels to provide adequate pledging for the repurchase agreement program and secondary liquidity for the Company's daily operations. In addition, the portfolio serves a primary interest rate risk management function. During 1998 the portfolio equaled 12% of average earning assets. At December 31, 1998 the portfolio was comprised of high credit quality U.S. Treasury notes (19%), U.S. Government Agency issued bonds (50%), and U.S. Government issued and guaranteed mortgage-backed securities (31%). Since the inception of the Company all securities have been designated as "available for sale" as defined in Financial Accounting Standards Board Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Securities designated as available for sale are stated at fair value, with the unrealized gains and losses, net of income tax, reported as a separate component of shareholders' equity. The net unrealized gain recorded at December 31, 1998, was $31,836, while the net unrealized loss recorded at December 31, 1997, was $3,631. Federal funds sold, consisting of excess funds sold overnight to correspondent banks, are used to manage daily liquidity needs and interest rate sensitivity. During 1998 the average balance of these funds equaled 4% of average earning asset. This level is well within internal policy guidelines, and is not expected to change significantly in the future. SOURCE OF FUNDS The Company's major source of funds is from deposits. Total deposits increased from $9.7 million at December 31, 1997, to $172.0 million on December 31, 1998. Although the Company experienced significant success in obtaining deposits from customers located within the market area, the substantial asset growth necessitated the acquisition of funds from depositors outside of the market area. While the Company's business plan anticipated the reliance on out-of-area deposits in the early stages of the Bank's development, the Company's longer term strategy for funding the Bank is to lower its reliance on out-of-area deposits and increase core deposits from local businesses and consumers. F-6 21 The Company experienced significant growth in its noninterest-bearing checking, interest-bearing checking, and savings accounts during 1998. Noninterest-bearing checking accounts, comprised primarily of business loan customers, grew $7.1 million and equaled 8% of average funding sources during 1998. Interest-bearing checking and savings accounts increased by $7.6 million and $26.7 million and equaled 3% and 13% of average funding sources during 1998, respectively. Business loan customers also comprise the majority of these deposit types, although to a lower extent than noninterest-bearing checking accounts. Per banking regulations, incorporated businesses may not own interest-bearing checking accounts and transactions from a savings account are limited. The Company anticipates continued growth of its checking and savings deposits as additional business loans are extended. The Company introduced a new deposit account, a money market account, during 1998. The balance of this limited transaction checking account was $3.8 million at December 31, 1998, and equaled 1% of average funding sources during 1998. A majority of these accounts were opened and funded in the latter part of the year, and the Company anticipates continued growth in the future. Certificates of deposit increased by $117.1 million and represented 52% of average funding sources during 1998. At December 31, 1998, this deposit type totaled $117.3 million. Of this amount 17% of the balances were owned by customers from within the market area, primarily individuals and local government municipalities. The remaining certificates of deposit were obtained from depositors outside of the market area. These out-of-area deposits consist primarily of $99,000 certificates of deposit placed by deposit brokers for a fee, but also include certificates of deposit for larger dollar amounts (generally $100,000) and/or from the deposit owners directly. The owners of out-of-area certificates of deposit are comprised mainly of credit unions located throughout the United States, but include banks, savings and loans, government municipalities, businesses, and individuals from across the country as well. Repurchase agreements increased $16.4 million and equaled 8% of average funding sources during 1998. Part of the Company's sweep account program, collected funds from certain business noninterest-bearing checking accounts are invested into over-night interest-bearing repurchase agreements. The securities involved in the repurchase agreement program are recorded as assets of the Company. Although not considered deposits, and therefore not afforded Federal Deposit Insurance Corporation insurance, this product enables the Company to provide the equivalent of an interest-bearing checking account to incorporated businesses that are prohibited by banking regulations from owning such an account. The sweep account program is designed for businesses that maintain relatively large checking account balances. Shareholders' equity increased $13.2 million and equaled 13% of average funding sources during 1998. The increase is directly attributable to the secondary stock offering completed during the year, whereby the Company received $14.3 million in net proceeds from the sale of 977,500 shares of common stock. Substantially all of the net proceeds were contributed to the Bank to provide support for asset growth, fund investments in loans and securities, and for general corporate purposes. Shareholders' equity was negatively impacted by the net loss from operations of $1.1 million recorded for all of 1998. The Company did record net income from operations during the third and fourth quarters of 1998, and expects net income from operations in 1999. RESULTS OF OPERATIONS SUMMARY As anticipated, the Company recorded a net operating loss during 1998, its first full year of operations. The net operating loss was $1.1 million, or $0.58 per share, and was primarily the result of a non-cash charge of $2.6 million for provision for loan losses. Although the company did not record any loan charge-offs during the year, significant provisions were required as the result of the substantial loan growth. The loan loss provisions are made in the period the loans are booked, and are an immediate reduction to earnings. Loan loss provisions are expected to continue to reduce earnings, although more moderately, as the anticipated rate of loan growth slows relative to the size of the Company. F-7 22 Although continued significant future asset growth is anticipated, resulting in additional large loan loss provisions, the overall earnings performance of the Company is expected to improve. The Company did not record any tax benefit as a result of the losses incurred and will not record income tax expense until the net operating losses are recovered. It is anticipated that the Company will be in a taxable position in the future. The asset growth of the Company should result in an increased level of net interest income, which when coupled with noninterest income, should exceed the growth and level of noninterest expense plus provisions for loan losses. In fact, on a quarter-by-quarter basis the Company has already achieved profitable status. During the third and fourth quarters of 1998 the Company recorded net income of $116,000 and $212,000, respectively. The following table shows some of the key equity performance ratios for the year ended December 31, 1998 and the period from July 15, 1997 (inception) through December 31, 1997.
1998 1997 ---- ---- Return on average total assets (.9)% (21.8)% Return on average equity (6.4) (30.9) Dividend payout ratio N/A N/A Average equity to average assets 13.4 70.4
NET INTEREST INCOME Net interest income, the difference between revenue generated from earning assets and the interest cost of funding those assets, is the Company's primary source of earnings. Interest income and interest expense totaled $10.1 million and $5.6 million during 1998, respectively, providing for net interest income of $4.5 million. The net yield on average earning assets during 1998 was 3.62%. The level of net interest income is primarily a function of asset size, as the weighted average interest rate received on earning assets is greater than the weighted average interest cost of funding sources; however, factors such as types of assets and liabilities, interest rate risk, liquidity, and customer behavior also impact net interest income as well as the net yield. The following table depicts the average balance, interest earned and paid, and weighted average rate of the Company's assets, liabilities and shareholders' equity during 1998:
Interest Average Average Earned Yield Balance or Paid or Cost ------- ------- ------- ASSETS: Loans $104,838,366 $ 9,007,668 8.59% Investment securities 15,340,648 880,639 5.74 Federal funds sold 4,831,066 256,422 5.31 Short term investments 413,209 23,487 5.68 ------------ ----------- ---- Total interest-earning assets 125,423,289 10,168,216 8.11 Allowance for loan losses (1,583,625) Other assets 5,559,749 Total assets $129,399,413 ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing checking $ 4,015,056 170,594 4.25 Savings 17,454,843 903,881 5.18 Money market 1,329,349 58,321 4.39 Certificates of deposit 67,817,243 4,007,992 5.91 Short term borrowings 10,340,121 488,430 4.72 ------------ ---------- ---- Total interest-bearing liabilities 100,956,612 5,629,218 5.58 Noninterest-bearing checking 10,797,858 Other liabilities 319,722 Shareholder's equity 17,325,221 ------------ Total liabilities and shareholders' equity $129,399,413 ============ Net Interest Income $ 4,538,998 =========== Net Yield on Interest-Earning Assets 3.62% ====
F-8 23 Interest income is primarily generated from the loan portfolio, which comprised 81% of average total assets during 1998. The loan portfolio, with an average yield of 8.59%, earned $9.0 million, or 89% of total interest income. The investment securities portfolio and Federal funds sold equaled 12% and 4% of average total assets during 1998, respectively. With an average yield of 5.74% investment securities contributed $0.9 million, or 9% of total interest income, while Federal funds sold ended 1998 with an average yield of 5.31%, and earned $0.3 million, or 3% of total interest income. Interest expense is primarily generated from certificates of deposit, which equaled 52% of average total assets during 1998. Certificates of deposit, with an average rate of 5.91%, cost $4.0 million, or 71% of total interest expense. Savings deposits and interest-bearing checking accounts equaled 13% and 3% of average total assets during 1998, respectively. With an average rate of 5.18% savings deposits cost $0.9 million, or 16% of total interest expense, while interest-bearing checking accounts ended 1998 with an average rate of 4.25%, and cost $0.2 million, or 3% of total interest expense. Short term borrowings, comprised primarily of repurchase agreements but also included Federal funds purchased, had an average rate of 4.72% during 1998. The Company paid $0.5 million in short term interest expense, or 9% of total interest expense. PROVISION FOR LOAN LOSSES Reflecting significant loan growth the provision for loan losses totaled $2.6 million during 1998. The allowance for loan losses as a percentage of total loans outstanding as of December 31, 1998 was 1.50%, which also represents the average ratio for the entire year. The Company maintains the allowance for loan losses at a level management feels is adequate to absorb losses inherent in the loan portfolio. The evaluation is based upon a continuous review of the Company's and banking industry's historical loan loss experience, known and inherent risks contained in the loan portfolio, composition and growth of the loan portfolio, current and projected economic conditions and other factors. Reflecting its focus on credit quality, the Company has not experienced any loan charge-offs since its inception. NONINTEREST INCOME Other income was $488,000 during 1998. Fees earned on referring residential mortgage loan applicants to various third parties was $210,000, commitment fees charged on issued commercial standby letters of credit equaled $159,000, and deposit and repurchase agreement service charges totaled $82,000. NONINTEREST EXPENSE Noninterest expense totaled $3.6 million during 1998. Salary and benefit costs were $1.9 million, while occupancy, furniture and equipment expenses totaled another $0.5 million. Additional large overhead expenses include computer data processing and software ($171,000), loan processing ($154,000), and advertising ($110,000). While the future dollar volume of noninterest costs are anticipated to increase, as a percent of average assets the level is expected to decline as the Company continues to grow and operating efficiencies are realized. Monitoring and controlling overhead expenses, while at the same time providing high quality of service to customers, is of utmost importance to the Company. The efficiency ratio, computed by dividing noninterest expenses by net interest income plus noninterest income, was 70.9% for all of 1998. However, due primarily to the rapid asset growth that has translated into increased net interest income, the Company's efficiency ratio declined throughout 1998 and was only 55.8% during the fourth quarter. In addition, the Company's lending philosophy of concentrating on commercial lending results in higher average loan balances compared to residential mortgage or consumer loans, which provides for a greater volume of loans with fewer people thereby improving its efficiency. This point is demonstrated by the Company's total assets per employee ratio, which as of December 31, 1998 was approximately $6.0 million. This level compares very favorably to the 3.4 million level of Michigan community banks of similar asset size. INCOME TAX EXPENSE Due to the net loss from operations recorded by the Company no provisions to income tax expense were necessary during 1998. It is anticipated that the Company will be in a taxable position in the future. F-9 24 1997 RESULTS OF OPERATIONS The Company was incorporated on July 15, 1997 to establish and own the Bank. The Bank received all necessary regulatory approvals and began operations on December 15, 1997. The Bank experienced significant growth in the loan portfolio during the first 17 days of operations from December 11, 1997 to December 31, 1997. This growth has continued into 1998 and at a more rapid rate than deposit growth. Management has chosen to fund this loan growth in 1998 in part by obtaining brokered and out-of-state deposits to augment normal deposit growth and expects to continue this practice until alternative funding sources become readily available. Management has staggered the maturities of brokered and out-of-state deposits with terms of 3 months to 60 months. As of December 31, 1997, the Company had a retained deficit of $404,071. This retained deficit was primarily the result of pre-opening fees and expenses totaling approximately $178,000 as well as $193,300 in provision expense to establish the allowance for loan losses at a level of 1.50% of total loans. Management anticipated that the Company would generate a net loss for 1998 as a result of expenditures made to build the management team and open the main office and provisions to the allowance for loan and lease losses. Significant ongoing additions to loan loss reserves were expected to also contribute to this deficit due to the projected rapid increase in the loan portfolio. Management further believes that the expenditures made in 1997 and 1998 will create the infrastructure and lay the foundation for growth in subsequent years. CAPITAL RESOURCES Shareholders' equity is a noninterest-bearing source of funds which provides support for asset growth. Shareholders' equity was $26.7 million and $13.5 million at December 31, 1998 and 1997, respectively. The increase during 1998 is attributable to the secondary stock offering completed during the year, when 977,500 shares of common stock were sold. Net proceeds to the Company, after deducting underwriting and other related costs, was $14.3 million. Substantially all of the net proceeds were contributed to the Bank, which were used to support anticipated growth in assets, fund investments in loans and securities, and for general corporate purposes. The Company's 1998 net operating loss of $1.1 million negatively impacted shareholders' equity. The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Failure to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. Since the Bank began operations, both the Company and Bank have been categorized as "Well Capitalized," the highest classification contained within the banking regulations. The capital ratios of the Company and Bank as of December 31, 1998 and 1997 are disclosed under Note 13 of the Notes to Consolidated Financial Statements. The ability of the Company to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. No cash or stock dividends were paid in 1998 or 1997. LIQUIDITY Liquidity is measured by the Company's ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and investment securities. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and operate the Company. Liquidity is primarily achieved through the growth of deposits (both local and out-of-area) and liquid assets such as securities available for sale, matured securities, and Federal funds sold. Asset and liability management is the process of managing the balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity. F-10 25 The Company's liquidity strategy is to fund loan growth with deposits and repurchase agreements and to maintain an adequate level of short- and medium-term investments to meet typical daily loan and deposit activity. Although deposit and repurchase agreement growth from depositors located in the market area increased by $81.4 million during 1998, the growth was not sufficient to meet the substantial loan growth of $171.8 million and provide monies for additional investing activities. To provide the additional needed funds the Company regularly obtained deposits from customers outside of the market area. These out-of-area deposits consist primarily of $99,000 certificates of deposit placed by deposit brokers for a fee, but also include certificates of deposit for larger dollar amounts (generally $100,000) and/or from the deposit owners directly. As of December 31, 1998, out-of-area deposits totaled approximately $97.3 million, or 51% of combined deposits and repurchase agreements. Reliance on out-of-area deposits is expected to be ongoing due to the planned future growth; however, a modest decline in the out-of-area deposit concentration level is expected as new business and retail relationships continue to be established and as existing customers increase their fund balances. The Company has the ability to borrow money on a daily basis through correspondent banks (Federal funds purchased), which it did on several occasions during 1998; however, this is viewed as only a secondary and temporary source of funds. During 1998 the Company's Federal funds sold position averaged $4.8 million. In addition to normal loan funding and deposit flow, the Company also needs to maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit. As of December 31, 1998, the Company had a total of $90.5 million in unfunded loan commitments and $19.3 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $68.7 million were commitments available as lines of credit to be drawn at any time as customers' cash needs vary, and $21.8 million were for loan commitments scheduled to close and become funded within the next three months. The Company monitors fluctuations in loan balances and commitment levels, and includes such data in its overall liquidity management. MARKET RISK ANALYSIS The Company's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of the Company's transactions are denominated in U.S. dollars with no specific foreign exchange exposure. The Company has only limited agricultural-related loan assets and therefore has no significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be insignificant. Interest rate risk is the exposure of the Company's financial condition to adverse movements in interest rates. The Company derives its income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-bearing liabilities. The rates of interest the Company earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, the Company is exposed to lower profitability if it cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to the Company's earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to the Company's safety and soundness. Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. The Company's interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk the Company assesses the existing and potential future effects of changes in interest rates on its financial condition, including capital adequacy, earnings, liquidity and asset quality. F-11 26 There are two interest rate risk measurement techniques used by the Company. The first, which is commonly referred to as GAP analysis, measures the difference between the dollar amounts of interest-sensitive assets and liabilities that will be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to the Company's net interest margin during periods of changing market interest rates. The following table depicts the Company's GAP position as of December 31, 1998 (dollars in thousands):
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------ ------ ----- ----- ----- Assets: Commercial loans $ 53,211 $ 3,458 $ 107,586 $ 7,735 $ 171,990 Residential real estate loans 2,609 1,400 5,376 1,271 10,656 Consumer loans 796 25 1,076 201 2,098 Securities available for sale (1) 1,500 3,023 13,916 5,721 24,160 Interest-bearing deposits 515 0 0 0 515 Allowance for loan losses 0 0 0 (2,765) (2,765) Other assets 0 0 0 9,583 9,583 --------- --------- --------- --------- --------- Total Assets 58,631 7,906 127,954 21,746 216,237 --------- --------- --------- --------- --------- Liabilities: Interest-bearing checking 7,766 0 0 0 7,766 Savings 28,796 0 0 0 28,796 Money market accounts 3,822 0 0 0 3,822 Time deposits < $100,000 15,310 46,987 18,856 0 81,153 Time deposits $100,000 and over 13,816 13,548 8,777 0 36,141 Other borrowings 17,038 0 0 0 17,038 Noninterest-bearing checking 0 0 0 14,319 14,319 Other liabilities 0 0 0 501 501 --------- --------- --------- --------- --------- Total Liabilities 86,548 60,535 27,633 14,820 189,536 Shareholders' Equity 0 0 0 26,701 26,701 --------- --------- --------- --------- --------- Total Sources of Funds 86,548 60,535 27,633 41,521 216,237 --------- --------- --------- --------- --------- Net asset (liability) GAP $ (27,917) $ (52,629) $ 100,321 $ (19,775) ========= ========= ========= Cumulative GAP $ (27,917) $ (80,546) $ 19,775 ========= ========= ========= Percent of cumulative GAP to total assets (13)% (37)% 9% ========= ========= =========
(1) Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of December 31, 1998. The second interest rate risk measurement used is commonly referred to as net interest income simulation analysis. The Company believes that this methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and therefore, serves as the primary interest rate risk measurement technique used by the Company. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates. Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest-sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and Company strategies, among other factors. F-12 27 The Company conducted multiple simulations as of December 31, 1998, whereby it was assumed that a simultaneous, instant and sustained change in market interest rates occurred. The following table reflects the suggested impact on net interest income over the next twelve months, which are well within the Company's policy parameters established to manage and monitor interest rate risk.
