-----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, LE2/hC+0HdjgtTbYVxXD3zOQgk09ahu1KvmY1vWC+7ONHgZ4Jz86to5r5kBLxO+n kzssKXMc4kLXp/Qny8fb0w== 0000950124-99-004376.txt : 19990811 0000950124-99-004376.hdr.sgml : 19990811 ACCESSION NUMBER: 0000950124-99-004376 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19990802 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: SB-2 SEC ACT: SEC FILE NUMBER: 333-84313 FILM NUMBER: 99676397 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MBWM CAPITAL TRUST I CENTRAL INDEX KEY: 0001092069 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-84313-01 FILM NUMBER: 99676398 BUSINESS ADDRESS: STREET 1: C/O MERCANTILE BANK CORP STREET 2: 216 NORTH DIVISION AVENUE CITY: GRAND RAPIDS STATE: MI ZIP: 49503 BUSINESS PHONE: 6162429000 MAIL ADDRESS: STREET 1: C/O MERCANTILE BANK CORPORATION STREET 2: 216 NORTH DIVISION AVENUE CITY: GRAND RAPIDS STATE: MI ZIP: 49503 SB-2 1 FORM SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1999 REGISTRATION NO. 333- REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- MERCANTILE BANK CORPORATION MBWM CAPITAL TRUST I (NAME OF SMALL BUSINESS CO-ISSUER IN ITS CHARTER) (NAME OF SMALL BUSINESS CO-ISSUER IN ITS CHARTER) MICHIGAN DELAWARE (STATE OR JURISDICTION OF INCORPORATION OR ORGANIZATION) (STATE OR JURISDICTION OF INCORPORATION OR ORGANIZATION) 6712 6719 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 38-3360865 APPLIED FOR (I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 216 NORTH DIVISION AVENUE 216 NORTH DIVISION AVENUE GRAND RAPIDS, MICHIGAN 49503 GRAND RAPIDS, MICHIGAN 49503 (616) 242-9000 (616) 242-9000 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL PLACE (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS) OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
------------------------- GERALD R. JOHNSON, JR., CHAIRMAN MERCANTILE BANK CORPORATION 216 NORTH DIVISION AVENUE GRAND RAPIDS, MICHIGAN 49503 (616) 242-9000 (NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ------------------------- COPIES TO: JEROME M. SCHWARTZ JENNIFER R. EVANS, ESQ. DICKINSON WRIGHT PLLC VEDDER, PRICE, KAUFMAN & KAMMHOLZ 500 WOODWARD AVENUE, 222 NORTH LASALLE STREET, SUITE 4000 SUITE 2600 DETROIT, MICHIGAN 48226-3425 CHICAGO, ILLINOIS 60601-1003
------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------- CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER UNIT(2) PRICE(2) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- % Cumulative Preferred Securities of MBWM Capital Trust I........................ 1,600,000 $10 $16,000,000 - --------------------------------------------------------------------------------------------------------------------------------- % Junior Subordinated Debentures of Mercantile Bank Corporation.................... (3)(4) - --------------------------------------------------------------------------------------------------------------------------------- Guarantee of Mercantile Bank Corporation with respect to the % Cumulative Preferred Securities..................... (4) - --------------------------------------------------------------------------------------------------------------------------------- Total Registration Fee........... $4,448 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes 200,000 % Cumulative Preferred Securities which may be purchased by the underwriters to cover over-allotments. (2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(a). (3) The % Junior Subordinated Debentures will be purchased by MBWM Capital Trust I with the proceeds of the sale of the Preferred Securities. The Junior Subordinated Debentures may later be distributed for no additional consideration to the holders of the Preferred Securities upon dissolution of MBWM Capital Trust I and the distribution of its assets. (4) This Registration Statement is deemed to cover the Junior Subordinated Debentures of Mercantile Bank Corporation, the rights of holders of the Junior Subordinated Debentures of Mercantile under the Indenture, the rights of holders of the Preferred Securities under the Trust Agreement, the Guarantee, the Expense Agreement entered into by Mercantile and certain backup undertakings as described herein. No separate consideration will be received for the Guarantee or such backup undertakings. THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A) OF THE SECURITIES ACT OF 1933, MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 2, 1999 1,400,000 PREFERRED SECURITIES MBWM CAPITAL TRUST I % CUMULATIVE PREFERRED SECURITIES MERCANTILE LOGO (LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY) FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED ON A SUBORDINATED BASIS AS DESCRIBED IN THIS PROSPECTUS BY MERCANTILE BANK CORPORATION ------------------------- The preferred securities of MBWM Capital Trust I being offered generally consist of an indirect beneficial interest in % junior subordinated debentures of Mercantile Bank Corporation. The junior subordinated debentures have the same payment terms as the preferred securities and will be purchased and held by MBWM Trust using the proceeds of this offering. A brief description of the preferred securities can be found under "Prospectus Summary -- The Offering" in this prospectus. The preferred securities are expected to be approved for trading on the Nasdaq National Market under the trading symbol "MBWMP". We expect that the preferred securities will begin trading on the Nasdaq National Market when they are issued. ------------------------- YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 9 BEFORE INVESTING IN THE PREFERRED SECURITIES. ------------------------- THE PREFERRED SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS, OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
PER PREFERRED SECURITY TOTAL ---------------------- ---------------------- Price to Public............................................ $10.00 $14,000,000 Proceeds to MBWM Trust..................................... $10.00 $14,000,000
This is a firm commitment underwriting. Mercantile will pay underwriting commissions of $ per preferred security, or a total of $ , for the arranging of the investment in its junior subordinated debentures. The underwriters have been granted a 30-day option to purchase up to an additional 200,000 preferred securities to cover over-allotments, if any. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. STIFEL, NICOLAUS & COMPANY TUCKER ANTHONY CLEARY GULL INCORPORATED , 1999 3 [KENT COUNTY MICHIGAN MAP] ------------------------- SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Information included in this prospectus includes forward-looking statements, which can be identified by the use of forward-looking terminology such as may, will, expect, anticipate, believe, estimate, or continue, or the negative thereof or other variations thereon or comparable terminology. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially include the risks and uncertainties discussed in the "Risk Factors" section as well as continued success of Mercantile's business strategy, general economic conditions, economic conditions in the Grand Rapids area particularly and western Michigan generally, the monetary policy of the Federal Reserve, changes in interest rates, inflation, and changes in the state and federal regulatory regime applicable to Mercantile and the Bank's operations. i 4 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and may not contain all the information that may be important to you. You should read the entire prospectus, including the financial statements and related notes, before making a decision to invest in the preferred securities. Unless indicated otherwise, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. As used in this prospectus, the term "Mercantile" refers to Mercantile Bank Corporation, a business corporation organized under Michigan law. The term "MBWM Trust" refers to MBWM Capital Trust I, a Delaware business trust organized to purchase Mercantile's junior subordinated debentures and issue the preferred securities. The term "Bank" refers to Mercantile Bank of West Michigan, a bank organized under the laws of Michigan that is a wholly owned subsidiary of Mercantile. Unless the context otherwise requires, references in this prospectus to Mercantile include Mercantile and the Bank, but not MBWM Trust. MERCANTILE BANK CORPORATION Mercantile is a single bank holding company headquartered in Grand Rapids, Michigan. Mercantile owns the Bank and conducts business primarily in the Kent and Ottawa counties of western Michigan. Mercantile has a strong commitment to community banking and offers a wide range of financial products and services, primarily for small- to medium-sized businesses. Mercantile's lending strategy emphasizes commercial lending. The Bank also provides services and makes residential and consumer loans to individuals. Mercantile offers a broad array of deposit products, including checking, savings, and money market accounts, business checking, direct deposits and certificates of deposit. Mercantile has grown significantly since the Bank opened in December 1997. Mercantile first posted a profit in the third quarter of 1998, nine months after the Bank opened. At June 30, 1999, Mercantile had total assets of $291.9 million, total loans of $246.7 million, total deposits of $245.8 million, and shareholders' equity of $27.1 million. At that date Mercantile had no non-performing assets and a ratio of allowance for loan losses to total loans of 1.50%. For the six months ended June 30, 1999, Mercantile recorded net income of $855,000, or $0.35 per share. While Mercantile has grown rapidly, management has placed an emphasis on building a quality loan portfolio focusing on prudent lending and adequate reserves. The allowance for loan losses is maintained at a level management feels is adequate to absorb losses inherent in the loan portfolio, an evaluation that is primarily based upon a review of Mercantile's and the banking industry's historical loan experience, known and inherent risks contained in the loan portfolio, composition and growth of the loan portfolio, and current and projected economic factors. Mercantile has been successful in attracting local deposits and has developed strategies to acquire wholesale deposits to provide funding for the high level of loan demand Mercantile has experienced. Mercantile has maintained a strong capital position by raising $30.3 million, in aggregate, through its initial public offering in October 1997 and a second public offering completed in July 1998. At June 30, 1999, Mercantile exceeded all applicable regulatory capital requirements. 1 5 MARKET AREA Mercantile's market area is the Kent and Ottawa counties of western Michigan, which includes the City of Grand Rapids, the second largest city in the State of Michigan. Kent County has a diverse economy based primarily on manufacturing, retail and service businesses. According to available statistical data, Kent County has approximately 547,000 people, 198,000 households and a median household income that is estimated to have grown approximately 51% from 1990 to 1998. Kent County is a significant banking market in the State of Michigan. According to available industry data, as of June 30, 1998, total deposits in Kent County, including those of banks, thrifts and credit unions, were approximately $7.0 billion. BUSINESS STRATEGY Mercantile's business strategy focuses on: - recruiting and retaining highly-qualified people; - commercial lending in western Michigan; - using a combination of local deposits and wholesale funding to meet loan growth; - taking advantage of industry consolidation; - community banking; - using alternative delivery channels; and - evaluating acquisition opportunities. Mercantile's principal executive offices are located at 216 North Division Avenue, Grand Rapids, Michigan. Mercantile's telephone number is (616) 242-9000. MBWM Trust is a business trust created in 1999 for the single purpose of offering the preferred securities and purchasing the junior subordinated debentures of Mercantile. MBWM Trust will have a term of 30 years, but may dissolve earlier as provided in its trust agreement. 2 6 THE OFFERING Preferred Securities issuer..... MBWM Trust Securities offered.............. MBWM Trust is offering 1,400,000 of its preferred securities, which represent an indirect beneficial interest in junior subordinated debentures issued by Mercantile and held by MBWM Trust. MBWM Trust will sell its preferred securities to the public and its common securities to Mercantile. Together, the preferred securities and the common securities are referred to as the trust securities. MBWM Trust will use the proceeds from the sale of the trust securities to buy a series of % junior subordinated debentures due , 2029, from Mercantile with the same payment terms as the preferred securities. Quarterly distributions are payable to you on the Preferred Securities.................... The distributions payable on each preferred security will: - be fixed and accumulate at a rate per year of %; - accrue from the date of issuance of the preferred securities; and - be payable after each calendar quarter on the 15th day of October, January, April and July of each year that the preferred securities are outstanding, beginning on October 15, 1999, subject to the right to defer distributions on the preferred securities. Mercantile and MBWM Trust have rights to defer distributions to you on the Preferred Securities.................... MBWM Trust will defer distributions on the preferred securities if Mercantile defers interest payments on the junior subordinated debentures. Mercantile generally has the right to defer interest payments on the junior subordinated debentures for up to 20 consecutive quarters. During any deferral period, you will still accumulate the right to receive distributions when subsequently made at the annual rate of %, plus you will earn interest at the annual rate of %, compounded quarterly, on any unpaid distributions. You will still be taxed even if distributions on the Preferred Securities are deferred....... If distributions on the preferred securities are deferred, you will also be required to accrue interest income and include it in your gross income 3 7 for United States federal income tax purposes for as long as the junior subordinated debentures remain outstanding, even if you are a cash basis taxpayer. For further information on deferrals and their tax consequences, see "Risk Factors -- Distributions on the preferred securities may be deferred; you may have to include interest in your taxable income before you receive cash," "Description of Junior Subordinated Debentures -- Option to Extend Interest Payment Period" and "Material Federal Income Tax Consequences -- Interest Income and Original Issue Discount." You will be required to sell your Preferred Securities to MBWM Trust when the Junior Subordinated Debentures mature........................ The junior subordinated debentures will mature on , 2029. You will be required to sell your preferred securities to MBWM Trust upon the stated maturity date of the junior subordinated debentures or earlier if they are prepaid. If the Junior Subordinated Debentures are prepaid your Preferred Securities will be redeemed...................... Upon Mercantile having received prior approval of the Board of Governors of the Federal Reserve System, if required, Mercantile may prepay the junior subordinated debentures prior to maturity: - on or after , 2004; or - at any time upon events occurring which may have a significant adverse effect on the benefits to Mercantile of having the preferred securities outstanding. Upon any prepayment of the junior subordinated debentures, your preferred securities will be redeemed at the liquidation amount of $10 per preferred security plus any accrued and unpaid distributions to the date of redemption. For further information on redemptions, see "Description of the Preferred Securities -- Redemption -- Mandatory and Optional Rights of Mercantile" and "Description of Junior Subordinated Debentures -- Redemption." At its option, Mercantile may require you to exchange your Preferred Securities for its Junior Subordinated Debentures.................... Mercantile has the right at any time to dissolve or liquidate MBWM Trust and distribute the junior subordinated debentures to you in exchange for 4 8 your preferred securities. However, Mercantile must receive prior approval of the Federal Reserve and first pay the creditors, if any, of MBWM Trust. Upon a dissolution or liquidation of MBWM Trust, you will receive junior subordinated debentures in exchange for the same principal amount of your holdings in preferred securities. For further information concerning distribution of the junior subordinated debentures, see "Description of the Preferred Securities -- Distribution of Junior Subordinated Debentures." If the junior subordinated debentures are distributed, Mercantile will use reasonable efforts to list them on a national securities exchange or quotation system. Your Preferred Securities are fully and unconditionally guaranteed by Mercantile on a subordinated basis............ Mercantile will fully, irrevocably and unconditionally guarantee the preferred securities on a subordinated basis. If Mercantile does not make a payment on the junior subordinated debentures, MBWM Trust will not have sufficient funds to make payments on the preferred securities. The preferred securities guarantee does not cover payments when MBWM Trust does not have sufficient funds. For further information concerning the preferred securities guarantee of Mercantile, see "Description of Preferred Securities Guarantee." Your Preferred Securities rank lower in payment compared to other obligations of Mercantile.................... Mercantile's obligations under its preferred securities guarantee, the junior subordinated debentures and other governing documents described in this prospectus are unsecured and rank junior in right of payment to all current and future senior and subordinated debt of Mercantile. In addition, because Mercantile is a bank holding company, all existing and future liabilities of any Mercantile subsidiary will rank prior to all obligations of Mercantile relating to the preferred securities and the junior subordinated debentures. There is no limit on the amount of other preferred securities or other junior subordinated debentures of Mercantile that may be issued in the future. Future issuances of this type will rank equally with Mercantile's obligations under the junior subordinated debentures and its preferred securities guarantee described in this prospectus. The preferred 5 9 securities will generally rank equally and payments on them will be made proportionately, with the common securities of MBWM Trust, which will be held by Mercantile. You will have limited voting rights.......................... As a holder of preferred securities, you have only limited voting rights. These rights relate only to the dissolution or termination of MBWM Trust and removal of the property trustee and the indenture trustee of MBWM Trust upon selected events described in this prospectus. See "Description of the Preferred Securities -- Voting Rights; Amendment of the Trust Agreement." The Preferred Securities will be in book entry form only......... You will not receive a certificate for your preferred securities. Instead, the preferred securities will be represented by a global security that will be deposited with and registered in the name of The Depository Trust Company or its nominee. Proposed Nasdaq National Market Listing....................... Application has been made to have the preferred securities approved for trading on the Nasdaq National Market under the trading symbol "MBWMP". Use of proceeds of sale of the Preferred Securities.......... The proceeds of the sale of the preferred securities will be invested by MBWM Trust in the junior subordinated debentures. Substantially all of the proceeds from the issuance of the junior subordinated debentures will be contributed by Mercantile to the capital of the Bank. Mercantile expects approximately $9.3 million of the proceeds of the preferred securities to qualify as Tier 1 (or core) capital of Mercantile under the capital adequacy guidelines of the Federal Reserve. The remaining $4.7 million of such proceeds will be included in Mercantile's total qualifying capital for purposes of the capital adequacy guidelines. See "Use of Proceeds" and "Capitalization." See also "Supervision and Regulation -- Mercantile -- Capital Requirements" for a definition of Tier 1 (or core) capital. 6 10 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial and other data of Mercantile. The selected income statement data for the year ended December 31, 1998 and the period ended December 31, 1997 has been derived from the audited consolidated statements of income and notes thereto which are included elsewhere in this prospectus. The selected balance sheet data as of December 31, 1998 has been derived from the audited consolidated financial statements and notes thereto which are included elsewhere in this prospectus. The consolidated statement of income data for the six months ended June 30, 1999 and 1998, and the consolidated balance sheet data as of June 30, 1999 and 1998, have been derived from unaudited consolidated financial statements, which, in the opinion of Mercantile, reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations of Mercantile for those periods. The consolidated statements of income data for interim periods are not necessarily indicative of results for subsequent periods or the full year. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with Mercantile's consolidated financial statements appearing elsewhere in this prospectus.