Dollar Change In Percent Change In Interest Rate Scenario Net Interest Income Net Interest Income ---------------------- ------------------- ------------------- Interest rates down 200 basis points $ 748,690 16.6% Interest rates down 100 basis points 468,956 10.4 No change in interest rates 191,660 4.3 Interest rates up 100 basis points (36,753) (0.8) Interest rates up 200 basis points (267,532) (5.9)
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing, and deposit gathering strategies; client preferences; and other factors. YEAR 2000 ISSUE The approach of the year 2000 presents potential problems to businesses that utilize computers in their daily operations. Some computer systems may not be able to properly interpret dates after December 31, 1999, because they use only two digits to indicate the year in the date. Therefore, a date using "00" as the year may recognize the year as 1900 rather than the year 2000. The Company has formed a Year 2000 Working Group to address the potential problems associated with the Year 2000 computer issue. The Year 2000 Working Group, consisting of senior officers and employees, meets periodically and provides regular reports to the Board of Directors detailing progress with the Year 2000 issue. As with any organization that depends on technology, particularly computer systems and software, a Year 2000 related failure poses a significant threat to continued business operations. While the Company has developed a plan to achieve Year 2000 readiness, we recognize that the success of our third party providers is vital to our success. Vendors of particular concern include, but are not limited to, our computer service providers, electronic banking vendors, correspondent banks, and utility and telecommunications companies. Additional risks include the Bank's lending and deposit relationships, as well as security and heating, ventilation, and air conditioning systems. No in-house programmed software is used by the Company. Management believes that all significant vendors have been identified and contacted regarding their Year 2000 readiness. These vendors have indicated that either their products are currently Year 2000 compliant or will be by December 31, 1999. For computer-based systems that are considered vital to operations, such as data and transaction processing, actual testing has been or will be conducted prior to December 31, 1999, to test Year 2000 readiness. In addition, a Year 2000 questionnaire has been sent to all commercial loan customers (comprising 92% of the loan portfolio) requesting information concerning their Year 2000 readiness. Responses are currently being followed-up by the Year 2000 Working Group and lending staff. Costs to the Company related to the Year 2000 issue are estimated to be between $10,000 and $25,000. These costs include testing of the data processing equipment and programs, equipment upgrades, and employee/customer education. It is impossible to predict the exact expenses associated with the Year 2000 issue and additional funds may be needed for unknown expenses relating to Year 2000 testing, training, and education, as well as system and software replacements. F-13 28 Despite careful planning by the Company, we recognize there may be circumstances beyond our control that may prohibit us from operating "as usual" after December 31, 1999. The Year 2000 Working Group is currently in process of developing a contingency plan to address potential Year 2000 problems. F-14 29 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Mercantile Bank Corporation Grand Rapids, Michigan We have audited the accompanying consolidated balance sheets of Mercantile Bank Corporation as of December 31, 1998 and 1997 and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year ended December 31, 1998 and the period from July 15, 1997 (date of inception) through December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercantile Bank Corporation as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended December 31, 1998 and the period from July 15, 1997 (date of inception) through December 31, 1997 in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP ----------------------------- Crowe, Chizek and Company LLP Grand Rapids, Michigan January 20, 1999 F-15 30 MERCANTILE BANK CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 ---- ---- ASSETS Cash and due from banks $ 5,940,713 $ 153,300 Short term investments 515,283 3,250,000 Federal funds sold 0 3,700,000 ------------- ------------- Total cash and cash equivalents 6,455,996 7,103,300 Securities available for sale 24,160,247 2,997,500 Total loans 184,744,602 12,886,763 Allowance for loan losses (2,765,100) (193,300) ------------- ------------- Total loans, net 181,979,502 12,693,463 Premises and equipment - net 1,857,805 953,982 Organizational costs - net 64,210 74,871 Accrued interest receivable 1,147,832 52,811 Other assets 571,265 233,258 ------------- ------------- Total assets $ 216,236,857 $ 24,109,185 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 14,319,290 $ 7,207,482 Interest-bearing 157,678,729 2,480,782 ------------- ------------- Total 171,998,019 9,688,264 Securities sold under agreements to repurchase 17,037,601 655,447 Accrued expenses and other liabilities 500,721 292,204 ------------- ------------- Total liabilities 189,536,341 10,635,915 Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, none issued Common stock, no par value; 9,000,000 shares authorized; 2,472,500 shares outstanding at December 31, 1998, and 1,495,000 shares outstanding at December 31, 1997 28,181,798 13,880,972 Retained earnings (deficit) (1,513,118) (404,071) Net unrealized gain (loss) on securities available for sale 31,836 (3,631) ------------- ------------- Total shareholders' equity 26,700,516 13,473,270 ------------- ------------- Total liabilities and shareholders' equity $ 216,236,857 $ 24,109,185 ============= =============
See accompanying notes to consolidated financial statements. F-16 31 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME Year ended December 31, 1998 and period from July 15, 1997 (date of inception) through December 31, 1997
1998 1997 ---- ---- Interest income Loans, including fees $ 9,007,668 $ 25,761 Investment securities 880,639 7,661 Federal funds sold 256,422 18,728 Interest-bearing balances 23,487 101,479 ------------ ------------ Total interest income 10,168,216 153,629 Interest expense Deposits 5,140,788 5,760 Short term borrowings 488,430 7,894 ------------ ------------ Total interest expense 5,629,218 13,654 ------------ ------------ NET INTEREST INCOME 4,538,998 139,975 Provision for loan losses 2,571,800 193,300 ------------ ------------ NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES 1,967,198 (53,325) Noninterest income Service charges on accounts 82,170 Gain on sale of securities 128 Mortgage loan referral fees 209,667 Letter of credit fees 159,064 Other income 37,149 45 ------------ ------------ Total noninterest income 488,178 45 Noninterest expense Salaries and benefits 1,891,264 254,771 Occupancy 304,231 39,101 Furniture and equipment 176,756 5,907 Data processing 170,990 Loan processing cost 153,835 Advertising 110,431 Other expense 756,916 51,012 ------------ ------------ Total noninterest expenses 3,564,423 350,791 ------------ ------------ INCOME (LOSS) BEFORE FEDERAL INCOME TAX (1,109,047) (404,071) Federal income tax expense 0 0 ------------ ------------ NET INCOME (LOSS) $ (1,109,047) $ (404,071) ============ ============ Basic income (loss) per share $ (0.58) $ (0.27) ============ ============ Diluted income (loss) per share $ (0.58) $ (0.27) ============ ============ Average shares outstanding 1,907,658 1,495,000 ============ ============
See accompanying notes to consolidated financial statements. F-17 32 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended December 31, 1998 and period from July 15, 1997 (date of inception) through December 31, 1997
1998 1997 ---- ---- NET INCOME (LOSS) $(1,109,047) $ (404,071) Other comprehensive income (loss), net of tax: Change in unrealized gains (losses) on securities 35,467 (3,631) ----------- ----------- COMPREHENSIVE INCOME (LOSS) $(1,073,580) $ (407,702) =========== ===========
See accompanying notes to consolidated financial statements. F-18 33 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Year ended December 31, 1998 and period from July 15, 1997 (date of inception) through December 31, 1997
Net Unrealized Gain (Loss) on Retained Securities Total Common Earnings Available Shareholders' Stock (Deficit) for Sale Equity ----- --------- -------- ------ BALANCE, JULY 15, 1997 (DATE OF INCEPTION) $ 0 $ 0 $ 0 $ 0 Common stock sale, October 23, 1997 13,880,972 13,880,972 Net income (loss) for the period from July 15, 1997 (date of inception) through December 31, 1997 (404,071) (404,071) Net unrealized gain (loss) on securities available for sale, net of tax effect (3,631) (3,631) ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1997 13,880,972 (404,071) (3,631) 13,473,270 Common stock sale, July 31, 1998 14,300,826 14,300,826 Net income (loss) (1,109,047) (1,109,047) Change in net unrealized gain (loss) on securities available for sale, net of tax effect 35,467 35,467 ------------ ------------ ------------ ------------ BALANCES, DECEMBER 31, 1998 $ 28,181,798 $ (1,513,118) $ 31,836 $ 26,700,516 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-19 34 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 1998 and period from July 15, 1997 (date of inception) through December 31, 1997
1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (1,109,047) $ (404,071) Adjustments to reconcile net income (loss) to net cash from operating activities Depreciation and amortization 274,364 119 Provision for loan losses 2,571,800 193,300 Gain on sale of securities (128) Net change in Accrued interest receivable (1,095,021) (74,871) Other assets (432,695) (286,069) Accrued expenses and other liabilities 208,517 292,204 ------------- ------------- Net cash from operating activities 417,790 (279,388) CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (171,857,839) (12,886,763) Purchase of: Securities available for sale (28,320,575) (3,001,250) Premises and equipment, net (1,082,815) (953,982) Proceeds from: Sales of available for sale securities 1,000,313 Maturities and repayments of available for sale securities 6,203,087 ------------- ------------- Net cash from investing activities (194,057,829) (16,841,995) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock 14,300,826 13,880,972 Net increase in deposits 162,309,755 9,688,264 Net increase in securities sold under agreements to repurchase 16,382,154 655,447 ------------- ------------- Net cash from financing activities 192,992,735 24,224,683 ------------- ------------- Net change in cash and cash equivalents (647,304) 7,103,300 Cash and cash equivalents at beginning of period 7,103,300 0 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,455,996 $ 7,103,300 ============= ============= Supplemental disclosures of cash flow information Cash paid during the year for Interest $ 5,237,738 $ 1,391 Federal income tax 165,000 0
See accompanying notes to consolidated financial statements. F-20 35 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Mercantile Bank Corporation and its wholly-owned subsidiary, Mercantile Bank of West Michigan, after elimination of significant intercompany transactions and accounts. Nature of Operations: Mercantile Bank Corporation ("Company") was incorporated on July 15, 1997 to establish and own Mercantile Bank of West Michigan (Bank) based in Grand Rapids, Michigan. The Bank is a community-based financial institution. The Bank's primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial, residential mortgage, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. The Bank's loan accounts are primarily with customers located in western Michigan, within Kent County. The Bank's retail deposits are also to customers located in western Michigan. As an alternative source of funds, the Bank has also issued certificates to depositors outside of the Bank's primary market area. Commercial real estate loans to lessors of real property comprise 19.5% of the Bank's total loans at December 31, 1998. Commercial loans to holding and other investment offices comprise 28.6% of the Bank's total loans at December 31, 1998. The Bank began operations on December 15, 1997, after several months of work by incorporators and employees in preparing applications with the various regulatory agencies and obtaining insurance and building space. Use of Estimates: To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses and the fair values of financial instruments are particularly subject to change. Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand deposits with other financial institutions, short-term investments (securities with daily put provisions) and federal funds sold. Cash flows are reported net for customer loan and deposit transactions, interest-bearing time deposits with other financial institutions and short-term borrowings with maturities of 90 days or less. Securities: Securities available for sale consist of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value and the related unrealized holding gain or loss is reported, net of related income tax effects, as a separate component of shareholders' equity, until realized. Premiums and discounts on securities are recognized in interest income using the interest method over the estimated life of the security. Gains and losses on the sale of securities available for sale are determined based upon amortized cost of the specific security sold. Loans: Loans are reported at the principal balance outstanding, net of deferred loan fees and costs. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and recoveries, and decreased by charge-offs. Management estimates the allowance balance required based on past industry loan loss experience, known and inherent risks in similar portfolios, and economic conditions. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. (Continued) F-21 36 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in aggregate for smaller-balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when the internal grading system indicates a doubtful classification. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both straight-line and accelerated methods over the estimated useful lives of the respective assets. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur and major improvements are capitalized. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Stock Options: No expense for stock options is recorded, as the grant price equals the market price of the stock at grant date. Pro-forma disclosures show the effect on income and earnings per share had the options' fair value been recorded using an option pricing model. The pro-forma effect is expected to increase in the future as more options are granted. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance has been established to the extent of net deferred tax assets due to a lack of operating performance to ensure that it is more likely than not it would be recovered. Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments does not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. Dividend Restriction: The Company and Bank are subject to banking regulations which require the maintenance of certain capital levels and positive retained earnings, which will prevent payment of dividends until positive retained earnings are achieved and may limit the amount of dividends thereafter. Earnings (Loss) Per Share: Basic earnings (loss) per share is based on weighted average common shares outstanding. Diluted earnings (loss) per share further assumes issue of any dilutive potential common shares. (Continued) F-22 37 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 2 - INVESTMENT SECURITIES The amortized cost and fair values of investment securities at year-end were as follows: AVAILABLE FOR SALE
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Values ---- ----- ------ ------ 1998 U.S. Treasury securities $ 4,506,744 $ 16,376 $ 0 $ 4,523,120 U.S. Government agency debt obligations 12,015,020 45,207 29,437 12,030,790 Mortgage-backed securities 7,590,648 21,104 5,415 7,606,337 ----------- ----------- ----------- ----------- Totals $24,112,412 $ 82,687 $ 34,851 $24,160,247 =========== =========== =========== =========== 1997 U.S. Treasury securities $ 3,001,131 $ 0 $ 3,631 $ 2,997,500 =========== =========== =========== ===========
The amortized cost and fair values of debt investment securities at year-end 1998, by contractual maturity, are shown below. The contractual maturity is utilized below for U.S. Treasury and U.S. Government agency debt obligations. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, mortgage backed securities, are shown separately.
Weighted Amortized Fair Average Yield Cost Values ------------- ---- ------ Debt securities, excluding mortgage-backed securities: Due in one year or less 5.61% $ 4,506,744 $ 4,523,120 Due after one year through five years 6.07 9,987,547 10,028,140 Due after five years through 15 years 6.13 2,027,473 2,002,650 ----------- ----------- 16,521,764 16,553,910 Mortgage-backed securities 6.29 7,590,648 7,606,337 ----------- ----------- Total investment securities $24,112,412 $24,160,247 =========== ===========
The sale of an investment security during 1998 resulted in a realized gain of $128. There were no sales of securities in 1997. The carrying value of investment securities that are pledged to secure securities sold under agreements to repurchase and other deposits was $24,160,247 and $2,997,500 at December 31, 1998 and 1997, respectively. (Continued) F-23 38 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES Year-end loans are as follows:
Percent December 31, 1998 December 31, 1997 Increase/ Balance % Balance % (Decrease) ------- - ------- - ---------- Real Estate: Construction and land development $ 13,656,284 7.4% $ 0 0.0% NA% Secured by 1 - 4 family properties 10,655,703 5.8 171,872 1.3 6,099.8 Secured by multi- family properties 2,520,747 1.4 0 0.0 NA Secured by nonfarm nonresidential properties 100,742,487 54.5 5,421,302 42.1 1,758.3 Commercial 55,071,347 29.8 7,278,664 56.5 656.6 Consumer 2,098,034 1.1 14,925 0.1 13,957.2 --------------- ------ ------------- ------- ----------- Total Loans $ 184,744,602 100.0% $ 12,886,763 100.0% 1,333.6 =============== ====== ============= ======= ===========
Activity in the allowance for loan losses is as follows:
1998 1997 ---- ---- Beginning balance $ 193,300 $ 0 Provision charged to operating expense 2,571,800 193,300 ----------- --------- Ending balance $ 2,765,100 $ 193,300 =========== =========
There were no loans classified as impaired at December 31, 1998 or 1997 or during the periods then ended. NOTE 4 - PREMISES AND EQUIPMENT - NET Year-end premises and equipment are as follows:
1998 1997 ---- ---- Land and improvements $ 315,020 $ 0 Buildings and leasehold improvements 759,942 545,401 Construction in process 100,638 0 Furniture and equipment 869,195 408,581 ---------- -------- 2,044,795 953,982 Less: accumulated depreciation 186,990 0 ---------- -------- $1,857,805 $953,982 ========== ========
(Continued) F-24 39 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 5 - DEPOSITS Deposits at year-end are summarized as follows:
Percent December 31, 1998 December 31, 1997 Increase/ Balance % Balance % (Decrease) ------- - ------- - ---------- Noninterest-bearing demand $ 14,319,290 8.3% $ 7,207,482 74.4% 98.7% Interest-bearing checking 7,765,703 4.5 213,218 2.2 3,542.1 Money market 3,822,019 2.2 0 0.0 NA Savings 28,796,603 16.8 2,089,539 21.6 1,278.1 Time, under $100,000 3,305,504 1.9 178,025 1.8 1,756.8 Time, $100,000 and over 16,718,705 9.7 0 0.0 NA -------------- -------- ------------- ------- ------------- 74,727,824 43.4 9,688,264 100.0 671.3 Out-of-area time, under $100,000 77,847,412 45.3 0 0.0 NA Out-of-area time, $100,000 and over 19,422,783 11.3 0 0.0 NA -------------- -------- ------------- ------- ------------- 97,270,195 56.6 0 0.0 NA -------------- -------- ------------- ------- ------------- Total Deposits $ 171,998,019 100.0% $ 9,688,264 100.0% 1,675.3% ============== ======== ============= ======= =============
Out-of-area certificates of deposit consist of certificates obtained from depositors outside of the primary market area. As of December 31, 1998, out-of-area certificates of deposit totaling $83,404,629 were obtained through deposit brokers, with the remaining $13,865,566 obtained directly from the depositors. The following table depicts the maturity distribution for certificates of deposit as of December 31, 1998. 1999 $ 89,659,963 2000 22,649,689 2001 4,194,752 2002 1,390,000 2003 ============== $ 117,294,404
(Continued) F-25 40 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 6 - SHORT-TERM BORROWINGS Information relating to short-term borrowings, comprised entirely of securities sold under agreements to repurchase, at December 31 is summarized below:
1998 1997 ---- ---- Outstanding balance at yearend $ 17,037,601 $ 655,447 Average interest rate at yearend 4.20% 4.70% Average balance during the year 10,305,728 3,853 Average interest rate during the year 4.72% 4.70% Maximum month end balance during the year 18,498,833 655,447
Securities sold under agreements to repurchase (repurchase agreements) generally have original maturities of less than one year. Repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with the repurchase agreements are recorded as assets of the Bank and are primarily held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain large deposit customers as deposit equivalent investments. NOTE 7 - FEDERAL INCOME TAXES The Company recorded no current or deferred benefit for income taxes as a result of recording the valuation allowance in the amount of net deferred tax assets. As a result of the valuation allowance, the Company's effective tax rate was reduced from the statutory rate of 34% to 0%. The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities as of December 31, 1998 and 1997:
1998 1997 ---- ---- Deferred tax assets Provision for loan losses $ 787,422 $ 65,722 Start-up/pre-opening expenses 76,713 97,811 Deferred loan fees 52,273 Depreciation 8,146 --------- --------- $ 924,554 $ 163,533 ========= ========= Deferred tax liabilities Unrealized gain on securities available for sale $ 16,400 Miscellaneous expenses 13,600 Accretion 2,176 --------- --------- $ 32,176 $ 163,533 ========= =========
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefits related to such assets will not be realized. Management has determined that an allowance of $892,378 and $163,533 is required for 1998 and 1997.
1998 1997 ---- ---- Net deferred tax asset before valuation allowance $ 892,378 $ 163,533 Valuation allowance for deferred tax assets (892,378) (163,533) ---------- ---------- $ 0 $ 0 ========== ==========
(Continued) F-26 41 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 8 - STOCK OPTION PLAN
1998 1997 ---- ---- Stock options outstanding Beginning 77,750 0 Granted 44,000 77,750 -------------- --------------- Ending 121,750 77,750 ============== =============== Options exercisable at year-end 50,166 22,918 -------------- --------------- Minimum exercise price $ 10.00 $ 10.00 Maximum exercise price 13.63 11.75 Average exercise price 11.50 10.75 Average remaining option term 9.0 Years 9.8 years Estimated fair value of stock options granted: 172,510 340,863 Assumptions used: Risk-free interest rate 4.56 6.01% Expected option life 7 years 7 years Expected stock volatility 11% 25% Expected dividends 0% 0% Pro-forma (loss), assuming SFAS 123 fair value method was used for stock options: Net loss $ (1,299,991) $ (539,585) Basic and diluted loss per share (0.68) (0.36)
NOTE 9 - RELATED PARTIES Certain directors and executive officers of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Bank. At year-end 1998 and 1997, the Bank had approximately $12,815,000 and $5,940,000 in loan commitments to directors and executive officers, of which approximately $9,095,000 and $2,147,000 were outstanding at December 31, 1998 and 1997, respectively, as reflected in the following table.