SIX MONTHS PERIOD ENDED ENDED JUNE 30, DECEMBER 31, -------------------------- ------------------------ 1999 1998 1998 1997 ----------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Interest income................................ $ 9,744 $ 3,384 $ 10,168 $ 154 Interest expense............................... 5,549 1,879 5,629 14 ---------- ---------- ---------- ---------- Net interest income............................ 4,195 1,505 4,539 140 Provision for loan losses...................... 936 1,472 2,572 193 ---------- ---------- ---------- ---------- Net interest income (loss) after provision for loan losses................................. 3,259 33 1,967 (53) Noninterest income............................. 416 87 488 -- Noninterest expense............................ 2,644 1,556 3,564 351 ---------- ---------- ---------- ---------- Income (loss) before income taxes.............. 1,031 (1,436) (1,109) (404) Provision for income taxes..................... 134 -- -- -- ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of change in accounting principle.............. 897 (1,436) (1,109) (404) Cumulative effect of change in accounting principle (net of income taxes)............. 42 -- -- -- ---------- ---------- ---------- ---------- Net income..................................... $ 855 $ (1,436) $ (1,109) $ (404) ========== ========== ========== ========== PER SHARE DATA(1): Earnings (loss) per common share: Basic and diluted before cumulative effect of change in accounting principle......... $ 0.36 $ (0.96) $ (0.58) $ (0.27) Basic and diluted........................... 0.35 (0.96) (0.58) (0.27) Average common shares and common share equivalents outstanding..................... 2,472,500 1,495,000 1,907,658 1,495,000 Diluted book value (period end)................ $ 10.94 $ 8.05 $ 10.80 $ 9.01
7 11
SIX MONTHS PERIOD ENDED ENDED JUNE 30, DECEMBER 31, -------------------------- ------------------------ 1999 1998 1998 1997 ----------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA (AT PERIOD END): Investment Securities.......................... $ 29,605 $ 14,495 $ 24,160 $ 2,998 Loans.......................................... 246,725 113,406 184,745 12,887 Total assets................................... 291,935 139,593 216,237 24,109 Total deposits................................. 245,811 116,691 171,998 9,688 Repurchase agreements.......................... 17,866 10,555 17,038 655 Total shareholders' equity..................... 27,060 12,038 26,701 13,473 Average assets (unaudited for all periods)..... 258,178 86,984 129,399 NM SELECTED RATIOS: Return on average total assets................. 0.66% (3.30)% (0.86)% NM Return on average total shareholders' equity... 6.34 (22.91) (6.40) NM Net interest margin............................ 3.41 3.37 3.62 NM Efficiency ratio(2)............................ 57.34 97.74 70.90 NM Average assets per employee (in millions)...... $ 6.21 $ 4.65 $ 6.18 $ 1.42 ASSETS QUALITY RATIOS: Allowance for possible loan losses to loans.... 1.50% 1.50% 1.50% 1.50% Nonperforming loans to loans(3)................ 0 0 0 0 Allowance for possible loan losses to nonperforming loans(3)...................... NA NA NA NA Nonperforming assets to loans and foreclosed assets(4)................................... 0 0 0 0 Net loan charge-offs to average loans.......... 0 0 0 0 CAPITAL RATIOS Average shareholders' equity to average assets...................................... 9.52% 14.41% 13.83% 69.72% Total risk-based capital ratio................. 10.77 11.22 11.79 77.04 Leverage ratio................................. 10.03 10.63 13.01 78.12 RATIO OF EARNINGS (LOSS) TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS(5) Including interest on deposits................. 1.18 0.25 0.81 NM Excluding interest on deposits................. 3.71 (8.03) (0.73) NM
- ------------------------- (1) No dividends have been paid or declared since inception of Mercantile. (2) The efficiency ratio = noninterest expense / (tax equivalent net interest income + noninterest income). (3) Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and loans with restructured terms. There have been no nonperforming loans since inception of Mercantile. (4) Nonperforming assets consist of nonperforming loans and foreclosed assets. There have been no nonperforming assets since inception of Mercantile. (5) For purposes of calculating the ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of income before taxes plus interest and rent expense. Fixed charges consist of interest and rent expense. NA Not applicable NM Not meaningful 8 12 RISK FACTORS You should carefully read and consider the following risks and uncertainties together with the other information provided in this prospectus before purchasing any preferred securities. RISK FACTORS RELATING TO THE PREFERRED SECURITIES IF MERCANTILE DOES NOT MAKE PAYMENTS UNDER THE JUNIOR SUBORDINATED DEBENTURES, MBWM TRUST WILL BE UNABLE TO PAY DISTRIBUTIONS AND LIQUIDATION AMOUNTS AND THE PREFERRED SECURITIES GUARANTEE WILL NOT APPLY. The ability of MBWM Trust to pay distributions and the liquidation amount of $10 per preferred security when due is solely dependent upon the ability of Mercantile to make the related payments on the junior subordinated debentures when due. If Mercantile defaults on its obligation to pay principal or interest on the junior subordinated debentures, MBWM Trust will not have sufficient funds to pay distributions or the liquidation amount. In that case, you will not be able to rely upon the preferred securities guarantee for payment of these amounts because the preferred securities guarantee only applies if Mercantile makes a payment of principal or interest on the junior subordinated debentures. For more information on Mercantile's obligations under the preferred securities guarantee and the junior subordinated debentures, see "Description of Preferred Securities Guarantee -- Status of Preferred Securities Guarantee" and "Description of Junior Subordinated Debentures -- Subordination of Junior Subordinated Debentures to Senior and Subordinated Debt of Mercantile." INTEREST AND PRINCIPAL PAYMENTS BY MERCANTILE ON THE JUNIOR SUBORDINATED DEBENTURES ARE DEPENDENT ON THE RECEIPT OF DIVIDENDS FROM THE BANK. Substantially all of Mercantile's assets consist of its investments in the Bank. Thus, Mercantile's ability to pay interest and principal on the junior subordinated debentures to MBWM Trust depends primarily upon the cash dividends Mercantile receives from the Bank. Dividend payments from the Bank to Mercantile are subject to, among other things: - regulatory limitations, generally based on current and retained earnings, and capital maintenance requirements which are higher during the first three years of operations, imposed by various bank regulatory agencies; - profitability, tax burden, financial condition and capital expenditures and other cash flow requirements of the Bank; and - prior claims of creditors of the Bank. The Bank has not previously declared or paid dividends. The Bank is currently subject to restrictions applicable to it as a recently formed bank during the first three years of operations, and will continue to be subject to regulatory restrictions that limit the amount of dividends a bank can pay. If the Bank is unable to pay sufficient dividends to Mercantile, Mercantile will likely be unable to make payments on the junior subordinated debentures, thereby leaving insufficient funds for MBWM Trust to make payments to you on the preferred securities. See "Risk Factors Relating to Mercantile -- The Bank is subject to regulatory restrictions on the dividends it can declare and pay." 9 13 DISTRIBUTIONS ON THE PREFERRED SECURITIES MAY BE DEFERRED; YOU MAY HAVE TO INCLUDE INTEREST IN YOUR TAXABLE INCOME BEFORE YOU RECEIVE CASH. It is possible that you will not receive cash distributions on your preferred securities for one or more periods of up to five years. Because you will still be required to include interest in your income for United States federal income tax purposes as it accrues, you may have to pay taxes before you actually receive the cash distributions. Mercantile has the right, at one or more times, to defer interest payments on the junior subordinated debentures for up to 20 consecutive quarters, but not beyond the maturity date of the junior subordinated debentures. This right exists only if no event of default under the junior subordinated debentures has occurred and is continuing. If Mercantile exercises this right, MBWM Trust would defer distributions on the preferred securities during any deferral period. However, you would still accumulate the right to receive distributions when subsequently made at the annual rate of % of the liquidation amount of $10 per preferred security, plus you will earn interest at the annual rate of %, compounded quarterly, on those unpaid distributions. During a deferral period, the preferred securities may trade at a price that does not fully reflect the value of accrued but unpaid distributions. During a deferral period and for as long thereafter as the junior subordinated debentures remain outstanding, you will be required to accrue interest income, as original issue discount, for United States federal income tax purposes in respect of your pro rata share of the junior subordinated debentures held by MBWM Trust. As a result, you would include the accrued interest in your gross income for United States federal income tax purposes prior to your receiving cash. You will also not receive the cash distributions related to any accrued and unpaid interest from MBWM Trust if you sell the preferred securities before the end of any deferral period. While Mercantile will take the position that original issue discount will not arise before any first deferral period, it is possible that all interest on the junior subordinated debentures would be required to be accounted for as original issue discount. In these circumstances, stated interest payments on interest previously accrued would not separately be reported as taxable income. Mercantile has no current intention of exercising its right to defer interest payments on the junior subordinated debentures. However, if Mercantile exercises its right in the future, the market price of the preferred securities is likely to be adversely affected. If you sell the preferred securities during an interest deferral period, you may not receive the same return on your investment as someone else who continues to hold the preferred securities. See "Material Federal Income Tax Consequences" for more information regarding the tax consequences of the preferred securities. YOU ARE SUBJECT TO PREPAYMENT RISK OF YOUR PREFERRED SECURITIES IN THE EVENT OF TAX, LEGISLATIVE OR REGULATORY CHANGES THAT MAY TRIGGER THE REDEMPTION OF THE JUNIOR SUBORDINATED DEBENTURES BY MERCANTILE AND PREPAYMENT OF THE PREFERRED SECURITIES PRIOR TO THE STATED MATURITY DATE. You are subject to prepayment risk relating to your preferred securities. Although the junior subordinated debentures have a stated maturity date of , 2029, they 10 14 may be redeemed by Mercantile prior to maturity which would cause an early redemption of the preferred securities, upon the following: - In whole or in part, beginning on , 2004 at the option of Mercantile. - In whole upon a change in the federal tax laws or a change in the interpretation of the tax laws by the courts or the IRS, which would result in a risk that (1) MBWM Trust may be subject to federal income tax, (2) interest paid by Mercantile on the junior subordinated debentures will not be deductible by Mercantile for federal income tax purposes, or (3) MBWM Trust is or will be subject to more than a minimal amount of other taxes or governmental charges. - In whole upon a change in the laws or regulations to the effect that MBWM Trust is or will be considered to be an investment company that is required to be registered under the Investment Company Act of 1940. - In whole upon a change in the laws or regulations if there is a risk that Mercantile will not be able to treat all or a substantial portion of the preferred securities as core capital for purposes of capital adequacy guidelines of the Federal Reserve. The exercise of these redemption rights is subject to Mercantile having received prior approval of the Federal Reserve, if required. For further information concerning tax, legislative or regulatory events that may trigger redemption of the junior subordinated debentures and prepayment of the preferred securities, see "Description of the Preferred Securities -- Redemption -- Mandatory and Optional Rights of Mercantile." YOU ARE SUBJECT TO PREPAYMENT RISK BECAUSE POSSIBLE TAX LAW CHANGES COULD RESULT IN A REDEMPTION OF THE PREFERRED SECURITIES. Future legislation may be proposed or enacted that may prohibit Mercantile from deducting its interest payments on the junior subordinated debentures for federal income tax purposes, making redemption of the junior subordinated debentures likely and resulting in a redemption of the preferred securities. From time to time, the Clinton Administration has proposed tax law changes that would, among other things, generally deny interest deductions to a corporate issuer if the debt instrument has a term exceeding 15 years and if the debt instrument is not reflected as indebtedness on the issuer's consolidated balance sheet. Other proposed tax law changes would have denied interest deductions if the debt instrument had a term exceeding 20 years. Although it is impossible to predict future proposals, if a future proposal of this sort were to become effective in a form applicable to already issued and outstanding securities, Mercantile could be precluded from deducting interest on the junior subordinated debentures. Enactment of any such proposal might in turn give rise to a tax event as described under "Description of the Preferred Securities -- Redemption -- Mandatory and Optional Rights of Mercantile." You should also be aware that a petition was recently filed in the United States Tax Court as a result of a challenge by the IRS of a taxpayer's treatment as indebtedness of a security issued with characteristics similar to the junior subordinated indentures. Although the IRS agreed to dismissal of the adjustments related to this issue, it could assert similar adjustments against other taxpayers. If it were to do so and the issue were litigated to a conclusion in which the IRS's position on this matter were sustained, such a judicial determination could constitute a tax event which could result in an early redemption of the preferred securities. For further information, see "Description of the Preferred Securities -- Redemption -- Mandatory and Optional Rights of Mercantile," "Description of Junior 11 15 Subordinated Indentures -- Redemption" and "Material Federal Income Tax Consequences." MERCANTILE'S OBLIGATIONS UNDER THE PREFERRED SECURITIES GUARANTEE AND THE JUNIOR SUBORDINATED DEBENTURES RANK LOWER THAN OTHER MERCANTILE OBLIGATIONS. Mercantile's obligations under the junior subordinated debentures are unsecured and will rank junior in priority of payment to any senior and subordinated debt Mercantile may incur, which generally includes indebtedness, liabilities or obligations of Mercantile, contingent or otherwise. Mercantile's obligations under the junior subordinated debentures will also be effectively subordinated to all existing and future liabilities and obligations of its subsidiaries, including the Bank. The preferred securities, the junior subordinated debentures and the preferred securities guarantee do not limit the ability of Mercantile or the Bank to incur unlimited future indebtedness, liabilities and obligations, which may rank senior to the junior subordinated debentures and the preferred securities guarantee. For more information on Mercantile's obligations under the preferred securities guarantee and the junior subordinated debentures, see "Description of Preferred Securities Guarantee -- Status of Preferred Securities Guarantee" and "Description of Junior Subordinated Debentures -- Subordination of Junior Subordinated Debentures to Senior and Subordinated Debt of Mercantile." DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED SECURITIES MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF YOUR HOLDINGS. Your investment in the preferred securities may decrease in value if the junior subordinated debentures are distributed to you. Mercantile cannot predict the liquidity or market prices for the junior subordinated debentures that may be distributed. Accordingly, the junior subordinated debentures that you receive upon a distribution, or the preferred securities you hold pending such a distribution, may trade at a discount to the price that you paid to purchase the preferred securities. Because you may receive junior subordinated debentures, you must also make an investment decision with regard to the junior subordinated debentures. You should carefully review all the information regarding the junior subordinated debentures contained in this prospectus. If the junior subordinated debentures are distributed, Mercantile will use reasonable efforts to list them on a national securities exchange or quotation system. The material United States federal income tax consequences of a distribution of the junior subordinated debentures are discussed under "Material Federal Income Tax Consequences -- Distribution of Junior Subordinated Debentures to Holders of Preferred Securities." YOU MUST RELY ON THE PROPERTY TRUSTEE OF MBWM TRUST TO ENFORCE YOUR RIGHTS UNDER THE JUNIOR SUBORDINATED DEBENTURES IN THE EVENT OF DEFAULT. You may not be able to directly enforce rights against Mercantile if an event of default occurs. If an event of default under the junior subordinated debentures occurs and is continuing, this event will also be an event of default under the preferred securities. In that case, the holders of the preferred securities would rely on the enforcement by the property trustee of its rights as holder of the junior subordinated debentures against Mercantile. The holders of a majority in liquidation amount of the preferred securities will have the right to direct the property trustee to enforce its rights. If the property trustee does not enforce its rights, any record holder may take action directly against Mercantile 12 16 to enforce the property trustee's rights. If a default under the preferred securities occurs that is attributable to Mercantile's failure to pay interest or principal on the junior subordinated debentures, a record holder of the preferred securities may proceed directly against Mercantile. The holders of preferred securities will not be able to exercise directly any other remedies available to the holders of the junior subordinated debentures unless the property trustee fails to do so. See "Description of the Preferred Securities -- Events of Default; Notice" and "Description of Junior Subordinated Debentures -- Indenture Events of Default" for more information on your rights if an event of default occurs. LIMITED COVENANTS RELATING TO THE PREFERRED SECURITIES AND THE JUNIOR SUBORDINATED DEBENTURES DO NOT PROTECT YOU. The covenants in the governing documents relating to the preferred securities and the junior subordinated debentures are limited. As a result, the governing documents do not protect you in the event of an adverse change in Mercantile's financial condition or results of operations. Nor do the governing instruments limit the ability of Mercantile or its subsidiary to incur additional debt. You should not consider the terms of the governing documents to be a significant factor in evaluating whether Mercantile will be able to comply with its obligations under the junior subordinated debentures or the preferred securities guarantee. AS A HOLDER OF PREFERRED SECURITIES YOU WILL HAVE LIMITED VOTING RIGHTS. As a holder of preferred securities, you have limited voting rights. These rights relate only to the modification of the preferred securities and removal of the property and indenture trustees of MBWM Trust upon the happening of a limited number of events. You will not have any voting rights regarding Mercantile or the administrative trustees. See "Description of the Preferred Securities -- Voting Rights; Amendment of the Trust Agreement" for more information on your limited voting rights. INTEREST ACCRUALS ON THE PREFERRED SECURITIES MAY CREATE ADVERSE TAX CONSEQUENCES FOR YOU IF THE PREFERRED SECURITIES ARE TRADED. The preferred securities may trade at a price that does not reflect the value of accrued but unpaid interest on the underlying junior subordinated debentures. If you dispose of your preferred securities between record dates for payments on the preferred securities, you may have adverse tax consequences. Under these circumstances, you will be required to include accrued but unpaid interest on the junior subordinated debentures allocable to the preferred securities through the date of disposition in your income as ordinary income if you use the accrual method of accounting or if such interest represents original issue discount. If interest on the junior subordinated debentures is included in income under the original issue discount provisions, you would add this amount to your adjusted tax basis in your share of the underlying junior subordinated debentures deemed disposed. If your selling price is less than your adjusted tax basis, which will include all accrued but unpaid original issue discount interest included in your income, you could recognize a capital loss which cannot be applied to offset ordinary income for federal income tax purposes, subject to exceptions. See "Material Federal Income Tax Consequences -- Interest Income and Original Issue Discount" and "-- Sales or Redemption of Preferred Securities" for more information on possible adverse tax consequences to you. 13 17 THE PRICE OF YOUR PREFERRED SECURITIES COULD BE ADVERSELY AFFECTED BY A POSSIBLE LIMITED PUBLIC MARKET. There can be no assurance that an active and liquid trading market for the preferred securities will develop or be sustained due to a possible limited number of owners of the preferred securities or lack of interest by persons who may want to trade the preferred securities. An inactive or illiquid trading market could adversely affect the price of your preferred securities. RISK FACTORS RELATING TO MERCANTILE MERCANTILE HAS A LIMITED OPERATING HISTORY AND IS SUBJECT TO THE RISKS OF A NEW BUSINESS. Mercantile commenced its banking business on December 15, 1997, and has a limited operating history. Mercantile is subject to the risks that accompany a new business, including those relating to finding and retaining customers, finding and hiring qualified people, growing the business, and developing and offering products. Mercantile expects that its future operating earnings will be adequate to enable it to make the quarterly distributions required to be paid to MBWM Trust under the junior subordinated debentures. However, the level of operating earnings in prior quarters would not have been adequate to fund the payment of these amounts. IF BORROWERS DO NOT REPAY LOANS IT WILL ADVERSELY AFFECT MERCANTILE. Some borrowers may not repay loans that the Bank makes to them. This risk is inherent in the commercial banking business. If a significant amount of loans are not repaid, it would have an adverse effect on Mercantile's earnings and overall financial condition, and could cause the insolvency of Mercantile. Like all financial institutions, the Bank maintains an allowance for loan losses to provide for loan defaults and nonperformance. The allowance for loan losses is maintained at a level management feels is adequate to absorb losses inherent in the loan portfolio, an evaluation that is primarily based upon a review of the Bank's and the banking industry's historical loan loss experience, known and inherent risks contained in the loan portfolio, composition, and growth of the loan portfolio, and current and projected economic factors. However, the Bank's allowance for loan losses may not be adequate to cover actual losses, and future provisions for loan losses may adversely affect Mercantile's earnings. IF ECONOMIC CONDITIONS IN GENERAL AND IN MERCANTILE'S PRIMARY MARKET AREA DETERIORATE, MERCANTILE'S REVENUES AND EARNINGS COULD DECREASE. Mercantile's financial results may be adversely affected by changes in prevailing economic conditions, including declines in real estate values, rapid changes in interest rates, adverse employment conditions and the monetary and fiscal policies of the federal government. Although economic conditions in Mercantile's primary market area are good and have aided its recent growth, there is no assurance that these conditions will continue. In addition, substantially all of the loans made by the Bank are to individuals and businesses in western Michigan, and any decline in the economy of this area could have an adverse impact on the Mercantile. There is no assurance that positive trends or developments discussed in this prospectus will continue or that negative trends or developments will not have a significant adverse effect on Mercantile. 14 18 A DECREASE IN INTEREST RATE SPREADS MAY DECREASE MERCANTILE'S PROFITS. Mercantile's profitability is in part a function of the spread between the interest rates earned on assets and the interest rates paid on deposits and other interest-bearing liabilities. A decrease in interest rate spreads would have a negative effect on the net interest income and profitability of Mercantile, and there is no assurance that a decrease will not occur. Although management believes that the maturities of Mercantile's assets are moderately balanced in relation to maturities of liabilities, this balance involves estimates as to how changes in the general level of interest rates will impact the yields earned on assets and the rates paid on liabilities. THE BANK IS SUBJECT TO REGULATORY RESTRICTIONS ON THE DIVIDENDS IT CAN DECLARE AND PAY TO MERCANTILE. Mercantile's sources of funds for payment of interest on the junior subordinated debentures (which payments will be the sole source of funds available for payment of distributions on the preferred securities) will consist primarily of dividends, if and when received, from the Bank. The Bank has not paid any dividends to date, and no agreement, written or otherwise, between the Bank and Mercantile exists that requires the Bank to pay any dividends to service Mercantile's debt. The Bank is and will continue to be subject to applicable regulatory restrictions which limit the amount of dividends that can be paid by banking institutions. Also, pursuant to the Bank's original application to the FDIC for deposit insurance, the Bank was prohibited from declaring or paying dividends for the first three years of operations, or until December 15, 2000, absent regulatory consent. While the necessary regulators have consented to the Bank declaring dividends sufficient to pay the amounts due on the junior subordinated debentures so long as the Bank maintains a Tier I leverage ratio of at least 8.0% until December 15, 2000, and continues to be profitable, there can be no assurance that the Bank will declare and pay dividends in amounts sufficient to pay amounts due on the preferred securities. MANAGEMENT WILL HAVE BROAD DISCRETION IN MERCANTILE'S USE OF THE PROCEEDS IT RECEIVES. Mercantile will receive approximately $13.2 million in net proceeds from the sale of its junior subordinated indentures, after deducting underwriting commissions and estimated expenses payable by Mercantile. The Bank's management will have broad discretion to allocate these net proceeds to uses it believes are appropriate. See "Use of Proceeds" for the application of the proceeds. The amount and timing of the allocations will depend on a number of factors and may affect Mercantile's earnings. GOVERNMENT REGULATIONS IMPOSE LIMITATIONS AND MAY RESULT IN HIGHER OPERATING COSTS AND COMPETITIVE DISADVANTAGES FOR MERCANTILE. Mercantile and the Bank are subject to extensive state and federal government supervision and regulation that is intended primarily to protect depositors and the Federal Deposit Insurance Corporation's Bank Insurance Fund, rather than investors. Existing state and federal banking laws subject the Bank to substantial limitations with respect to loans, the purchase of securities, the payment of dividends and many other aspects of its banking business. Some of the banking laws may benefit the Bank, others may increase the cost of doing business or otherwise adversely affect the Bank and create competitive advantages for non-bank competitors. There can be no assurance that future legislation or government policy will not adversely affect the banking industry or the operations of the Bank. Federal 15 19 economic and monetary policy may affect the Bank's ability to attract deposits, make loans and achieve satisfactory interest spreads. See "Supervision and Regulation." THE BANKING BUSINESS IN MERCANTILE'S MARKET AREA IS HIGHLY COMPETITIVE. Mercantile and the Bank face strong competition for deposits, loans and other financial services from numerous banks, savings banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services, including consumer finance companies, securities brokerage firms, mortgage brokers, insurance companies, mutual funds, and other lending sources and investment alternatives. Some of the financial institutions and financial services organizations with which the Bank competes are not subject to the same degree of regulation as the Bank. Many of the financial institutions and financial services organizations aggressively compete for business in the Bank's market area. Most of these competitors have been in business for many years, have customer bases, deposits and lending limits that are substantially larger than those of the Bank, and are able to offer certain services that the Bank does not currently provide, including branch networks, trust services and international banking services. In addition, most of these entities have greater capital resources than the Bank, which, among other things, may allow them to price their services at levels more favorable to the customer and to provide larger credit facilities than could the Bank. This competition may limit Mercantile's growth or earnings. See "Business -- Competition." Additionally, recently effective legislation regarding interstate branching and banking may increase competition in the future from out-of-state banks. IF THE COMPUTER SYSTEMS OF MERCANTILE OR ITS SUPPLIERS AND CUSTOMERS DO NOT TIMELY BECOME YEAR 2000 COMPLIANT, MERCANTILE MAY BE ADVERSELY AFFECTED. Mercantile faces a significant business issue regarding how existing application software programs and operating systems can accommodate the date value for the year 2000. Many existing software application products, including software application products used by Mercantile and its suppliers and customers, were designed to accommodate only a two-digit date value which represents the year. Such faulty recognition could result in a system failure, disruption of operations, or inaccurate information or calculations. The interruption to Mercantile's business could be substantial if Mercantile's main data processing service provider fails to become year 2000 compliant. In addition, failure by suppliers and customers of Mercantile to modify and convert their own computer systems could have a significant adverse effect on the suppliers' or customers' operations and profitability, thus inhibiting their ability to provide services or repay loans to Mercantile. For further information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." MERCANTILE WILL NEED TO APPLY NEW TECHNOLOGY TO SERVICE ITS CUSTOMERS. The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Mercantile's future success will depend in part on its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in the Bank's operations. Many of the Bank's competitors have substantially greater resources to invest in technological improvements. Such technology may permit competitors to perform certain functions at a lower cost than the Bank. There can be no assurance that the Bank will be able to effectively implement new technology-driven 16 20 products and services or be successful in marketing such products and services to its customers. MERCANTILE IS DEPENDENT ON KEY PERSONNEL. Mercantile is dependent on the continued services of Mr. Johnson and Mr. Price, the two senior executive officers of Mercantile who have provided vision and leadership since its organization. The loss of either of these officers could have an adverse affect on Mercantile's growth and performance. Mercantile and the Bank have entered into employment contracts with Mr. Johnson and Mr. Price that provide for their employment through December 31, 2001. Mercantile presently maintains policies of key man life insurance on the lives of Mr. Johnson and Mr. Price in the amount of $1 million each. GROWTH AND EXPANSION MAY BE LIMITED BY MANY FACTORS. Mercantile has pursued and intends to continue to pursue an internal growth strategy, the success of which will depend primarily on generating an increasing level of loans and deposits at acceptable risk levels without corresponding increases in non-interest expenses. There can be no assurance that Mercantile will be successful in continuing its growth strategies due to delays and other impediments resulting from regulatory oversight, limited availability of qualified personnel, unavailability of branch sites or poor site selection of bank branches. In addition, the success of Mercantile's growth strategy will depend on maintaining sufficient regulatory capital levels and on continued favorable economic conditions in Mercantile's market area. 17 21 USE OF PROCEEDS MBWM Trust will use all of the proceeds from the sale of preferred securities to purchase the junior subordinated debentures from Mercantile. The net proceeds to Mercantile from the sale of the junior subordinated debentures, after deducting underwriting commissions and offering expenses, are expected to be approximately $13.2 million, or $15.1 million if the underwriters' over-allotment option is exercised in full. Mercantile intends to use substantially all of the net proceeds to make a contribution to the capital of the Bank. The Bank will use the net proceeds to invest in both short term investment securities and loans. Mercantile is required by the Federal Reserve to maintain defined levels of capital for bank regulatory purposes. In 1996, the Federal Reserve announced that qualifying amounts of securities having the characteristics of the preferred securities could be included as core capital for bank holding companies subject to certain limits. See "Capitalization." This capital treatment, together with Mercantile's ability to deduct, for federal income tax purposes, interest payable on the junior subordinated debentures, are expected to provide Mercantile with a cost-effective means of obtaining capital for bank regulatory purposes. Therefore, a portion of these proceeds will qualify as core capital. To support its growth, the Bank will be able to leverage this core capital by continuing to grow deposits internally or through wholesale deposits and borrowing additional funds. The additional capital that will be contributed to the Bank will result in an increased legal lending limit which may add to the Bank's ability to serve additional borrowing needs of the Bank's current customers and larger customers in the Bank's market. 18 22 MARKET FOR MERCANTILE'S COMMON STOCK AND PRICE RANGE The common stock of Mercantile is quoted on the Nasdaq National Market under the symbol MBWM. Prior to July 19, 1999, Mercantile's common stock was quoted on the OTC Bulletin Board under the same symbol. At July 15, 1999, there were 93 record holders of Mercantile's common stock. In addition, Mercantile estimates that there are more than 1,500 beneficial owners of its common stock who own their shares through brokers or banks. Mercantile has not paid dividends since its formation in 1997. The following table shows the high and low bid prices by quarter during the period from the date of Mercantile's initial public stock offering (October 23, 1997) through June 30, 1999. The quotations reflect bid prices as reported by the OTC Bulletin Board, and do not include retail mark-up, mark-down or dealer commission.