1998 1997 ---- ---- Beginning balance $ 2,147,000 $ 0 New loans 7,222,000 2,147,000 Repayments (274,000) 0 -------------- --------------- Ending balance $ 9,095,000 $ 2,147,000 ============== ===============
Related party deposits and repurchase agreements totaled approximately $7,978,000 and $416,000 at year-end 1998 and 1997. (Continued) F-27 42 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 10 - COMMITMENTS AND OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. The Bank's maximum exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, property and equipment, is generally obtained based on management's credit assessment of the borrower. Fair value of the Bank's off-balance sheet instruments (commitments to extend credit and standby letters of credit) is based on rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. At December 31, 1998 and 1997, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties. The Bank's maximum exposure to credit losses for loan commitments and standby letters of credit outstanding at December 31 was as follows:
1998 1997 ---- ---- Commercial unused lines of credit $ 61,600,909 $ 3,701,272 Unused lines of credit secured by 1 - 4 family residential properties 3,434,290 64,356 Credit card unused lines of credit 2,251,329 0 Other consumer unused lines of credit 1,534,497 0 Commitments to make loans 21,751,900 7,198,584 Standby letters of credit 19,271,848 0 ------------ ----------- $109,844,773 $10,964,212 ============ ===========
Management does not anticipate any significant losses as a result of these commitments. At year-end 1998, reserves of $185,000 were required as deposits with the Federal Reserve Bank of Chicago. These reserves do not earn interest. The Bank leases the main office facility under an operating lease agreement. Total rental expense for the lease for 1998 and 1997 was $151,349 and $37,463. Future minimum rentals under this lease as of December 31, 1998 are as follows: 1999 $ 154,344 2000 154,344 2001 154,344 2002 154,344 2003 154,344 Thereafter 565,928 -------------- $ 1,337,648 ==============
(Continued) F-28 43 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 11 - EMPLOYEE BENEFIT PLANS The Company established a 401(k) plan effective January 1, 1998, covering substantially all of its employees. The Company's 1998 matching 401(k) contribution charged to expense was $59,705. The percent of the Company's matching contributions to the 401(k) is determined annually by the Board of Directors. NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS Financial instruments at year-end are as follows:
1 9 9 8 1 9 9 7 ------- ------- Carrying Fair Carrying Fair Values Values Values Values ------ ------ ------ ------ Financial assets Cash and cash equivalents $ 6,455,996 $ 6,455,996 $ 7,103,300 $ 7,103,300 Securities available for sale 24,160,247 24,160,247 2,997,500 2,997,500 Loans, net 181,979,502 181,963,000 12,693,463 12,693,463 Accrued interest receivable 1,147,832 1,147,832 52,811 52,811 Financial liabilities Deposits 171,998,019 173,664,615 9,688,264 9,688,264 Securities sold under agreements to repurchase 17,037,601 17,037,601 655,447 655,447 Accrued interest payable 422,717 422,717 4,369 4,369
The estimated fair value approximates carrying amount for all items except those described below. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. Estimated fair value for loans is based on the rates charged at year end for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. Estimated fair value for IRAs, time CDs, and agreements to repurchase is based on the rates paid at year end for new deposits or borrowings, applied until maturity. Estimated fair value for other financial instruments and off-balance-sheet loan commitments are considered to approximate carrying value. NOTE 13 - SALE OF COMMON STOCK During 1998 the Company completed a secondary stock offering, selling 977,500 shares. Net of issuance expenses the common stock sale raised $14.3 million. Substantially all of the net proceeds were contributed to the Bank, which were used to support the anticipated growth in assets, fund investments in loans and securities, and for general corporate purposes. NOTE 14 - REGULATORY MATTERS The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. (Continued) F-29 44 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 14 - REGULATORY MATTERS (Continued) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
Capital to Risk- Weighted Assets --------------- Tier 1 Capital Total Tier 1 to Average Assets ----- ------ ----------------- Well capitalized 10% 6% 5% Adequately capitalized 8 4 4 Undercapitalized 8 4 4
At year end, actual capital levels (in thousands) and minimum required levels for the Company 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 ------ ----- ------ ----- ------ ----- 1998 Total capital (to risk weighted assets) Consolidated $ 29,434 13.0% $ 18,100 8.0% $ 22,625 10.0% Bank 28,453 12.6 18,093 8.0 22,616 10.0 Tier 1 capital (to risk weighted assets) Consolidated 26,669 11.8 9,050 4.0 13,575 6.0 Bank 25,688 11.4 9,047 4.0 13,570 6.0 Tier 1 capital (to average assets) Consolidated 26,669 13.8 7,711 4.0 9,639 5.0 Bank 25,688 13.3 7,707 4.0 9,634 5.0 1997 Total capital (to risk weighted assets) Consolidated $ 13,595 78.1% $ 1,392 8.0% $ 1,740 10.0% Bank 13,056 75.6 1,382 8.0 1,728 10.0 Tier 1 capital (to risk weighted assets) Consolidated 13,402 77.0 696 4.0 1,044 6.0 Bank 12,863 74.5 691 4.0 1,037 6.0 Tier 1 capital (to average assets) Consolidated 13,402 69.7 769 4.0 961 5.0 Bank 12,863 69.3 743 4.0 928 5.0
The Bank was categorized as well capitalized at year-end 1998 and 1997. (Continued) F-30 45 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 15 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS Following are condensed parent company only financial statements (1997 includes the period from July 15, 1997 (date of inception) through December 31, 1997). CONDENSED BALANCE SHEETS
1998 1997 ---- ---- ASSETS Cash and cash equivalents $ 910,068 $ 536,824 Investment in subsidiary 25,720,043 12,862,806 Other assets 81,905 126,545 ----------- ----------- Total assets $26,712,016 $13,526,175 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities $ 11,500 $ 52,905 Shareholders' equity 26,700,516 13,473,270 ----------- ----------- Total liabilities and shareholders' equity $26,712,016 $13,526,175 =========== ===========
CONDENSED STATEMENTS OF INCOME
1998 1997 ---- ---- Income Other $ 28,868 $ 32,781 ----------- ----------- Total income 28,868 32,781 Expenses Other operating expenses 187,797 303,289 ----------- ----------- Total expenses 187,797 303,289 LOSS BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED NET LOSS OF SUBSIDIARIES (158,929) (270,508) Federal income tax expense 0 0 Equity in undistributed net loss of subsidiary (950,118) (133,563) ----------- ----------- NET LOSS $(1,109,047) $ (404,071) =========== ===========
(Continued) F-31 46 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 15 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENT OF CASH FLOWS
1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,109,047) $ (404,071) Adjustments to reconcile net loss to net cash from operating activities Equity in undistributed loss of subsidiary 950,118 133,563 Change in other assets 44,640 (126,545) Change in other liabilities (41,405) 52,905 ------------ ------------- Net cash from operating activities (155,694) (344,148) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock 14,300,826 13,880,972 Capital investment into Mercantile Bank of West Michigan (13,771,888) (13,000,000) ------------ ------------- Net cash from financing activities 528,938 880,972 ------------ ------------- Net change in cash and cash equivalents 373,244 536,824 Cash and cash equivalents at beginning of period 536,824 0 ------------ ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 910,068 $ 536,824 ============ =============
F-32 47 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 8, 1999. MERCANTILE BANK CORPORATION /s/ Gerald R. Johnson, Jr. -------------------------- Gerald R. Johnson, Jr. Chairman of the Board and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant, and in the capacities indicated on March 8, 1999. /s/ Betty S. Burton /s/ Lawrence W. Larsen - ------------------- ---------------------- Betty S. Burton, Director Lawrence W. Larsen, Director /s/ Edward J. Clark /s/ Calvin D. Murdock - ------------------- --------------------- Edward J. Clark, Director Calvin D. Murdock, Director /s/ Peter A. Cordes /s/ Michael H. Price - ------------------- -------------------- Peter A. Cordes, Director Michael H. Price, President and Chief Operating Officer /s/ C. John Gill /s/ Dale J. Visser - ---------------- ------------------ C. John Gill, Director Dale J. Visser, Director /s/ David M. Hecht /s/ Donald Williams - ------------------ ------------------- David M. Hecht, Director Donald Williams, Director /s/ Gerald R. Johnson, Jr. /s/ Robert M. Wynalda - -------------------------- --------------------- Gerald R. Johnson, Jr., Chairman of the Board and Chief Robert M. Wynalda, Director Executive Officer (principal executive officer) /s/ Susan K. Jones /s/ Charles E. Christmas - ------------------ ------------------------ Susan K. Jones, Director Charles E. Christmas, Chief Financial Officer, Treasurer and Compliance Officer (principal financial and accounting officer)
48 EXHIBIT INDEX
Exhibit No. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's Registration Statement on Form SB-2 (Commission File no. 333-33081) that became effective on October 23, 1997 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997 10.1 1997 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997 (Management contract or compensatory plan) 10.2 Lease Agreement between the Company and Division Avenue Partners, L.L.C. dated August 16, 1997, is incorporated by reference to exhibit 10.2 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective October 23, 1997 10.3 Agreement between the Company and Visser Brothers Construction Inc. dated November 16,1998, on modified Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is also the Constructor 10.4 Employment Agreement dated December 1, 1998 between the Company, the Bank and Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of the Company (Management contract or compensatory plan) 10.5 Employment Agreement dated December 1, 1998 between the Company, the Bank and Michael H. Price, President and Chief Operating Officer of the Company (Management contract or compensatory plan) 20 Proxy Statement of the Company for its April 15, 1999 Annual Meeting. Except for the portions of the Proxy Statement that are expressly incorporated by reference in this Annual Report on Form 10-KSB, the Proxy Statement of the Company shall not be deemed filed as a part thereof 21 Subsidiaries of the Company is incorporated by reference to Exhibit 21 of the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (Commission File No. 333-33081) 27 Financial Data Schedule
EX-10.3 2 AGMT BET. THE CO. & VISSER DATED NOVEMBER 16, 1998 1 EXHIBIT 10.3 [LOGO] STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONSTRUCTION MANAGER WHERE THE CONSTRUCTION MANAGER IS ALSO THE CONSTRUCTOR AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565 - ELECTRONIC FORMAT - -------------------------------------------------------------------------------- THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES: CONSULTATION WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. AUTHENTICATION OF THIS ELECTRONICALLY DRAFTED AIA DOCUMENT MAY BE MADE BY USING AIA DOCUMENT D401. The 1987 Edition of AIA Document A201, General Conditions of the Contract for Construction, is referred to herein. This Agreement requires modification if other general conditions are utilized. Portions of this document are derived from AIA Document Al11, Standard Form of Agreement Between the Owner and Contractor where the Basis of Payment is the Cost of the Work Plus a Fee, copyright 1920, 1925, 1951, 1958, 1961, 1963, 1967, 1974, 1978, copyright 1987 by The American Institute of Architects; other portions are derived from AGC Document 500. Copyright 1980 by The Associated General Contractors of American. Material in this document differing from that found in AIA Document AIII and AGC Document 500 is copyrighted 1991 by The American Institute of Architects and The Associated General Contractors of America. Reproduction of the material herein or substantial quotation of its provisions without written permission of AIA and AGC violates the copyright laws of the United States and will subject the violator to legal prosecution. - -------------------------------------------------------------------------------- AGREEMENT made as of the Sixteenth day of November in the year of Nineteen Hundred and Ninety-Eight (In words, indicate day, month and year) BETWEEN the Owner: (Name and address) Mercantile Bank of West Michigan 216 N. Division Avenue, NW Grand Rapids, MI 49503 and the Construction Manager. (Name and address) Visser Brothers Construction 1946 Turner, NW Grand Rapids, MI 49504 The Project is: (Name, address and brief description) Mercantile Bank of West Michigan Alpine Avenue and Wheaton Drive Alpine Township, MI The Architect is: (Name and address) Concept Design Group 89 Monroe Center, NW Grand Rapids, MI 49503 The Owner and Construction Manager agree as set forth below. - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #1 2 TABLE OF CONTENTS ARTICLE I GENERAL PROVISIONS 1.1 Relationship of Parties 1.2 General Conditions ARTICLE 2 CONSTRUCTION MANAGER'S RESPONSIBILITIES 2.1 Preconstruction Phase 2.2 Guaranteed Maximum Price Proposal and Contract Time 2.3 Construction Phase 2.4 Professional Services 2.5 Unsafe Materials ARTICLE 3 OWNER'S RESPONSIBILITIES 3.1 Information and Services 3.2 Owner's Designated Representative 3.3 Architect 3.4 Legal Requirements ARTICLE 4 COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE SERVICES 4.1 Compensation 4.2 Payments ARTICLE 5 COMPENSATION FOR CONSTRUCTION PHASE SERVICES 5.1 Compensation 5.2 Guaranteed Maximum Price 5.3 Changes in the Work ARTICLE 6 COST OF THE WORK FOR CONSTRUCTION PHASE 6.1 Costs To Be Reimbursed 6.2 Costs Not To Be Reimbursed 6.3 Discounts, Rebates and Refunds 6.4 Accounting Records ARTICLE 7 CONSTRUCTION PHASE 7.1 Progress Payments 7.2 Final Payment ARTICLE 8 INSURANCE AND BONDS 8.1 Insurance Required of the Construction Manager 8.2 Insurance Required of the Owner 8.3 Performance Bond and Payment Bond ARTICLE 9 MISCELLANEOUS PROVISIONS 9.1 Dispute Resolution for the Preconstruction Phase 9.2 Dispute Resolution for the Construction Phase 9.3 Other Provisions ARTICLE 10 TERMINATION OR SUSPENSION 10.1 Termination Prior to Establishing Guaranteed Maximum Price 10.2 Termination Subsequent to Establishing Guaranteed Maximum Price 10.3 Suspension ARTICLE 11 OTHER CONDITIONS AND SERVICES ATTACHMENTS: AMENDMENT NO. 1 TO AGREEMENT BETWEEN OWNER AND CONSTRUCTION MANAGER
- -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #2 3 Standard Form of Agreement Between Owner and Construction Manager Where the Construction Manager is also the Constructor ARTICLE 1 GENERAL PROVISIONS 1.1 RELATIONSHIP OF PARTIES The Construction Manager accepts the relationship of trust and confidence established with the Owner by this Agreement, and covenants with the Owner to furnish the Construction Manager's reasonable skill and judgment and to cooperate with the Architect in furthering the interests of the Owner. The Construction Manager shall furnish construction administration and management services and use the Construction Manager's best efforts to perform the Project in an expeditious and economical manner consistent with the interests of the Owner. The Owner shall endeavor to promote harmony and cooperation among the Owner, Architect, Construction Manager and other persons or entities employed by the Owner for the Project. 1.2 GENERAL CONDITIONS For the Construction Phase, the General Conditions of the Contract shall be the 1987 Edition of AIA Document A201, General Conditions of the Contract for Construction, which is incorporated herein by reference. For the Preconstruction Phase, or in the event that the Preconstruction and Construction Phases proceed concurrently, AIA Document A201 shall apply to the Preconstruction Phase only as specifically provided in this Agreement. The term "Contractor" as used in AIA Document A201 shall mean the Construction Manager. ARTICLE 2 CONSTRUCTION MANAGER'S RESPONSIBILITIES The Construction Manager shall perform the services described in this Article. The services to be provided under Paragraphs 2.1 and 2.2 constitute the Preconstruction Phase services. If the Owner and Construction Manager agree, after consultation with the Architect, the Construction Phase may commence before the Preconstruction Phase is completed, in which case both phases shall proceed concurrently. 2.1 PRECONSTRUCTION PHASE 2.1.1 PRELIMINARY EVALUATION N/A 2.1.2 CONSULTATION N/A 2.1.3 PRELIMINARY PROJECT SCHEDULE N/A 2.1.4 PHASED CONSTRUCTION N/A - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #3 4 2.1.5 PRELIMINARY COST ESTIMATES 2.1.5.1 N/A 2.1.5.2 N/A 2.1.5.3 N/A 2.1.5.4 N/A 2.1.6 SUBCONTRACTORS AND SUPPLIERS The Construction Manager shall seek to develop subcontractor interest in the Project and shall furnish to the Owner and Architect for their information a list of possible subcontractors, including suppliers who are to furnish materials or equipment fabricated to a special design, from whom proposals will be requested for each principal portion of the Work. The Architect will promptly reply in writing to the Construction Manager if the Architect or Owner know of any objection to such subcontractor or supplier. The receipt of such list shall not require the Owner or Architect to investigate the qualifications of proposed subcontractors or supplier, nor shall it waive the right of the Owner or Architect later to object to or reject any proposed subcontractor or supplier. 2.1.7 LONG-LEAD TIME ITEMS The Construction Manager shall recommend to the Owner and Architect a schedule for procurement of long-lead time items which will constitute part of the Work as required to meet the Project schedule. If such long-lead time items are procured by the Owner, they shall be procured on terms and conditions acceptable to the Construction Manager. Upon the Owner's acceptance of the Construction Manager's Guaranteed Maximum Price proposal, all contracts for such items shall be assigned by the Owner to the Construction Manager, who shall accept responsibility for such items as if procured by the Construction Manager. The Construction Manager shall expedite the delivery of long-lead time items. 2.1.8 EXTENT OF RESPONSIBILITY The Construction Manager does not warrant or guarantee estimates and schedules except as may be included as part of the Guaranteed Maximum Price. The recommendations and advice of the Construction Manager concerning design alternatives shall be subject to the review and approval of the Owner and the Owner's professional consultants. It is not the Construction Manager's responsibility to ascertain that the Drawings and Specifications are in accordance with applicable laws, statutes, ordinances, building codes, rules and regulations. However, if the Construction Manager recognizes that portions of the Drawings and Specifications are at variance therewith, the Construction Manager shall promptly notify the Architect and Owner in writing. 2.1.9 EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION The Construction Manager shall comply with applicable laws, regulations and special requirements of the Contract Documents regarding equal employment opportunity and affirmative action programs. 2.2 GUARANTEED MAXIMUM PRICE PROPOSAL AND CONTRACT TIME 2.2.1 When the Drawings and Specifications are sufficiently complete, the Construction Manager shall propose a Guaranteed Maximum Price, which shall be the sum of the estimated Cost of the Work and the Construction Manager's Fee. 2.2.2 As the Drawings and Specifications may not be finished at the time the Guaranteed Maximum Price proposal is prepared, the Construction Manager shall provide in the Guaranteed Maximum Price for further development of the Drawings and Specifications by the Architect that is consistent with the Contract Documents and reasonably inferable therefrom. Such further development does not - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #4 5 include such things as changes in scope, systems, kinds and quality of materials, finishes or equipment, all of which, if required, shall be incorporated by Change Order. 2.2.3 The estimated Cost of the Work shall include the Construction Manager's contingency, a sum established by the Construction Manager for the Construction Manager's exclusive use to cover costs arising under Subparagraph 2.2.2 and other costs which are properly reimbursable as Costs of the Work but not the basis for a Change Order. 2.2.4 BASIS OF GUARANTEED MAXIMUM PRICE The Construction Manager shall include with the Guaranteed Maximum Price proposal a written statement of its basis, which shall include: .1 A list of the Drawings and Specifications, including all addenda thereto and the Conditions of the Contract, which were used in preparation of the Guaranteed Maximum Price proposal. .2 A list of allowances and a statement of their basis. .3 A list of the clarifications and assumptions made by the Construction Manager in the preparation of the Guaranteed Maximum Price proposal to supplement the information contained in the Drawings and Specifications. .4 The proposed Guaranteed Maximum Price, including a statement of the estimated cost organized by trade categories, allowances, contingency, and other items and the fee that comprise the Guaranteed Maximum Price. .5 The Date of Substantial Completion upon which the proposed Guaranteed Maximum Price is based, and a schedule of the Construction Documents issuance dates upon which the date of Substantial Completion is based. 2.2.5 The Construction Manager shall meet with the Owner and Architect to review the Guaranteed Maximum Price proposal and the written statement of its basis. In the event that the Owner or Architect discovers any inconsistencies or inaccuracies in the information presented, they shall promptly notify the Construction Manager, who shall make appropriate adjustments to the Guaranteed Maximum Price proposal, its basis or both. 2.2.6 Unless the Owner accepts the Guaranteed Maximum Price proposal in writing on or before the date specified in the proposal for such acceptance and so notifies the Construction Manager, the Guaranteed Maximum Price proposal shall not be effective without written acceptance by the Construction Manager. 2.2.7 Prior to the Owner's acceptance of the Construction Manager's Guaranteed Maximum Price proposal and issuance of a Notice to Proceed, the Construction Manager shall not incur any cost to be reimbursed as part of the Cost of the Work, except as the Owner may specifically authorize in writing. 2.2.8 Upon acceptance by the Owner of the Guaranteed Maximum Price proposal, the Guaranteed Maximum Price and its basis shall be set forth in Amendment No.1. The Guaranteed Maximum Price shall be subject to additions and deductions by a change in the Work as provided in the Contract Documents and the date of Substantial Completion shall be subject to adjustment as provided in the Contract Documents. 2.2.9 The Owner shall authorize and cause the Architect to revise the Drawings and Specifications to the extent necessary to reflect the agreed-upon assumptions and clarifications contained in Amendment No. 1. Such revised Drawings and Specifications shall be furnished to the Construction Manager in accordance with schedules agreed to by the Owner, Architect and Construction Manager. The Construction Manager shall promptly notify the Architect and Owner if such revised Drawings and Specifications are inconsistent with the agreed-upon assumptions and clarifications. 2.2.10 The Guaranteed Maximum Price shall include in the Cost of the Work only those taxes which are enacted at the time the Guaranteed Maximum Price is established. 2.3 CONSTRUCTION PHASE 2.3.1 GENERAL 2.3.1.1 The Construction Phase shall commence on the earlier of: (1) the Owner's acceptance of the Construction Manager's Guaranteed Maximum Price proposal and issuance of a Notice to Proceed, or (2) the Owner's first authorization to the Construction Manager to: (a) award a subcontract, or - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #5 6 (b) undertake construction Work with the Construction Manager's own forces, or (c) issue a purchase order for materials or equipment required for the Work. 2.3.2 ADMINISTRATION 2.3.2.1 Those portions of the Work that the Construction Manager does not customarily perform with the Construction Manager's own personnel shall be performed under subcontracts or by other appropriate agreements with the Construction Manager. The Construction Manager shall obtain bids from Subcontractors and from suppliers of materials or equipment fabricated to a special design for the Work from the list previously reviewed and, after analyzing such bids, shall deliver such bids to the Owner and Architect. The Owner shall then determine, with the advice of the Construction Manager and subject to the reasonable objection of the Architect, which bids will be accepted. The Owner may designate specific persons or entities from whom the Construction Manager shall obtain bids; however, if the Guaranteed Maximum Price has been established, the Owner may not prohibit the Construction Manager from obtaining bids from other qualified bidders. The Construction Manager shall not be required to contract with anyone to whom the Construction Manager has reasonable objection. 2.3.2.2 If the Guaranteed Maximum Price has been established and a specific bidder among those whose bids are delivered by the Construction Manager to the Owner and Architect (1) is recommended to the Owner by the Construction-Manager, (2) is qualified to perform that portion of the Work; (3) has submitted a bid which conforms to the requirements of the Contract Documents without reservations or exceptions, but the Owner requires that another bid be accepted, then the Construction Manager may require that a change in the Work be issued to adjust the Contract Time and the Guaranteed Maximum Price by the difference between the bid of the person or entity recommended to the Owner by the Construction Manager and the amount of the subcontract or other agreement actually signed with the person or entity designated by the Owner. 2.3.2.3 Subcontracts and agreements with suppliers furnishing materials or equipment fabricated to a special design shall conform to the payment provisions of Subparagraphs 7.1.8 and 7.1.9 and shall not be awarded on the basis of cost plus a fee without the prior consent of the Owner. 2.3.2.4 The Construction Manager shall schedule and conduct meetings at which the Owner, Architect, Construction Manager and appropriate Subcontractors can discuss the status of the Work. The Construction Manager shall prepare and promptly distribute meeting minutes. 2.3.2.5 Promptly after the Owner's acceptance of the Guaranteed Maximum Price proposal, the Construction Manager shall prepare a schedule in accordance with Paragraph 3.10 of AIA Document A201, including the Owner's occupancy requirements. 2.3.2.6 The Construction Manager shall provide monthly written reports to the Owner and Architect on the progress of the entire Work. The Construction Manager shall maintain a daily log containing a record of weather, Subcontractors working on the site, number of workers, Work accomplished, problems encountered and other similar relevant data as the Owner may reasonably require. The log shall be available to the Owner and Architect. 2.3.2.7 The Construction Manager shall develop a system of cost control for the Work, including regular monitoring of actual costs for activities in progress and estimates for uncompleted tasks and proposed changes. The Construction Manager shall identify variances between actual and estimated costs and report the variances to the Owner and Architect at regular intervals. 