BID PRICES ---------------- HIGH LOW ------ ------ CALENDAR YEAR 1999 First Quarter............................................... $17.50 $13.00 Second Quarter.............................................. $16.63 $13.00 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
19 23 ACCOUNTING TREATMENT For financial reporting purposes, MBWM Trust will be treated as a subsidiary of Mercantile and, accordingly, the accounts of MBWM Trust will be included in the consolidated financial statements of Mercantile. The preferred securities will be presented as a separate line item in the consolidated balance sheets of Mercantile under the caption "Guaranteed Preferred Beneficial Interests in the Company's Subordinated Debentures," and appropriate disclosures about the preferred securities, the preferred securities guarantee of Mercantile and the junior subordinated debentures will be included in the notes to consolidated financial statements. For financial reporting purposes, Mercantile will record distributions payable on the preferred securities as interest expense in the consolidated statements of income. Future reports of Mercantile filed under the Securities Exchange Act of 1934, as amended, will include a footnote to the consolidated financial statements stating that: - MBWM Trust is a wholly-owned subsidiary of Mercantile; - the sole asset of MBWM Trust is the junior subordinated debentures, specifying the principal amount, interest rate and maturity date of the junior subordinated debentures; and - the obligations of Mercantile described in this prospectus, in the aggregate, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by Mercantile of the obligations of MBWM Trust under the preferred securities. MBWM Trust will not provide separate reports under the Securities Exchange Act of 1934. No separate financial statements of MBWM Trust have been included in this prospectus. Mercantile and MBWM Trust do not consider that financial statements of MBWM Trust would be material to holders of the preferred securities because MBWM Trust is a newly formed, special purpose entity, has no operating history or independent operations and is not engaged in and does not propose to engage in any activity other than holding as assets the junior subordinated debentures of Mercantile and issuing the preferred securities. For more information, see "Description of the Preferred Securities," "Description of Junior Subordinated Debentures" and "Description of Preferred Securities Guarantee." 20 24 CAPITALIZATION The following table shows (1) the consolidated capitalization of Mercantile at June 30, 1999 and (2) the consolidated capitalization of Mercantile giving effect to the issuance of the preferred securities of MBWM Trust in this offering and receipt by Mercantile of the net proceeds from the corresponding sale of the junior subordinated debentures to MBWM Trust, as if the sale of the preferred securities had been consummated on June 30, 1999, and assuming the Underwriter's over-allotment option is not exercised.
JUNE 30, 1999 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (DOLLARS IN THOUSANDS) LONG TERM DEBT........................................... $ 0 $ 0 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S SUBORDINATED DEBENTURES...................... 0 14,000 SHAREHOLDERS' EQUITY Preferred Stock, no par value; 1,000,000 shares authorized; 0 shares issued and outstanding......... $ 0 $ 0 Common stock, no par value; 9,000,000 shares authorized; 2,472,500 shares issued and outstanding......................................... 28,182 28,182 Retained earnings (deficit)............................ (658) (658) Unrealized gain (loss), net of tax, on available for sale securities..................................... (464) (464) ------- ------- Total shareholders' equity.......................... 27,060 27,060 ------- ------- Total capitalization................................ $27,060 $41,060 ======= ======= CAPITAL RATIOS: Shareholders' equity to total assets................... 9.27% 8.85% Leverage ratio(1)(2)(3)(4)............................. 10.03 13.37 Risk-based capital ratios:(3)(4) Tier 1 capital to risk-weighted assets.............. 9.52 12.57 Total risk-based capital to risk-weighted assets.... 10.77 15.48
- ------------------------- (1) The leverage ratio is Tier 1 capital divided by average quarterly assets, after deducting intangible assets and net deferred tax assets in excess of regulatory maximum limits. (2) The capital ratios, as adjusted, are computed including the total estimated net proceeds from the sale of the preferred securities, in a manner consistent with Federal Reserve guidelines. (3) Federal Reserve guidelines for calculation of Tier 1 capital to risk-weighted assets limits the amount of cumulative preferred securities which can be included in Tier 1 capital to 25% of total Tier 1 capital. (4) Unrealized gain (loss), net of tax, on available for sale securities is not included in calculating regulatory capital ratios. 21 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this prospectus. This discussion provides information about the consolidated financial condition and results of operations of Mercantile and its wholly-owned subsidiary, the Bank. Mercantile was incorporated on July 15, 1997 as a bank holding company to establish and own the Bank. In October 1997, in connection with the organization of Mercantile and Bank, Mercantile sold 1,495,000 shares of common stock in an underwritten, initial public offering. Mercantile funded the capital of the Bank and paid certain expenses from the net proceeds of the public offering. The Bank, after receiving all necessary regulatory approvals, began operations on December 15, 1997. The Bank has a strong commitment to community banking and offers a wide range of financial products and services, primarily to small- to medium-sized businesses, as well as individuals. The Bank's lending strategy focuses on commercial lending, and, to a lesser extent, residential mortgage and consumer lending. The Bank also offers a broad array of deposit products, including checking, savings, money market, and certificates of deposit, as well as security repurchase agreements. The Bank's primary market area is the Kent and Ottawa County areas of western Michigan, which includes the City of Grand Rapids, the second largest city in the State of Michigan. FINANCIAL CONDITION AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 During the first six months of 1999, the assets of Mercantile increased from $216.2 million on December 31, 1998, to $291.9 million on June 30, 1999. This represents a total increase in assets of $75.7 million, or 35.0%. The asset growth was comprised primarily of a $61.0 million increase in net loans, a $6.5 million increase in cash and cash equivalents, and an increase of $5.4 million in investment securities. The increase in assets was primarily funded by a $73.8 million growth in deposits and an increase of $0.8 million in securities sold under agreements to repurchase. The growth in deposits was in both local deposits and out-of-area CD's. While management expects continuing asset growth, it is anticipated to be at a slower rate. Commercial loans increased by $56.7 million during the first six months of 1999, and at June 30, 1999 comprised 93% of the total loan portfolio. The significant concentration in commercial loans and the rapid growth of this portion of Mercantile's business is in keeping with a strategy of focusing a substantial amount of effort on "wholesale" banking. Corporate and business lending is an area of expertise for all of Mercantile's senior management team. Commercial loans are also the assets most easily originated and managed by the fewest number of staff, thus reducing overhead through necessitating fewer full-time equivalents (FTE's)/$million in assets. The commercial sector of Mercantile's business generates the greatest amount of local deposits, and is virtually the only source of significant demand deposits. Residential mortgage and consumer loans also increased by $4.9 million and $0.4 million, respectively, during the first six months of 1999. However, the commercial sector of the lending efforts and resultant assets have been and continue to be Mercantile's 22 26 primary strategy for growth and profitability, and Mercantile expects that the current composition of the loan portfolio will remain relatively stable. Deposits increased $73.8 million during the first six months of 1999, totaling $245.8 million at June 30, 1999. Local deposits increased $21.5 million, while out-of-area deposits increased $52.3 million. Although the level of local deposits has declined as a percent of total deposits from 43.4% as of December 31, 1998, to 39.1% at June 30, 1999, due to the higher level of growth in out-of-area deposits, there have been significant dollar volume increases in all categories of the local deposits. Out-of-area deposits totaled $149.6 million, or 60.9% of total deposits, as of June 30, 1999. Out-of-area deposits consist primarily of certificates of deposit obtained from depositors located outside Mercantile's market area and placed by deposit brokers for a fee, but also include certificates of deposit obtained from the deposit owners directly. Out-of-area deposits are utilized to support the asset growth of Mercantile, and are generally a lower cost source of funds when compared to the interest rates that would have to be offered in the local market to generate a commensurate level of funds. In addition, the overhead costs associated with the out-of-area deposits are considerably less than the overhead costs that would be incurred to administer a similar level of local deposits. Although local deposits have and are expected to increase as new business, governmental and consumer deposit relationships have been established and as existing customers increase their deposit accounts, the high reliance on out-of-area deposits will likely remain. Securities sold under agreements to repurchase increased by $0.8 million during the first six months of 1999. As part of Mercantile's sweep account program, collected funds from certain business noninterest-bearing checking accounts are invested into over-night interest-bearing repurchase agreements. Although not considered a deposit account and therefore not afforded federal deposit insurance, these repurchase agreements have characteristics very similar to that of business checking deposit accounts. RESULTS OF OPERATIONS FOR THE SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998 Net operating income for the second quarter of 1999 was $503,472 ($0.20 per share), which compares favorably to the net loss of $294,624 (-$0.20 per share) recorded during the second quarter of 1998. Net operating income for the first six months of 1999 was $855,163 ($0.35 per share), which also compares favorably to the net loss of $1,436,201 (-$0.96 per share) recorded during the first six months of 1998. The improvement during both time periods is primarily the result of an increase in net interest income, greater employee efficiency and a reduction of provisions to the allowance for loan losses. The year-to-date 1999 net operating income includes a one-time $42,210 ($0.02 per share) charge reflecting an accounting adjustment for organization costs. In accordance with previous accounting guidelines, these costs were being amortized over a five-year period; however, as required by AICPA Statement of Position 98-5, the unamortized balance was written off effective January 1, 1999, and is reflected in the Consolidated Financial Statements as a change in accounting principle. Interest income during the second quarter of 1999 was $5,212,444, a significant increase over the $2,204,973 earned during the second quarter of 1998. Interest income during the first six months of 1999 was $9,743,639, a significant increase over the $3,383,678 earned during the first six months of 1998. The growth in interest income during both time periods is primarily attributable to an increase in earning assets. During 23 27 the second quarter of 1999, earning assets averaged $266.2 million, a level substantially higher than the average earning assets of $107.5 million during the second quarter of 1998. During the first six months of 1999, earning assets averaged $250.3 million, a level substantially higher than the average earning assets of $82.4 million during the same time period in 1998. Somewhat offsetting the positive impact of the increase in earning assets is the decline in yield on earning assets. During the second quarter of 1999 and 1998, earnings assets had a weighted average rate of 7.85% and 8.23%, respectively. During the first six months of 1999 and 1998 earning assets had a weighted average rate of 7.79% and 8.26%, respectively. This decline is primarily due to an overall decline of market interest rates, in part evidenced by the 75 basis point drop in the prime lending rate during the last six months of 1998. Interest expense during the second quarter of 1999 was $2,947,730, a significant increase over the $1,299,514 expensed during the second quarter of 1998. Interest expense during the first six months of 1999 was $5,549,147, a significant increase over the $1,878,455 expensed during the first six months of 1998. The growth in interest expense is primarily attributable to the growth in assets, which necessitated an increase in funding liabilities. During the second quarter of 1999, interest-bearing liabilities averaged $230.1 million, a level substantially higher than average interest-bearing funds of $92.3 million during the second quarter of 1998. During the first six months of 1999, interest-bearing liabilities averaged $215.1 million, a level substantially higher than average interest-bearing funds of $66.4 million during the same time period in 1998. Also adding to the increased level of interest expense is the increase of interest-bearing liabilities as a percent of average assets. During the second quarter of 1999, interest-bearing liabilities averaged 83.8% of average assets, an increase from the 80.9% level of the second quarter of 1998. During the first six months of 1999, interest-bearing liabilities averaged 83.3% of average assets, a notable increase from the 76.3% level during the same time period in 1998. The increase is primarily the result of the planned and expected leveraging of shareholders' equity. During the second quarter of 1999, shareholders' equity averaged 9.9% of average assets, a decline from the 10.7% level during the second quarter of 1998. During the first six months of 1999, shareholders' equity averaged 10.4% of average assets, a decline from the 14.4% level during the first six months of 1998. Somewhat offsetting the increased level of interest-bearing liabilities is the decline in the average rate paid on interest-bearing liabilities. During the second quarter of 1999 and 1998, interest-bearing liabilities had a weighted average rate of 5.14% and 5.65%, respectively. During the first six months of 1999 and 1998, interest-bearing liabilities had a weighted average rate of 5.17% and 5.76%, respectively. This decline, as mentioned previously, is due in large part to the overall decline of market interest rates during the last six months of 1998. Net interest income during the second quarter of 1999 was $2,264,714, a significant increase over the $905,459 earned during the second quarter of 1998. Net interest income during the first six months of 1999 was $4,194,492, a significant increase over the $1,505,223 earned during the same time period in 1998. As described above, the increase is primarily due to the substantial growth experienced between the compared time periods. Additional factors impacting net interest income included, but were not limited to, changes in interest rates and a reduction of the capital level. The following table sets forth certain information relating to Mercantile's consolidated average interest earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the period indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, 24 28 respectively, for the period presented. During the period presented, there were no nonaccrual loans.
QUARTER ENDED JUNE 30, 1999 ------------------------------- AVERAGE AVERAGE BALANCE INTEREST RATE -------- -------- ------- (IN THOUSANDS) ASSETS Loans........................................... $230,483 $4,696 8.17% Investment securities........................... 28,634 433 6.07 Federal funds sold.............................. 6,451 76 4.73 Short term investments.......................... 586 7 4.79 -------- ------ ---- Total interest-earning assets................ 266,154 5,212 7.85 Allowance for loan losses....................... (3,393) Other assets.................................... 11,734 -------- Total assets................................. $274,495 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits....................... $213,432 $2,776 5.22% Other borrowings................................ 16,674 172 4.14 -------- ------ ---- Total interest-bearing liabilities........... 230,106 2,948 5.14 Noninterest-bearing deposits.................... 16,235 Other liabilities............................... 1,026 Shareholders' equity............................ 27,128 -------- Total liability and shareholders' equity..... $274,495 ======== Net interest income............................. $2,264 ====== Net interest rate spread........................ 2.71% ==== Net interest margin on earning assets........... 3.41% ====
Interest rate risk is the exposure of Mercantile's financial condition and operating performance to adverse movements in interest rates. Mercantile derives its income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-bearing liabilities. Since market rates are subject to change over time, Mercantile is exposed to lower profitability if interest rate changes result in a reduction of the Bank's net interest margin. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to Mercantile's safety and soundness. The primary measurement method utilized by Mercantile to assess interest rate risk is commonly referred to as net interest income simulation analysis. This computer-based model measures the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates. Although the assumptions used within the model are inherently uncertain and subject to fluctuation and revision, and therefore actual results will differ from the simulated results, management believes this 25 29 methodology provides meaningful information to assist in managing the interest rate risk of Mercantile. Mercantile conducted multiple simulations as of June 30, 1999, whereby it was assumed that a simultaneous, instant and sustained change in market interest rates occurred. The following table illustrates the suggested impact on net interest income over the next twelve months, which are well within Mercantile'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....... $ 670,911 8.3% Interest rates down 100 basis points....... 388,640 4.8 No change in interest rates................ 106,422 1.3 Interest rates up 100 basis points......... (132,375) (1.6) Interest rates up 200 basis points......... (372,083) (4.6)
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. Provisions to the allowance for loan losses during the second quarter of 1999 were $480,900, a level similar to the $473,000 expensed during the same time period in 1998. Provisions to the allowance for loan losses during the first six months of 1999 were $935,900, a notable decline from the $1,471,800 expensed during the same time period in 1998. The reduction reflects the lower level of loan growth during the first six months of 1999 when compared to the first six months of 1998. The allowance for loan losses as a percentage of total loans outstanding as of June 30, 1999 was 1.5%, which also represents the level that has been maintained since inception of the Bank. The allowance for loan losses is maintained at a level management feels is adequate to absorb losses inherent in the loan portfolio. The evaluation is based upon a continuous review of Mercantile's and the banking industry's historical loan loss experience, known and inherent risks contained in the loan portfolio, composition and growth of the loan portfolio, current and projected economic conditions and other factors. Reflecting its focus on credit quality, Mercantile has not experienced any loan charge-offs since its inception. Noninterest income during the second quarter of 1999 was $205,835, a significant increase over the $72,823 earned during the same time period in 1998. Noninterest income during the first six months of 1999 was $415,558, a significant increase over the $87,263 earned during the same time period in 1998. Fees earned on referring residential mortgage loan applicants to various third parties and commitment fees charged on issued standby letters of credit, combined with an increase in fee income earned on deposit and repurchase agreements resulting from an increase in deposit and repurchase accounts, comprise a majority of the increase. Noninterest expense during the second quarter of 1999 was $1,380,177, a significant increase over the $799,906 expensed during the same time period in 1998. Noninterest expense during the first six months of 1999 was $2,642,777, a significant increase over the $1,556,887 expensed during the same time period in 1998. An increase in all major 26 30 overhead cost categories, including salaries and benefits, occupancy, and furniture and equipment, was recorded. The increases primarily result from the hiring of additional staff. All other noninterest costs have also increased, reflecting additional expenses required to administer the significantly increased loan and deposit base. While the dollar volume of noninterest costs has increased, as a percent of average assets the level has substantially declined as a result of Mercantile's growth and realized operating efficiencies. During the second quarter of 1999 noninterest costs were 2.01% of average assets on an annualized basis, a significant decline from the 2.80% level during the same time period in 1998. During the first six months of 1999, noninterest costs were 2.05% of average assets on an annualized basis, a significant decline from the 3.58% level during the same time period in 1998. Monitoring and controlling noninterest costs, while at the same time providing high quality service to customers, is of utmost importance to Mercantile. The efficiency ratio, computed by dividing noninterest expenses by net interest income plus noninterest income, was 55.9% and 57.3% during the second quarter and first six months of 1999, respectively. This compares favorably to the efficiency ratios of 81.8% and 97.8% during the second quarter and first six months of 1998, respectively. This improved performance is primarily due to the rapid asset growth that has translated into increased net interest income, as well as Mercantile's lending philosophy of concentrating on commercial lending that results in higher average loan balances compared to residential mortgage and consumer loans which provides for a greater dollar volume of loans with fewer people. Federal income tax expense was $106,000 and $134,000 during the second quarter and first six months of 1999, respectively. No expense was recorded in 1998 due to Mercantile's operating loss; however, federal income tax expense is being recorded in 1999 as it is expected that a portion of Mercantile's 1999 net operating income will be subject to federal income tax. FINANCIAL CONDITION AS OF DECEMBER 31, 1998 AND 1997 Mercantile experienced significant asset growth during 1998, its first full year of operations. Assets of Mercantile 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 Mercantile expects continued asset growth, it is anticipated that the growth will occur at a slower rate. EARNING ASSETS Mercantile's loan portfolio, which equaled 84% of average earning 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 Mercantile'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 27 31 Mercantile's strategy of focusing a substantial amount of its efforts on commercial banking. Business lending is an area of expertise for all of Mercantile's senior management team and commercial lending staff. Residential mortgage and consumer lending, while averaging under 7% of average loans during 1998, also experienced excellent growth. However, the commercial sector of the lending efforts and resultant assets have been and continue to be Mercantile's primary strategy for growth and profitability, and it is expected that the current composition of the loan portfolio will remain relatively stable. 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. All figures are stated in thousands of dollars.
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 =========== ============ ========== ============
Mercantile's credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to ensure effective loan portfolio administration. The credit policies and procedures are meant to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, Mercantile must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur quickly because of changing economic conditions. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuring in the future, are included on the internal loan "Watch List." Senior management reviews this list regularly and adjusts for changing conditions. Since inception of Mercantile 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 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 28 32 evaluation of the allowance is further based on consideration of actual loss experience, the present and prospective financial condition of borrowers, industry concentrations within the portfolio and general economic conditions. Management believes that the present allowance is adequate, based on the broad range of considerations listed above. The following table illustrates the breakdown of the allowance balance to loan type.
1998 1997 -------------------------- -------------------------- PERCENT OF LOANS PERCENT OF LOANS BALANCE TO END OF IN EACH CATEGORY IN EACH CATEGORY PERIOD APPLICABLE TO AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS - -------------------- ------ ---------------- ------ ---------------- Commercial, financial and agricultural............. $2,612 84.3% $193 98.6% Real estate -- construction... 57 7.4 Real estate -- mortgage.... 57 7.2 1.3 Installment loans to individuals.............. 39 1.1 0.1 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 creditors' 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 in any given period which could be substantial in relation to 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. Mercantile maintains the portfolio at levels to provide adequate pledging for the repurchase agreement program and secondary liquidity for Mercantile's daily operations. In addition, the portfolio serves a primary interest rate risk management function. During 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 Mercantile, 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. 29 33 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 assets. This level is well within internal policy guidelines, and is not expected to change significantly in the future. SOURCE OF FUNDS Mercantile's major source of funds is from deposits. Total deposits increased from $9.7 million at December 31, 1997, to $172.0 million on December 31, 1998. Although Mercantile experienced significant success in obtaining deposits from customers located within the market area, the substantial asset growth necessitated the acquisition of funds from depositors located outside of the market area. Out-of-area deposits are utilized to support the asset growth of Mercantile, and are generally a lower cost source of funds when compared to the interest rates that would have to be offered in the local market to generate a commensurate level of funds. In addition, the overhead costs associated with the out-of-area deposits are considerably less than the overhead costs that would be incurred to administer a similar level of local deposits. Although local deposits have and are expected to increase as new business, governmental and consumer deposit relationships have been established and as existing customers increase their deposit accounts, the high reliance on out-of-area deposits will likely remain. Mercantile 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 and 1997, respectively. Business loan customers also comprise the majority of these deposit types, although to a lesser 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. Mercantile anticipates continued growth of its checking and savings deposits as additional business loans are extended. Mercantile 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 Mercantile 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 Mercantile's market area, primarily individuals and local government municipalities. The remaining certificates of deposit were obtained from depositors outside of Mercantile's market area. These out-of-area deposits consist primarily of certificates of deposit placed by deposit brokers for a fee, but also include certificates of deposit obtained from the deposit owners directly. The owners of 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. 30 34 Repurchase agreements increased $16.4 million and equaled 8% of average funding sources during 1998. As part of Mercantile's sweep account program, collected funds from certain business noninterest-bearing checking accounts are invested into over-night interest-bearing repurchase agreements. The securities involved in the repurchase agreement program are recorded as assets of Mercantile. Although not considered deposits, and therefore not afforded Federal Deposit Insurance Corporation insurance, this product enables Mercantile to provide the equivalent of an interest-bearing checking account to incorporated businesses that are prohibited by banking regulations from owning such an account. The sweep account program is designed for businesses that maintain relatively large checking account balances. Shareholders' equity increased $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 Mercantile 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. Mercantile did record net income from operations during the third and fourth quarters of 1998, and believes that this performance will continue in the future. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 SUMMARY As anticipated, Mercantile 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 Mercantile 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 Mercantile. Although continued significant future asset growth is anticipated, resulting in additional large loan loss provisions, the overall earnings performance of Mercantile is expected to improve. Mercantile 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 Mercantile will be in a taxable position in the future. The asset growth of Mercantile 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, Mercantile has already achieved profitable status. During the third and fourth quarters of 1998 Mercantile recorded net income of $116,000 and $212,000, respectively. 31 35 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.............................. (0.9)% (21.8)% Return on average equity.................................... (0.6) (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 Mercantile'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 Mercantile's assets, liabilities and shareholders' equity during 1998 (in thousands):
INTEREST AVERAGE AVERAGE EARNED YIELD BALANCE OR PAID OR COST -------- ------- ------- ASSETS: Loans........................................... $104,838 $9,008 8.59% Investment securities........................... 15,341 881 5.74 Federal funds sold.............................. 4,831 256 5.31 Short term investments.......................... 413 23 5.68 -------- ------ ---- Total interest-earning assets........... 125,423 10,168 8.11 Allowance for loan losses....................... (1,584) Other assets.................................... 5,560 -------- Total assets............................ $129,399 ========
32 36
INTEREST AVERAGE AVERAGE EARNED YIELD BALANCE OR PAID OR COST -------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing checking....................... $ 4,015 171 4.25 Savings......................................... 17,455 904 5.18 Money market.................................... 1,330 58 4.39 Certificates of deposit......................... 67,817 4,008 5.91 Short term borrowings........................... 10,340 488 4.72 -------- ------ ---- Total interest-bearing liabilities...... 100,957 5,629 5.58 Noninterest-bearing checking.................... 10,798 Other liabilities............................... 319 Shareholder's equity............................ 17,325 -------- Total liabilities and shareholders' equity............................... $129,399 ======== Net Interest Income............................... $4,539 ====== Net Yield on Interest-Earning Assets.............. 3.62% ====
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. Mercantile paid $0.5 million in short term interest expense, or 9% of total interest expense, during 1998. 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. Mercantile maintains the allowance for loan losses at a level management feels is adequate to absorb losses inherent in the loan portfolio. The evaluation is based upon a continuous 33 37 review of Mercantile's and the banking industry's historical loan loss experience, known and inherent risks contained in the loan portfolio, composition and growth of the loan portfolio, current and projected economic conditions and other factors. Reflecting its focus on credit quality, Mercantile 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 Mercantile 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 Mercantile. 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, Mercantile's efficiency ratio declined throughout 1998 and was only 55.8% during the fourth quarter. In addition, Mercantile's lending philosophy of concentrating on commercial lending results in higher average loan balances compared to residential mortgage or consumer loans, which provides for a greater volume of loans with fewer people thereby improving its efficiency. This point is demonstrated by Mercantile's total assets per employee ratio, which as of December 31, 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 Mercantile no provisions to income tax expense were necessary during 1998. It is anticipated that Mercantile will be in a taxable position in the future. 34 38 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 Mercantile was incorporated on July 15, 1997 as a bank holding company 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 12 months to 60 months. As of December 31, 1997, Mercantile 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 Mercantile would generate a net loss for 1998 as a result of expenditures made to build its management team and open the main office. 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 $27.1 million, $26.7 million, and $13.5 million at June 30, 1999, December 31, 1998, and December 31, 1997. The increase during 1999 was due to net income recorded during the first six months of 1999, net of the change in unrealized gains (losses) on securities available for sale. The increase during 1998 is attributable to the secondary common stock offering completed during the year, when 977,500 shares of common stock were sold. Net proceeds to Mercantile, 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. Mercantile's net operating loss of $1.1 million negatively impacted shareholders' equity. Mercantile and the 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 inception, both Mercantile and the Bank have been categorized as "Well Capitalized," the highest classification rating contained within the banking regulations. It is Mercantile's strategy to maintain the "Well Capitalized" rating for both Mercantile and the Bank; however, if the rapid asset growth that Mercantile and the Bank have experienced since inception continues, the acquisition of additional capital will be required. This additional capital would likely be obtained through the sale of common stock or trust preferred securities, or possibly a combination of both. The sale of stock is, in large part, subject to 35 39 the capital markets environment. While Mercantile believes this environment is currently favorable, this could change at any time, thereby significantly impacting the ability of Mercantile to raise additional capital. The capital ratios of Mercantile and the Bank as of June 30, 1999, December 31, 1998, and December 31, 1997 are disclosed under Note 14 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus. The ability of Mercantile to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. No cash or stock dividends have been paid since Mercantile's inception. LIQUIDITY Liquidity is measured by Mercantile's ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and investment securities. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and operate Mercantile. Liquidity is primarily achieved through the growth of deposits (both local and out-of-area) and liquid assets such as securities available for sale, matured securities, and Federal funds sold. Asset and liability management is the process of managing the balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity. Mercantile's liquidity strategy is to fund loan growth with deposits and repurchase agreements and to maintain an adequate level of short- and medium-term investments to meet typical daily loan and deposit activity. Although deposit and repurchase agreement growth from depositors located in the market area increased by $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 Mercantile regularly obtained deposits from customers outside of the market area. These out-of-area deposits consist primarily of certificates of deposit placed by deposit brokers for a fee, but also include certificates of deposit obtained from the deposit owners directly. As of December 31, 1998, out-of-area deposits totaled approximately $97.3 million, or 51% of combined deposits and repurchase agreements. Although local deposits are expected to increase as new business, governmental and consumer deposit relationships have been established and as existing customers increase their deposit accounts, the high reliance on out-of-area deposits will likely remain. Mercantile 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 Mercantile's Federal funds sold position averaged $4.8 million. In addition to normal loan funding and deposit flow, Mercantile also needs to maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit. As of December 31, 1998, Mercantile 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 36 40 months. Mercantile monitors fluctuations in loan balances and commitment levels, and includes such data in its overall liquidity management. MARKET RISK ANALYSIS Mercantile's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of Mercantile's transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Mercantile has only limited agricultural-related loan assets and therefore has no significant exposure to changes in commodity prices. Any impacts that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be insignificant. Interest rate risk is the exposure of Mercantile's financial condition to adverse movements in interest rates. Mercantile derives its income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-bearing liabilities. The rates of interest Mercantile earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, Mercantile is exposed to lower profitability if interest rate changes result in a reduction of the Bank's net interest margin. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to Mercantile's earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to Mercantile's safety and soundness. Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. Mercantile's interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk Mercantile assesses the existing and potential future effects of changes in interest rates on its financial condition, including capital adequacy, earnings, liquidity and asset quality. There are two interest rate risk measurement techniques used by Mercantile. The first, which is commonly referred to as GAP analysis, measures the difference between the dollar amounts of interest-sensitive assets and liabilities that will be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to Mercantile's net interest margin during periods of changing market interest rates. The 37 41 following table depicts Mercantile'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 GAP................... $(27,917) $(52,649) $100,321 $(19,775) ======== ======== ======== ======== Cumulative GAP............ $(27,917) $(80,546) $ 19,775 $ 0 ======== ======== ======== ======== Percent of cumulative GAP to total assets......... (13)% (37)% 9% 0% ======== ======== ======== ========
- ------------------------- (1) Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of December 31, 1998. 38 42 The second interest rate risk measurement used is commonly referred to as net interest income simulation analysis. Mercantile believes that this methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and therefore, serves as the primary interest rate risk measurement technique used by Mercantile. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates. Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest-sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and Mercantile's strategies, among other factors. Mercantile conducted multiple simulations as of December 31, 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 Mercantile's policy parameters established to manage and monitor interest rate risk.
DOLLAR CHANGE PERCENT CHANGE IN NET IN NET INTEREST RATE SCENARIO INTEREST INCOME 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 The year 2000 issue confronting Mercantile and its suppliers, customers, and competitors, centers on the inability of computer systems and embedded technology to properly recognize dates near the end of and beyond the year 1999. Mercantile has established a year 2000 working group consisting of senior officers and other key employees and has been actively implementing a comprehensive plan throughout 1998 and 1999, as required by bank regulatory guidelines, to address the potential impact of the year 2000 problem on Mercantile's information technology and non-information 39 43 technology systems. Mercantile's year 2000 plans are subject to modification and are revised periodically as additional information is developed. READINESS Mercantile has completed the inventory, assessment and planning phases for its mission-critical information technology and non-information technology systems, which pose risks to Mercantile's ability to process data for its loans, deposits and general ledger impacting revenues and operating results. Based on testing that has been completed, management believes that all mission-critical systems are year 2000 compliant. Mercantile recognizes that its ability to be year 2000 compliant is somewhat dependent upon the year 2000 efforts of its vendors. In 1998 and 1999, Mercantile has requested year 2000 readiness information from its significant vendors. All mission-critical vendors have represented that they are or will be year 2000 compliant. Mercantile is continuing to monitor its non-mission critical vendors to determine their level of year 2000 readiness as well. Mercantile is also following bank regulatory requirements that require an assessment of loan customers' year 2000 readiness. Letters and questionnaires have been utilized to assess material loan customers' readiness based on the size of their loan type. The number of existing customers that have not responded to the letters and questionnaires is minimal. Follow-up letters or phone calls are being made when necessary to obtain additional information from these customers. Of those who have responded, all material customers represented that they are year 2000 compliant or are working toward compliance. Of those customers still working towards year 2000 compliance, in Mercantile's opinion, their inability to become compliant will not have a material adverse effect on Mercantile's business or operating results. The Bank requires business customers applying for new loans to disclose the potential impact of the year 2000 problem on their businesses. WORST CASE SCENARIO AND CONTINGENCY PLANS Mercantile has determined the most reasonably likely worst case scenario is the possibility of the lack of power or communication services for a period of time in excess of one day. If this scenario were to occur, Mercantile's operations could be interrupted. Mercantile has developed plans and procedures to address this scenario, ranging from producing complete printed reports from the core banking systems prior to January 1, 2000, to ensure that a hard copy of the data is available in the event of a failure, to preparations for failures of voice and data communications through the use of manual posting and courier services, use of generators, alternative customer service locations or reduced lobby hours. Contingency planning, including the type discussed above is an integral part of Mercantile's year 2000 readiness plan. Mercantile's contingency plans attempt to address alternative courses of action in the event that mission-critical systems do not function properly with the date change. Development of the contingency plans was recently completed. The year 2000 contingency plans have been tested and the effectiveness of contingent procedures was validated by an independent accounting firm. 40 44 COSTS The total costs associated with Mercantile's year 2000 compliance are estimated at less than $75,000. These costs principally relate to the added personnel costs, the employment of external consultants, and the purchase of software upgrades. Mercantile expects to pay these costs from operating income. Information technology staff and senior management have devoted significant time and resources to year 2000 activities. While this has resulted in allocating resources that would have otherwise been devoted to other information technology projects, no projects have been delayed or postponed that would have a material adverse impact on operations. REGULATORY OVERSIGHT Bank regulators have issued numerous statements and guidance on year 2000 compliance issues and the responsibilities of senior management and directors of banks and bank holding companies. In addition, bank regulators have issued safety and soundness guidelines to be followed by insured depository institutions, such as the Bank, to ensure resolution of any year 2000 problems. Periodic year 2000 reviews are performed by various bank regulatory agencies. Most of the recent examinations have been performed by the FDIC and it is expected that the FDIC will continue its frequent examinations throughout 1999. The bank regulatory agencies have asserted that year 2000 testing and certification is a key safety and soundness issue in conjunction with regulatory examinations. Consequently, failure to address appropriately the year 2000 issue could result in supervisory action, including the reduction of the Bank's supervisory ratings, the denial of applications for examination, or the imposition of civil money penalties. 41 45 BUSINESS OVERVIEW Mercantile was incorporated as a Michigan business corporation on July 15, 1997. Mercantile was formed to acquire all of the Bank's capital stock and to engage in the business of a bank holding company under the federal Bank Holding Company Act of 1956, as amended (the "BHCA"). The Bank is Mercantile's only bank subsidiary, and Mercantile's only other subsidiary is MBWM Trust. In October 1997, in connection with the organization of Mercantile and the Bank, Mercantile sold 1,495,000 shares of its common stock in an underwritten, initial public offering, at a price of $10 per share. Mercantile funded the capital of the Bank and paid certain expenses from the net proceeds of the public offering. In July of 1998, Mercantile sold an additional 997,500 shares of its common stock in an underwritten public offering at a price of $15.75 per share. The Bank is a Michigan banking corporation that commenced business 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 and consumer lending. The Bank also offers a broad array of deposit products, including checking, savings, and money market accounts, business checking, direct deposits and certificates of deposit. MARKET AREA Mercantile's market area is the Kent and Ottawa Counties of western Michigan, which includes the city of Grand Rapids, the second largest city in the State of Michigan. Kent County has a diverse economy based primarily on manufacturing, retail and service businesses. According to available statistical data, Kent County has approximately 547,000 people, 198,000 households and a median household income that is estimated to have grown approximately 51% from 1990 to 1998. Kent County is a significant banking market in the State of Michigan. According to available industry data, as of June 30, 1998, total deposits in Kent County, including those of banks, thrifts and credit unions, were approximately $7.0 billion. BUSINESS STRATEGY Mercantile's business strategy revolves around the focused execution of the following seven practices: - RECRUIT AND RETAIN HIGHLY-QUALIFIED PERSONNEL. Mercantile's strategy focuses on the recruitment of experienced community banking personnel and empowering these employees to make decisions and resolve customer problems as a means of providing outstanding customer service. Mercantile's compensation structure is intended to reward its employees for generating quality loans and maximizing long-standing customer relationships. The lack of any non-performing assets since Mercantile's inception, the consistent maintenance of a 1.50% reserves to total loans ratio and the rapid growth of loans to $246.7 million at June 30, 1999, provide evidence of the conservative credit culture Mercantile has established. Mercantile 42 46 employs 53 people, most of whom have prior banking experience, and many of whom have previously worked together. Mercantile's management team has an average of 17 years in the banking industry. - EMPHASIZE COMMERCIAL LENDING IN MERCANTILE'S PRIMARY MARKET. Mercantile's lending philosophy concentrates on commercial lending, which represented 93% of its loan portfolio as of June 30, 1999. This emphasis on commercial lending results in higher average loan balances compared to residential or consumer loans, which allows Mercantile to generate a greater volume of loans with fewer people, thereby improving Mercantile's efficiency. Also, Mercantile's commercial loan customers contribute to core deposit growth through demand deposit relationships, which totaled $16.3 million as of June 30, 1999, and provide Mercantile with a cost-effective source of liquidity. - USING A COMBINATION OF LOCAL DEPOSITS AND WHOLESALE FUNDING TO MEET LOAN GROWTH. While local deposits have grown rapidly to $96.2 million since opening, commercial loan originations have outpaced local deposit growth, creating a need for additional funding. Management believes the lowest "all-in" cost source of funding in excess of the local deposit base comes from out-of-market certificates of deposit. Mercantile's experience indicates that wholesale deposits can be obtained at a minimal cost premium to local deposits and have a lower associated servicing cost than traditional retail deposits. Funding from deposits acquired primarily from loan customers supplemented with out-of-market deposits has permitted Mercantile to operate with higher average assets per employee ($6.2 million for the three months ended June 30, 1999) than comparable institutions by: - operating only two offices; - emphasizing commercial loans, which tend to be larger in size than retail loans; - employing an experienced staff of lending officers; and - outsourcing services where possible. - TAKE ADVANTAGE OF INDUSTRY CONSOLIDATION. Mercantile's marketplace has experienced several bank mergers where a local bank has been merged into a regional or super-regional bank. Management believes that these mergers have resulted in certain customers becoming dissatisfied with the quality of services being provided as well as certain customers being negatively impacted by the merger integration process. Mercantile is in a position to offer these disenfranchised customers a local banking alternative. Additionally, these mergers have made available to Mercantile experienced banking personnel. Management believes Mercantile is better able to compete effectively in the marketplace because: - industry consolidation has resulted in fewer independent banks and fewer banks addressing Mercantile's target market niche; - Mercantile's lending officers and senior management maintain close working relationships with their commercial customers and their businesses; - Mercantile is often able to react more quickly to loan requests than its larger competitors; and 43 47 - management and loan officers have significant experience within the Grand Rapids community. Management would attribute the majority of Mercantile's rapid loan growth to the high level of service provided to customers rather than from offering below market interest rates to attract new business. - EMPHASIZE COMMUNITY BANKING. Mercantile strives to maintain a strong commitment to community banking. Management encourages and expects all employees to participate actively in local philanthropic activities and to build relationships in the community. Through the development of such relationships, Mercantile's goal is to attract small- to medium-sized business owners and employees as customers who wish to conduct business with a local community bank that demonstrates an active and knowledgeable interest in their business and personal financial affairs. Management believes that Mercantile is better able than many of its larger competitors to deliver more timely decisions, provide customized financial products and services, and offer customers the personal attention of senior banking officers. - UTILIZE ALTERNATIVE DELIVERY CHANNELS. Management believes that the business of banking is rapidly evolving. One of the major changes taking place is the way in which customers access their money. Rather than construct and staff numerous branches, management has chosen to emphasize less expensive delivery channels. Examples of these channels are courier service, telephone and computer banking, ATM and other electronic access points including direct deposit. - EVALUATE ACQUISITION OPPORTUNITIES. Management intends to evaluate merger and acquisition opportunities which may arise in western Michigan to enhance or expand Mercantile's market position. The goals and strategies of Mercantile's business plan make the acquisition of a typical community bank which would serve primarily to expand Mercantile's market area unappealing, however, management would consider acquisition opportunities which would further Mercantile's growth consistent with the objectives of its business plan. To date, management has not initiated any bank or branch acquisition. Mercantile presently has no agreements, commitments, understandings or arrangements to acquire any other banks or branches and there is no assurance that Mercantile will be successful in taking advantage of any such opportunities. MARKETING PLAN The Bank's marketing plan focuses on the concepts of corporate citizenship and personal interaction within the communities the Bank serves through promotion of, and active participation in, a number of civic organizations and ongoing community activities. Management believes that these efforts establish the identity and philosophy of the Bank within the communities it serves and allow Bank officers and employees to personally interact with local business leaders and members of the public. The marketing plan also emphasizes direct customer interaction and relationships by Bank officers. Management believes that the experience and expertise of its senior officers allow the Bank to differentiate itself from its competition. Mercantile emphasizes the convenience of alternative delivery systems such as courier service, electronic and telephone banking, direct deposits and ATMs. 44 48 BUSINESS FINANCIAL SERVICES. The Bank's business development efforts are directed by Mr. Price, the President and Chief Executive Officer of the Bank, whose duties include administering and coordinating the business development efforts of the Bank. Each Bank officer is responsible for creating new business opportunities for the Bank. The targeted list of new business customers represents a mix of industrial, manufacturing, professional and retail clients with an emphasis on businesses with credit needs of $8 million or less. The Bank has an aggressive calling program based in part on an extensive knowledge of its market area possessed by the officers contacting potential or current customers. The Bank also relies on a strong referral system from lawyers, accountants and other professionals, many of whom are well known to officers of the Bank. The Bank regularly hosts "after hours" receptions for accounting and law firms to develop or nurture business contacts and relationships. CONSUMER FINANCIAL SERVICES. The Bank originates residential real estate loans through its main office. Bank officers and mortgage loan originators develop new residential mortgage applications from several sources, including real estate brokers, insurance agents, accountants, attorneys, existing residential mortgage customers and other customers of the Bank. An extensive selling effort generates potential customers as a result of these contacts. The Bank, as a result of its secondary market operations, is able to offer a variety of loan products that serve the needs of first-time home buyers by providing five percent down payment loans and loans with no points. Customers desiring to construct new homes are able to obtain financing as a result of the Bank's construction loan program that is offered in addition to permanent loans. The Bank has developed its own home equity loan, debit card and credit card programs. Credit card transactions are processed for the Bank by an outside service provider. Management believes that cross-selling of the Bank's products and services to its existing customers is vital to expanding account relationships, generating additional opportunities and increasing fee income. LOAN POLICY As a routine part of the Bank's 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 business and individual 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 45 49 responsibility; purpose of the loan; knowledge of collateral and its value; terms of repayment; source of repayment; payment history; and economic conditions. Mercantile's 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 specifies lending authority for certain officers up to $1 million, and $1.5 million for the Chairman of the Board and President. Loan requests exceeding $1.5 million, up to the legal lending limit of approximately $6.70 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. Following the completion of the offering, the Bank's legal lending limit will increase to approximately $10 million. 