2.4 PROFESSIONAL SERVICES The Construction Manager shall not be required to provide professional services which constitute the practice of architecture or engineering, unless such services are specifically required by the Contract Documents for a portion of the Work or unless the Construction Manager has specifically agreed in writing to provide such services. In such event, the Construction Manager shall cause such services to be performed by appropriately licensed professionals. 2.5 UNSAFE MATERIALS In addition to the provisions of Paragraph 10.1 in AIA Document A201, if reasonable precautions will be inadequate to prevent foreseeable bodily injury or death to persons resulting from a material or substance encountered but not created on the site by the Construction Manager, the Construction Manager shall, upon recognizing the condition, immediately stop Work in the affected area and report the condition to the Owner and Architect in writing. The Owner, Construction Manager and Architect shall then proceed in the same manner described in Subparagraph 10.1.2 of AIA Document A201. The Owner shall be responsible for obtaining the services of a licensed laboratory to verify the presence or absence of the material or substance reported by the Construction Manager and, in the event such material or - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #6 7 substance is found to be present, to verify that it has been rendered harmless. Unless otherwise required by the Contract. Documents, the Owner shall furnish in writing to the Construction Manager and Architect the names and qualifications of persons or entities who are to perform tests verifying the presence or absence of such material or substance or who are to perform the task of removal or safe containment of such material or substance. The Construction Manager and Architect will promptly reply to the Owner in writing stating whether or not either has reasonable objection to the persons or entities proposed by the Owner. If either the Construction Manager or Architect has an objection to a person or entity proposed by the Owner, the Owner shall propose another to whom the Construction Manager and Architect have no reasonable objection. ARTICLE 3 OWNER'S RESPONSIBILITIES 3.1 INFORMATION AND SERVICES 3.1.1 The Owner shall provide full information in a timely manner regarding the requirements of the Project, including a program which sets forth the Owner's objectives, constraints and criteria, including space requirements and relationships, flexibility and expandability requirements, special equipment and systems, and site requirements. 3.1.2 The Owner, upon written request from the Construction Manager, shall furnish evidence of Project financing prior to the start of the Construction Phase and from time to time thereafter as the Construction Manager may request. Furnishing of such evidence shall be a condition precedent to commencement or continuation of the Work. 3.1.3 The Owner shall establish and update an overall budget for the Project, based on consultation with the Construction Manager and Architect, which shall include contingencies for changes in the Work and other costs which are the responsibility of the Owner. 3.1.4 STRUCTURAL AND ENVIRONMENTAL TESTS, SURVEYS AND REPORTS In the Preconstruction Phase, the Owner shall furnish the following with reasonable promptness and at the Owner's expense, and the Construction Manager shall be entitled to rely upon the accuracy of any such information, reports, surveys, drawings and tests described in Clauses 3.1.4.1 through 3.1.4.4, except to the extent that the Construction Manager knows of any inaccuracy: 3.1.4.1 Reports, surveys, drawings and tests concerning the conditions of the site which are required by law. 3.1.4.2 Surveys describing physical characteristics, legal limitations and utility locations for the site of the Project, and a written legal description of the site. The surveys and legal information shall include, as applicable, grades and lines of streets, alleys, pavements and adjoining property and structures; adjacent drainage; rights-of-way, restrictions, easements, encroachments, zoning, deed restrictions, boundaries and contours of the site; locations, dimensions and necessary data pertaining to existing buildings, other improvements and trees; and information concerning available utility services and lines, both public and private, above and below grade, including inverts and depths. All information on the survey shall be referenced to a project benchmark. 3.1.4.3 The services of geotechnical engineers when such services are requested by the Construction Manager. Such services may include but are not limited to test borings, test pits, determinations of soil bearing values, percolation tests, evaluations of hazardous materials, ground corrosion and resistivity tests, including necessary operations for anticipating subsoil conditions, with reports and appropriate professional recommendations. 3.1.4.4 Structural, mechanical, chemical, air and water pollution tests, tests for hazardous materials, and other laboratory and environmental tests, inspections and reports which are required by law. 3.1.4.5 The services of other consultants when such services are reasonably required by the scope of the Project and are requested by the Construction Manager. 3.2 OWNER'S DESIGNATED REPRESENTATIVE The Owner shall designate in writing a representative who shall have express authority to bind the Owner with respect to all matters requiring the Owner's approval or authorization. This representative shall have the authority to make decisions on behalf of the Owner concerning estimates and schedules, construction budgets, and changes in the Work, and shall render such decisions promptly and furnish information expeditiously, so as to avoid unreasonable delay in the services or Work of the Construction Manager. 3.3 ARCHITECT The Owner shall retain an Architect to provide the Basic Services, including normal structural, mechanical and electrical engineering services, other than cost estimating - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA 957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #9 8 services, described in the edition OF AIA DOCUMENT B141 current as of the date of this Agreement. The Owner shall authorize and cause the Architect to provide those Additional Services described in AIA Document B141 requested by the Construction Manager which must necessarily be provided by the Architect for the Preconstruction and Construction Phases of the Work. Such services shall be provided in accordance with time schedules agreed to by the Owner, Architect and Construction Manager. Upon request of the Construction Manager, the Owner shall furnish to the Construction Manager a copy of the Owner's Agreement with the Architect, from which compensation provisions may be deleted. 3.4 LEGAL REQUIREMENTS The Owner shall determine and advise the Architect and Construction Manager of any special legal requirements relating specifically to the Project which differ from those generally applicable to construction in the jurisdiction of the Project. The Owner shall furnish such legal services as are necessary to provide the information and services required under Paragraph 3.1. ARTICLE 4 COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE SERVICES The Owner shall compensate and make payments to the Construction Manager for Preconstruction Phase services as follows: 4.1 COMPENSATION 4.1.1 For the services described in Paragraphs 2.1 and 2.2 the Construction Manager's compensation shall be calculated as follows: (State basis of compensation, whether a stipulated sum, multiple of Direct Personnel Expense, actual cost, etc. Include a statement of reimbursable cost items as applicable.) No Preconstruction Services as stated in Paragraphs 2.1 to 2.1.5.4. are required in this Contract. Compensation for 2.1.6, 2.1.7, 2.1.8, 2.1.9 and 2.2 service shall be based under Article 5.1.1 to 5.2.1. 4.1.2 Compensation for Preconstruction Phase services shall be equitably adjusted if such services extend beyond from the date of this Agreement or if the originally contemplated scope of services is significantly modified. 4.1.3 If compensation is based on a multiple of Direct Personnel Expense, Direct Personnel Expense is defined as the direct salaries of the Construction Manager's personnel engaged in the Project and the portion of the cost of their mandatory and customary contributions and benefits related thereto, such as employment taxes and other statutory employee benefits, insurance, sick leave, holidays, vacations, pensions and similar contributions and benefits. 4.2 PAYMENTS 4.2.1 Payments shall be made monthly following presentation of the Construction Manager's invoice and, where applicable, shall be in proportion to services performed. 4.2.2 Payments are due and payable Thirty (30) days from the date the Construction Manager's invoice is received by the Owner. Amounts unpaid after the date on which payment is due shall bear interest at the rate entered below, or in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located. (Insert rate of interest agreed upon) (Usury laws and requirements under the Federal Truth in Lending Act, similar state and local consumer credit laws and other regulations at the Owner's and Construction Manager's principal places of business, the location of the Project and elsewhere may affect the validity of this provision. Legal advice should be obtained with respect to deletions or modifications, and also regarding requirements such as written disclosures or waivers.) ARTICLE 5 COMPENSATION FOR CONSTRUCTION PHASE SERVICES The Owner shall compensate the Construction Manager for Construction Phase services as follows: 5.1 COMPENSATION - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #8 9 5.1.1 For the Construction Manager's performance of the Work as described in Paragraph 2.3, the Owner shall pay the Construction Manager in current funds the Contract Sum consisting of the Cost of the Work as defined in Article 7 and the Construction Manager's Fee determined as follows: (State a lump sum, percentage of actual Cost of the Work or other provision for determining the Construction Manager's Fee, and explain how the Construction Manager's Fee is to be adjusted for changes in the Work.) 5% of the Cost of the Work as defined under Article 6. 5.2 GUARANTEED MAXIMUM PRICE 5.2.1 The sum of the Cost of the Work and the Construction Manager's Fee are guaranteed by the Construction Manager not to exceed the amount provided in Amendment No. 1, subject to additions and deductions by changes in the Work as provided in the Contract Documents. Such maximum sum as adjusted by approved changes in the Work is referred to in the Contract Documents as the Guaranteed Maximum Price. Costs which would cause the Guaranteed Maximum Price to be exceeded shall be paid by the Construction Manager without reimbursement by the Owner. (Insert specific provisions if the Construction Manager is to participate in any savings.) 5.3 CHANGES IN THE WORK 5.3.1 Adjustments to the Guaranteed Maximum Price on account of changes in the Work subsequent to the execution of Amendment No. 1 may be determined by any of the methods listed in Subparagraph 7.3.3 of AIA Document A201. 5.3.2 In calculating adjustments to subcontracts (except those awarded with the Owner's prior consent on the basis of cost plus a fee), the terms "cost" and "fee" as used in Clause 7.3.3.3 of AIA Document A201 and the terms "costs" and "a reasonable allowance for overhead and profit" as used in Subparagraph 7.3.6 of AIA Document A201 shall have the meanings assigned to them in that document and shall not be modified by this Article 5. Adjustments to subcontracts awarded with the Owner's prior consent on the basis of cost plus a fee shall be calculated in accordance with the terms of those subcontracts. 5.3.3 In calculating adjustments to the Contract, the terms "cost" and "costs" as used in the above-referenced provisions of AIA Document A201 shall mean the Cost of the Work as defined in Article 6 of this Agreement and the terms "and a reasonable allowance for overhead and profit" shall mean the Construction Manager's Fee as defined in Subparagraph 5.1.1 of this Agreement. 5.3.4 If no specific provision is made in Subparagraph 5.1.1 for adjustment of the Construction Manager's Fee in the case of changes in the Work, or if the extent of such changes is such, in the aggregate, that application of the adjustment provisions of Subparagraph 5.1.1 will cause substantial inequity to the Owner or Construction Manager, the Construction Manager's Fee shall be equitably adjusted on the basis of the fee established for the original Work. ARTICLE 6 COST OF THE WORK FOR CONSTRUCTION PHASE 6.1 COSTS TO BE REIMBURSED 6.1.1 The term "Cost of the Work" shall mean costs necessarily incurred by the Construction Manager in the proper performance of the Work. Such costs shall be at rates not higher than those customarily paid at the place of the Project except with prior consent of the Owner. The Cost of the Work shall include only the items set forth in this Article 6. 6.1.2 LABOR COSTS .1 Wages of construction workers directly employed by the Construction Manager to perform the construction of the Work at the site or, with the Owner's agreement, at off-site workshops. .2 Wages or salaries of the Construction Manager's supervisory and administrative personnel when stationed at the site with the Owner's agreement. (If it is intended that the wages or salaries of certain personnel stationed at the Construction Manager's principal office or offices other than the site office shall be included in the Cost of the Work, such personnel shall be identified below.) - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #9 10 .3 Wages and salaries of the Construction Manager's supervisory or administrative personnel engaged, at factories, workshops or on the road, in expediting the production or transportation of materials or equipment required for the Work, but only for that portion of their time required for the Work. .4 Costs paid or incurred by the Construction Manager for taxes, insurance, contributions, assessments and benefits required by law or collective bargaining agreements, and, for personnel not covered by such agreements, customary benefits such as sick leave, medical and health benefits, holidays, vacations and pensions, provided that such costs are based on wages and salaries included in the Cost of the Work under Clauses 6.1.2.1 through 6.1.2.3. 6.1.3 SUBCONTRACT COSTS Payments made by the Construction Manager to Subcontractors in accordance with the requirements of the subcontracts. 6.1.4 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED CONSTRUCTION .1 Costs, including transportation, of materials and equipment incorporated or to be incorporated in the completed construction. .2 Costs of materials described in the preceding Clause 6.1.4.1 in excess of those actually installed but required to provide reasonable allowance for waste and for spoilage. Unused excess materials, if any, shall be handed over to the Owner at the completion of the Work or, at the Owner's option, shall be sold by the Construction Manager; amounts realized, if any, from such sales shall be credited to the Owner as a deduction from the Cost of the Work. 6.1.5 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITIES AND RELATED ITEMS .1 Costs, including transportation, installation, maintenance, dismantling and removal of materials, supplies, temporary facilities, machinery, equipment, and hand tools not customarily owned by the construction workers, which are provided by the Construction Manager at the site and fully consumed in the performance of the Work; and cost less salvage value on such items if not fully consumed, whether sold to others or retained by the Construction Manager. Cost for items previously used by the Construction Manager shall mean fair market value. .2 Rental charges for temporary facilities, machinery, equipment, and hand tools not customarily owned by the construction workers, which are provided by the Construction Manager at the site, whether rented from the Construction Manager or others, and costs of transportation, installation, minor repairs and replacements, dismantling and removal thereof. Rates and quantities of equipment rented shall be subject to the Owner's prior approval. .3 Costs of removal of debris from the site. .4 Reproduction costs, costs of telegrams, facsimile transmissions and long-distance telephone calls, postage and express delivery charges, telephone service at the site and reasonable petty cash expenses of the site office. .5 That portion of the reasonable travel and subsistence expenses of the Construction Manager's personnel incurred while traveling in discharge of duties connected with the Work. 6.1.6 MISCELLANEOUS COSTS .1 That portion directly attributable to this Contract of premiums for insurance and bonds. (If charges for self insurance are to be included, specify the basis of reimbursement.) .2 Sales, use or similar taxes imposed by a governmental authority which are related to the Work and for which the Construction Manager is liable. .3 Fees and assessments for the building permit and for other permits, licenses and inspections for which the Construction - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #10 11 Manager is required by the Contract Documents to pay. .4 Fees of testing laboratories for tests required by the Contract Documents, except those related to nonconforming Work other than that for which payment is permitted by Clause 6.1.8.2. .5 Royalties and license fees paid for the use of a particular design, process or product required by the Contract Documents; the cost of defending suits or claims for infringement of patent or other intellectual property rights arising from such requirement by the Contract Documents; payments made in accordance with legal judgments against the Construction Manager resulting from such suits or claims and payments of settlements made with the Owner's consent; provided, however, that such costs of legal defenses, judgments and settlement shall not be included in the calculation of the Construction Manager's Fee or the Guaranteed Maximum Price and provided that such royalties, fees and costs are not excluded by the last sentence of Subparagraph 3.17.1 of AIA Document A201 or other provisions of the Contract Documents. .6 Data processing costs related to the Work. .7 Deposits lost for causes other than the Construction Manager's negligence or failure to fulfill a specific responsibility to the Owner set forth in this Agreement. .8 Legal, mediation and arbitration costs, other than those arising from disputes between the Owner and Construction Manager, reasonably incurred by the Construction Manager in the performance of the Work and with the Owners written permission, which permission shall not be unreasonably withheld. .9 Expenses incurred in accordance with the Construction Manager's standard personnel policy for relocation and temporary living allowances of personnel required for the Work, in case it is necessary to relocate such personnel from distant locations. 6.1.7 OTHER COSTS .1 Other costs incurred in the performance of the Work if and to the extent approved in advance in writing by the Owner. 6.1.8 EMERGENCIES AND REPAIRS TO DAMAGED OR NONCONFORMING WORK The Cost of the Work shall also include costs described in Subparagraph 6.1.1 which are incurred by the Construction Manager: .1 In taking action to prevent threatened damage, injury or loss in case of an emergency affecting the safety of persons and property, as provided in Paragraph 10.3 of AIA Document A201. .2 N/A 6.1.9 The costs described in Subparagraphs 6.1.1 through 6.1.8 shall be included in the Cost of the Work notwithstanding any provision of AIA Document A201 or other Conditions of the Contract which may require the Construction Manager to pay such costs, unless such costs are excluded by the provisions of Paragraph 6.2. 6.2 COSTS NOT TO BE REIMBURSED 6.2.1 The Cost of the Work shall not include: - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #11 12 .1 Salaries and other compensation of the Construction Manager's personnel stationed at the Construction Manager's principal office or offices other than the site office, except as specifically provided in Clauses 6.1.2.2 and 6.1.2.3. .2 Expenses of the Construction Manager's principal office and offices other than the site office except as specifically provided in Paragraph 6.1. .3 Overhead and general expenses, except as may be expressly included in Paragraph 6.1. .4 The Construction Manager's capital expenses, including interest on the Construction Manager's capital employed for the Work. .5 Rental costs of machinery and equipment, except as specifically provided in Subparagraph 6.1.5.2. .6 Except as provided in Clause 6.1.8.2, costs due to the negligence of the Construction Manager or to the failure of the Construction Manager to fulfill a specific responsibility to the Owner set forth in this Agreement. .7 Costs incurred in the performance of Preconstruction Phase Services. .8 Except as provided in Clause 6.1.7.1, any cost not specifically and expressly described in Paragraph 6.1. .9 Costs which would cause the Guaranteed Maximum Price to be exceeded. 6.3 DISCOUNTS, REBATES AND REFUNDS 6.3.1 Cash discounts obtained on payments made by the Construction Manager shall accrue to the Owner if (1) before making the payment, the Construction Manager included them in an Application for Payment and received payment therefor from the Owner, or (2) the Owner has deposited funds with the Construction Manager with which to make payments; otherwise, cash discounts shall accrue to the Construction Manager. Trade discounts, rebates, refunds and amounts received from sales of surplus materials and equipment shall accrue to the Owner, and the Construction Manager shall make provisions so that they can be secured. 6.3.2 Amounts which accrue to the Owner in accordance with the provisions of Subparagraph 6.3.1 shall be credited to the Owner as a deduction from the Cost of the Work. 6.4 ACCOUNTING RECORDS 6.4.1 The Construction Manager shall keep full and detailed accounts and exercise such controls as may be necessary for proper financial management under this Contract; the accounting and control systems shall be satisfactory to the Owner. The Owner and the Owner's accountants shall be afforded access to the Construction Manager's records, books, correspondence, instructions, drawings, receipts, subcontracts, purchase orders, vouchers, memoranda and other data relating to this Project, and the Construction Manager shall preserve these for a period of three years after final payment, or for such longer period as may be required by law. ARTICLE 7 CONSTRUCTION PHASE 7.1 PROGRESS PAYMENTS 7.1.1 Based upon Applications for Payment submitted to the Architect by the Construction Manager and Certificates for Payment issued by the Architect, the Owner shall make progress payments on account of the Contract Sum to the Construction Manager as provided below and elsewhere in the Contract Documents. 7.1.2 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month, or as follows: - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 - 5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #12 13 7.1.3 Provided an Application for Payment is received by the Architect not later than the First day of a month, the Owner shall make payment to the Construction Manager not later than the Fifteenth day of the Same month. If an Application for Payment is received by the Architect after the application date fixed above, payment shall be made by the Owner not later than Fifteen days after the Architect receives the Application for Payment. 7.1.4 With each Application for Payment, the Construction Manager shall submit payrolls, petty cash accounts, receipted invoices or invoices with check vouchers attached, and any other evidence required by the Owner or Architect to demonstrate that cash disbursements already made by the Construction Manager on account of the Cost of the Work equal or exceed (1) progress payments already received by the Construction Manager; less (2) that portion of those payments attributable to the Construction Manager's Fee; plus (3) payrolls for the period covered by the present Application for Payment. 7.1.5 Each Application for Payment shall be based upon the most recent schedule of values submitted by the Construction Manager in accordance with the Contract Documents. The schedule of values shall allocate the entire Guaranteed Maximum Price among the various portions of the Work, except that the Construction Manager's Fee shall be shown as a single separate item. The schedule of values shall be prepared in such form and supported by such data to substantiate its accuracy as the Architect may require. This schedule, unless objected to by the Architect, shall be used as a basis for reviewing the Construction Manager's Applications for Payment. 7.1.6 Applications for Payment shall show the percentage completion of each portion of the Work as of the end of the period covered by the Application for Payment. The percentage completion shall be the lesser of (1) the percentage of that portion of the Work which has actually been completed or (2) the percentage obtained by dividing (a) the expense which has actually been incurred by the Construction Manager on account of that portion of the Work for which the Construction Manager has made or intends to make actual payment prior to the next Application for Payment by (b) the share of the Guaranteed Maximum Price allocated to that portion of the Work in the schedule of values. 7.1.7 Subject to other provisions of the Contract Documents, the amount of each progress payment shall be computed as follows: .1 Take that portion of the Guaranteed Maximum Price properly allocable to completed Work as determined by multiplying the percentage completion of each portion of the Work by the share of the Guaranteed Maximum Price allocated to that portion of the Work in the schedule of values. Pending final determination of cost to the Owner of changes in the Work, amounts not in dispute may be included as provided in Subparagraph 7.3.7 of AIA Document A201, even though the Guaranteed Maximum Price has not yet been adjusted by Change Order. .2 Add that portion of the Guaranteed Maximum Price properly allocable to materials and equipment delivered and suitably stored at the site for subsequent incorporation in the Work or, if approved in advance by the Owner, suitably stored off the site at a location agreed upon in writing. .3 Add the Construction Manager's Fee, less retainage of Ten percent (10%). The Construction Manager's Fee shall be computed upon the Cost of the Work described in the two preceding Clauses at the rate stated in Subparagraph 5.1.1 or, if the Construction Manager's Fee is stated as a fixed sum in that Subparagraph, shall be an amount which bears the same ratio to that fixed-sum Fee as the Cost of the Work in the two preceding Clauses bears to a reasonable estimate of the probable Cost of the Work upon its completion. .4 Subtract the aggregate of previous payments made by the Owner. .5 Subtract the shortfall, if any, indicated by the Construction Manager in the documentation required by Subparagraph 7.1.4 to substantiate prior Applications for Payment, or resulting from errors subsequently discovered by the Owner's accountants in such documentation. .6 Subtract amounts, if any, for which the Architect has withheld or nullified a Certificate for Payment as provided in - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA -COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 -AGC - COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C., 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC - 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 - Page #13 14 Paragraph 9.5 of AIA Document A201. 7.1.8 Except with the Owner's prior approval, payments to Subcontractors shall be subject to retention of not less than ten percent (10%). The Owner and the Construction Manager shall agree upon a mutually acceptable procedure for review and approval of payments and retention for subcontracts. 