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 Kent and Ottawa County areas of western Michigan. Commercial loans are originated by seven lenders, including the President and the Chairman. The lending group has over 90 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 an 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. 46 50 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 (1) limiting the amount of credit to any one borrower to an amount less than the Bank's legal lending limit, and (2) avoiding certain types of commercial real estate financings. SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank originates 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. Loans are sold on a servicing released basis in the secondary market with all interest rate risk and credit risk passed to the purchaser. The Bank from time to time may elect to underwrite certain residential real estate loans, generally with maturities of five years or less, to be held in its own loan portfolio. 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. INVESTMENTS The principal investment of Mercantile is its investment in the common stock of the Bank. Funds retained by Mercantile from time to time may be invested in various debt instruments, including but not limited to obligations of or guaranteed by the United States, general obligations of a state or political subdivision or agency thereof, bankers' acceptances or certificates of deposit of United States commercial banks, or commercial paper of United States issuers rated in the highest category by a nationally-recognized investment rating service. Although Mercantile is permitted to make 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, Mercantile has no present plans to 47 51 do so. Mercantile's Board of Directors may alter Mercantile's investment policy without shareholder approval. 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. At June 30, 1999, the Bank's investment portfolio consisted of U.S. Government Agency guaranteed mortgage-backed securities, U.S. Government Agency bonds, U.S. Treasury Notes and municipal bonds. 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 do this. 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 Financial Institutions Bureau of the Michigan Department of Consumer & Industry Services ("FIB") 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 real estate that is necessary for the convenient transaction of its business. Other than the Bank's recent investment in its Alpine Township branch and operations facility, it has no present plans to make any investment of this type. The Bank's Board of Directors may alter the Bank's investment policy without shareholder approval. COMPETITION Mercantile and the Bank face strong competition for deposits, loans and other financial services from numerous banks, savings banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services, including consumer finance companies, securities brokerage firms, mortgage brokers, insurance companies, mutual funds, and other lending sources and investment alternatives. Some of the financial institutions and financial service organizations with which the Bank competes are not subject to the same degree of regulation as the Bank. Many of the financial institutions and financial service organizations aggressively compete for business in the Bank's market area. Most of these competitors have been in business for many years, have customer bases, deposits and lending limits that are substantially larger than those of the Bank, and are able to offer certain services that the Bank does not currently provide, including extensive branch networks, trust services and international banking services. In addition, most of these entities have greater capital resources than the Bank, which, among other things, may allow them to price their services at levels more favorable to the customer and to provide larger credit facilities than could the Bank. Additionally, recently effective legislation regarding interstate branching and banking may increase competition in the future from out-of-state banks. LEGAL PROCEEDINGS From time to time, Mercantile and the Bank may be involved in various legal proceedings that are incidental to their business. In the opinion of management, neither Mercantile nor the Bank is a party to any current legal proceedings that are material to their financial condition, either individually or in the aggregate. 48 52 EMPLOYEES As of June 30, 1999, the Bank had 43 full-time and 10 part-time employees, including 18 officers and 35 customer service, operations and other support persons. Mercantile expects to add additional employees during the next year. Management believes that the Bank's relations with its employees are good. BANK PREMISES The Bank leases a one story building in downtown Grand Rapids, Michigan for use as the Bank's main office and Mercantile's headquarters. This building is of masonry construction and has approximately 11,000 square feet of usable space with on-site parking. The lease for the Bank's office, which commenced in 1997, has an initial term of ten years and the Bank has four, five-year renewal options. The Bank designed and constructed a full service branch and operations facility in Alpine Township, a suburb of Grand Rapids, that opened in July of 1999. The facility is one story, of masonry construction, and has approximately 8,000 square feet of usable space. The land and building is owned by the Bank. The facility has multiple drive-through lanes and ample parking space. The Bank's main office and Mercantile's headquarters are located at 216 North Division Avenue between Lyon Street and Michigan Street in downtown Grand Rapids, Michigan. The Alpine Township branch and operations center is located at 4613 Alpine Avenue NW, Comstock Park, Michigan. 49 53 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of Mercantile, their ages and positions as of June 30, 1999 are as follows:
YEAR WHEN HAS SERVED TERM AS A AS DIRECTOR DIRECTOR NAME AGE POSITION SINCE EXPIRES - ---- --- -------- ----------- --------- Betty S. Burton......... 57 Director 1998 2002 Edward J. Clark......... 54 Director 1998 2001 Peter A. Cordes......... 58 Director 1997 2002 C. John Gill............ 65 Director 1997 2001 David M. Hecht.......... 62 Director 1997 2002 Gerald R. Johnson, 52 Chairman of the Board and 1997 2001 Jr.................... Chief Executive Officer Susan K. Jones.......... 50 Director 1998 2000 Lawrence W. Larsen...... 59 Director 1997 2000 Calvin D. Murdock....... 60 Director 1997 2001 Michael H. Price........ 42 President, Chief 1997 2000 Operating Officer and Director Dale J. Visser.......... 63 Director 1997 2000 Donald Williams, Sr. ... 63 Director 1998 2001 Robert M. Wynalda....... 63 Director 1997 2002 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 and executive officers of Mercantile for at least the past five years is summarized below: BETTY S. BURTON (Director) Betty S. Burton is Director and Consultant of Wonderland Business Forms, Inc. She was President and Chief Executive Officer of Wonderland Business Forms from 1995 to 1999. She has held director positions at First Michigan Bank-Grand Rapids and Butterworth Hospital. Prior to taking over the family business in January of 1990, Mrs. Burton was a long time elementary teacher in the public school system, from 1966 to 1989. She is a graduate of Western Michigan University, Grand Valley State University, and Dartmouth College of 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. Mrs. Burton is very involved in civic and community activities in and around the Grand Rapids area. EDWARD J. CLARK (Director) Mr. Clark is the President and Chief Executive of The American Seating Company, and has held this position since 1986. American Seating is 50 54 headquartered in Grand Rapids, Michigan, and produces seating and furniture for laboratories and offices, as well as seating for 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 its sole owner. Mr. Cordes graduated from St. Louis University with a degree in aeronautics. He is a native of Traverse City, Michigan and has spent the last eighteen years in western Michigan. 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. DAVID M. HECHT (Director) Mr. Hecht has practiced law for 38 years, including the past 26 years in Grand Rapids. Since 1993, 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 Mercantile 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 Mercantile. Mr. Johnson served as Chairman of the Board and Chief Executive Officer of Mercantile 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 Mercantile 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). 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 51 55 Project Rehab. Mr. Johnson 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, a marketing consulting firm, and a tenured, fulltime Professor of Marketing at Ferris State University in Big Rapids, Michigan. She began her own marketing consulting 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 corporate sponsorship representative of the American Marketing Association of Western Michigan, 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 a trustee of the Chicago Association of Direct Marketing Educational Foundation and the Direct Marketing Education Foundation. 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 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 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 Mercantile 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 from 1992 to 1997, and President of FMB-Grand Rapids for several months in 1997, before joining the Bank in late 1997. Mr. Price served as President and Chief Operating Officer of Mercantile and the Bank from December of 1997 through 1998, and has served as President and Chief Operating Officer of Mercantile 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 52 56 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 been the recipient of numerous awards in the Grand Rapids and West Michigan area for community services and job performance. 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 University of Grand Rapids, and formerly served as a director of a local financial institution. ROBERT B. KAMINSKI (Senior Vice President and Secretary) Mr. Kaminski joined the bank in June 1997 and 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 Mercantile 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 joined the Bank in April 1998 and served as Vice President of Finance, Treasurer and Compliance Officer of Mercantile and the Bank in 1998, and in 1999 was elected Chief Financial Officer, Treasurer and Compliance Officer. Prior to joining Mercantile, he examined various financial institutions for over ten years while serving as a bank examiner with the 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. KEY EMPLOYEES In addition to the directors and executive officers named above, Mercantile has many experienced employees who assist the Bank in servicing its customers and pursuing its business opportunities. These employees include, among others, the key employees described below. 53 57 MARK S. AUGUSTYN (Senior Vice President, Commercial Loan Officer), joined the Bank in December 1997 and has over eight years of commercial banking experience, primarily in the commercial lending area. He began his career with FMB-Grand Rapids as Credit Analyst, and was promoted to Senior Analyst, Credit Manager, Assistant Vice President of Commercial Lending, and finally Vice President of Commercial Lending before joining the Bank. Mr. Augustyn is active in the Grand Rapids/western Michigan community. He serves as a Board Member and Chairman of the Finance Committee of Residential Treatment, and is a volunteer for the West Side Food Drive. HAROLD L. DRENTEN (Senior Vice President, Business Development Officer), joined the Bank in January 1998 and has over 28 years of commercial banking experience, all with FMB and its subsidiary, FMB-Grand Rapids. Mr. Drenten held numerous positions at FMB-Grand Rapids, including Branch Manager, Mortgage Department head, Commercial Loan Officer, and finally, Vice President of Business Development before joining the Bank. Mr. Drenten is an active member of the local community, serving 15 years as a Teaching Consultant with Junior Achievement Project Business and serving seven years as an Ambassador for the Grand Rapids Area Chamber of Commerce. He further participates in various charity events in both Kent and Ottawa Counties. MARK R. HOFFHINES (Senior Vice President, Commercial Loan Officer), joined the Bank in January 1998 and has over 17 years of commercial banking experience, beginning with his tenure as a Commercial Lender at Comerica Bank in 1981. In 1986, he joined Bank One as an Assistant Vice President of Commercial Loans, and in 1988 left to take a position as Vice President of Commercial Loans at Great Lakes National Bank. In 1991, Mr. Hoffhines accepted a position at FMB-Grand Rapids as Vice President, Commercial Loan Department head, where he continued to work until joining the Bank. He serves as Chairman of the Board of the Kent County American Cancer Society and on the Parent Advisory Council of Forest Hills Northern Schools. GORDON L. OOSTING (Senior Vice President, Branch Administrator), joined the Bank in December 1997 and has over 16 years of commercial banking experience, primarily in the commercial lending area. Before working in the banking business, he held the position of Vice President of Finance for a local manufacturing company with annual sales of approximately $20 million. After leaving that position in 1982, Mr. Oosting served as Vice President of Commercial Lending at NBD Bank until 1992, when he began work with FMB-Grand Rapids, serving as Vice President of Commercial Lending. DEBORAH A. PARRENT (Vice President, Branch Administrator), joined the Bank in September 1997 and has over 16 years of commercial banking experience, having begun her career in 1981 at Great Lakes National Bank as a Residential Loan Officer, Business Development Officer, and finally Branch District Manager. In 1994, she moved to FMB-Grand Rapids, where she was a Branch Manager until her employment with the Bank. She holds offices in such organizations as the Junior League of Grand Rapids and Habitat for Humanity, and serves as an Ambassador for the Grand Rapids Area Chamber of Commerce. She has worked with many other community organizations including: United Way, Family Services, YMCA, American Heart Association and Kent County District Library. Ms. Parrent has also participated in the Economic Club of Grand Rapids and Professional Women's Network events. LONNA L. WIERSMA (Vice President, Human Resource Director), joined the Bank in March 1999, and has over 17 years of Human Resource experience, beginning her career at Old Kent Bank of Holland in February of 1982. In July of 1991, she joined FMB as Assistant Vice President, Employee Relations/Employment Manager, then in 1993 54 58 accepted the position of Vice President, Human Resource Manager for FMB-Grand Rapids. In 1995, she was appointed to the position of Affiliate Human Resource Manager, responsible for servicing five affiliate banks. In 1998, at the time of the Huntington merger, she accepted the position of Vice President, Senior Human Resource Generalist where she continued to work until joining the Bank. SUMMARY COMPENSATION TABLE The following table details the compensation received by the named executive officers for the period July 15, 1997 (inception) to December 31, 1997 and during 1998:
LONG TERM COMPENSATION ------------------------- ANNUAL COMPENSATION SECURITIES ----------------------- UNDERLYING 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 and 1997 $ 83,654 $0 40,000 $ 0 Chief Executive Officer Michael H. Price.............. 1998 $135,307 $0 7,000 $6,919(2) President and Chief Operating 1997 $ 14,112 $0 21,000 $ 0 Officer
- ------------------------- (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 Mercantile's 1997 Employee Stock Option Plan, stock options are granted to Mercantile's and the Bank's senior management and other key employees. The Board of Directors of Mercantile is responsible for awarding the stock options. These options are awarded to give senior management and key employees an additional interest in Mercantile from a shareholder's perspective, and enable them to participate in the future growth and profitability of Mercantile. 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 Mercantile, and such other factors as the Board may deem relevant. Options for up to 130,000 shares may be issued under the Plan. As of July 1, 1999, options for 121,750 shares had issued. 55 59 The following table summarizes certain information about the options granted in 1998 to each named executive officer:
NUMBER OF % OF TOTAL SHARES OPTIONS UNDERLYING GRANTED TO EXERCISE OR OPTIONS EMPLOYEES IN BASE PRICE NAME GRANTED(1) 1998 PER SHARE EXPIRATION 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 granted to Mr. Johnson becomes exercisable on July 22, 2001. The option granted to Mr. Price becomes exercisable on December 1, 2000. 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 executive officers and the value of unexercised options at December 31, 1998:
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT IN-THE-MONEY OPTIONS ACQUIRED 12/31/98 AT 12/31/98 ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE REALIZED UNEXERCISABLE 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) 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 ask prices reported on the OTC Bulletin Board on December 31, 1998. EMPLOYMENT AGREEMENTS Effective December 1, 1998, the Bank and Mercantile 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 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 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 56 60 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 Mercantile 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 certain 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 Mercantile. The officer also continues to participate in life, disability, and health insurance plans of the Bank or Mercantile, 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 Mercantile 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 Mercantile 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 (1) his annual base salary through the end of the Employment Period or (2) 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 Mercantile for 18 months, to the extent permitted under such plans, to an assignment of any assignable life insurance policies owned by the Bank or Mercantile insuring his life, and $10,000 for out-placement, interim office and related expenses. The Employment Agreements also provide severance benefits in the event that after the Employment Period the officer's employment is terminated by the Bank and Mercantile 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 Mercantile. 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 Mercantile, or use any such information in any manner adverse to the Bank or Mercantile. In addition, each has agreed that for 18 months following his employment with the Bank and Mercantile, 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. 57 61 DIRECTORS COMPENSATION During 1998, no compensation was paid to any directors of Mercantile or the 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. 58 62 SECURITY OWNERSHIP The following table presents information regarding the beneficial ownership of Mercantile's common stock as of July 1, 1999, by Mercantile's directors and named executive officers, and all directors and executive officers of Mercantile as a group. To the best of Mercantile's knowledge, no person owns more than 5% of Mercantile's outstanding common stock.
AMOUNT PERCENT OF CLASS BENEFICIALLY BENEFICIALLY NAME OF BENEFICIAL OWNER OWNED(1) OWNED(6) - ------------------------ ------------ ---------------- Betty S. Burton..................................... 1,016 * 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. ............................. 81,509(3) 3.3% Susan K. Jones...................................... 850 * Lawrence W. Larsen.................................. 13,500 * Calvin D. Murdock................................... 15,875 * Michael H. Price.................................... 16,095(4) * Dale J. Visser...................................... 90,000 3.6% Donald Williams, Sr. ............................... 730 * Robert M. Wynalda................................... 50,000 2.0% All directors and executive officers as a group (15 persons).......................................... 388,175(5) 15.6%
- ------------------------- * 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 30,000 shares that Mr. Johnson has the right to acquire within 60 days of July 1, 1999 pursuant to Mercantile's 1997 Employee Stock Option Plan and 1,509 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 17,000 shares, which have not yet vested. (4) Includes 14,000 shares that Mr. Price has the right to acquire within 60 days of July 1, 1999, pursuant to Mercantile's 1997 Employee Stock Option Plan and 1,395 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. 59 63 (5) Includes 49,000 shares that such persons have the right to acquire within 60 days of July 1, 1999 pursuant to Mercantile'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 Mercantile's common stock outstanding as of July 1, 1999, plus the number of shares that the named person or group has the right to acquire within 60 days of July 1, 1999. 60 64 RELATED PARTY TRANSACTIONS BANK TRANSACTIONS The Bank has had, and expects in the future to have, loan and other financial transactions in the ordinary course of business with Mercantile'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 (1) were made in the ordinary course of business, (2) 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 (3) 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 directors or executive officers of Mercantile totaling approximately $9.1 million in aggregate amount under commitments totaling approximately $12.8 million. As of June 30, 1999, the Bank had outstanding 55 loans to directors or executive officers of Mercantile totaling approximately $8.8 million in aggregate amount under commitments totaling approximately $12.5 million. CONTRACT WITH COMPANY CONTROLLED BY A DIRECTOR 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 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 Mercantile and the Bank, and both were organizers of the Bank. The contract estimated the construction costs for the facility at not more than approximately $1.3 million. Visser Brothers was to receive approximately 5% of this amount for its construction management services, and be reimbursed for the wages, salaries, and related taxes and benefits of construction workers and supervisory and administrative personnel that it employed in connection with the construction. The payments for the percentage amount and reimbursements totaled approximately $60,000 for the project. In addition, when deemed appropriate by the Bank, the architect for the project, and Visser Brothers, the Bank permitted Visser Brothers to bid as a subcontractor for portions of the work that were to be performed on the project. In several instances, Visser Brothers was hired as a subcontractor where its bid was determined to be the most favorable. It received a total of approximately $511,000 for serving as a subcontractor for the project. 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 1997 pursuant to specifications provided by the Bank's architect. 61 65 SUPERVISION AND REGULATION GENERAL Financial institutions and their holding companies are extensively regulated under federal and state law and regulations. Such provisions applicable to banks and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, nature and amount of collateral for loans, establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to Mercantile and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC deposit insurance funds, the depositors of the Bank, and the public, rather than shareholders of the Bank or Mercantile. Any change in government regulation may have a material effect on the business of Mercantile and the Bank. There has been significant legislative and regulatory change relating to the financial services industry in recent years. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, have been permitted to engage in activities that directly compete with traditional bank business. The services that banks are permitted to provide and the types of accounts banks may offer to depositors have been expanded. Geographic constraints on the operations of financial institutions and their holding companies have been relaxed. MERCANTILE GENERAL. Mercantile is a registered bank holding company, subject to supervision and examination by the Federal Reserve. Mercantile is required to make periodic reports to the Federal Reserve and to furnish such other information as the Federal Reserve may require under the BHCA. Federal Reserve policy requires a bank holding company such as Mercantile to serve as a source of financial and managerial strength to its banking subsidiaries. Under this policy, a bank holding company must use available resources to provide adequate capital funds to a troubled banking subsidiary, even if it is not otherwise obligated to do so. In addition, in certain circumstances a Michigan state bank having impaired capital may be required by the Commissioner of the FIB either to restore the bank's capital by a special assessment upon its shareholders, or to initiate the liquidation of the bank. INVESTMENTS AND ACTIVITIES. In general, the BHCA requires a bank holding company to obtain prior approval of the Federal Reserve before it may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank or bank holding company, or acquire ownership or control of any voting shares of any bank or bank holding company, if after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank holding company or bank. In acting on such applications, the Federal Reserve considers statutory factors, including the financial and managerial condition of the parties, their record of performance under the Community Reinvestment Act, and the impact upon competition in relevant geographic and product markets. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of 62 66 any company that is not a bank, and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and other permitted subsidiaries. Upon notice to the Federal Reserve, bank holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve to be so closely related to banking or the management or control of banks as to be a proper incident thereto. Under current Federal Reserve regulations, a holding company and its non-bank subsidiaries are permitted to engage in financial and investment advisory, sales and consumer finance, equipment leasing, data processing, discount securities brokerage, mortgage banking and brokerage, and other activities. These activities are subject to certain limitations imposed by the regulations. CAPITAL REQUIREMENTS. The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (a) a leverage capital requirement expressed as a percentage of total assets, (b) a qualifying capital requirement expressed as a percentage of risk-weighted assets, (c) a Tier 1 leverage requirement expressed as a percentage of total assets, and (d) for bank holding companies having defined trading activities equal to 10% or more of total assets (or $1 billion, whichever is less), a risk-based capital ratio adjusted for market risk. The leverage capital requirement consists of a minimum ratio of total capital to total assets of 6%, with an expressed expectation that banking organizations generally should operate above such minimum level. The qualifying capital requirement consists of a minimum ratio of total qualifying capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital. Tier 1 capital consists principally of shareholders' equity, other than goodwill and certain amounts of other intangibles, but also includes certain amounts attributable to minority interests in the equity account of consolidated subsidiaries. The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. Mercantile is not currently subject to the capital ratio requirement relative to market risk. Each of the capital guidelines currently used by the Federal Reserve is a minimum requirement, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization, such as Mercantile, experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. The Federal Reserve's regulations provide that the capital guidelines will generally be applied on a consolidated basis in the case of a bank holding company, such as Mercantile, with more than $150 million in total consolidated assets. THE BANK GENERAL. The Bank is a Michigan-chartered bank, subject to supervision and examination by the FIB. Deposit accounts with the Bank are insured by the FDIC pursuant to the Federal Deposit Insurance Act ("FDIA") and regulations issued by the FDIC. Federal Reserve and FDIC regulations affect many activities of the Bank, including the permissible types and amounts of loans, investments, capital adequacy, branching, interest payable on deposits, required reserves, and the safety and soundness of the Bank's practices. The regulations are intended primarily for the protection of the Bank's depositors and customers, and not the shareholders of the Bank or Mercantile. The Bank is regulated and examined by the FDIC, and is not a member of the Federal Reserve System. 