7.1.9 Except with the Owner's prior approval, the Construction Manager shall not make advance payments to suppliers for materials or equipment which have not been delivered and stored at the site. 7.1.10 In taking action on the Construction Manager's Applications for Payment, the Architect shall be entitled to rely on the accuracy and completeness of the information furnished by the Construction Manager and shall not be deemed to represent that the Architect has made a detailed examination, audit or arithmetic verification of the documentation submitted in accordance with Subparagraph 7.1.4 or other supporting data; that the Architect has made exhaustive or continuous on-site inspections or that the Architect has made examinations to ascertain how or for what purposes the Construction Manager has used amounts previously paid on account of the Contract. Such examinations, audits and verifications, if required by the Owner, will be performed by the Owner's accountants acting in the sole interest of the Owner. 7.2 FINAL PAYMENT 7.2.1 Final payment shall be made by the Owner to the Construction Manager when (1) the Contract has been fully performed by the Construction Manager except for the Construction Manager's responsibility to correct nonconforming Work, as provided in Subparagraph 12.2.2 of AIA Document A201, and to satisfy other requirements, if any, which necessarily survive final payment; (2) a final Application for Payment and a final accounting for the Cost of the Work have been submitted by the Construction Manager and reviewed by the Owner's accountants; and (3) a final Certificate for Payment has then been issued by the Architect; such final payment shall be made by the Owner not more than 30 days after the issuance of the Architect's final Certificate for Payment, or as follows: 7.2.2 The amount of the final payment shall be calculated as follows: .1 Take the sum of the Cost of the Work substantiated by the Construction Manager's final accounting and the Construction Manager's Fee; but not more than the Guaranteed Maximum Price. .2 Subtract amounts, if any, for which the Architect withholds, in whole or in part, a final Certificate for Payment as provided in Subparagraph 9.5.1 of AIA Document A201 or other provisions of the Contract Documents. .3 Subtract the aggregate of previous payments made by the Owner. If the aggregate of previous payments made by the Owner exceeds the amount due the Construction Manager, the Construction Manager shall reimburse the difference to the Owner. 7.2.3 The Owner's accountants will review and report in writing on the Construction Manager's final accounting within 30 days after delivery of the final accounting to the Architect by the Construction Manager. Based upon such Cost of the Work as the Owner's accountants report to be substantiated by the Construction Manager's final accounting, and provided the other conditions of Subparagraph 7.2.1 have been met, the Architect will, within seven days after receipt of the written report of the Owner's accountants, either issue to the Owner a final Certificate for Payment with a copy to the Construction Manager, or notify the Construction Manager and Owner in writing of the Architect's reasons for withholding a certificate as provided in Subparagraph 9.5.1 of AIA Document A201. The time periods stated in this Paragraph 7.2 supersede those stated in Subparagraph 9.4.1 of AIA Document A201. 7.2.4 If the Owner's accountants report the Cost of the Work as substantiated by the Construction Manager's final accounting to be less than claimed by the Construction Manager, the Construction Manager shall be entitled to proceed in accordance with Article 9 without a further decision of the Architect. Unless agreed to otherwise, a demand for mediation or arbitration of the disputed amount shall be made by the Construction Manager within 60 days after the Construction Manager's receipt of a copy of the Architect's final Certificate for Payment. Failure to make such demand within this 60-day period shall result in the substantiated amount reported by - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA -COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 -AGC - COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C., 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC - 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 - Page #14 15 the Owner's accountants becoming binding on the Construction Manager. Pending a final resolution of the disputed amount, the Owner shall pay the Construction Manager the amount certified in the Architect's final Certificate for Payment. 7.2.5 N/A ARTICLE 8 INSURANCE AND BONDS 8.1 INSURANCE REQUIRED OF THE CONSTRUCTION MANAGER During both phases of the Project, the Construction Manager shall purchase and maintain insurance as set forth in Paragraph 11.1 of AIA Document A201. Such insurance shall be written for not less than the following limits, or greater if required by law: 8.1.1 Workers' Compensation and Employers' Liability meeting statutory limits mandated by State and Federal laws. If (1) limits in excess of those required by statute are to be provided or (2) the employer is not statutorily bound to obtain such insurance coverage or (3) additional coverages are required, additional coverages and limits for such insurance shall be as follows:. 8.1.2 Commercial General Liability including coverage for Premises-Operations, Independent Contractors' Protective, Products-Completed Operations, Contractual Liability, Personal Injury, and Broad Form Property Damage (including coverage for Explosion, Collapse and Underground hazards) $1,000,000.00 Each Occurrence $1,000,000.00 General Aggregate $1,000,000.00 Personal and Advertising Injury $1,000,000.00 Products-Completed Operations Aggregate .1 The policy shall be endorsed to have the General Aggregate apply to this Project only. .2 Products and Completed Operations insurance shall be maintained for a minimum period of at least year(s) after either 90 days following Substantial Completion or final payment, whichever is earlier. .3 The Contractual Liability insurance shall include coverage sufficient to meet the obligations in AIA Document A201 under Paragraph 3.18. 8.1.3 Automobile Liability (owned, non-owned and hired vehicles) for bodily injury and property damage: $1,000,000.00 Each Accident 8.1.4 Other coverage: (If Umbrella Excess Liability coverage is required over the primary insurance or retention, insert the coverage limits. Commercial General Liability and Automobile Liability limits may be attained by individual policies or by a combination of primary policies and Umbrella and/or Excess Liability policies.) 8.2 INSURANCE REQUIRED OF THE OWNER - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA -COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 -AGC - COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C., 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC - 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 - Page #15 16 During both phases of the Project, the Owner shall purchase and maintain liability and property insurance, including waivers of subrogation, as set forth in Paragraphs 11.2 and 11.3 of AIA Document A201. Such insurance shall be written for not less than the following limits, or greater if required by law: 8.2.1 Builder Risk Insurance shall be written with a limit of the Contract amount. $ 1,000.00 Deductible Per Occurrence $ No Limit On Aggregate Deductible 8.2.2 Boiler and Machinery insurance with a limit of: Owner's Boiler Insurance will start on the day of Substantial Completion, upon acceptance by the Owner for occupancy and operation of the Bank. (If not a blanket policy, list the objects to be insured.) 8.3 PERFORMANCE BOND AND PAYMENT BOND 8.3.1 The Construction Manager shall not (Insert "shall" or "shall not") furnish bonds covering faithful performance of the Contract and payment of obligations arising thereunder. Bonds may be obtained through the Construction Manager's usual source and the cost thereof shall be included in the Cost of the Work. The amount of each bond shall be equal to percent ( ) of the Contract Sum. 8.3.2 The Construction Manager shall deliver the required bonds to the Owner at least three days before the commencement of any Work at the Project site. ARTICLE 9 MISCELLANEOUS PROVISIONS 9.1 DISPUTE RESOLUTION FOR THE PRECONSTRUCTION PHASE 9.1.1 Claims, disputes or other matters in question between the parties to this Agreement which arise prior to the commencement of the Construction Phase or which relate solely to the Preconstruction Phase services of the Construction Manager or to the Owner's obligations to the Construction Manager during the Preconstruction Phase, shall be resolved by mediation or by arbitration. 9.1.2 Any mediation conducted pursuant to this Paragraph 9.1 shall be held in accordance with the Construction Industry Mediation Rules of the American Arbitration Association currently in effect, unless the parties mutually agree otherwise. Demand for mediation shall be filed in writing with the other party to this Agreement and with the American Arbitration Association. Any demand for mediation shall be made within a reasonable time after the claim, dispute or other matter in question has arisen. In no event shall the demand for mediation be made after the date when institution of legal or equitable proceedings based upon such claim, dispute or other matter in question would be barred by the applicable statute of limitations. 9.1.3 Any claim, dispute or other matter in question not resolved by mediation shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect unless the parties mutually agree otherwise. 9.1.4 Demand for arbitration shall be filed in writing with the other party to this Agreement and with the American Arbitration Association. A demand for arbitration may be made concurrently with a demand for mediation and shall be made within a reasonable time after the claim, dispute or other matter in question has arisen. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based upon such claim, dispute or other matter in question would be barred by the applicable statute of limitations. 9.1.5 No arbitration arising out of or relating to the Contract Documents shall include, by consolidation or joinder or in any other manner, the Architect, the Architect's employees or consultants, except by written consent containing specific reference to the Agreement and signed by the Architect, Owner, Construction Manager and any other person or entity sought to be joined. No arbitration shall include, by consolidation or joinder or in any other manner, parties other than the Owner, Construction Manager, a separate contractor as described in Article 6 of AIA Document A201 and other persons substantially involved in a common question of fact or law whose presence is required if complete relief is to be accorded in arbitration. No person or entity other than the Owner or Construction Manager or a separate contractor as described in Article 6 of AIA. - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA -COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 -AGC - COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C., 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC - 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 - Page #16 17 Document A201 shall be included as an original third party or additional third party to an arbitration whose interest or responsibility is insubstantial. Consent to arbitration involving an additional person or entity shall not constitute agreement to arbitration of a dispute not described in such consent or with a person or entity not named or described therein. The foregoing agreement to arbitrate and other agreements to arbitrate with an additional person or entity duly consented to by parties to this Agreement shall be specifically enforceable under applicable law in any court having jurisdiction thereof. 9.1.6 The award rendered by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof. 9.2 DISPUTE RESOLUTION FOR THE CONSTRUCTION PHASE 9.2.1 Any other claim, dispute or other matter in question arising out of or related to this Agreement or breach thereof shall be settled in accordance with Article 4 of AIA Document A201, except that in addition to and prior to arbitration, the parties shall endeavor to settle disputes by mediation in accordance with the Construction Industry Mediation Rules of the American Arbitration Association currently in effect unless the parties mutually agree otherwise. Any mediation arising under this Paragraph shall be conducted in accordance with the provisions of Subparagraphs 9.1.2 and 9.1.3. 9.3 OTHER PROVISIONS 9.3.1 Unless otherwise noted, the terms used in this Agreement shall have the same meaning as those in the 1987 Edition of AIA Document A201, General Conditions of the Contract for Construction. 9.3.2 EXTENT OF CONTRACT This Contract, which includes this Agreement and the other documents incorporated herein by reference, represents the entire and integrated agreement between the Owner and Construction Manager and supersedes all prior negotiations, representations or agreements, either written or oral. This Agreement may be amended only by written instrument signed by both the Owner and Construction Manager. If anything in any document incorporated into this Agreement is inconsistent with this Agreement, this Agreement shall govern. 9.3.3 OWNERSHIP AND USE OF DOCUMENTS The Drawings, Specifications and other documents prepared by the Architect, and copies thereof furnished to the Construction Manager, are for use solely with respect to this Project. They are not to be used by the Construction Manager, Subcontractors, Sub-subcontractors or suppliers on other projects, or for additions to this Project outside the scope of the Work, without the specific written consent of the Owner and Architect. The Construction Manager, Subcontractors, Sub-subcontractors and suppliers are granted a limited license to use and reproduce applicable portions of the Drawings, Specifications and other documents prepared by the Architect appropriate to and for use in the execution of their Work under the Contract Documents. 9.3.4 GOVERNING LAW The Contract shall be governed by the law of the place where the Project is located. 9.3.5 ASSIGNMENT The Owner and Construction Manager respectively bind themselves, their partners, successors, assigns and legal representatives to the other party hereto and to partners, successors, assigns and legal representatives of such other party in respect to covenants, agreements and obligations contained in the Contract Documents. Neither party to the Contract shall assign the Contract as a whole without written consent of the other. If either party attempts to make such an assignment without such consent, that party shall nevertheless remain legally responsible for all obligations under the Contract. ARTICLE 10 TERMINATION OR SUSPENSION 10.1 TERMINATION PRIOR TO ESTABLISHING, GUARANTEED MAXIMUM PRICE 10.1.1 Prior to execution by both parties of Amendment No. 1 establishing the Guaranteed Maximum Price, the Owner may terminate this Contract at any time without cause, and the Construction Manager may terminate this Contract for any of the reasons described in Subparagraph 14.1.1 of AIA Document A201. 10.1.2 If the Owner or Construction Manager terminates this Contract pursuant to this Paragraph 10.1 prior to commencement of the Construction Phase, the Construction Manager shall be equitably compensated for Preconstruction Phase services performed prior to receipt of notice of termination; provided, however, that the compensation for such services shall not exceed the compensation set forth in Subparagraph 4.1.1. - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #17 18 10.1.3 If the Owner or Construction Manager terminates this Contract pursuant to this Paragraph 10.1 after commencement of the Construction Phase, the Construction Manager shall, in addition to the compensation provided in Subparagraph 10.1.2, be paid an amount calculated as follows: .1 Take the Cost of the Work incurred by the Construction Manager. .2 Add the Construction Manager's Fee computed upon the Cost of the Work to the date of termination at the rate stated in Paragraph 5.1 or, if the Construction Manager's Fee is stated as a fixed sum in that Paragraph, an amount which bears the same ratio to that fixed-sum Fee as the Cost of Work at the time of termination bears to a reasonable estimate of the probable Cost of the Work upon its completion. .3 Subtract the aggregate of previous payments made by the Owner on account of the Construction Phase. The Owner shall also pay the Construction Manager fair compensation, either by purchase or rental at the election of the Owner, for any equipment owned by the Construction Manager which the Owner elects to retain and which is not otherwise included in the Cost of the Work under Clause 10.1.3.1. To the extent that the Owner elects to take legal assignment of subcontracts and purchase orders (including rental agreements), the Construction Manager shall, as a condition of receiving the payments referred to in this Article 10, execute and deliver all such papers and take all such steps, including the legal assignment of such subcontracts and other contractual rights of the Construction Manager, as the Owner may require for the purpose of fully vesting in the Owner the rights and benefits of the Construction Manager under such subcontracts or purchase orders. Subcontracts, purchase orders and rental agreements entered into by the Construction Manager with the Owner's written approval prior to the execution of Amendment No. 1 shall contain provisions permitting assignment to the Owner as described above. If the Owner accepts such assignment, the owner shall reimburse or indemnify the Construction Manager with respect to all costs arising under the subcontract, purchase order or rental agreement except those which would not have been reimbursable as Cost of the Work if the contract had not been terminated. If the Owner elects not to accept the assignment of any subcontract, purchase order or rental agreement which would have constituted a Cost of the Work had this agreement not been terminated, the Construction Manager shall terminate such subcontract, purchase order or rental agreement and the Owner shall pay the Construction Manager the costs necessarily incurred by the Construction Manager by reason of such termination. 10.2 TERMINATION SUBSEQUENT TO ESTABLISHING GUARANTEED MAXIMUM PRICE Subsequent to execution by both parties of Amendment No. 1, the Contract may be terminated as provided in Article 14 of AIA Document A201. 10.2.1 In the event of such termination by the Owner, the amount payable to the Construction Manager pursuant to Subparagraph 14.1.2 of AIA Document A201 shall not exceed the amount the Construction Manager would have been entitled to receive pursuant to Subparagraphs 10.1.2 and 10.1.3 of this Agreement. 10.2.2 In the event of such termination by the Construction Manager, the amount to be paid to the Construction Manager under Subparagraph 14.1.2 of AIA Document A201 shall not exceed the amount the Construction Manager would be entitled to receive under Subparagraphs 10.1.2 or 10.1.3 above, except that the Construction Manager's Fee shall be calculated as if the Work had been fully completed by the Construction Manager, including a reasonable estimate of the Cost of the Work for Work not actually completed. 10.3 SUSPENSION The Work may be suspended by the Owner as provided in Article 14 of AIA Document A201; in such case, the Guaranteed Maximum Price, if established, shall be increased as provided in Subparagraph 14.3.2 of AIA Document A201 except that the term "cost of performance of the Contract" in that Subparagraph shall be understood to mean the Cost of the Work and the term "profit" shall be understood to mean the Construction Manager's Fee as described in Subparagraphs 5.1.1 and 5.3.4 of this Agreement. ARTICLE 11 OTHER CONDITIONS AND SERVICES Construction Manager shall bid out all portions of work required under this Contract to complete all Work as shown on the Construction Documents. Due to the limited time schedule, drawings will be produced in phases, each phase is as follows: I Structural Steel Foundations Site Work - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #18 19 Building Exterior Masonry Glazing, Windows and Storefront Exterior Light Gauge Metal Framing Roofing Sheet Metal and Flashing Caulking II. Building Interior Finishes Doors and Interior Windows and Cabinetry Carpentry Finish and Rough Drywall Ceiling Insulation III. Mechanical Electrical Construction Manager shall submit a minimum of three bids on each subcontract and/or his bid if wishes to do any portion of the Work. All bids are to be submitted to Visser Brothers at a predetermined time. Article 6.1.8.2 should be modified as follows: In repairing damaged Work, provided that such damaged Work is not caused by the negligence or failure to fulfill a specific responsibility to the Owner set forth in this Agreement of the Construction Manager or the Construction Manager's foremen, engineers or superintendents, or other supervisory administrative or managerial personnel of the Construction Manager, or the failure of the Construction Manager's personnel to supervise adequately the Work of the Subcontractors or suppliers, and only to the extent that the cost of repair is not recoverable by the Construction Manager from insurance, Subcontractors or suppliers. Article 7.2.5 shall be deleted. If the provisions of this Agreement conflict with the General Conditions, the provisions of this Agreement shall control. Date of project completion shall be 150 days after first day of start of construction as stipulated in Section 2.3.1.1 (1). All Subcontractors shall be required to carry and submit their insurance for this Project as required in Article 8. Guaranteed Maximum Price Total Budget $ 987,105.00 Additional Cost of Sloping Metal Roof $ 67,745.00 Owner's Contingency $ 50,000.00 Total: $1,104,850.00 One Million One Hundred Four Thousand Eight Hundred Fifty & 00/100. This Agreement entered into as of the day and year first written above. OWNER CONSTRUCTION MANAGER (Signature) (Signature) Mercantile Bank of West Michigan Visser Brothers Construction, Inc. Robert Kaminski, Vice President Bruce Visser President (Printed Name and Title) (Printed Name and Title) - -------------------------------------------------------------------------------- AIA DOCUMENT AIA121/CMC AND AGC DOCUMENT 565 - OWNER-CONSTRUCTION MANAGER AGREEMENT - 1991 EDITION - AIA - COPYRIGHT 1991 - THE AMERICAN INSTITUTE OF THE ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006-5292 - AGC COPYRIGHT 1991 - THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 1957 E STREET, N.W., WASHINGTON, D.C. 20006-5209. WARNING; Unlicensed photocopying violates U.S. copyright laws and is subject to legal prosecution. This document was electronically produced with permission of the AIA and can be reproduced without violation until the date of expiration as noted below. Electronic Format A121/CMc-1991 User Document: MBWM-ALPINE.DOC -- 11/16/1998. AIA License Number 108020, which expires on 2/28/1999 -- Page #19 EX-10.4 3 EMPLOYMENT AGMT DATED DECEMBER 1, 1998 1 EXHIBIT 10.4 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made this 1st Day of December, 1998, by and between Mercantile Bank Corporation, a Michigan corporation (the "Company"), Mercantile Bank of West Michigan, a Michigan banking corporation (the "Bank", and collectively with the Company, the "Employers", and each an "Employer"), and Gerald R. Johnson, Jr. (the "Employee"). RECITALS A. The Employee has served as the Chairman of the Board and Chief Executive Officer of the Company and the Bank since their formation under his direction in 1997. B. The Employers and the Employee expect that the Employee will continue as the Chairman of the Board and Chief Executive Officer of the Company and the Bank and wish to describe the terms of such employment in this Agreement. C The Employers believe that entering into this Agreement is in the best interest of their respective shareholders. D The Employee believes that entering into this Agreement is in his best interest. TERMS OF AGREEMENT In consideration of the mutual covenants and obligations set forth in this Agreement, to induce the Employee to remain in the employment of the Employers, and for other good and valuable consideration, the Employers and the Employee agree as follows: 1. Employment , Term, and Acceptance: The Company and the Bank each agree to employ the Employee as its Chairman of the Board of Directors and Chief Executive Officer for the period from December 1, 1998 through December 31, 2001 (the "Employment Period"), unless such employment is terminated earlier pursuant to Section 7 or 8 of this Agreement. The Employee hereby accepts such employment. 2. Duties and Authority: 2.1 Promotion of Employers' Interest. While employed as the Chairman of the Board and Chief Executive Officer of the Company and the Bank, the Employee shall devote his business time and attention to the business and affairs of the Employers, and shall use his efforts and abilities to promote the interests of the Employers. 2.2 Performance of Duties. The Employee shall perform such services and duties necessary or appropriate for the management of the Employers as are normally expected of persons appointed to chairmanship and chief executive positions in the businesses in which the 2 Employers are engaged. 3. Cash Compensation. For all services to be performed by the Employee under this Agreement (including services as an officer, employee, director, or member of any board committee), the Bank shall pay the Employee an annual base salary (prorated for any partial year) of (a) One Hundred Eighty Thousand Dollars ($180,000) for the period from December 1, 1998 through June 30, 1999, (b) Two Hundred Thousand Dollars ($200,000) for the period from July 1, 1999 through December 31, 1999, and (c) for the periods from January 1, 2000 through December 31, 2000, and January 1, 2001 through December 31, 2001, amounts not less than Two Hundred Thousand Dollars ($200,000) as are determined by the Board of Directors of the Bank, such determination to be made for each period prior to the beginning of such period ("Base Cash Compensation"); payable in each case in accordance with the then prevailing payroll practices of the Bank. To the extent that the date of any change in rate of compensation provided for clause (a), (b) or (c) above does not coincide with the first day of a payroll period of the Bank, such change in rate of compensation shall become effective as of the first day of the payroll period that includes such date. As a one time adjustment, the Bank shall also pay the Employee within twenty (20) days after the execution of this Agreement a one time payment of $5,000, which is an amount equal to the difference between the compensation paid to the Employee for October and November of 1998, and the amount he would have been paid if his annual base salary had been increased to One Hundred and Eighty Thousand Dollars ($180,000) effective October 1, 1998. In addition to the Base Cash Compensation and one time adjustment described above, the Employee will be entitled to such bonuses and other discretionary compensation as may be awarded to him from time to time by the Board of Directors of either of the Employers. 4. Participation in Employee Benefit Plans. In addition to the cash compensation payable to the Employee under this Agreement, the Employee shall be entitled to participate in such employee benefit plans, whether contributory or non-contributory, such as group life and disability insurance plans, hospital, surgical, vision and dental benefit plans or other bonus incentive, profit sharing, stock option, retirement or other employee benefit plans of the Employers as may now or hereafter exist to the extent that the Employee meets the eligibility requirements of any such plans. All such group life and disability insurance plans, and hospital, surgical, vision and dental benefit plans are hereafter referred to as ("Life, Disability and Medical Plans"). It is specifically agreed that the Employee shall be entitled to participate in the incentive compensation plan described in Exhibit A to this Agreement. 5. Out of Pocket Expenses. The Employee will be reimbursed by the Bank or the Company, as the case may be, for all reasonable expenses incurred in promoting their respective businesses; including expenses for entertainment, travel and similar items upon the presentation by Employee, from time to time, of an itemized account of such expenditures in a form and manner as determined by the Board of Directors or the chief financial or accounting officer of the Employer for whose account the expenditures are made. 6. Vacations. The Employee shall be entitled each year to four (4) weeks paid 2 3 vacation time. The Employee will not be entitled to additional compensation for vacation time not utilized in any year nor will the Employee be permitted to carry over unused vacation time to a succeeding year. 7. Termination of Employment Upon Disability or Death. 7.1 Disability. In the event the Employee shall become mentally or physically disabled during the Employment Period and unable to perform the material duties of his employment for ninety (90) days or more because of illness, accident, or any other cause ("Disability"), the Bank or the Company may terminate the Employee's employment under this Agreement by giving him written notice of such termination ("Disability Termination Notice"). In the event of any such termination during the Employment Period, the Bank shall continue to pay the employee his Base Cash Compensation, at the rate in effect immediately prior to the giving of the Disability Termination Notice, through the end of the Employment Period (through December 31, 2001). In addition, the Employers shall cover the Employee under their disability plans, if any, in effect from time to time under the terms and conditions that such coverage is made available to other employees of the respective Employers, and the Employee shall be entitled to any benefits payable to him under such disability plans. While disabled, the Bank shall continue to provide the Employee and his dependents with coverage under its Life, Disability and Medical Plans until the Employee reaches the age of sixty-five (65) years old to the extent that it may do so under the provisions of such plans, with the Employee's contribution to the premiums under such plans being no more than the amounts he paid for such premiums prior to his disability, adjusted from time to time for normal periodic increases in such premiums applied in general to employees of the Bank. 7.2 Death. In the event of the death of the Employee, his employment with the Employers shall terminate as of the date of his death. Promptly following his death, the Bank shall pay to his legal representative a death benefit of $250,000. In addition, any life insurance policies owned by the Bank or the Company, and insuring the life of the Employee shall be payable to the beneficiaries of such policies in accordance with the terms of such policies. 7.3 Extent of Obligations. The provisions of Sections 7.1 and 7.2 apply only to Disability or death occurring during the Employment Period while the Employee is employed by the Bank and the Company. Other than as set forth in Section 7.1 or 7.2, neither of the Employers shall have any obligation or liability to the Employee upon the employee's death or Disability except that the Employee shall be entitled to all of his accrued rights under stock option, retirement and other employee benefit plans of the Company and the Bank, and the Bank shall promptly pay the Employee (or his personal representative) his Base Cash Compensation due through the effective date of the termination of his employment, the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), and any out-of -pocket expenses for which the Employee is entitled to be reimbursed, and for which reimbursement has not yet been made. 8. Termination of Employment for Cause, Without Cause, Good Reason, or Without 3 4 Good Reason. 8.1 Termination by an Employer for Cause. Each of the Employers shall have the right, at any time, to terminate the Employee's employment for Cause (as defined herein), within 90 days of the Employer's learning of such Cause. For purposes of this Agreement, the term "Cause" means (a) an act or acts of dishonesty committed by the Employee and intended by the Employee to result in the Employee's substantial personal enrichment at the expense of the Company or the Bank, (b) continuing intentional gross neglect by the Employee of his duties under Section 2 of this Agreement which cause or are expected to cause material harm to the Company or the Bank, and which is not remedied after receipt of notice from the applicable Employer, (c) the Employee's conviction of a felony, or (d) the Employee's intentional breach of his obligations under Section 10 or 11 which causes or may be expected to cause material harm to the Company or the Bank. Any termination for Cause shall be effective upon an Employer giving the Employee written notice that the Employee's employment is terminated, and setting forth in reasonable detail the basis for such termination, and that such termination is for Cause. Any such notice shall terminate the Employee's employment with both Employers. 8.2 Termination by an Employer Without Cause. Each of the Employers shall have the right at any time to terminate the Employee's employment without Cause by giving the Employee written notice that the Employee's employment is terminated, and setting forth in reasonable detail the basis, if any, for such termination. Any such termination shall be effective upon the giving of such notice by the Employer. 8.3 Termination by Employee for Good Reason. The Employee shall have the right at any time to terminate his employment under this Agreement for Good Reason (as defined herein) within ninety (90) days of learning of such Good Reason. For purposes of this Agreement, the term "Good Reason" means (a) any assignment to the Employee of any title or duties that are materially inconsistent with the Employee's present positions, titles, duties, or responsibilities, other than an insubstantial or inadvertent action which is remedied by the applicable Employer promptly after receipt of written notice from the Employee, or which is approved of by the Employee in writing; (b) any failure by an Employer to comply in a material respect with any provision of Section 3, 4, 5, or 6, other than a insubstantial or inadvertent failure which is remedied by the applicable Employer promptly after receipt of written notice from the Employee. Any termination for Good Reason shall be effective upon the Employee giving the Employers written notice that the Employee is terminating his employment, and setting forth in reasonable detail the basis for such termination, and that such termination is for Good Reason. Any such termination shall be effective upon the giving of such notice by the Employee; and any such notice shall terminate his employment with both Employers. Notwithstanding the above, the failure of the Employee to hold the position of Chairman of the Board of the Company arising from any failure of the shareholders of the Company to re-elect the Employee to the Board of Directors of the Company, provided that the Board of Directors of the Company has included the Employee on its slate of nominees as a director, shall not be sufficient to constitute Good Reason for termination of employment by the Employee. 4 5 8.4 Termination by Employee Without Good Reason. The Employee shall have the right at any time to terminate the Employee's employment with both Employers without Good Reason by giving the Employers written notice that the Employee is terminating his employment. Any such termination shall apply to the Employee's employment with both Employers and be effective ninety (90) days after the giving of such notice by the Employee. 8.5 Obligation of Employers upon Termination without Cause or Employee's Termination with Good Reason. In the event that during the Employment Period, an Employer terminates the Employee's employment without Cause under Section 8.2, or the Employee terminates his employment for Good Reason under Section 8.3; or the Employee's employment is terminated for any other reason except (i) for Cause under Section 8.1, (ii) without Good Reason under Section 8.4, or (iii) for Disability or death pursuant to Section 7; the Bank shall pay and provide (and to the extent the insurance referred to in Section 8.5(d) is owned by the Company, the Company shall provide) to the Employee the following: (a) to the extent not previously paid, the Employee's Base Cash Compensation due through the effective date of the termination of employment, the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), and any out-of -pocket expenses for which the Employee is entitled to be reimbursed, and for which reimbursement has not yet been made; payable within ten (10) days of such effective date, plus (b) an amount equal to the greater of (i) the Base Cash Compensation payable to the Employee for the remainder of the Employment Period (i.e. through December 31, 2001), or (ii) $500,000; in either case, payable in eighteen (18) substantially equal monthly installments commencing within thirty (30) days after the effective date of the termination of employment; plus (c) coverage for the Employee and his dependents under the Bank's Life, Disability, and Medical Plans for the eighteen (18) month period commencing on the effective date of the termination of employment to the extent that the Bank may do so under the provisions of such plans, and to the extent that it is not permitted to do so shall pay the Employee an amount that will permit him to obtain and pay for substantially equivalent coverage; plus (d) any life insurance policies owned by the Bank or the Company insuring the life of the Employee, to the extent that they may be practically assigned or transferred to the Employee; plus (e) $10,000 for out-placement, interim office, and related expenses. In addition, the Employee shall be entitled to all of his accrued rights under stock option, retirement, and other employee benefit plans of the Company and the Bank, 5 6 8.6 Obligation of Employers upon Termination for Cause or by Employee without Good Reason. In the event that during the Employment Period, an Employer terminates the Employee's employment for Cause as provided for in Section 8.1, or the Employee terminates his employment without Good Reason as permitted in Section 8.4; the Bank shall pay and provide to the Employee, to the extent not previously paid, the Employee's Base Cash Compensation due through the effective date of the termination of employment, plus the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), within ten (10) days of such effective date. In addition, the Employee shall be entitled to all of his accrued rights under stock option (except with respect to stock option plans, in the event of termination for Cause), retirement, and other employee benefit plans of the Company and the Bank, 8.7 No Other Obligations of Employers upon Termination. Upon termination of the Employee's employment, the Employers shall have no obligations to the Employee except as set forth in this Agreement, or accrued rights under stock option, retirement, or other employee benefit plans of either Employer. 9 Severance Payments on Termination after the Employment Period. If at any time after the Employment Period, (a) the Employee's employment with the Bank is terminated by the Bank without Cause, or (b) the Employee's annual base salary from the Bank is reduced without his consent and without Cause, and in the case of either (a) or (b) the Employee, within ninety (90) days thereafter, terminates his employment with the Bank; then unless the termination of employment or reduction in annual base salary resulted from the death or Disability of the Employee, the Bank shall pay and provide (and to the extent the insurance referred to in Section 8.5(d) is owned by the Company, the Company shall provide) to the Employee the following: (a) the amounts, coverage, benefits and life insurance provided for in Section 8.5 (a), (c), (d) and (e), plus (b) $500,000, payable in eighteen (18) substantially equal monthly installments commencing within thirty (30) days after the effective date of the termination of employment. In addition, the Employee shall be entitled to all of his accrued rights under stock option (except with respect to stock option plans, in the event of termination for Cause), retirement, and other employee benefit plans of the Company and the Bank, 10. Confidential Information. Employee agrees that he will not at any time (whether during his employment or at any time thereafter) disclose to any person, corporation, firm, partnership or other entity, except as required by law, any secret or confidential information concerning the business, clients or affairs of the Company or the Bank, or any of their affiliates, for any reason or purpose whatsoever other than in furtherance of the Employee's work for the Company or the Bank, nor shall the Employee make use of any of such secret or confidential information in any manner adverse to the Company or the Bank. 11. Noncompetition Covenant. For a period of eighteen (18) months following the termination of Employee's employment with the Employers, Employee will not be employed by or 6 7 act as a director or officer of any business involving or engaged in the business of banking within a 50-mile radius of the City of Grand Rapids, Michigan, where such business engages in soliciting, directly or indirectly, customers of the Bank. 12. Remedies under Section 10 and 11. The Employee acknowledges and agrees that his obligations under Sections 10 and 11 are of a special and unique nature and that a failure to perform any such obligation or a violation of any such obligation would cause irreparable harm to the Employers, the amount of which cannot be accurately compensated for in damages by an action at law. In the event of a breach by the Employee of any of the provisions of Section 10 or 11, the Company and the Bank shall be entitled to an injunction restraining the Employee from such breach. Nothing in this Section shall be construed as prohibiting the Company or the Bank from pursuing any other remedies available for any breach of this Agreement. 13. Deduction of Taxes. Each Employer may deduct from any amounts required to be paid to the Employee under this Agreement any amounts required to be withheld by the Employer pursuant to federal, state, or local law relating to taxes or related payroll deductions. 14. Objection to Termination and Legal Fees. The termination of the Employee's employment pursuant to this Agreement shall not preclude any Employer or the Employee from objecting to the basis asserted by the terminating party for such termination. The Employers agree to pay all reasonable legal fees and expenses incurred by the Employee in enforcing his rights under this Agreement, except with respect to claims made by the Employee that are rejected by a court (or any arbitrator sitting by agreement of the parties) to which such claims are presented; provided that the Employers' obligation to pay legal fees and expenses under this Section shall not exceed $10,000 in aggregate amount. 15. Adjustment between the Company and the Bank. The Company and the Bank acknowledge that although the Employee is generally paid solely by the Bank, he also performs some services for the Company, and the Company pays the Bank periodically an amount necessary to reimburse the Bank for amounts paid to the Employee by the Bank for services actually rendered to the Company. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered or sent by registered or certified United States mail or by a nationally recognized overnight courier service, to his residence or the last address he has provided in writing to the Employers, in the case of the Employee, or to its principal office in the case of an Employer. For purposes of this Agreement, notices shall be deemed given when received at the address or office specified in the preceding sentence. 17. Waiver of Breach. No waiver by either party of any breach or non-performance of any provision or obligation of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision of this Agreement. 7 8 18. Assignment. The rights and obligations of each Employer under this Agreement shall inure to the benefit of and shall be binding upon them and their respective successors and assigns. As used in this Agreement, the term "successor" shall include any person, firm, corporation, or other business entity which at any time whether by merger, purchase or otherwise acquires all or substantially all of the assets or business of an Employer. 19. Entire Agreement. This instrument contains the entire Agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements or understandings between the parties hereto relating to the subject matter hereof. This Agreement may not be changed orally but only by an agreement in writing signed by the Employee and the Employers. 20. Severability. If a court of competent jurisdiction determines that any one or more of the provisions of this Agreement is invalid, illegal or unenforceable in any respect, such determination shall not affect the validity, legality or enforceability of any other provision of this Agreement. 21. Governing Law. This Agreement and the legal relations between the parties shall be subject to and governed by the internal laws (and not the law of conflicts) of the State of Michigan. The parties have executed this Agreement as of the day and year first above written. MERCANTILE BANK CORPORATION By: /s/ Michael H. Price ---------------------------------------- Name: Michael H. Price --------------------------------- Its: President ---------------------------------- MERCANTILE BANK OF WEST MICHIGAN By: /s/ Michael H. Price ---------------------------------------- Name: Michael H. Price --------------------------------- Its: President ---------------------------------- EMPLOYEE /s/ Gerald R. Johnson, Jr. --------------------------------------------- Gerald R. Johnson, Jr. 8 9 EXHIBIT A TO: MERCANTILE BANK CORPORATION/MERCANTILE BANK OF WEST MICHIGAN BOARDS OF DIRECTORS FROM: GERALD R. JOHNSON, JR. SUBJECT: PROPOSED 1998 BONUS PLAN DATE: FEBRUARY 17, 1998 - -------------------------------------------------------------------------------- The 1998 Bonus Plan is designed to reflect the fact that the directors and management of Mercantile Bank of West Michigan and Mercantile Bank Corporation believe that the company's shareholders are willing to share financially in operating results that are superior to those forecast by the company and approved by the Board of Directors. Consequently, the following bonus plan is proposed for 1998. It should be noted that the non-lender portion of the plan will probably not be utilized, because payout under the plan requires positive earnings results. PROPOSED 1998 EMPLOYEE BONUS PLAN Lenders receive $500/$MM in increase in outstandings from computation period to computation period. Lenders also receive 5% of fees generated. Increases in outstandings do not include any Reg. O loans. Total payout is reduced by 3% of chargeoffs in the lender's portfolio. Payout is on a quarterly basis and is contingent on the resolution of all major collateral and file exceptions. EXAMPLE:
Outstandings: 20,000,000 Fees: 25,000 $500/$MM: 10,000 5% of fees: 1,250 -------------- Payout 11,250 (No charge-off's reported)
Non-lenders receive $0.33 for every $1.00 over budgeted net operating income. Maximum payouts are calculated as a percentage of salary as follows:
Chairman, President, Senior Vice President(s): 25.0% of salary Vice Presidents 20.0% of salary Assistant Vice Presidents 10.0% of salary Officers 7.5% of salary Non-officer employees: 5.0% of salary
10 PROPOSED 1998 BONUS PLAN PAGE 2 The following example illustrates the payout percentages and monetary awards a non-lender bonus plan participant would receive from a $40,000 bonus pool based on salary level at time of award:
SALARY MAX. BONUS MAX. BONUS % OF BONUS $ BONUS FROM $ BONUS AS % $ $ POOL $40,000 POOL % OF SALARY 150,000 25.0% 37,500 73.9% 29,557 19.7$ 55,000 20.0% 11,000 21.7% 8,670 15.8% 30,000 7.5% 2,250 4.4% 1,773 5.9% ---------- ---------- --------- 50,750 100.0% 40,000
Payouts under both the lender and non-lender bonus plans are contingent upon the recipient's employment status at the time of award. If an employee terminates his or her association with Mercantile Bank of West Michigan, any accrued but unpaid bonus award is cancelled. EX-10.5 4 EMPLOYMENT AGMT DATED DECEMBER 1, 1998 1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made this 1st Day of December, 1998, by and between Mercantile Bank Corporation, a Michigan corporation (the "Company"), Mercantile Bank of West Michigan, a Michigan banking corporation (the "Bank", and collectively with the Company, the "Employers", and each an "Employer"), and Michael H. Price (the "Employee"). RECITALS A. The Employee has served as the President and Chief Operating Officer of the Company and the Bank. B. The Employers and the Employee expect that the Employee will continue as the President and Chief Operating Officer of the Company and the Bank and wish to describe the terms of such employment in this Agreement. C The Employers believe that entering into this Agreement is in the best interest of their respective shareholders. D The Employee believes that entering into this Agreement is in his best interest. TERMS OF AGREEMENT In consideration of the mutual covenants and obligations set forth in this Agreement, to induce the Employee to remain in the employment of the Employers, and for other good and valuable consideration, the Employers and the Employee agree as follows: 1. Employment , Term, and Acceptance: The Company and the Bank each agree to employ the Employee as its President and Chief Operating Officer for the period from December 1, 1998 through December 31, 2001 (the "Employment Period"), unless such employment is terminated earlier pursuant to Section 7 or 8 of this Agreement. The Employee hereby accepts such employment. 2. Duties and Authority: 2.1 Promotion of Employers' Interest. While employed as the President and Chief Operating Officer of the Company and the Bank, the Employee shall devote his business time and attention to the business and affairs of the Employers, and shall use his efforts and abilities to promote the interests of the Employers. 2.2 Performance of Duties. The Employee shall perform such services and duties necessary or appropriate for the management of the Employers as are normally expected of persons appointed to president and chief operating officer positions in the businesses in which the Employers are engaged. 2 3. Cash Compensation. For all services to be performed by the Employee under this Agreement (including services as an officer, employee, director, or member of any board committee), the Bank shall pay the Employee an annual base salary (prorated for any partial year) of (a) One Hundred Fifty Thousand Dollars ($150,000) for the period from December 1, 1998 through June 30, 1999, (b) One Hundred Seventy Thousand Dollars ($170,000) for the period from July 1, 1999 through December 31, 1999 , and (c) for the periods from January 1, 2000 through December 31, 2000, and January 1, 2001 through December 31, 2001, amounts not less than One Hundred Seventy Thousand Dollars ($170,000) as are determined by the Board of Directors of the Bank, such determination to be made for each period prior to the beginning of such period ("Base Cash Compensation"); payable in each case in accordance with the then prevailing payroll practices of the Bank. To the extent that the date of any change in rate of compensation provided for clause (a), (b) or (c) above does not coincide with the first day of a payroll period of the Bank, such change in rate of compensation shall become effective as of the first day of the payroll period that includes such date. As a one time adjustment, the Bank shall also pay the Employee within twenty (20) days after the execution of this Agreement a one time payment of $5,000, which is an amount equal to the difference between the compensation paid to the Employee for October and November of 1998, and the amount he would have been paid if his annual base salary had been increased to One Hundred and Fifty Thousand Dollars ($150,000) effective October 1, 1998. In addition to the Base Cash Compensation and one time adjustment described above, the Employee will be entitled to such bonuses and other discretionary compensation as may be awarded to him from time to time by the Board of Directors of either of the Employers. 4. Participation in Employee Benefit Plans. In addition to the cash compensation payable to the Employee under this Agreement, the Employee shall be entitled to participate in such employee benefit plans, whether contributory or non-contributory, such as group life and disability insurance plans, hospital, surgical, vision and dental benefit plans or other bonus incentive, profit sharing, stock option, retirement or other employee benefit plans of the Employers as may now or hereafter exist to the extent that the Employee meets the eligibility requirements of any such plans. All such group life and disability insurance plans, and hospital, surgical, vision and dental benefit plans are hereafter referred to as ("Life, Disability and Medical Plans"). It is specifically agreed that the Employee shall be entitled to participate in the incentive compensation plan described in Exhibit A to this Agreement. 5. Out of Pocket Expenses. The Employee will be reimbursed by the Bank or the Company, as the case may be, for all reasonable expenses incurred in promoting their respective businesses; including expenses for entertainment, travel and similar items upon the presentation by Employee, from time to time, of an itemized account of such expenditures in a form and manner as determined by the Board of Directors or the chief financial or accounting officer of the Employer for whose account the expenditures are made. 6. Vacations. The Employee shall be entitled each year to four (4) weeks paid vacation time. The Employee will not be entitled to additional compensation for vacation time not 2 3 utilized in any year nor will the Employee be permitted to carry over unused vacation time to a succeeding year. 7. Termination of Employment Upon Disability or Death 7.1 Disability. In the event the Employee shall become mentally or physically disabled during the Employment Period and unable to perform the material duties of his employment for ninety (90) days or more because of illness, accident, or any other cause ("Disability"), the Bank or the Company may terminate the Employee's employment under this Agreement by giving him written notice of such termination ("Disability Termination Notice"). In the event of any such termination during the Employment Period, the Bank shall continue to pay the employee his Base Cash Compensation, at the rate in effect immediately prior to the giving of the Disability Termination Notice, through the end of the Employment Period (through December 31, 2001). In addition, the Employers shall cover the Employee under their disability plans, if any, in effect from time to time under the terms and conditions that such coverage is made available to other employees of the respective Employers, and the Employee shall be entitled to any benefits payable to him under such disability plans. While disabled, the Bank shall continue to provide the Employee and his dependents with coverage under its Life, Disability and Medical Plans until the Employee reaches the age of sixty-five (65) years old to the extent that it may do so under the provisions of such plans, with the Employee's contribution to the premiums under such plans being no more than the amounts he paid for such premiums prior to his disability, adjusted from time to time for normal periodic increases in such premiums applied in general to employees of the Bank. 7.2 Death. In the event of the death of the Employee, his employment with the Employers shall terminate as of the date of his death. Promptly following his death, the Bank shall pay to his legal representative a death benefit of $250,000. In addition, any life insurance policies owned by the Bank or the Company, and insuring the life of the Employee shall be payable to the beneficiaries of such policies in accordance with the terms of such policies. 