63 67 The Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to Mercantile or its subsidiaries, on investments in the stock or other securities of Mercantile or its subsidiaries, and the acceptance of the stock or other securities of Mercantile or its subsidiaries as collateral for loans to any person. Federal law places restrictions on the amount and nature of loans to executive officers, directors and controlling persons of banks insured by the FDIC and holding companies controlling such banks. CAPITAL REQUIREMENTS. The FDIC's capital guidelines for a state chartered, FDIC-insured non-member bank, like the Bank, include (a) a leverage measure, consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks and a minimum requirement of not less than 4% for all others, and (b) a risk-based capital measure consisting of a minimum ratio of qualifying total capital to risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders' equity. In addition, the FDIC has adopted requirements for each such bank having defined trading activities as shown on its most recent Consolidated Report of Condition and Income ("Call Report") in an amount equal to 10% or more of its total assets (or $1 billion, whichever is less) (1) to measure its market risk using an internal value-at-risk model conforming to the FDIC's capital guidelines, and (2) to maintain a commensurate amount of additional capital to reflect the risk. The FDIC's capital guidelines establish minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. In addition to the foregoing, under the terms of the FDIC Order granting the Bank deposit insurance coverage, the Bank is required to maintain a ratio of Tier 1 capital to total assets of not less than 8% until December 15, 2000. The regulatory capital ratios of Mercantile and the Bank, respectively, at June 30, 1999, and December 31, 1998, are set forth in Note 14 of the Notes to Consolidated Financial Statements of Mercantile elsewhere in this Prospectus. PROMPT CORRECTIVE ACTION. Among other things, the FDIA requires the federal depository institution regulators to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. The scope and degree of regulatory intervention is linked to the capital category in which a depository institution falls. The FDIA and the implementing regulations of the Federal depository institution regulators establish five capital categories, ranging from "well capitalized" to "critically undercapitalized", based upon an institution's qualifying capital to risk-based assets, Tier 1 capital to risk-based assets, and Tier 1 capital to total assets ratios. Each depository institution is periodically assigned to a capital category, generally on the basis of its most recent Call Report. Depending upon the capital category in which an institution falls, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. 64 68 BROKERED DEPOSITS. In order to fund its rapid asset growth to date, Mercantile has relied significantly on wholesale funding sources during its first 18 months of operations. This wholesale funding consists primarily of short-term certificates of deposit obtained from depositors located outside Mercantile's local market area, including varying amounts of "brokered deposits" placed by deposit brokers for a fee. Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. The Bank is currently well-capitalized and, therefore, is eligible under the statutory standard to accept brokered deposits without restriction. Mercantile anticipates that as the Bank matures, it will continue to use a combination of local deposits and wholesale funding, including such amounts of brokered deposits as management deems appropriate from an asset/liability management perspective. DIVIDENDS Mercantile is a corporation separate and distinct from the Bank. The ability of Mercantile to obtain funds for the payment of dividends and for other cash requirements will be dependent on the amount of dividends that may be declared by its subsidiary, the Bank. The Bank is subject to limitations on the dividends it may pay to Mercantile. As a banking corporation organized under Michigan law, the Bank will be restricted as to the maximum amount of dividends it may pay on its common stock. The Bank may not pay dividends except out of net profits after deducting its losses and bad debts. The Bank may not declare or pay a dividend unless it will have a surplus amounting to at least 20% of its capital after the payment of the dividend. If the Bank has a surplus less than the amount of its capital it may not declare or pay any dividend until an amount equal to at least 10% of net profits for the preceding half year (in the case of quarterly or semiannual dividends) or full year (in the case of annual dividends) has been transferred to surplus. The Bank may, with the approval of the Commissioner of the FIB, by vote of shareholders owning two-thirds of the stock eligible to vote increase its capital stock by a declaration of a stock dividend, provided that after the increase its surplus equals at least 20% of its capital stock, as increased. The Bank may not declare or pay any dividend on its common stock until the cumulative dividends on preferred stock (should any such stock be issued and outstanding) have been paid in full. The Bank has no present plans to issue preferred stock. The FDIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. It is the policy of the Federal Reserve that a bank holding company should not pay cash dividends unless (a) the organization's net income available to common equity for the past year is sufficient to fully fund the dividends, and (b) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall 65 69 financial condition. For small bank holding companies (those with less than $150 million in assets), the Federal Reserve's position is that such companies should not pay dividends so long as they have a debt-to-equity ratio of 1:1 or greater. The Federal Reserve has also expressed the view that a bank holding company should not pay cash dividends that can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability in appropriate cases to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over the Bank are possessed by the FDIC. The "prompt corrective action" provisions of the FDIA impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels and, in some cases, their parent bank holding companies. In addition to the restrictions on dividends imposed by the Federal Reserve, the Michigan Business Corporation Act imposes certain restrictions on the declaration and payment of dividends by Michigan corporations such as Mercantile. Under Michigan law, dividends may be legally declared or paid by Mercantile only if after the distribution Mercantile can pay its debts as they come due in the usual course of business and Mercantile's total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock then outstanding whose preferential rights are superior to those receiving the distribution. 66 70 DESCRIPTION OF THE PREFERRED SECURITIES The preferred securities and the common securities will be issued under the terms of the trust agreement of MBWM Trust. The trust agreement will be qualified as an indenture under the Trust Indenture Act. Initially, Wilmington Trust Company will be the property trustee and will act as trustee for the purpose of complying with the Trust Indenture Act. The terms of the preferred securities will include those stated in the trust agreement of MBWM Trust and those made part of the trust agreement by the Trust Indenture Act. The following is a summary of the material terms and provisions of the preferred securities and the trust agreement. Prospective investors in the preferred securities are urged to read all the provisions of the trust agreement, including the definitions in the trust agreement, and the Trust Indenture Act. The form of the trust agreement has been filed as an exhibit to the Registration Statement of which this prospectus is a part. GENERAL OVERVIEW Under the terms of the trust agreement of MBWM Trust, the administrative trustees will issue the preferred securities and the common securities, collectively, the trust securities. The preferred securities will represent preferred undivided beneficial interests in the assets of MBWM Trust and the holders of the preferred securities will be entitled to a preference in most circumstances regarding distributions and amounts payable on redemption or liquidation over the common securities of MBWM Trust, as well as other benefits as described in the trust agreement. The preferred securities will rank pari passu, and payments will be made thereon pro rata, with the common securities of MBWM Trust except as described under "Subordination of Common Securities of MBWM Trust Held by Mercantile" below. Legal title to the junior subordinated debentures will be held by the property trustee in trust for the benefit of the holders of the trust securities. The preferred securities guarantee executed by Mercantile for the benefit of the holders of the preferred securities will be a guarantee on a subordinated basis and will not guarantee payment of distributions or amounts payable on redemption or liquidation of the preferred securities if MBWM Trust does not have funds on hand available to make the payments. See "Description of Preferred Securities Guarantee." If an event of default under the indenture has occurred and is continuing and the default is attributable to Mercantile's failure to pay interest or principal on the junior subordinated debentures on the due date, a holder of preferred securities may institute a legal proceeding directly against Mercantile for payment of principal and interest on the junior subordinated debentures having a principal amount equal to the aggregate liquidation amount of the preferred securities of the holder. This action is referred to in this discussion as a direct action. See "Description of Junior Subordinated Debentures -- Enforcement of Rights by Holders of Preferred Securities" and "Relationship Among the Preferred Securities, the Junior Subordinated Debentures and the Preferred Securities Guarantee." QUARTERLY DISTRIBUTION PAYMENTS AND EXTENSIONS ON DISTRIBUTION PAYMENTS PAYMENT OF DISTRIBUTIONS. Distributions on the preferred securities will be payable at the annual rate of % of the stated liquidation amount of $10, payable quarterly after each calendar quarter on the 15th day of October, January, April and July in each year, 67 71 beginning October 15, 1999. The amount of each distribution due will include amounts accrued through the date the distribution is due. Distributions on the preferred securities will be payable to the holders as they appear on the register of MBWM Trust on the relevant record date. Until the preferred securities do not remain in book-entry form, the relevant record date will be one business day prior to the relevant distribution date and, in the event the preferred securities are not in book-entry form, the relevant record date will be the first day of the month in which the relevant distribution date occurs. The right to receive distributions will be cumulative from the date of original issuance of the preferred securities. The amount of distributions payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. In the event that any payment date is not a business day, the distribution will be made on the next business day, and without any interest or other payment regarding any delay, except that, if the business day is in the next succeeding calendar year, payment of the distribution will be made on the immediately preceding business day. As used in this prospectus, a business day means any day other than a Saturday or a Sunday, or a day on which banking institutions in Michigan are authorized or required by law or executive order to remain closed or a day on which the corporate trust office of the property trustee or the indenture trustee is closed for business. The only funds of MBWM Trust available for distribution to its preferred securities holders will be payments by Mercantile under the junior subordinated debentures. See "Description of Junior Subordinated Debentures." If Mercantile does not make interest payments on the junior subordinated debentures, the property trustee will not have funds available to pay distributions on the preferred securities. The payment of distributions, if and to the extent MBWM Trust has legally available funds and cash sufficient to make payments, is guaranteed by Mercantile. For further information, see "Description of Preferred Securities Guarantee." EXTENSION PERIOD. Unless a debenture event of default has occurred and is continuing, Mercantile has the right under the indenture to defer interest payments on the junior subordinated debentures at any time for a period not exceeding 20 consecutive quarters regarding each extension period. However, no extension period may extend beyond the stated maturity of the junior subordinated debentures. As a consequence of any extension election by Mercantile, quarterly distributions on the preferred securities will be deferred by MBWM Trust during any extension period. Distributions to which holders of preferred securities are entitled will accumulate additional amounts at the rate per year of % thereof, compounded quarterly from the relevant distribution date. The term distributions as used in this prospectus includes any additional accumulated amounts. During any extension period, Mercantile may not (1) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment regarding, any of its capital stock which includes common and preferred stock, or (2) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of Mercantile that rank pari passu with or junior in interest to the junior subordinated debentures or make any preferred securities guarantee payments regarding any preferred securities guarantee by Mercantile of the debt securities of any subsidiary of 68 72 Mercantile if the preferred securities guarantee ranks pari passu with or junior in interest to the junior subordinated debentures. These restrictions do not apply to: - dividends or distributions in common stock of Mercantile; - any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any plan of this type in the future, or the redemption or repurchase of any rights pursuant to this type of plan; - payments under the preferred securities guarantee of Mercantile; or - purchases of common stock for issuance under any future benefit plans for its directors, officers or employees. Prior to the termination of any extension period, Mercantile may further extend the extension period, provided that the extension does not cause the extension period to exceed 20 consecutive quarters or extend beyond the stated maturity of the junior subordinated debentures. Upon the termination of any extension period and the payment of all amounts then due, and subject to the above limitations, Mercantile may elect to begin a new extension period. There is no limitation on the number of times that Mercantile may elect to begin an extension period. Mercantile has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the junior subordinated debentures. REDEMPTION -- MANDATORY AND OPTIONAL RIGHTS OF MERCANTILE MANDATORY REDEMPTION OF PREFERRED SECURITIES. Upon the repayment or redemption at any time, in whole or in part, of any junior subordinated debentures, the proceeds from the repayment or redemption will be applied by the property trustee to redeem a like amount of the trust securities at the redemption price, as defined below. For more information, see "Description of Junior Subordinated Debentures -- Redemption." If less than all of the junior subordinated debentures are to be repaid or redeemed on a redemption date, then the proceeds will be allocated to the redemption of the preferred securities and common securities pro rata. OPTIONAL REDEMPTION OF JUNIOR SUBORDINATED DEBENTURES. Mercantile will have the right to redeem the junior subordinated debentures (1) beginning on , 2004, in whole at any time or in part from time to time at a redemption price equal to the accrued and unpaid interest on the junior subordinated debentures redeemed to the date fixed for redemption, plus 100% of the principal amount of the junior subordinated debentures, or (2) at any time, in whole, but not in part, upon a tax event, an investment company event or a capital treatment event as defined in the following paragraph. The redemption price will be equal to the accrued and unpaid interest on the redeemed junior subordinated debentures, plus 100% of the principal amount. These payments will be subject to receipt of prior approval by the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. See "Description of Junior Subordinated Debentures -- Redemption." TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION, CAPITAL TREATMENT EVENT REDEMPTION OR DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES. If a tax event, an investment company event or a capital treatment event occurs after original issuance of the preferred securities and is continuing, Mercantile has the right to redeem the junior 69 73 subordinated debentures in whole. If a redemption of the junior subordinated debentures occurs, Mercantile would also cause a mandatory redemption of the preferred securities and common securities in whole at the redemption price, as defined below, within 90 days following the occurrence of any of these events. In each case the redemption would be subject to receipt of prior approval by the Federal Reserve if then required under its applicable capital guidelines or policies. If any of these events has occurred and is continuing, and Mercantile does not elect to redeem the junior subordinated debentures and cause a mandatory redemption of the trust securities or to liquidate MBWM Trust and cause the junior subordinated debentures to be distributed to holders of the trust securities in liquidation of MBWM Trust, the trust securities will remain outstanding. Also, additional sums, as defined below, may be payable on the junior subordinated debentures. A tax event requires the receipt by Mercantile and MBWM Trust of a legal opinion to the effect that, as a result of any amendment to, including any announced prospective change in, the laws or regulations of the United States or any political subdivision or taxing authority of the United States, or as a result of any official administrative pronouncement or judicial decision interpreting or applying the tax laws or regulations, there is more than an insubstantial risk that: - MBWM Trust is, or will be within 90 days of the date of the opinion, subject to United States federal income tax regarding income received or accrued on the junior subordinated debentures; - interest payable by Mercantile on the junior subordinated debentures is not, or within 90 days of the opinion, will not be, deductible by Mercantile, in whole or in part, for United States federal income tax purposes; or - MBWM Trust is, or will be within 90 days of the date of the opinion, subject to more than a de minimis amount of other taxes, duties, assessments or other governmental charges. An investment company event requires the receipt by Mercantile and MBWM Trust of a legal opinion to the effect that, as a result of any change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, MBWM Trust is or will be considered an investment company required to be registered under the Investment Company Act. A capital treatment event requires the receipt by Mercantile and MBWM Trust of a legal opinion to the effect that, as a result of any amendment to, including any proposed change in, the laws or regulations of the United States or any of its political subdivisions, or as a result of any official action or judicial decision interpreting the laws or regulations, there is more than an insubstantial risk that Mercantile's ability to treat the preferred securities as core capital or its equivalent for purposes of the Federal Reserve capital adequacy guidelines, is impaired. Additional sums means the additional amounts as may be necessary to be paid by Mercantile on the junior subordinated debentures so that the amount of distributions payable by MBWM Trust on the outstanding trust securities will not be reduced as a result of any additional taxes, duties, assessments and other governmental charges to which MBWM Trust has become subject. 70 74 Like amount means (1) regarding a redemption of trust securities, trust securities having a liquidation amount, as defined below, equal to that portion of the principal amount of junior subordinated debentures to be contemporaneously redeemed in accordance with the indenture, allocated to the common securities and to the preferred securities based upon the relative liquidation amounts of these classes and the proceeds of which will be used to pay the redemption price of the trust securities, and (2) regarding a distribution of junior subordinated debentures to holders of trust securities in connection with a dissolution or liquidation of MBWM Trust, junior subordinated debentures having a principal amount equal to the liquidation amount of the trust securities of the holder to whom the junior subordinated debentures are distributed. Liquidation amount means the stated amount of $10 per trust security. Redemption price means, regarding any trust security, the liquidation amount of the trust security, plus accumulated and unpaid distributions to the redemption date, allocated on a pro rata basis, based on liquidation amounts, among the trust securities. DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES Subject to Mercantile's having received prior approval of the Federal Reserve, Mercantile will have the right at any time to liquidate MBWM Trust and, after satisfaction of the liabilities of creditors of MBWM Trust as provided by applicable law, cause the junior subordinated debentures to be distributed to the holders of trust securities in liquidation of MBWM Trust. After the liquidation date fixed for any distribution of junior subordinated debentures for preferred securities: - the preferred securities will no longer be deemed to be outstanding; - the depositary or its nominee, as the record holder of the preferred securities, will receive a registered global certificate or certificates representing the junior subordinated debentures to be delivered upon the distribution; and - any certificates representing preferred securities not held by the depositary or its nominee will be deemed to represent the junior subordinated debentures having a principal amount equal to the liquidation amount of the preferred securities, and bearing interest equal to the accrued and unpaid distributions on the preferred securities, until the certificates are presented to the administrative trustees or their agent for reissuance. There can be no assurance as to the market prices for the preferred securities or the junior subordinated debentures that may be distributed in exchange for the preferred securities if a dissolution and liquidation of MBWM Trust were to occur. Accordingly, the preferred securities that an investor may purchase, or the junior subordinated debentures that the investor may receive on dissolution and liquidation of MBWM Trust, may trade at a discount to the price that the investor paid to purchase the preferred securities. If the junior subordinated debentures are distributed, Mercantile will use reasonable efforts to list them on a national securities exchange or quotation system. REDEMPTION PROCEDURES Preferred securities redeemed on each redemption date will be redeemed at the redemption price with the proceeds from the contemporaneous redemption of the junior subordinated debentures. Redemptions of the preferred securities will be made and the 71 75 redemption price will be payable on each redemption date only to the extent that MBWM Trust has funds on hand available for the payment of the redemption price. See "-- Subordination of Common Securities of MBWM Trust Held by Mercantile" and "Description of Preferred Securities Guarantee." Notice of any redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of trust securities at the holder's registered address. Unless MBWM Trust defaults in payment of the applicable redemption price, on and after the redemption date, distributions will cease to accrue on the preferred securities called for redemption. If MBWM Trust gives a notice of redemption regarding the preferred securities, then, by 12:00 noon, Detroit, Michigan time, on the redemption date, the property trustee will pay the redemption price to the depositary, as the record holder of the preferred securities. The depositary thereafter will credit the redemption price to the participants for whom it holds the preferred securities. See "Book-Entry Issuance." If the preferred securities are no longer in book-entry form, the property trustee, to the extent funds are available, will deposit with the paying agent for the preferred securities funds sufficient to pay the aggregate redemption price. The property trustee will give the paying agent irrevocable instructions and authority to pay the redemption price upon surrender of certificates evidencing the preferred securities. Notwithstanding the foregoing, distributions payable on or prior to the redemption date will be payable to the holders of the preferred securities on the relevant record dates for the related distribution dates. If notice of redemption has been given and funds deposited as required, then upon the date of the deposit, all rights of the holders of the preferred securities will cease, except the right of the holders of the preferred securities to receive the redemption price, but without interest on the redemption price, and the preferred securities will cease to be outstanding. If any date fixed for redemption of the preferred securities is not a business day, then payment of the redemption price payable on the date will be made on the next business day and without any interest or other payment for the delay. If, however, the business day falls in the next calendar year, the payment will be made on the immediately preceding business day. If payment of the redemption price in respect of preferred securities called for redemption is improperly withheld or refused and not paid either by MBWM Trust or by Mercantile under the preferred securities guarantee, distributions on the preferred securities will continue to accrue at the then applicable rate, from the redemption date originally established by MBWM Trust for the preferred securities to the date the redemption price is actually paid. In this case the actual payment date will be the date fixed for redemption for purposes of calculating the redemption price. See "Description of Preferred Securities Guarantee." Subject to applicable law, including, without limitation, federal securities laws, Mercantile may at any time and from time to time purchase outstanding preferred securities by tender, in the open market or by private agreement. Payment of the redemption price on the preferred securities and any distribution of junior subordinated debentures to holders of preferred securities will be made to the applicable record holders as they appear on the register of the preferred securities on the relevant record date, which date will be one business day prior to the relevant redemption date; provided, however, that if any preferred securities are not in book-entry form, the relevant record date for them will be a date at least 15 days prior to the redemption date. In the case of a liquidation, the record date will be established by the property trustee and be no more than 45 days before the liquidation date. 72 76 If less than all of the trust securities are to be redeemed on a redemption date, then the aggregate redemption price for the trust securities to be redeemed will be allocated pro rata to the preferred securities and common securities based upon the relative liquidation amounts of these classes. The particular outstanding preferred securities to be redeemed will be selected by any method as the property trustee deems fair and appropriate. This method may provide for the selection for redemption of portions equal to $10 or an integral multiple of $10 of the liquidation amount of preferred securities. The property trustee will promptly notify the trust securities registrar in writing of the preferred securities selected for redemption and, in the case of any preferred securities selected for partial redemption, the liquidation amount thereof to be redeemed. For all purposes of the trust agreement, unless the context otherwise requires, all provisions relating to the redemption of preferred securities will relate to the portion of the aggregate liquidation amount of preferred securities which has been or is to be redeemed. SUBORDINATION OF COMMON SECURITIES OF MBWM TRUST HELD BY MERCANTILE Payment of distributions on, and the redemption price of, the preferred securities and common securities will be made pro rata based on the liquidation amounts of these securities. However, if on any distribution date or redemption date a debenture event of default has occurred and is continuing, no distributions on or redemption of the common securities will be made. Further, no other payment on account of the redemption, liquidation or other acquisition of the common securities will be made unless payment in full in cash of all distributions payable on all of the outstanding preferred securities are made, or in the case of redemption the full redemption price on all of the outstanding preferred securities then called for redemption, has been made or provided for. All funds available to the property trustee will first be applied to the payment in full in cash of all distributions on, or redemption price of, the preferred securities then due and payable. In the case of any event of default under the trust agreement resulting from a debenture event of default, Mercantile as holder of the common securities will be deemed to have waived any right to act regarding any event of default until the effects of all events of default have been cured, waived or otherwise eliminated. Until any events of default have been so cured, waived or otherwise eliminated, the property trustee will act solely on behalf of the holders of the preferred securities and not on behalf of Mercantile as holder of the common securities, and only the holders of the preferred securities will have the right to direct the property trustee to act on their behalf. LIQUIDATION DISTRIBUTION UPON TERMINATION Mercantile will have the right at any time to terminate MBWM Trust and cause the junior subordinated debentures to be distributed to the holders of the preferred securities. This right is subject to Mercantile having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. See "Distribution of Junior Subordinated Debentures" above. In addition, under the trust agreement, MBWM Trust will automatically terminate upon expiration of its term and will earlier terminate on the first to occur of: (1) events of bankruptcy, dissolution or liquidation of Mercantile; (2) delivery by Mercantile of written direction to the property trustee to terminate MBWM Trust, which direction is optional and wholly within the discretion of