7.3 Extent of Obligations. The provisions of Sections 7.1 and 7.2 apply only to Disability or death occurring during the Employment Period while the Employee is employed by the Bank and the Company. Other than as set forth in Section 7.1 or 7.2, neither of the Employers shall have any obligation or liability to the Employee upon the employee's death or Disability except that the Employee shall be entitled to all of his accrued rights under stock option, retirement and other employee benefit plans of the Company and the Bank, and the Bank shall promptly pay the Employee (or his personal representative) his Base Cash Compensation due through the effective date of the termination of his employment, the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), and any out-of -pocket expenses for which the Employee is entitled to be reimbursed, and for which reimbursement has not yet been made. 8. Termination of Employment for Cause, Without Cause, Good Reason, or Without Good Reason. 3 4 8.1 Termination by an Employer for Cause. Each of the Employers shall have the right, at any time, to terminate the Employee's employment for Cause (as defined herein), within 90 days of the Employer's learning of such Cause. For purposes of this Agreement, the term "Cause" means (a) an act or acts of dishonesty committed by the Employee and intended by the Employee to result in the Employee's substantial personal enrichment at the expense of the Company or the Bank, (b) continuing intentional gross neglect by the Employee of his duties under Section 2 of this Agreement which cause or are expected to cause material harm to the Company or the Bank, and which is not remedied after receipt of notice from the applicable Employer, (c) the Employee's conviction of a felony, or (d) the Employee's intentional breach of his obligations under Section 10 or 11 which causes or may be expected to cause material harm to the Company or the Bank. Any termination for Cause shall be effective upon an Employer giving the Employee written notice that the Employee's employment is terminated, and setting forth in reasonable detail the basis for such termination, and that such termination is for Cause. Any such notice shall terminate the Employee's employment with both Employers. 8.2 Termination by an Employer Without Cause. Each of the Employers shall have the right at any time to terminate the Employee's employment without Cause by giving the Employee written notice that the Employee's employment is terminated, and setting forth in reasonable detail the basis, if any, for such termination. Any such termination shall be effective upon the giving of such notice by the Employer. 8.3 Termination by Employee for Good Reason. The Employee shall have the right at any time to terminate his employment under this Agreement for Good Reason (as defined herein) within ninety (90) days of learning of such Good Reason. For purposes of this Agreement, the term "Good Reason" means (a) any assignment to the Employee of any title or duties that are materially inconsistent with the Employee's present positions, titles, duties, or responsibilities, other than an insubstantial or inadvertent action which is remedied by the applicable Employer promptly after receipt of written notice from the Employee, or which is approved of by the Employee in writing; (b) any failure by an Employer to comply in a material respect with any provision of Section 3, 4, 5, or 6, other than a insubstantial or inadvertent failure which is remedied by the applicable Employer promptly after receipt of written notice from the Employee. Any termination for Good Reason shall be effective upon the Employee giving the Employers written notice that the Employee is terminating his employment, and setting forth in reasonable detail the basis for such termination, and that such termination is for Good Reason. Any such termination shall be effective upon the giving of such notice by the Employee; and any such notice shall terminate his employment with both Employers. 8.4 Termination by Employee Without Good Reason. The Employee shall have the right at any time to terminate the Employee's employment with both Employers without Good Reason by giving the Employers written notice that the Employee is terminating his employment. Any such termination shall apply to the Employee's employment with both Employers and be effective ninety (90) days after the giving of such notice by the Employee. 4 5 8.5 Obligation of Employers upon Termination without Cause or Employee's Termination with Good Reason. In the event that during the Employment Period, an Employer terminates the Employee's employment without Cause under Section 8.2, or the Employee terminates his employment for Good Reason under Section 8.3; or the Employee's employment is terminated for any other reason except (i) for Cause under Section 8.1, (ii) without Good Reason under Section 8.4, or (iii) for Disability or death pursuant to Section 7; the Bank shall pay and provide (and to the extent the insurance referred to in Section 8.5(d) is owned by the Company, the Company shall provide) to the Employee the following: (a) to the extent not previously paid, the Employee's Base Cash Compensation due through the effective date of the termination of employment, the cash equivalent of any accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), and any out-of -pocket expenses for which the Employee is entitled to be reimbursed, and for which reimbursement has not yet been made; payable within ten (10) days of such effective date, plus (b) an amount equal to the greater of (i) the Base Cash Compensation payable to the Employee for the remainder of the Employment Period (i.e. through December 31, 2001), or (ii) $425,000; in either case, payable in eighteen (18) substantially equal monthly installments commencing within thirty (30) days after the effective date of the termination of employment; plus (c) coverage for the Employee and his dependents under the Bank's Life, Disability, and Medical Plans for the eighteen (18) month period commencing on the effective date of the termination of employment to the extent that the Bank may do so under the provisions of such plans, and to the extent that it is not permitted to do so shall pay the Employee an amount that will permit him to obtain and pay for substantially equivalent coverage; plus (d) any life insurance policies owned by the Bank or the Company insuring the life of the Employee, to the extent that they may be practically assigned or transferred to the Employee; plus (e) $10,000 for out-placement, interim office, and related expenses. In addition, the Employee shall be entitled to all of his accrued rights under stock option, retirement, and other employee benefit plans of the Company and the Bank, 8.6 Obligation of Employers upon Termination for Cause or by Employee without Good Reason. In the event that during the Employment Period, an Employer terminates the Employee's employment for Cause as provided for in Section 8.1, or the Employee terminates his employment without Good Reason as permitted in Section 8.4; the Bank shall pay and provide to the Employee, to the extent not previously paid, the Employee's Base Cash Compensation due through the effective date of the termination of employment, plus the cash equivalent of any 5 6 accrued vacation days not taken as of such effective date (calculated based on the Employee's annual base salary attributable to each vacation day), within ten (10) days of such effective date. In addition, the Employee shall be entitled to all of his accrued rights under stock option (except with respect to stock option plans, in the event of termination for Cause), retirement, and other employee benefit plans of the Company and the Bank, 8.7 No Other Obligations of Employers upon Termination. Upon termination of the Employee's employment, the Employers shall have no obligations to the Employee except as set forth in this Agreement, or accrued rights under stock option, retirement, or other employee benefit plans of either Employer. 9 Severance Payments on Termination after the Employment Period. If at any time after the Employment Period, (a) the Employee's employment with the Bank is terminated by the Bank without Cause, or (b) the Employee's annual base salary from the Bank is reduced without his consent and without Cause, and in the case of either (a) or (b) the Employee, within ninety (90) days thereafter, terminates his employment with the Bank; then unless the termination of employment or reduction in annual base salary resulted from the death or Disability of the Employee, the Bank shall pay and provide (and to the extent the insurance referred to in Section 8.5(d) is owned by the Company, the Company shall provide) to the Employee the following: (a) the amounts, coverage, benefits and life insurance provided for in Section 8.5 (a), (c), (d) and (e), plus (b) $425,000, payable in eighteen (18) substantially equal monthly installments commencing within thirty (30) days after the effective date of the termination of employment. In addition, the Employee shall be entitled to all of his accrued rights under stock option (except with respect to stock option plans, in the event of termination for Cause), retirement, and other employee benefit plans of the Company and the Bank, 10. Confidential Information. Employee agrees that he will not at any time (whether during his employment or at any time thereafter) disclose to any person, corporation, firm, partnership or other entity, except as required by law, any secret or confidential information concerning the business, clients or affairs of the Company or the Bank, or any of their affiliates, for any reason or purpose whatsoever other than in furtherance of the Employee's work for the Company or the Bank, nor shall the Employee make use of any of such secret or confidential information in any manner adverse to the Company or the Bank. 11. Noncompetition Covenant. For a period of eighteen (18) months following the termination of Employee's employment with the Employers, Employee will not be employed by or act as a director or officer of any business involving or engaged in the business of banking within a 50-mile radius of the City of Grand Rapids, Michigan, where such business engages in soliciting, directly or indirectly, customers of the Bank. 12. Remedies under Section 10 and 11. The Employee acknowledges and agrees that his obligations under Sections 10 and 11 are of a special and unique nature and that a failure to 6 7 perform any such obligation or a violation of any such obligation would cause irreparable harm to the Employers, the amount of which cannot be accurately compensated for in damages by an action at law. In the event of a breach by the Employee of any of the provisions of Section 10 or 11, the Company and the Bank shall be entitled to an injunction restraining the Employee from such breach. Nothing in this Section shall be construed as prohibiting the Company or the Bank from pursuing any other remedies available for any breach of this Agreement. 13. Deduction of Taxes. Each Employer may deduct from any amounts required to be paid to the Employee under this Agreement any amounts required to be withheld by the Employer pursuant to federal, state, or local law relating to taxes or related payroll deductions. 14. Objection to Termination and Legal Fees. The termination of the Employee's employment pursuant to this Agreement shall not preclude any Employer or the Employee from objecting to the basis asserted by the terminating party for such termination. The Employers agree to pay all reasonable legal fees and expenses incurred by the Employee in enforcing his rights under this Agreement, except with respect to claims made by the Employee that are rejected by a court (or any arbitrator sitting by agreement of the parties) to which such claims are presented; provided that the Employers' obligation to pay legal fees and expenses under this Section shall not exceed $10,000 in aggregate amount. 15. Adjustment between the Company and the Bank. The Company and the Bank acknowledge that although the Employee is generally paid solely by the Bank, he also performs some services for the Company, and the Company pays the Bank periodically an amount necessary to reimburse the Bank for amounts paid to the Employee by the Bank for services actually rendered to the Company. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered or sent by registered or certified United States mail or by a nationally recognized overnight courier service, to his residence or the last address he has provided in writing to the Employers, in the case of the Employee, or to its principal office in the case of an Employer. For purposes of this Agreement, notices shall be deemed given when received at the address or office specified in the preceding sentence. 17. Waiver of Breach. No waiver by either party of any breach or non-performance of any provision or obligation of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision of this Agreement. 18. Assignment. The rights and obligations of each Employer under this Agreement shall inure to the benefit of and shall be binding upon them and their respective successors and assigns. As used in this Agreement, the term "successor" shall include any person, firm, corporation, or other business entity which at any time whether by merger, purchase or otherwise acquires all or substantially all of the assets or business of an Employer. 7 8 19. Entire Agreement. This instrument contains the entire Agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements or understandings between the parties hereto relating to the subject matter hereof. This Agreement may not be changed orally but only by an agreement in writing signed by the Employee and the Employers. 20. Severability. If a court of competent jurisdiction determines that any one or more of the provisions of this Agreement is invalid, illegal or unenforceable in any respect, such determination shall not affect the validity, legality or enforceability of any other provision of this Agreement. 21. Governing Law. This Agreement and the legal relations between the parties shall be subject to and governed by the internal laws (and not the law of conflicts) of the State of Michigan. The parties have executed this Agreement as of the day and year first above written. MERCANTILE BANK CORPORATION By: /s/ Gerald R. Johnson, Jr. ---------------------------------------- Name: Gerald R. Johnson, Jr. --------------------------------- Its: Chairman ---------------------------------- MERCANTILE BANK OF WEST MICHIGAN By: /s/ Gerald R. Johnson, Jr. ---------------------------------------- Name: Gerald R. Johnson, Jr. --------------------------------- Its: Chairman ---------------------------------- EMPLOYEE /s/ Michael H. Price -------------------------------------------- Michael H. Price 8 9 EXHIBIT A TO: MERCANTILE BANK CORPORATION/MERCANTILE BANK OF WEST MICHIGAN BOARDS OF DIRECTORS FROM: GERALD R. JOHNSON, JR. SUBJECT: PROPOSED 1998 BONUS PLAN DATE: FEBRUARY 17, 1998 - -------------------------------------------------------------------------------- The 1998 Bonus Plan is designed to reflect the fact that the directors and management of Mercantile Bank of West Michigan and Mercantile Bank Corporation believe that the company's shareholders are willing to share financially in operating results that are superior to those forecast by the company and approved by the Board of Directors. Consequently, the following bonus plan is proposed for 1998. It should be noted that the non-lender portion of the plan will probably not be utilized, because payout under the plan requires positive earnings results. PROPOSED 1998 EMPLOYEE BONUS PLAN Lenders receive $500/$MM in increase in outstandings from computation period to computation period. Lenders also receive 5% of fees generated. Increases in outstandings do not include any Reg. O loans. Total payout is reduced by 3% of chargeoffs in the lender's portfolio. Payout is on a quarterly basis and is contingent on the resolution of all major collateral and file exceptions. EXAMPLE:
Outstandings: 20,000,000 Fees: 25,000 $500/$MM: 10,000 5% of fees: 1,250 -------------- Payout 11,250 (No charge-off's reported)
Non-lenders receive $0.33 for every $1.00 over budgeted net operating income. Maximum payouts are calculated as a percentage of salary as follows:
Chairman, President, Senior Vice President(s): 25.0% of salary Vice Presidents 20.0% of salary Assistant Vice Presidents 10.0% of salary Officers 7.5% of salary Non-officer employees: 5.0% of salary
10 PROPOSED 1998 BONUS PLAN PAGE 2 The following example illustrates the payout percentages and monetary awards a non-lender bonus plan participant would receive from a $40,000 bonus pool based on salary level at time of award:
SALARY MAX. BONUS MAX. BONUS % OF BONUS $ BONUS FROM $ BONUS AS % $ $ POOL $40,000 POOL % OF SALARY 150,000 25.0% 37,500 73.9% 29,557 19.7$ 55,000 20.0% 11,000 21.7% 8,670 15.8% 30,000 7.5% 2,250 4.4% 1,773 5.9% ---------- ---------- --------- 50,750 100.0% 40,000
Payouts under both the lender and non-lender bonus plans are contingent upon the recipient's employment status at the time of award. If an employee terminates his or her association with Mercantile Bank of West Michigan, any accrued but unpaid bonus award is cancelled. EX-20 5 PROXY STATMENT OF THE COMPANY ANNUAL MEETING 1 MERCANTILE BANK CORPORATION 216 NORTH DIVISION AVENUE GRAND RAPIDS, MICHIGAN 49503 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 15, 1999 TO THE HOLDERS OF SHARES OF COMMON STOCK OF MERCANTILE BANK CORPORATION NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of MERCANTILE BANK CORPORATION will be held at the Peninsular Club, Second Floor, 120 Ottawa Avenue, N.W., Grand Rapids, Michigan on Thursday, April 15, 1999, at 9:00 a.m., for the purpose of considering and voting upon the following matters: 1. ELECTION OF DIRECTORS. To elect four Class II directors for a three year term, as detailed in the accompanying Proxy Statement. 2. OTHER BUSINESS. To transact such other business as may properly be brought before the meeting or any adjournment or adjournments thereof. Only those shareholders of record at the close of business on Monday, March 1, 1999, shall be entitled to notice of and to vote at the meeting. We urge you to sign and return the enclosed proxy as promptly as possible, whether or not you plan to attend the meeting in person. If you plan to attend the meeting, please let us know by checking the box provided for this purpose on the enclosed proxy. We would appreciate receiving your proxy by Monday, April 5, 1999. By Order of the Board of Directors, /s/ Gerald R Johnson Jr Gerald R. Johnson, Jr. Chairman of the Board & Chief Executive Officer Dated: March 12, 1999 2 MERCANTILE BANK CORPORATION 216 NORTH DIVISION AVENUE GRAND RAPIDS, MICHIGAN 49503 MARCH 12, 1999 PROXY STATEMENT GENERAL INFORMATION This Proxy Statement is furnished to shareholders of Mercantile Bank Corporation (the "Corporation") in connection with the solicitation of proxies by the Board of Directors of the Corporation, for use at the Annual Meeting of shareholders of the Corporation to be held on Thursday, April 15, 1999, at 9:00 a.m., at the Peninsular Club, Second Floor, 120 Ottawa Avenue, N.W., Grand Rapids, Michigan, and at any and all adjournments thereof. It is expected that the proxy materials will be mailed to shareholders on or about March 12, 1999. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its exercise. Unless the proxy is revoked, the shares represented thereby will be voted at the Annual Meeting or any adjournment thereof. The entire cost of soliciting proxies will be borne by the Corporation. Proxies may be solicited by mail, facsimile or telegraph, or by directors, officers, or regular employees of the Corporation or its subsidiary, in person or by telephone. The Corporation will reimburse brokerage houses and other custodians, nominees and fiduciaries for their out-of-pocket expenses for forwarding soliciting material to the beneficial owners of Common Stock of the Corporation. The Board of Directors, in accordance with the By-Laws of the Corporation, has fixed the close of business on March 1, 1999 as the record date for determining shareholders entitled to notice of and to vote at the Annual Meeting and at any and all adjournments thereof. At the close of business on such record date, the outstanding number of voting securities of the Corporation was 2,472,500 shares of Common Stock, each of which is entitled to one vote. ELECTION OF DIRECTORS The Corporation's Certificate of Incorporation and By-Laws provide that the number of directors, as determined from time to time by the Board of Directors, shall be no less than six and no more than fifteen. The Board of Directors has presently fixed the number of directors at thirteen. The Certificate of Incorporation and By-Laws further provide that the directors shall be divided into three classes, Class I, Class II and Class III, with each class serving a staggered three year term and with the number of directors in each class being as nearly equal as possible. The Board of Directors has nominated Betty S. Burton, Peter A. Cordes, David M. Hecht and Robert M. Wynalda as Class II directors for three year terms expiring at the 2002 Annual Meeting and upon election and qualification of their successors. Each of the nominees is presently a Class II director of the Corporation whose term expires at the April 15, 1999 Annual Meeting of the shareholders. The other members of the Board, who are Class I and Class III directors, will continue in office in accordance with their previous elections until the expiration of their terms at the 2001 or 2000 Annual Meetings, as the case may be. It is the intention of the persons named in the enclosed proxy to vote such proxy for the election of the four nominees listed herein. The proposed nominees for election as director are willing to be elected and serve; but in the event that any nominee at the time of election is unable to serve or is otherwise unavailable for election, the Board of Directors may select a substitute nominee, and in that event the persons named in the enclosed proxy intend to vote such proxy for the person so selected. If a substitute nominee is not so selected, such proxy will be voted for the election of the remaining nominees. The affirmative vote of a plurality of the votes cast at the meeting is required for the nominees to be elected. 1 3 STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table presents information regarding the beneficial ownership of the Corporation's Common Stock as of February 1, 1999, by the nominees for election as directors of the Corporation, the directors of the Corporation whose terms of office will continue after the Annual Meeting, the executive officers named in the Summary Compensation Table, and all directors and executive officers of the Corporation as a group.
AMOUNT PERCENT OF CLASS BENEFICIALLY BENEFICIALLY NAME OF BENEFICIAL OWNER OWNED(1) OWNED(6) ------------------------ ------------ ---------------- Betty S. Burton............................................. 2,000 * Edward J. Clark............................................. 1,600 * Peter A. Cordes............................................. 25,000 1.0% C. John Gill................................................ 42,000(2) 1.7% David M. Hecht.............................................. 50,000 2.0% Gerald R. Johnson, Jr. ..................................... 71,101(3) 2.9% Susan K. Jones.............................................. 850 * Lawrence W. Larsen.......................................... 13,500 * Calvin D. Murdock........................................... 15,875 * Michael H. Price............................................ 15,708(4) * Dale J. Visser.............................................. 90,000 3.6% Donald Williams, Sr. ....................................... 650 * Robert M. Wynalda........................................... 50,000 2.0% All directors and executive officers of the Corporation as a group (15 Persons)........................................ 387,290(5) 15.4%
- ------------------------- * Less than one percent. (1) Some or all of the Common Stock listed may be held jointly with, or for the benefit of, spouses and children or grandchildren of, or various trusts established by, the person indicated. (2) Includes 14,000 shares held by Mr. Gill's spouse. (3) Includes 20,000 shares that Mr. Johnson has the right to acquire within 60 days of February 1, 1999 pursuant to the Corporation's 1997 Employee Stock Option Plan and 1,101 shares that Mr. Johnson owns under the Bank's 401(k) Plan. Mr. Johnson also holds options under the Employee Stock Option Plan to purchase an additional 27,000 shares, which have not yet vested. (4) Includes 14,000 shares that Mr. Price has the right to acquire within 60 days of February 1, 1999, pursuant to the Corporation's 1997 Employee Stock Option Plan and 1,008 shares that Mr. Price owns under the Bank's 401(k) Plan. Mr. Price also holds options under the Employee Stock Option Plan to purchase an additional 14,000 shares, which have not yet vested. (5) Includes 38,000 shares that such persons have the right to acquire within 60 days of February 1, 1999 pursuant to the Corporation's 1997 Employee Stock Option Plan and 6,615 shares that such persons own under the Bank's 401(k) Plan. (6) The percentages shown are based on the 2,472,500 shares of the Corporation's Common Stock outstanding as of February 1, 1999, plus the number of shares that the named person or group has the right to acquire within 60 days of February 1, 1999. To the best of the Corporation's knowledge, no person owns more than 5% of the Corporation's outstanding Common Stock. INFORMATION ABOUT DIRECTORS, NOMINEES, AND EXECUTIVE OFFICERS The following information is furnished with respect to each continuing director, nominee as a director, and executive officer of the Corporation. Each of the continuing directors and nominees is currently a director 2 4 of the Corporation as well as a director of Mercantile Bank of West Michigan (the "Bank") which is the Corporation's subsidiary.
HAS SERVED NAME, AGE, AND POSITION WITH AS YEAR WHEN TERM AS A THE CORPORATION AND THE BANK DIRECTOR SINCE DIRECTOR EXPIRES ---------------------------- -------------- ------------------- Betty S. Burton, 57, Director............................... 1998 1999 Edward J. Clark, 54, Director............................... 1998 2001 Peter A. Cordes, 58, Director............................... 1997 1999 C. John Gill, 65, Director.................................. 1997 2001 David M. Hecht, 61, Director................................ 1997 1999 Gerald R. Johnson, Jr., 52, Chairman of the Board and Chief Executive Officer of the Corporation, Chairman of the Board of the Bank; and Director........................... 1997 2001 Susan K. Jones, 49, Director................................ 1998 2000 Lawrence W. Larsen, 59, Director............................ 1997 2000 Calvin D. Murdock, 59, Director............................. 1997 2001 Michael H. Price, 42, President and Chief Operating Officer of the Corporation, President and Chief Executive Officer of the Bank; and Director...... 1997 2000 Dale J. Visser, 62, Director................................ 1997 2000 Donald Williams, Sr., 62, Director.......................... 1998 2001 Robert M. Wynalda, 63, Director............................. 1997 1999 Robert B. Kaminski; 37, Senior Vice President and Secretary................................................. Charles E. Christmas; 33, Chief Financial Officer, Treasurer and Compliance Officer....................................
The business experience of each of the directors, nominees and executive officers of the Corporation for at least the past five years is summarized below: BETTY S. BURTON (Director) Betty S. Burton is President and Chief Executive Officer of Wonderland Business Forms, Inc. She has held director positions at First Michigan Bank and Butterworth Hospital. Prior to taking over the family business in 1990, Mrs. Burton was a long time elementary teacher in the public school system. She is a graduate of Western Michigan University, Grand Valley State University and Dartmouth College Minority Business Executive Program. Mrs. Burton sits on the National Council of Steelcase Suppliers Board of Directors, and is a Trustee of both the Grand Valley State University Foundation and the Western Michigan University Foundation. EDWARD J. CLARK (Director) Mr. Clark is the President and Chief Executive of The American Seating Company, and has held this position since he joined the company in 1986. American Seating is headquartered in Grand Rapids, Michigan, and produces seating furniture for laboratories, offices, buses, rail cars, auditoriums, stadiums and performing arts centers. Mr. Clark is a member of the Boards of Directors of the Metropolitan YMCA and the Grand Rapids Employers' Association. He is Vice President of the Foundation Board of Trustees and Chairman of the Development Committee of Grand Valley State University. From 1988 through 1997 he was a member of the Board of Directors and Executive Committee of FMB-First Michigan Bank-Grand Rapids ("FMB-Grand Rapids"). Mr. Clark has also previously served on the Boards of Directors of the Grand Rapids Symphony Orchestra, Red Cross of Kent County, St. Mary's Hospital and The Business and Institutional Furniture Manufacturer's Association. PETER A. CORDES (Director) Mr. Cordes has served as President and Chief Executive Officer of GWI Engineering Inc. ("GWI") of Grand Rapids, Michigan since 1991. GWI is engaged in the manufacturing of industrial automation systems for customers in a variety of industries in the Midwest. Mr. Cordes purchased GWI in 1991 and is now sole owner. Mr. Cordes is a 1966 graduate of St. Louis University with a degree in aeronautics. He is a native of Traverse City, Michigan and has spent the last eighteen years in West Michigan. 3 5 C. JOHN GILL (Director) Mr. Gill is the retired Chairman of the Board and one of the owners of Gill Industries of Grand Rapids, Michigan. Mr. Gill served as Chairman of Gill Industries from 1994 through 1997, and served as President of Gill Industries from 1983 through 1993. Gill Industries is a manufacturing company involved with sheet metal stampings and assemblies for the automotive and appliance industries. Mr. Gill is a native of Lakeview, Michigan. DAVID M. HECHT (Director) Mr. Hecht has practiced law for 37 years, including the past 25 years in Grand Rapids. For more than the past five years he has been the Chairman of the Grand Rapids law firm of Hecht & Lentz and is a founder of such firm. Mr. Hecht is a native of Grand Rapids and a graduate of the University of Michigan and the University of Wisconsin. He is the President of the Charles W. Loosemore Foundation, a Trustee of the Grand Valley University Foundation and a Director of Hospice Foundation of Greater Grand Rapids. GERALD R. JOHNSON, JR. (Chairman of the Board, Chief Executive Officer and Director of the Corporation and Chairman of the Board and Director of the Bank) Mr. Johnson has over 27 years experience in the financial service industry, including 24 years of commercial banking experience. Mr. Johnson was appointed President and Chief Executive Officer of FMB-Grand Rapids in 1986, and served as Chairman, President and Chief Executive Officer from 1988 to May of 1997, when he resigned to organize the Company. Mr. Johnson served as Chairman of the Board and Chief Executive Officer of the Corporation and the Bank from their inception through 1998, and since the beginning of 1999 has served as Chairman of the Board and Chief Executive Officer of the Corporation and Chairman of the Board of the Bank. In the Grand Rapids market, prior to joining FMB-Grand Rapids, Mr. Johnson was employed in various lending capacities by Union Bank (now part of Bank One Corporation), Pacesetter Bank-Grand Rapids (now part of Old Kent) and Manufacturers Bank (now part of Comerica Bank). Mr. Johnson has been involved in charitable and community activities for many years. He currently serves as Chairman of the Board of the Downtown YMCA, Chairman of Residential Treatment of West Michigan, Treasurer of Life Guidance Services and serves on the Boards of Directors of the American Heart Association of Greater Grand Rapids, Michigan Trails Girl Scout Council and The Recuperation Center. Mr. Johnson is also affiliated with the Economic Development Foundation, Grand Rapids Rotary Club, Junior League of Grand Rapids and Project Rehab. Mr. Johnson also has past affiliations with Hope Network, and the Grand Rapids Area Chamber of Commerce where he was a Board member for six years. SUSAN K. JONES (Director) Ms. Jones is both a partner of the Callahan Group, LLC and a tenured, full-time Associate Professor of Marketing at Ferris State University in Big Rapids, Michigan. She began her own firm, Susan K. Jones & Associates, in 1980, and joined Ferris State in the fall of 1990. She enjoys an active volunteer career, currently serving as secretary of the Arts Council of Greater Grand Rapids, as a member of the Northwestern Alumni Association Board, and as the West Michigan Alumni Admissions Council Chair for Northwestern University. She is a past-president of the Junior League of Grand Rapids, a graduate of Leadership Grand Rapids, and currently serves as Vice President-Elect of Communications of the West Michigan American Marketing Association, and as a trustee of the Chicago Association of Direct Marketing Educational Foundation. She is a resident of East Grand Rapids, Michigan. LAWRENCE W. LARSEN (Director) Mr. Larsen is Chief Executive Officer, President, and owner of Central Industrial Corporation of Grand Rapids, Michigan. He began his employment with the company in 1967, and purchased it in 1975. Central Industrial Corporation is a wholesale distributor of industrial supplies. Mr. Larsen is also an owner and director of Jet Products, Inc. of West Carrollton, Ohio. Jet Products, Inc. designs, manufactures and sells hose reels and related hydraulic products. Mr. Larsen is a native of Wisconsin. He has spent the last 31 years in the Grand Rapids area. Mr. Larsen is an active supporter of the Catholic secondary schools system in Grand Rapids. Mr. Larsen served as a director of FMB-Grand Rapids from 1980 until June of 1997, and was a member of the Executive Loan Committee and the Audit Committee. CALVIN D. MURDOCK (Director) Mr. Murdock is President of SF Supply ("SF") of Grand Rapids, Michigan. He has held this position since 1994. From 1992 to 1994, he served as the General Manager of SF, and in 1991, served as SF's Controller. SF is a wholesale distributor of commercial and industrial electronic, electrical and automation parts, supplies and services. Mr. Murdock is a Michigan native and a graduate of 4 6 Ferris State University with a degree in accounting. Prior to joining SF, Mr. Murdock owned and operated businesses in the manufacturing and supply of automobile wash equipment. MICHAEL H. PRICE (President, Chief Operating Officer and Director of the Corporation and President, Chief Executive Officer and Director of the Bank) Mr. Price has over 17 years of commercial banking experience, most of which was with First Michigan Bank Corporation ("FMB") and its subsidiary FMB-Grand Rapids. Spending most of his banking career in Commercial Lending, Mr. Price was the Senior Lending Officer, then President of FMB-Grand Rapids before joining the Bank in late 1997. Mr. Price served as President and Chief Operating Officer of the Corporation and the Bank from December of 1997 through 1998, and has served as President and Chief Operating Officer of the Corporation and President and Chief Executive Officer of the Bank since January of 1999. Mr. Price has been and continues to be very active in the Grand Rapids community. He currently serves on the Board of Directors of Kent County Habitat for Humanity. DALE J. VISSER (Director) Mr. Visser is Chairman and one of the owners of Visser Brothers Inc. of Grand Rapids, Michigan. He has served this company in various officer positions since 1960. Visser Brothers is a construction general contractor specializing in commercial buildings. Mr. Visser also has an ownership interest in several real estate projects in the Grand Rapids area including Eastbrook Mall and Breton Village Shopping Center. Mr. Visser served as a director of FMB-Grand Rapids from 1972 until June of 1997. He is a Grand Rapids native and a graduate of the University of Michigan with a degree in civil engineering. Mr. Visser is active in the community having served on the boards for the Grand Rapids YMCA, Christian Rest Home and West Side Christian School. DONALD WILLIAMS, SR. (Director) Mr. Williams has over 30 years experience in administration of educational programs with special emphasis on political sensitivity and equality. He is currently Dean of Minority Affairs and Director of the Multicultural Center of Grand Valley State University. Mr. Williams also serves as President of the Coalition for Representative Government (CRG) and is a member of the Rotary Club of Grand Rapids. Previously, he has served as a member of the Board of Directors of FMB-Grand Rapids and the Grand Rapids Advisory Board of Michigan National Bank, as Treasurer and President of the Minority Affairs Council of Michigan Universities (MACMU), and as a member of the Board of Directors of the Grand Rapids Area Chamber of Commerce. Mr. Williams has also been the recipient of numerous awards in the Grand Rapids and West Michigan area, for community services and job performance. He currently resides in Grand Rapids. ROBERT M. WYNALDA (Director) Mr. Wynalda is the retired Chief Executive Officer and former owner of Wynalda Litho Inc. of Rockford, Michigan. Mr. Wynalda held the position of Chief Executive Officer from 1970 when he founded the company until its sale in February of 1998. Wynalda Litho Inc. is a commercial printing company serving customers from around the country. Mr. Wynalda is a native of Grand Rapids and has spent 45 years in the printing business. Mr. Wynalda serves on the Board of Trustees for Cornerstone College of Grand Rapids, and formerly served as a director of a local financial institution. ROBERT B. KAMINSKI (Senior Vice President and Secretary) Mr. Kaminski has over 14 years of commercial banking experience. From 1984 to 1993, Mr. Kaminski worked for FMB-Grand Rapids in various capacities in the areas of credit administration and bank compliance. In 1993, Mr. Kaminski was appointed Vice President in charge of Loan Review and served as Vice President and Manager of the Commercial Credit Department for three of FMB's subsidiaries. He has served as Senior Vice President and Secretary of the Corporation and the Bank since their inception in 1997. Mr. Kaminski serves on the Leadership Committee for the National Kidney Foundation of Michigan in Grand Rapids, the Board of Directors for HELP Pregnancy Crisis Aid, Inc. and is a career mentor for Aquinas College of Grand Rapids. CHARLES E. CHRISTMAS (Chief Financial Officer, Treasurer and Compliance Officer) Mr. Christmas served as Vice President of Finance, Treasurer and Compliance Officer of the Corporation and the Bank in 1998, and in 1999 was elected Chief Financial Officer, Treasurer and Compliance Officer. Prior to joining the Corporation, he worked with various financial institutions for over ten years while serving as a bank examiner with the Federal Deposit Insurance Corporation ("FDIC"). He began his tenure with the FDIC upon his graduation from Ferris State University. Mr. Christmas holds a Bachelors of Science degree in Accountancy. 5 7 BOARD OF DIRECTORS MEETINGS AND COMMITTEES The Corporation has standing Audit, Compensation, and Nominating Committees of the Board of Directors. The members of the Audit Committee consist of C. John Gill, David M. Hecht, and Robert M. Wynalda. The Audit Committee's responsibilities include recommending to the Board of Directors the selection of independent accountants, approving the scope of audit and non-audit services performed by the independent accountants, reviewing the results of their audit, reviewing the Corporation's internal auditing activities and financial statements, and reviewing the Corporation's system of accounting controls and recordkeeping. The members of the Compensation Committee consist of Peter A. Cordes, Lawrence W. Larson, and Calvin D. Murdock. The Compensation Committee's responsibilities include considering and recommending to the Board of Directors any changes in compensation and benefits for officers of the Corporation. At present, all officers of the Corporation are also officers of the Bank, and although they receive compensation from the Bank in their capacity as officers of the Bank, they presently receive no separate cash compensation from the Corporation. The members of the Nominating Committee consist of David M. Hecht, Dale J. Visser, and Robert M. Wynalda. The Nominating Committee is responsible for reviewing and making recommendations to the Board of Directors as to its size and composition, and recommending to the Board of Directors candidates for election as directors at the Corporation's annual meetings. The Nominating Committee will consider as potential nominees persons recommended by shareholders. Recommendations should be submitted to the Nominating Committee in care of Gerald R. Johnson, Jr., Chairman and Chief Executive Officer of the Corporation. Each recommendation should include a personal biography of the suggested nominee, an indication of the background or experience that qualifies such person for consideration, and a statement that such person has agreed to serve if nominated and elected. Shareholders who themselves wish to effectively nominate a person for election to the Board of Directors, as contrasted with recommending a potential nominee to the Nominating Committee for its consideration, are required to comply with the advance notice and other requirements set forth in the Corporation's Articles of Incorporation. During 1998, there were a total of six meetings of the Board of Directors of the Corporation. Each director attended at least 75% of the total number of meetings of the Board of Directors and Committees of the Board held during the period that the director served except C. John Gill and Robert M. Wynalda who attended 63% and 60%, respectively, of the meetings. Messrs. Gill and Wynalda also attended 17 and 13 meetings, respectively, of the Board of Directors of the Bank. There were two meetings of the Audit Committee, two meetings of the Compensation Committee, and two meetings of the Nominating Committee during 1998. During 1998, no compensation was paid to any directors of the Corporation or Bank for their services in such capacities. In January of 1999, the Board of Directors of the Bank approved the payment of an annual retainer to each non-employee director of the Bank in the amount of $1,200, payable on each May 1, beginning May 1, 1999. The Board of Directors of the Bank also approved a deferred compensation plan for non-employee directors of the Bank under which such directors may elect to defer the receipt of their annual retainer until they are no longer serving on the Board. 6 8 SUMMARY COMPENSATION TABLE The following table details the compensation received by the named executives for the period from July 15, 1997 (inception) to December 31, 1997; and the year ended December 31, 1998:
LONG TERM COMPENSATION ANNUAL COMPENSATION ----------------------- ------------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION --------------------------- ---- ------ ----- ------- ------------ Gerald R. Johnson, Jr.,.......................... 1998 164,231 0 7,000 8,655(1) Chairman of the Board 1997 $ 83,654 0 40,000 0 and Chief Executive Officer of the Corporation and Chairman of the Board of the Bank Michael H. Price,................................ 1998 135,307 0 7,000 6,919(2) President and Chief Operating Officer of the Corporation and President and 1997 14,112 0 21,000 0 Chief Executive Officer of the Bank
- ------------------------- (1) Includes a matching contribution by the Bank to Mr. Johnson's 401(k) Plan account of $6,338, and life and disability insurance premiums paid by the Bank on policies insuring Mr. Johnson of $488 and $1,829, which policies are in addition to the Bank's group insurance plans that are generally available to salaried employees. (2) Includes a matching contribution by the Bank to Mr. Price's 401(k) Plan account of $5,220, and life and disability insurance premiums paid by the Bank on policies insuring Mr. Price of $995 and $704, which policies are in addition to the Bank's group insurance plans that are generally available to salaried employees. OPTIONS GRANTED IN 1998 Under the Corporation's 1997 Employee Stock Option Plan, stock options are granted to the Corporation's and the Bank's senior management and other key employees. The Board of Directors of the Corporation is responsible for awarding the stock options. These options are awarded to give senior management and key employees an additional interest in the Corporation from a shareholder's perspective, and enable them to participate in the future growth and profitability of the Corporation. In making awards, the Board may consider the position and responsibilities of the employee, the nature and value of his or her services and accomplishments, the present and potential contribution of the employee to the success of the Corporation, and such other factors as the Board may deem relevant. The following table provides information on options granted to the named executives during the year ended December 31, 1998:
INDIVIDUAL GRANTS ----------------------------------------------------------------------- NUMBER OF SHARES % OF TOTAL UNDERLYING OPTIONS GRANTED EXERCISE OR OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION NAME GRANTED(1) IN 1998 PER SHARE(2) DATE ---- ---------------- --------------- ------------ ---------- Gerald R. Johnson, Jr.,........... 7,000 22.6% $13.63 October 21, 2008 Michael H. Price.................. 7,000 22.6% $13.63 October 21, 2008
- ------------------------- (1) The option for Mr. Johnson becomes exercisable on July 22, 2001. The option for Mr. Price becomes exercisable on December 1, 2000. (2) The exercise price may be paid in cash, by the delivery of previously owned shares, or a combination thereof. 7 9 AGGREGATED STOCK OPTION EXERCISES IN 1998 AND YEAR END OPTION VALUES The following table provides information on the exercise of stock options during the year ended December 31, 1998 by the named executives and the value of unexercised options at December 31, 1998:
NUMBER OF VALUE OF SHARES UNEXERCISED UNEXERCISED IN-THE-MONEY ACQUIRED ON VALUE OPTIONS AT 12/31/98 OPTIONS AT 12/31/98 NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1) ---- ----------- -------- ------------------------- ---------------------------- Gerald R. Johnson, Jr.,...... None N/A 20,000/27,000 $125,000/$143,340 Michael H. Price............. None N/A 14,000/14,000 $ 80,500/$ 58,590
- ------------------------- (1) In accordance with the SEC's rules, values are calculated by subtracting the exercise price from the fair market value of the underlying Common Stock. For purposes of this table, fair market value is deemed to be $16.25 per share, the average of the closing bid and asked prices reported on the OTC Bulletin Board on December 31, 1998. EMPLOYMENT AGREEMENTS Effective December 1, 1998, the Bank and the Corporation have entered into Employment Agreements with Mr. Johnson and Mr. Price providing for their employment from December 1, 1998 through December 31, 2001 (the "Employment Period"), and certain severance, confidentiality and non-compete arrangements that may continue after the Employment Period. The Employment Agreement with Mr. Johnson establishes an annual base salary for him of $180,000 for the period from December 1, 1998 through June 30, 1999, of $200,000 for the period from July 1, 1999 through December 31, 1999, and of an amount not less than $200,000 to be determined by the Board of Directors of the Bank for the period of January 1, 2000 through December 31, 2001. The Employment Agreement with Mr. Price establishes an annual base salary for him of $150,000 for the period from December 1, 1998 through June 30, 1999, of $170,000 for the period from July 1, 1999 through December 31, 1999, and of an amount not less than $170,000 to be determined by the Board of Directors of the Bank for the period of January 1, 2000 through December 31, 2001. In addition, the Employment Agreements provide for a one time payment of $5,000 to each of Mr. Johnson and Mr. Price to augment the salary amounts that they received in October and November of 1998, prior to the execution of the Employment Agreements. In addition to the annual base salary, the Employment Agreements provide that Mr. Johnson and Mr. Price are entitled to participate in any employee benefit and incentive compensation plans of the Corporation and the Bank, including health insurance, life and disability insurance, stock option, profit sharing and retirement plans. In the event that either of the officers becomes disabled or dies during the Employment Period he is entitled to benefits under his Employment Agreement. In the event of disability, the officer continues to receive his then current annual base salary through the end of the Employment Period, and any disability benefits payable under disability plans provided by the Bank or the Corporation. The officer also continues to participate in life, disability, and health insurance plans of the Bank or the Corporation, through age 65, to the extent permitted under such plans. If the officer dies during the Employment Period, the Bank is obligated to pay the officer's legal representative a death benefit of $250,000, and if the Bank or the Corporation owns any life insurance insuring the life of the officer, the proceeds of the policies are payable to the named beneficiaries. The Employment Agreements provide severance benefits in the event that the officer's employment is terminated by the Corporation and the Bank without "Cause" or the officer elects to terminate his employment for "Good Reason" during the Employment Period. In such event, the officer is entitled to receive the greater of (i) his annual base salary through the end of the Employment Period or (ii) in the case of Mr. Johnson, $500,000, and in the case of Mr. Price $425,000; in either case payable over 18 months in equal monthly installments. In addition, in the case of such a termination of employment, the officer is entitled to continue his participation in life, disability and health insurance plans provided by the Bank or the Corporation for 18 months, to the extent permitted under such plans, to an assignment of any assignable life insurance policies owned by the Bank or the Corporation insuring his life, and $10,000 for out-placement, interim office and related expenses. The Employment Agreements also provide severance benefits in the event 8 10 that after the Employment Period the officer's employment is terminated by the Bank and the Corporation without "Cause" or the officer's annual base salary is reduced without "Cause". In such event, the officer receives the same benefits as are described above for a termination during the Employment Period, except that when determining the cash severance payable to him over the 18 months following his termination, the alternative of receiving his annual base salary through the end of the Employment Period does not apply, and instead he receives the stated dollar amount of $500,000 in the case of Mr. Johnson, or $425,000 in the case of Mr. Price. In the event that an officer's employment is terminated for "Cause" during the Employment Period, the officer is not entitled to any accrued rights that he may then have under any stock option plan of the Corporation. Under the Employment Agreements, Mr. Johnson and Mr. Price agree not to disclose, except as required by law, any confidential information relating to the business or customers of the Bank or the Corporation, or use any such information in any manner adverse to the Bank or the Corporation. In addition, each has agreed that for 18 months following his employment with the Bank and the Corporation, he will not be employed by, or act as a director or officer of, any business engaged in banking within a 50 mile radius of Grand Rapids, Michigan that solicits customers of the Bank. CERTAIN TRANSACTIONS The Bank has had, and expects in the future to have, loan and other financial transactions in the ordinary course of business with the Corporation's directors, executive officers, and principal shareholders (and their associates) on substantially the same terms as those prevailing for comparable transactions with others. All such transactions (i) were made in the ordinary course of business, (ii) were made on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transactions with other persons, and (iii) in the opinion of management did not involve more than the normal risk of collectibility or present other unfavorable features. As of December 31, 1998, the Bank had outstanding 44 loans to the directors or executive officers of the Corporation totaling approximately $9.1 million in aggregate amount under commitments totaling approximately $12.8 million. In November of 1998, the Bank entered into a contract with Visser Brothers, Inc. for it to act as construction manager and perform portions of the construction for the Bank's new operations facility and branch to be located in Alpine Township, a suburb of Grand Rapids, Michigan. Dale Visser and Bruce Visser, who are brothers, are owners of a substantial majority of Visser Brothers. Dale Visser is a member of the Board of Directors of the Corporation and the Bank, and both were organizers of the Bank. The contract estimates the construction costs for the facility at not more than approximately $1.3 million. Visser Brothers is to receive approximately 5% of this amount for its construction management services, and will be reimbursed for the wages, salaries, and related taxes and benefits of construction workers and supervisory and administrative personnel that it employs in connection with the construction. The Bank estimates that the payments for the percentage amount and reimbursements will total approximately $65,000 for the project. In addition, when deemed appropriate by the Bank, the architect for the project, and Visser Brothers, the Bank may permit Visser Brother to bid as a subcontractor for portions of the work that is to be performed on the project. In such cases, the Bank expects that Visser Brothers may be hired as a subcontractor where its bid is determined to be the most favorable. In 1997, the Bank contracted with Visser Brothers Inc. to renovate the building that the Bank is leasing for its main office. The contract provided for the payment of approximately $450,000 to Visser Brothers for renovation work that it performed under its base bid, and an additional approximately $150,000 for work that was specified in the contract to be performed by a separate supplier. The contract was awarded to Visser Brothers after being submitted for bids. The renovations were completed in December of 1997 pursuant to specifications provided by the Bank's architect. SELECTION OF INDEPENDENT AUDITORS The Board of Directors has selected Crowe, Chizek & Company LLP as the Corporation's principal independent auditors for the year ending December 31, 1999. Representatives of Crowe, Chizek & Company 9 11 LLP plan to attend the Annual Meeting of shareholders, will have the opportunity to make a statement if they desire to do so, and will respond to appropriate questions by shareholders. SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING A proposal submitted by a shareholder for the 2000 Annual Meeting of shareholders must be sent to the Secretary of the Corporation, 216 North Division Avenue, Grand Rapids, Michigan 49503, and received by November 13, 1999 in order to be eligible to be included in the Corporation's Proxy Statement for that meeting. OTHER MATTERS The Board of Directors does not know of any other matters to be brought before the Annual Meeting. If other matters are presented upon which a vote may properly be taken it is the intention of the persons named in the proxy to vote the proxies in accordance with their best judgment. MBCCM-PS-99 10 12 [X] PLEASE MARK VOTES APPENDIX AS IN THIS EXAMPLE
- ------------------------------------ 1. Election of Directors MERCANTILE BANK CORPORATION Nominees as Directors - ------------------------------------ BETTY S. BURTON FOR ALL WITH FOR ALL PETER A. CORDES NOMINEES HELD EXCEPT DAVID M. HECHT [ ] [ ] [ ] ROBERT M. WYNALDA NOTE: If you do not wish your shares voted "For" a particular nominee, mark the "For All Except" box and strike a line through the name(s) of the nominee(s). Your shares will be RECORD DATE SHARES: voted for the remaining nominee(s). YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL NOMINEES. 2. In their discretion, the Proxies are authorized to vote upon such other matters as may properly come before the meeting, or at any adjournment of the meeting. Mark box at right if you plan to attend the meeting. [ ] Please be sure to sign and date Mark box at right if an address change or comment has been [ ] this Proxy. Date noted on the reverse side of this card. ----------- Shareholder sign here Co-owner sign here ---------------- -------------------
DETACH CARD DETACH CARD MERCANTILE BANK CORPORATION Dear Shareholder, Enclosed with this proxy is your Notice of Annual Meeting and Proxy Statement, and 1998 Annual Report. We encourage you to carefully read these materials and exercise your right to vote your shares. Please mark the boxes on this proxy card to indicate how your shares will be voted, then sign the proxy card, detach it, and return your proxy vote in the enclosed postage paid envelope. If you plan to attend the meeting, please mark the appropriate box on the proxy. Your proxy card must be received prior to the Annual Meeting of Shareholders on April 15, 1999. Sincerely, Mercantile Bank Corporation 13 MERCANTILE BANK CORPORATION 216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503 PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 15, 1999 The undersigned hereby appoints Calvin D. Murdock and Susan K. Jones, or either of them, with power of substitution in each, proxies of the undersigned to vote all Common Stock of the undersigned in Mercantile Bank Corporation, at the Annual Meeting of Shareholders to be held on April 15, 1999, and at all adjournments thereof. IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES NAMED IN THIS PROXY. PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. Please sign exactly as your name(s) appear(s) hereon. Joint owners should each sign personally. Trustees and other fiduciaries should indicate the capacity in which they sign. If a corporation or partnership, the signature should be that of an authorized person who should state his or her title. HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS? - ---------------------------- -------------------------------------- - ---------------------------- -------------------------------------- - ---------------------------- -------------------------------------- EX-27 6 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1998 DEC-31-1998 5,940,713 515,283 0 0 0 24,160,247 24,160,247 184,744,602 (2,765,100) 216,236,857 171,998,019 17,037,601 500,721 0 0 0 28,181,798 (1,481,282) 216,236,857 9,007,668 880,639 279,909 10,168,216 5,140,788 5,629,218 4,538,998 2,571,800 128 3,564,423 (1,109,047) (1,109,047) 0 0 (1,109,047) (0.58) (0.58) 3.62 0 0 0 0 193,300 0 0 2,765,100 2,765,100 0 0
-----END PRIVACY-ENHANCED MESSAGE-----