Mercantile; (3) redemption of all of the preferred securities as described under "-- Redemption -- Mandatory and Optional Rights of 73 77 Mercantile;" and (4) the entry of an order for the dissolution of MBWM Trust by a court of competent jurisdiction. If an early termination occurs as described in clause (1), (2) or (4) above or upon the expiration of the term of MBWM Trust, it will be liquidated by the trustees as expeditiously as the trustees determine to be possible. The liquidation will be made after satisfaction of liabilities to creditors of MBWM Trust as provided by applicable law. In the liquidation, holders of the trust securities will receive a like amount of the junior subordinated debentures, unless this distribution is determined by the property trustee not to be practical. If the property trustee determines that a distribution of the junior subordinated debentures is not practical, then the holders of preferred securities will be entitled to receive an amount equal to the liquidation amount of $10 per trust security plus accrued and unpaid distributions thereon to the date of payment. This amount, payable out of the assets of MBWM Trust available for distribution, is referred to as the liquidation distribution. If the liquidation distribution can be paid only in part because MBWM Trust has insufficient assets available to pay the full aggregate liquidation distribution, then the amounts payable directly by MBWM Trust on the preferred securities will be paid on a pro rata basis. The holders of the common securities will be entitled to receive distributions upon a liquidation pro rata with the holders of the preferred securities, except that if a debenture event of default has occurred and is continuing, the preferred securities will have a priority over the common securities. Under current United States federal income tax law and interpretations and assuming, as expected, MBWM Trust is treated as a grantor trust, a distribution of the junior subordinated debentures should not be a taxable event to holders of the preferred securities. Should there be a change in law, a change in legal interpretation, a tax event or other circumstances, however, the distribution could be a taxable event to holders of the preferred securities. See "Material Federal Income Tax Consequences." If Mercantile elects neither to redeem the junior subordinated debentures prior to maturity nor to liquidate MBWM Trust and distribute the junior subordinated debentures to holders of the preferred securities, the preferred securities will remain outstanding until the repayment of the junior subordinated debentures. If Mercantile elects to liquidate MBWM Trust and cause the junior subordinated debentures to be distributed to holders of the preferred securities in liquidation of MBWM Trust, Mercantile will continue to have the right to shorten the maturity of the junior subordinated debentures under most circumstances. See "Description of Junior Subordinated Debentures -- General Overview." EVENTS OF DEFAULT; NOTICE Any one of the following events that has occurred and is continuing constitutes an event of default under the trust agreement: - the occurrence of a debenture event of default under the indenture, see "Description of Junior Subordinated Debentures -- Indenture Events of Default"; or - default by MBWM Trust in the payment of any distribution when it becomes due and payable, and continuation of the default for a period of 30 days; or - default by MBWM Trust in the payment of any redemption price of any trust security when it becomes due and payable; or 74 78 - default in the performance, or breach, in any material respect, of any covenant or warranty of the property trustee in the trust agreement, other than a default or breach in the performance of a covenant or warranty which is addressed in the previous two points above, and continuation of the default or breach, for a period of 60 days after there has been given, by registered or certified mail, to the property trustee by the holders of at least 25% in aggregate liquidation amount of the outstanding preferred securities, a written notice specifying the default or breach and requiring it to be remedied and stating that the notice is a "Notice of Default" under the trust agreement; or - the occurrence of events of bankruptcy or insolvency regarding the property trustee and the failure by Mercantile to appoint a successor property trustee within 60 days thereof. Within five business days after the occurrence of any event of default actually known to the property trustee, the property trustee is required to transmit notice of the event of default to the holders of the preferred securities, the administrative trustees and Mercantile, unless the event of default has been cured or waived. Mercantile and the administrative trustees are required to file annually with the property trustee a certificate as to whether they are in compliance with all the conditions and covenants applicable to them under the trust agreement. If a debenture event of default has occurred and is continuing, the preferred securities will have a preference over the common securities upon termination of MBWM Trust as described above. See "-- Liquidation Distribution Upon Termination." Upon a debenture event of default, unless the principal of all the junior subordinated debentures has already become due and payable, either the property trustee or the holders of not less than 25% in aggregate principal amount of outstanding junior subordinated debentures may declare all of the junior subordinated debentures to be due and payable immediately. Written notice must be given to Mercantile, and to the property trustee, if given by holders of the junior subordinated debentures. If the property trustee or the holders of the junior subordinated debentures fail to declare the principal of all of the junior subordinated debentures due and payable upon a debenture event of default, the holders of at least 25% in liquidation amount of the preferred securities then outstanding will have the right to declare the junior subordinated debentures immediately due and payable. In either event, payment of principal and interest on the junior subordinated debentures will remain subordinated to the extent provided in the indenture. In addition, holders of the preferred securities have to bring a direct action as discussed below. See "Description of Junior Subordinated Debentures -- Enforcement of Rights by Holders of Preferred Securities." REMOVAL OF TRUSTEES Unless a debenture event of default has occurred and is continuing, any trustee may be removed at any time by the holder of the common securities of MBWM Trust. If a debenture event of default has occurred and is continuing, the property trustee, Delaware trustee or both may be removed by the holders of a majority in liquidation amount of the outstanding preferred securities. In no event will the holders of the preferred securities have the right to vote to appoint, remove or replace the administrative trustees, which voting rights are vested exclusively in Mercantile as the holder of the common securities. No resignation or removal of a trustee and no appointment of a successor trustee will be 75 79 effective until the acceptance of appointment by the successor trustee in accordance with the provisions of the trust agreement. CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE Unless an event of default has occurred and is continuing, at any time, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of trust property may at the time be located, the holders of the common securities and the administrative trustees have power to appoint one or more persons either to act as (1) a co-trustee, jointly with the property trustee, of all or any part of the trust property, or (2) to act as separate trustee of any such property. In either case these trustees will have the powers which may be provided in the instrument of appointment, and will have vested in them any property, title, right or power deemed necessary or desirable, subject to the provisions of the trust agreement. In case a debenture event of default has occurred and is continuing, the property trustee alone will have power to make the appointment. MERGER OR CONSOLIDATION OF TRUSTEES Generally, any person or successor to any of the trustees of MBWM Trust may be a successor trustee to any of the trustees, including a successor resulting from a merger or consolidation. However, any successor trustee must meet all of the qualifications and eligibility standards to act as a trustee to MBWM Trust. MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF MBWM TRUST MBWM Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any trust or other person, except as described below. MBWM Trust may, at the request of Mercantile, with the consent of the administrative trustees and without the consent of the holders of the preferred securities, the property trustee or the Delaware trustee, undertake the transactions described above; provided, that: - the successor entity either (a) expressly assumes all of the obligations of MBWM Trust regarding the preferred securities or (b) substitutes for the preferred securities other securities having substantially the same terms as the preferred securities, so long as the successor securities rank the same as the preferred securities rank in priority regarding distributions and payments upon liquidation, redemption and otherwise; - Mercantile expressly appoints a trustee of the successor entity possessing substantially the same powers and duties as the property trustee as the holder of the junior subordinated debentures; - any transaction of this kind does not adversely affect the rights, preferences and privileges of the holders of the preferred securities, including any successor securities, in any material respect; - the successor entity has a purpose identical to that of MBWM Trust; - the successor securities will be listed or traded on any national securities exchange or other organization on which the preferred securities may then be listed; 76 80 - prior to the transaction, Mercantile has received a legal opinion from independent counsel to MBWM Trust experienced in such matters to the effect that (a) the transaction does not adversely affect the rights, preferences and privileges of the holders of the preferred securities, including any successor securities, in any material respect, and (b) following any transaction of this kind, neither MBWM Trust nor the successor entity will be required to register as an investment company under the Investment Company Act; and - Mercantile or any permitted successor or designee owns all of the common securities of the successor entity and guarantees the obligations of the successor entity under the successor securities at least to the extent provided by the preferred securities guarantee. Notwithstanding the foregoing, MBWM Trust will not, except with the consent of holders of 100% in liquidation amount of the preferred securities, enter into any transaction of this kind, or permit any other entity to consolidate, amalgamate, merge with or into, or replace it, if the transaction would cause MBWM Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT Except in certain limited circumstance described below and under "Description of Preferred Securities Guarantee -- Amendments and Assignment", in general, the holders of the preferred securities will have no voting rights. The trust agreement may be amended from time to time by Mercantile and the trustees, without the consent of the holders of the trust securities: - to cure any ambiguity, correct or supplement any provisions in the trust agreement that may be inconsistent with any other provision, or to make any other provisions regarding matters or questions arising under the trust agreement, which are not inconsistent with the other provisions of the trust agreement; or - to modify, eliminate or add to any provisions of the trust agreement to the extent that is necessary to ensure that MBWM Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any trust securities are outstanding or to ensure that MBWM Trust will not be required to register as an investment company under the Investment Company Act. Provided, however, that in the case of the first point above, this action will not adversely affect in any material respect the interests of any holder of trust securities, and any amendments of the trust agreement will become effective when notice is given to the holders of the trust securities. The trust agreement may be amended by the trustees and Mercantile (1) with the consent of holders representing not less than a majority of the aggregate liquidation amount of the outstanding trust securities, and (2) upon receipt by the trustees of an opinion of counsel to the effect that the amendment or the exercise of any power granted to the trustees in accordance with the amendment will not affect MBWM Trust's status as a grantor trust for United States federal income tax purposes or MBWM Trust's exemption from status as an investment company under the Investment Company Act. However, without the consent of each holder of trust securities, the trust agreement may not be amended to (1) change the amount or timing of any distribution on the trust securities or otherwise adversely affect the amount of any distribution required to be made 77 81 in respect of the trust securities as of a specified date or (2) restrict the right of a holder of trust securities to institute suit for the enforcement of any payment of distributions afterwards. For the time that any junior subordinated debentures are held by the property trustee, the trustees will not: - direct the time, method and place of conducting any proceeding for any remedy available to the indenture trustee, or executing any trust or power conferred on the indenture trustee regarding the junior subordinated debentures; - waive any past default that is waivable under the indenture; - exercise any right to rescind or annul a declaration that the principal of all the junior subordinated debentures will be due and payable; or - consent to any amendment, modification or termination of the indenture or the junior subordinated debentures, where this consent is required, without, in each case, obtaining the prior approval of the holders of a majority in aggregate liquidation amount of all outstanding preferred securities. However, where a consent under the indenture would require the consent of each affected holder of junior subordinated debentures, this consent may not be given by the property trustee without the prior consent of each holder of the preferred securities. The trustees will not revoke any action previously authorized or approved by a vote of the holders of the preferred securities except by subsequent vote of the holders of the preferred securities. The property trustee will notify each holder of the preferred securities of any notice of default regarding the junior subordinated debentures. In addition to obtaining these approvals of the holders of the preferred securities, prior to taking any of the above actions, the trustees will obtain an opinion of counsel stating that MBWM Trust will not, as a consequence of the proposed action by the property trustee, cease to be classified as a grantor trust and will not be classified as an association taxable as a corporation for United States federal income tax purposes on account of the action. Any required approval of holders of the preferred securities may be given at a meeting of holders of preferred securities convened for this purpose or under written consent. The property trustee will cause a notice of any meeting at which holders of the preferred securities are entitled to vote, or of any matter upon which action by written consent of the holders is to be taken, to be given to each holder of record of the preferred securities in the manner set forth in the trust agreement. No vote or consent of the holders of the preferred securities will be required for MBWM Trust to redeem and cancel the preferred securities in accordance with the trust agreement. Any of the preferred securities that are owned by Mercantile, the trustees or any affiliate of Mercantile or any trustees, will, for purposes of the vote or consent, be treated as if they were not outstanding. GLOBAL PREFERRED SECURITIES The preferred securities will be represented by one or more global certificates registered in the name of the depositary or its nominee. Beneficial interests in the preferred 78 82 securities will be shown on, and transfers will be effected only through, records maintained by participants in the depositary. Except as described below, preferred securities in certificated form will not be issued in exchange for the global certificates. See "Book-Entry Issuance." A global security will be exchangeable for preferred securities registered in the names of persons other than the depositary or its nominee only if: - the depositary notifies Mercantile that it is unwilling or unable to continue as a depositary for the global security and no successor depositary has been appointed, or if at any time the depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, at a time when the depositary is required to be so registered to act as a depositary; - Mercantile in its sole discretion determines that the global security will be so exchangeable; or - there has occurred and is continuing an event of default under the indenture. Any global security that is exchangeable under the preceding sentence will be exchangeable for definitive certificates registered in the names which the depositary directs. It is expected that the instructions will be based upon directions received by the depositary regarding ownership of beneficial interests in the global security. In the event that preferred securities are issued in certificated form, they will be in denominations of $10 or integral multiples of $10 and may be transferred or exchanged at the offices described below. Unless and until it is exchanged in whole or in part for the individual preferred securities, the global preferred security may not be transferred except (1) as a whole by the depositary to a nominee of the depositary or by a nominee of the depositary to the depositary or (2) another nominee of the depositary or (3) by the depositary or any nominee to a successor depositary or any nominee of the successor. Payments on preferred securities represented by a global security will be made to the depositary, as the depositary for the preferred securities. In the event the preferred securities are issued in certificated form, distributions will be payable, the transfer of the preferred securities will be registrable, and preferred securities will be exchangeable for preferred securities of other denominations of a like aggregate liquidation amount, at the corporate office of the property trustee, or at the offices of any paying agent or transfer agent appointed by the administrative trustees. However, payment of any distribution may be made at the option of the administrative trustees by check mailed to the address of the persons entitled to payments or by wire transfer. In addition, if the preferred securities are issued in definitive form, the record dates for payment of distributions will be the first day of the month in which the relevant distribution date occurs. For a description of the terms of the depositary arrangements relating to payments, transfers, voting rights, redemptions and other notices and other matters, see "Book-Entry Issuance." Upon the issuance of a global preferred security, and the deposit of the global preferred security with or on behalf of the depositary, the depositary will credit, on its book-entry registration and transfer system, the respective aggregate liquidation amounts of the individual preferred securities represented by the global preferred security to persons that have accounts with the depositary. The accounts will be designated by the dealers, underwriters or agents regarding the preferred securities. Ownership of beneficial interests in a global preferred security will be limited to participants or persons that may hold 79 83 interests through participants. Ownership of beneficial interests in the global preferred security will be shown on, and the transfer of that ownership will be effected only through, records maintained by the depositary or its nominee and the records of participants regarding interests of persons who hold through participants. The laws of some states require that some purchasers of securities in those states take physical delivery of the securities in certificated form. The limits, under these laws, may impair the ability to transfer beneficial interests in a global preferred security. For the time that the depositary for a global preferred security, or its nominee, is the registered owner of the global preferred security, this registered owner will be considered the sole owner or holder of the preferred securities represented by the global preferred security for all purposes under the trust agreement of MBWM Trust. Except as provided below, owners of beneficial interests in a global preferred security will not be entitled to have any of the individual preferred securities represented by the global preferred security registered in their names, will not receive or be entitled to receive physical delivery of any the preferred securities in certificated form and will not be considered the owners or holders thereof. None of Mercantile, the property trustee, any paying agent, or the securities registrar for the preferred securities will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of the global preferred security or for maintaining, supervising or reviewing any records relating to the beneficial ownership interests. Mercantile expects that the depositary, upon receipt of any payment of the liquidation amount or distributions in respect of a permanent global preferred security, immediately will credit participants' accounts with payments in amounts proportionate to their respective beneficial interest in the aggregate liquidation amount of the global preferred security as shown on the records of the depositary or its nominee. Mercantile also expects that payments by participants to owners of beneficial interests in the global preferred security held through the participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in street name. The payments will be the responsibility of the participants. If the depositary for the preferred securities is at any time unwilling, unable or ineligible to continue as depositary and a successor depositary is not appointed by Mercantile within 90 days, MBWM Trust will issue individual preferred securities in exchange for the global preferred security. In addition, MBWM Trust may at any time in its sole discretion, subject to any limitations described in this prospectus relating to the preferred securities, determine not to have any preferred securities represented by one or more global preferred securities. In this event, Mercantile will issue individual preferred securities in exchange for the global preferred security or securities representing the preferred securities. Further, if MBWM Trust specifies, an owner of a beneficial interest in a global preferred security representing preferred securities may receive individual preferred securities in exchange for the beneficial interests, subject to any limitations described in this prospectus. In any such instance, a beneficial interest owner in a global preferred security will be entitled to physical delivery of individual preferred securities represented by the global preferred security equal in liquidation amount to the beneficial interest, and to have the preferred securities registered in its name. Individual preferred securities issued will be issued in denominations, unless otherwise specified by MBWM Trust, of $10 and integral multiples of $10. 80 84 PAYMENT AND PAYING AGENCY Payments in respect of the preferred securities will be made to the depositary, which will credit the relevant accounts at the depositary on the applicable distribution dates. However, if any of the preferred securities are not held by the depositary, the payments will be made by check mailed to the address of the holder as the address appears on the register. The paying agent will initially be the property trustee and any co-paying agent chosen by the property trustee and acceptable to the administrative trustees and Mercantile. The paying agent will be permitted to resign as paying agent upon 30 days' written notice to the property trustee and Mercantile. In the event that the property trustee is no longer the paying agent, the administrative trustees will appoint a successor paying agent, which will be a bank or trust company acceptable to the administrative trustees and Mercantile. REGISTRAR AND TRANSFER AGENT The property trustee will act as registrar and transfer agent for the preferred securities. Registration of transfers of the preferred securities will be effected without charge by or on behalf of MBWM Trust, but the registrar may require payment to cover any tax or other governmental charges that may be imposed in connection with any transfer or exchange. MBWM Trust will not be required to register or cause to be registered the transfer of the preferred securities after the preferred securities have been called for redemption. INFORMATION CONCERNING THE PROPERTY TRUSTEE The property trustee, other than upon the occurrence and during the continuance of an event of default, undertakes to perform only the duties which are specifically set forth in the trust agreement. After an event of default, the property trustee must exercise the same degree of care and skill as a prudent person would exercise or use in the conduct of his or her own affairs. Subject to this provision, the property trustee is under no obligation to exercise any of the powers vested in it by the trust agreement at the request of any holder of preferred securities unless it is offered reasonable indemnity against the costs, expenses and liabilities that might be incurred. If no event of default has occurred and is continuing and the property trustee is required to decide between alternative causes of action, construe ambiguous provisions in the trust agreement or is unsure of the application of any provision of the trust agreement, and the matter is not one on which holders of the preferred securities are entitled under the trust agreement to vote, then the property trustee will take action as directed by Mercantile. If the property trustee is not so directed, it will take action as it deems advisable and in the best interests of the holders of the trust securities and will have no liability under the trust agreement except for its own bad faith, negligence or willful misconduct. MISCELLANEOUS The administrative trustees are authorized and directed to conduct the affairs of and to operate MBWM Trust in such a way that MBWM Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act or classified as an association taxable as a corporation for United States federal income tax purposes and so that the junior subordinated debentures will be treated as indebtedness of Mercantile for United States federal income tax purposes. In this regard, Mercantile and the administrative trustees are authorized to take any lawful action not inconsistent with 81 85 the certificate of trust of MBWM Trust or the trust agreement, that they determine in their discretion to be necessary or desirable for these purposes, as long as the action does not materially adversely affect the interests of the holders of the related preferred securities. Holders of the preferred securities have no preemptive or similar rights. MBWM Trust may not borrow money or issue debt or mortgage or pledge any of its assets. 82 86 DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES The junior subordinated debentures will be issued under a subordinated indenture, dated as of , 1999, between Mercantile and Wilmington Trust Company, as the indenture trustee. The following is a summary of the material terms and provisions of the junior subordinated debentures and the indenture. Prospective investors are urged to read the indenture, which has been filed as an exhibit to the Registration Statement of which this prospectus forms a part. Wherever particular defined terms of the indenture are referred to but not defined herein, such defined terms have the same meaning as that in the indenture. The indenture is qualified under the Trust Indenture Act. Concurrently with the issuance of the preferred securities, MBWM Trust will invest the proceeds from the sale of the preferred securities, together with the consideration paid by Mercantile for the common securities, in junior subordinated debentures issued by Mercantile. The junior subordinated debentures will be issued as unsecured debt under the indenture. GENERAL OVERVIEW The junior subordinated debentures will bear interest at the rate of % per year of their principal amount, payable quarterly after each calendar quarter on the 15th day of October, January, April and July of each year, beginning October 15, 1999, to the person in whose name each junior subordinated debenture is registered, subject to minor exceptions, at the close of business on the business day next preceding the interest payment date. Notwithstanding the above, in the event that either (1) the junior subordinated debentures are held by the property trustee and the preferred securities are no longer in book-entry only form or (2) the junior subordinated debentures are not represented by a global subordinated debenture, the record date for the interest payment will be the first day of the month in which the payment is made. The amount of each interest payment due regarding the junior subordinated debentures will include amounts accrued through the interest payment date. It is anticipated that, until the liquidation, if any, of MBWM Trust, each junior subordinated debenture will be held in the name of the property trustee in trust for the benefit of the holders of the preferred securities. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on the junior subordinated debentures is not a business day, then payment of the interest payable on that date will be made on the next business day, except that, if the business day is in the next succeeding calendar year, the payment will be made on the immediately preceding business day. Accrued interest that is not paid on the applicable interest payment date will bear additional interest at the rate per year of % compounded quarterly. The term interest as used in this prospectus includes quarterly interest payments, interest on quarterly interest payments not paid on the applicable interest payment date and additional sums, as defined below, as applicable. The junior subordinated debentures will mature on , 2029. This date, as it may be shortened as described below, is the stated maturity. This date may be shortened once at any time by Mercantile before the day which is 90 days before the scheduled maturity date to any date not earlier than , 2004, subject to Mercantile having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. In the event that Mercantile elects to shorten the stated maturity of the junior subordinated debentures, it will give at least 90 days prior 83 87 notice to the registered holders of the junior subordinated debentures, the property trustee and the indenture trustee. The property trustee must give notice to the holders of the trust securities of the shortening of the stated maturity. The junior subordinated debentures will be unsecured and will rank junior and be subordinate in right of payment to all senior and subordinated debt (as defined in the indenture) of Mercantile. Because Mercantile is a holding company, the right of Mercantile to participate in any distribution of assets of Bank, or upon the Bank's liquidation or reorganization or otherwise, and thus the ability of holders of the junior subordinated debentures to benefit indirectly from the distribution, is subject to the prior claims of creditors of that subsidiary, except to the extent that Mercantile may itself be recognized as a creditor of that subsidiary. Accordingly, the junior subordinated debentures will be effectively subordinated to all existing and future liabilities of Mercantile's subsidiaries, and holders of junior subordinated debentures should look only to the assets of Mercantile for payments on the junior subordinated debentures. The indenture does not limit the incurrence or issuance of other secured or unsecured debt of Mercantile, including senior and subordinated debt, whether under the indenture or any existing or other indenture that Mercantile may enter into in the future or otherwise. See "Subordination" below. OPTION TO EXTEND INTEREST PAYMENT PERIOD If no debenture event of default has occurred and is continuing, Mercantile has the right under the indenture at any time during the term of the junior subordinated debentures to defer interest payments at any time for a period not exceeding 20 consecutive quarters. However, no extension period may extend beyond the stated maturity of the junior subordinated debentures. At the end of an extension period, Mercantile must pay all interest then accrued and unpaid, together with interest at the rate of % per year, compounded quarterly. During an extension period, interest will continue to accrue and holders of junior subordinated debentures will be required to accrue interest income for United States federal income tax purposes. See "Material Federal Income Tax Consequences -- Interest Income and Original Issue Discount." During any extension period, Mercantile may not (1) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment regarding, any of Mercantile's capital stock or (2) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of Mercantile, including other junior subordinated debentures, that rank pari passu with or junior in interest to the junior subordinated debentures or make any preferred securities guarantee payments regarding any preferred securities guarantee by Mercantile of the debt securities of any subsidiary of Mercantile if the preferred securities guarantee ranks pari passu with or junior in interest to the junior subordinated debentures. These restrictions do not apply to: - dividends or distributions in common stock of Mercantile; - any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any plan in the future, or the redemption or repurchase of any rights pursuant to this type of plan; - payments under the preferred securities guarantee; or 84 88 - purchases of common stock related to the issuance of common stock or rights under any of Mercantile's benefit plans for its directors, officers or employees. Prior to the termination of any extension period, Mercantile may further extend the extension period, provided that the extension does not cause the extension period to exceed 20 consecutive quarters or extend beyond the stated maturity of the junior subordinated debentures. Upon the termination of any extension period and the payment of all amounts then due on any interest payment date, Mercantile may elect to begin a new extension period subject to the above requirements. No interest will be due and payable during an extension period, except at the end of the extension period. If the property trustee is the only registered holder of the junior subordinated debentures, Mercantile must give the property trustee, the administrative trustees and the indenture trustee notice of its election of any extension period at least one business day prior to the earlier of (1) the date the distributions on the preferred securities would have been payable except for the election to begin or extend the extension period or (2) the date the administrative trustees are required to give notice to the holders of the preferred securities of the record date or the date the distributions are payable, but in any event not less than one business day prior to the record date. The indenture trustee will give notice of Mercantile's election to begin or extend a new extension period to the administrative trustees who, in turn, will give notice to the holders of the preferred securities. There is no limitation on the number of times that Mercantile may elect to begin an extension period. ADDITIONAL SUMS TO BE PAID AS A RESULT OF ADDITIONAL TAXES If MBWM Trust or the property trustee is required to pay any additional taxes, duties, assessments or other governmental charges as a result of a tax event, Mercantile will pay as additional amounts on the junior subordinated debentures any amounts which will be required so that the distributions payable by MBWM Trust will not be reduced as a result of any additional taxes, duties or other governmental charges. See "Description of the Preferred Securities -- Redemption -- Mandatory and Optional Rights of Mercantile" for a definition of tax event. REDEMPTION Subject to Mercantile's having received prior approval of the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve the junior subordinated debentures are redeemable prior to maturity at the option of Mercantile (1) beginning , 2004, in whole at any time or in part from time to time, or (2) at any time in whole, but not in part, upon the occurrence and during the continuance of a tax event, an investment company event or a capital treatment event, in each case at a redemption price equal to the accrued and unpaid interest on the junior subordinated debentures redeemed to the date fixed for redemption, plus 100% of the principal amount of the junior subordinated debentures. See "Description of the Preferred Securities -- Redemption -- Mandatory and Optional Rights of Mercantile" for definitions of tax event, investment company event and capital treatment event. Notice of any redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of junior subordinated debentures to be redeemed at the holder's registered address. Unless Mercantile defaults in payment of the redemption price, on and after the redemption date interest will cease to accrue on the 85 89 junior subordinated debentures or portions of the junior subordinated debentures called for redemption. The junior subordinated debentures will not be subject to any sinking fund. DISTRIBUTION UPON LIQUIDATION As described under "Description of the Preferred Securities -- Liquidation Distribution Upon Termination," under circumstances involving the termination of MBWM Trust, the junior subordinated debentures may be distributed to the holders of the preferred securities and common securities in liquidation of MBWM Trust after satisfaction of liabilities to creditors of MBWM Trust. If distributed to holders of the preferred securities in liquidation, the junior subordinated debentures will initially be issued in the form of one or more global securities and the depositary, or any successor depositary for the preferred securities, will act as depositary for the junior subordinated debentures. It is anticipated that the depositary arrangements for the junior subordinated debentures would be substantially identical to those in effect for the preferred securities. If the junior subordinated debentures are distributed to the holders of preferred securities upon the liquidation of MBWM Trust, there can be no assurance as to the market price of any junior subordinated debentures that may be distributed to the holders of preferred securities. If the junior subordinated debentures are distributed, Mercantile will use reasonable efforts to list them on a national securities exchange or quotation system. RESTRICTIONS ON PAYMENTS Mercantile has restrictions on paying dividends or making payments regarding pari passu or junior debt if: - there has occurred any event of which Mercantile has actual knowledge that (a) with the giving of notice or the lapse of time, or both, would constitute a debenture event of default and (b) in respect of which Mercantile shall not have taken reasonable steps to cure; - Mercantile has given notice of its election of an extension period as provided in the indenture regarding the junior subordinated debentures and has not rescinded the notice, or the extension period, or any extension thereof, is continuing; or - while the junior subordinated debentures are held by MBWM Trust, Mercantile is in default regarding its payment of any obligation under the preferred securities guarantee. If any of the events above have occurred, Mercantile will not: - declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment regarding, any of Mercantile's capital stock; or - make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of Mercantile, including other junior subordinated debt, that rank pari passu with or junior in interest to the junior subordinated debentures or make any preferred securities guarantee payments regarding any preferred securities guarantee by Mercantile of the debt securities of any subsidiary of Mercantile if the preferred securities guarantee ranks pari passu or junior in interest to the junior subordinated debentures. 86 90 Provided, however, Mercantile may (a) declare and pay dividends or distributions in common stock, (b) make any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under this type of plan in the future or the redemption or repurchase of any rights under such plan, (c) make payments under the preferred securities guarantee and (d) make purchases of common stock related to the issuance of common stock or rights under any of Mercantile's benefit plans for its directors, officers or employees. SUBORDINATION OF JUNIOR SUBORDINATED DEBENTURES TO SENIOR AND SUBORDINATED DEBT OF MERCANTILE In the indenture, Mercantile has agreed that any junior subordinated debentures will be subordinate and junior in right of payment to all senior and subordinated debt to the extent provided in the indenture. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, reorganization or any bankruptcy, or similar proceedings in connection with any insolvency or bankruptcy proceeding of Mercantile, the holders of senior and subordinated debt will first be entitled to receive payment in full of principal, interest and premium, if any, on the senior and subordinated debt before the holders of junior subordinated debentures will be entitled to receive principal or interest payments on the junior subordinated debentures. In the event of the acceleration of the maturity of any junior subordinated debentures, the holders of all senior and subordinated debt outstanding upon acceleration will first be entitled to receive payment in full of all amounts due to them, including any amounts due upon acceleration, before the holders of junior subordinated debentures will be entitled to receive any principal or interest payments on the junior subordinated debentures. However, holders of subordinated debt will not be entitled to receive payment of any of these amounts to the extent that the subordinated debt is by its terms subordinated to trade creditors. No principal or interest payments on the junior subordinated debentures may be made if there has occurred and is continuing a default in any payment regarding senior and subordinated debt or an event of default regarding any senior and subordinated debt resulting in the acceleration of the maturity of senior and subordinated debt, or if any judicial proceeding is pending regarding any of this type of default. Debt as used in this discussion means regarding any person, whether recourse is to all or a portion of the assets of the person and whether or not contingent: - every obligation of the person for money borrowed; - every obligation of the person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; - every reimbursement obligation of the person regarding letters of credit, bankers' acceptances or similar facilities issued for the account of the person; - every obligation of the person issued or assumed as the deferred purchase price of property or services, but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business; - every capital lease obligation of the person; and 87 91 - every obligation of the type referred to in all of the points immediately above of another person and all dividends of another person the payment of which, in either case, the person has guaranteed or is responsible or liable, directly or indirectly, as obligor or otherwise. Senior and subordinated debt means the principal of and premium, if any, and interest, if any, on debt of Mercantile, including interest accruing at the time of the filing of any petition in bankruptcy or for reorganization relating to Mercantile, whether incurred on or prior to the date of the indenture or thereafter incurred, unless, in the instrument creating or evidencing the debt or under which the debt is outstanding, it is provided that the obligations are not superior in right of payment to the junior subordinated debentures or to other debt which is pari passu with, or subordinated to, the junior subordinated debentures. However, senior and subordinated debt will not be deemed to include: - any debt of Mercantile which when incurred and without respect to any election under section 1111(b) of the United States Bankruptcy Code was without recourse to Mercantile; - any debt of Mercantile to any of its subsidiaries; - any debt to any employee of Mercantile; - any debt which by its terms is subordinated to trade accounts payable or accrued liabilities arising in the ordinary course of business to the extent that payments made to the holders of the debt by the holders of the junior subordinated debentures as a result of the subordination provisions of the indenture would be greater than they otherwise would have been as a result of any obligation of the holders to pay amounts over to the obligees on the trade accounts payable or accrued liabilities arising in the ordinary course of business as a result of subordination provisions to which the debt is subject; - the preferred securities guarantee; and - any other debt securities issued under the indenture. The indenture places no limitation on the amount of additional senior and subordinated debt that may be incurred by Mercantile. Mercantile expects from time to time to incur additional indebtedness constituting senior and subordinated debt. DENOMINATIONS, REGISTRATION AND TRANSFER It is anticipated that, until the liquidation, if any, of MBWM Trust, each junior subordinated debenture will be held in the name of the property trustee in trust for the benefit of the holders of the preferred securities. However, in the event of either a tax event, investment company event or capital treatment event, the junior subordinated debentures in certificated form may be exchanged and represented by global certificates registered in the name of the depositary or its nominee. In the event of such an exchange, beneficial interests in the junior subordinated debentures will be shown on, and transfers thereof will be effected only through, records maintained by the depositary. Except as described below, junior subordinated debentures in certificated form will not be issued in exchange for the global certificates. See "Book-Entry Issuance." 88 92 Unless and until a global subordinated debenture is exchanged in whole or in part for the individual junior subordinated debentures, it may not be transferred except (1) as a whole by the depositary for the global subordinated debenture to a nominee of the depositary or (2) by the depositary to a successor depositary selected or approved by Mercantile or (3) to any nominee of the successor. A global security will be exchangeable for junior subordinated debentures registered in the names of persons other than the depositary or its nominee only if (1) the depositary notifies Mercantile that it is unwilling or unable to continue as a depositary for the global security and no successor depositary has been appointed, or if at any time the depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934 at a time when the depositary is required to be so registered to act as a depositary or (2) Mercantile in its sole discretion determines that the global security will be so exchangeable. Any global security that is exchangeable under the preceding sentence will be exchangeable for definitive certificates registered in the names which the depositary directs. It is expected that the instructions will be based upon directions received by the depositary from its participants regarding ownership of beneficial interests in the global security. In the event that junior subordinated debentures are issued in definitive form, the junior subordinated debentures will be in denominations of $10 and integral multiples of $10 and may be transferred or exchanged at the offices described below. Payments on junior subordinated debentures represented by a global security will be made to the depositary for the junior subordinated debentures. In the event junior subordinated debentures are issued in definitive form, principal and interest will be payable, the transfer of the junior subordinated debentures will be registrable, and junior subordinated debentures will be exchangeable for junior subordinated debentures of other denominations of a like aggregate principal amount, at the corporate office of the indenture trustee, or at the offices of any paying agent or transfer agent appointed by Mercantile. However, interest payments may be made at the option of Mercantile by check mailed to the address of the persons entitled to payments or by wire transfer. In addition, if the junior subordinated debentures are issued in certificated form, the record dates for interest payments will be the first day of the month in which the payment is to be made. For a description of the depositary and the terms of the depositary arrangements relating to payments, transfers, voting rights, redemptions and other notices and other matters, see "Book-Entry Issuance." Mercantile will appoint the indenture trustee as securities registrar under the indenture. Junior subordinated debentures may be presented for exchange as provided above, and may be presented for registration of transfer with the form of transfer endorsed, or a satisfactory written instrument of transfer, duly executed, at the office of the securities registrar. Mercantile may at any time rescind the designation of any registrar or approve a change in the location through which any registrar acts, provided that Mercantile maintains a registrar in the place of payment. Mercantile may at any time designate additional registrars regarding the junior subordinated debentures. In the event of any redemption of less than all of the junior subordinated debentures, neither Mercantile nor the indenture trustee will be required to issue, exchange or register the transfer of less than all of the junior subordinated debentures during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption selecting for redemption less than all of the junior subordinated debentures and ending at the close of business on the day of mailing of the relevant notice of redemption. 89 93 PAYMENT AND PAYING AGENTS Payment of principal of and any interest on the junior subordinated debentures will be made at the office of the indenture trustee, except that at the option of Mercantile payment of any interest may be made, except in the case of a global subordinated debenture, by check mailed to the address of the person entitled to payment as the person's address appears in the securities register. Payment of any interest on junior subordinated debentures will be made to the person in whose name the junior subordinated debenture is registered at the close of business on the regular record date for the interest payment. Mercantile may at any time designate additional paying agents or rescind the designation of any paying agent; however, Mercantile will at all times be required to maintain a paying agent in each place of payment for the junior subordinated debentures. Any moneys deposited with the indenture trustee or any paying agent, or then held by Mercantile in trust, for the payment of the principal of or interest on the junior subordinated debentures that are not applied and remain unclaimed for two years after the principal or interest has become due and payable will, at the request of Mercantile, be repaid to Mercantile. Thereafter, the holder of the junior subordinated debenture will look, as a general unsecured creditor, only to Mercantile for payment. MODIFICATION OF INDENTURE From time to time Mercantile and the indenture trustee may, without the consent of the holders of the junior subordinated debentures, amend, waive or supplement the indenture for specified purposes. These purposes may include, among other things, curing ambiguities, defects or inconsistencies, provided that this action does not materially adversely affect the interests of the holders of the junior subordinated debentures or the preferred securities while they remain outstanding, and qualifying, or maintaining the qualification of, the indenture under the Trust Indenture Act. The indenture contains provisions permitting Mercantile and the indenture trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the outstanding junior subordinated debentures, to modify the indenture in a manner affecting the rights of the holders of the junior subordinated debentures; provided, that, the modification may not, without the consent of the holder of each outstanding junior subordinated debenture: - change the stated maturity of the junior subordinated debentures or extend the time of payment of interest on them, except as described under "Description of Junior Subordinated Debentures -- General Overview" and "-- Option to Extend Interest Payment Period," or reduce the principal amount thereof or the rate of interest thereon; or - reduce the percentage of principal amount of junior subordinated debentures, the holders of which are required to consent to any such modification of the indenture. However, while any of the preferred securities remain outstanding, (1) no modification may be made that adversely affects the holders of the preferred securities in any material respect, (2) no termination of the indenture may occur, and (3) no waiver of any debenture event of default or compliance with any covenant under the indenture may be effective, without the prior consent of the holders of at least a majority of the aggregate liquidation amount of the preferred securities, until the principal and interest of the junior subordinated debentures have been paid in full and other conditions are satisfied. 90 94 INDENTURE EVENTS OF DEFAULT The indenture provides that any one or more of the following described events regarding the junior subordinated debentures that has occurred and is continuing constitutes a debenture event of default: - failure for 30 days to pay any interest on the junior subordinated debentures, when due, subject to the deferral of any due date in the case of an extension period; - failure to pay any principal on the junior subordinated debentures when due whether at maturity, upon redemption, by declaration or otherwise, provided however that a valid extension of any interest payment period by Mercantile according to the terms of the indenture shall not constitute a debenture event of default; - failure by Mercantile to observe or perform in any material respect any of its other covenants or agreements contained in the indenture for 90 days after written notice to Mercantile from the indenture trustee or to Mercantile and the indenture trustee by the holders of at least 25% in aggregate outstanding principal amount of the junior subordinated debentures; or - events in bankruptcy, insolvency or reorganization of Mercantile, including the voluntary commencement of bankruptcy proceedings, entry of an order for relief against Mercantile in a bankruptcy proceeding, appointment of a custodian over substantially all of Mercantile's property, a general assignment for the benefit of creditors, or a court order for liquidation of Mercantile. The holders of a majority in aggregate outstanding principal amount of the junior subordinated debentures have the right to direct the time, method and place of conducting any proceeding for any remedy available to the indenture trustee. The indenture trustee or the holders of not less than 25% in aggregate outstanding principal amount of the junior subordinated debentures may declare the principal due and payable immediately upon a debenture event of default. The holders of a majority in aggregate outstanding principal amount of the junior subordinated debentures may rescind and annul the declaration and waive the default if the default, other than the non-payment of the principal of the junior subordinated debentures which has become due solely by the acceleration, has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the indenture trustee. Should the holders of the junior subordinated debentures fail to annul the declaration and waive the default, the holders of a majority in aggregate liquidation amount of the preferred securities will have the right to do so. In case a debenture event of default occurs and is continuing, the property trustee will have the right to declare the principal of and the interest on the junior subordinated debentures, and any other amounts payable under the indenture, to be due and payable and to enforce its other rights as a creditor. Mercantile is required to file annually with the indenture trustee a certificate as to whether Mercantile is in compliance with all the conditions and covenants applicable to it under the indenture. ENFORCEMENT OF RIGHTS BY HOLDERS OF PREFERRED SECURITIES If an event of default under the indenture has occurred and is continuing and the default is attributable to Mercantile's failure to pay interest or principal on the junior 91 95 subordinated debentures on the due date, a holder of preferred securities may institute a legal proceeding directly against Mercantile for payment of principal and interest on the junior subordinated debentures having a principal amount equal to the aggregate liquidation amount of the preferred securities of the holder. This action is referred to in this discussion as a direct action. If the right to bring a direct action is removed, MBWM Trust may become subject to the reporting obligations under the Securities Exchange Act of 1934. Mercantile will have the right under the indenture to set-off any payment made to the holder of preferred securities by Mercantile in connection with a direct action. The holders of the preferred securities would not be able to exercise directly any remedies other than those set forth in the preceding paragraph available to the holders of the junior subordinated debentures unless there has been an event of default under the trust agreement. See "Description of the Preferred Securities -- Events of Default; Notice." CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS The indenture provides that Mercantile will not consolidate with or merge into any other person or convey, transfer or lease its properties and assets substantially as an entirety to any person, and no person will consolidate with or merge into Mercantile or convey, transfer or lease its properties and assets substantially as an entirety to Mercantile, unless: - in case Mercantile consolidates with or merges into another person or conveys or transfers its properties and assets substantially as an entirety to any person, the successor person is organized under the laws of the United States or any state or the District of Columbia, and the successor person expressly assumes Mercantile's obligations on the junior subordinated debentures issued under the indenture; - immediately after giving effect to this type of transaction, no debenture event of default, and no event which, after notice or lapse of time or both, would become a debenture event of default, has occurred and is continuing; and - other conditions as prescribed in the indenture are met. The provisions of the indenture do not afford holders of the junior subordinated debentures protection in the event of a highly leveraged or other transaction involving Mercantile that may adversely affect holders of the junior subordinated debentures. SATISFACTION AND DISCHARGE Under the indenture, Mercantile will have satisfied and discharged the indenture when all junior subordinated debentures not previously delivered to the indenture trustee for cancellation (1) have become due and payable or (2) will become due and payable at their stated maturity within one year, and Mercantile deposits in trust with the indenture trustee sufficient funds to pay and discharge the entire indebtedness on the junior subordinated debentures to the deposit date or to the stated maturity, as the case may be. This satisfaction and discharge will not apply to Mercantile's obligations to pay all other sums due under the indenture and to provide the officers' certificates and opinions of counsel described in the indenture. 92 96 GOVERNING LAW The indenture and the junior subordinated debentures will be governed by and construed in accordance with the laws of the State of Michigan. INFORMATION CONCERNING THE INDENTURE TRUSTEE The indenture trustee will have and be subject to all the duties and responsibilities specified for an indenture trustee under the Trust Indenture Act. Subject to these provisions, the indenture trustee is under no obligation to exercise any of the powers vested in it by the indenture at the request of any holder of junior subordinated debentures, unless offered reasonable indemnity by the holder against the costs, expenses and liabilities which might be incurred. The indenture trustee is not required to expend or risk its own funds or otherwise incur personal financial liability in the performance of its duties if the indenture trustee reasonably believes that repayment or adequate indemnity is not reasonably assured to it. COVENANTS OF MERCANTILE Mercantile will covenant in the indenture, as to the junior subordinated debentures, that during the time that (1) MBWM Trust is the holder of all junior subordinated debentures, (2) a tax event in respect of MBWM Trust has occurred and is continuing and (3) Mercantile has elected, and has not revoked the election, to pay additional sums, as defined under "Description of the Preferred Securities -- Redemption -- Mandatory and Optional Rights of Mercantile," in respect of the preferred securities, Mercantile will pay to MBWM Trust these additional sums. Mercantile will also covenant, as to the junior subordinated debentures: - to maintain directly or indirectly 100% ownership of the common securities of MBWM Trust to which junior subordinated debentures have been issued, provided that successors which are permitted under the indenture may succeed to Mercantile's ownership of the common securities; - to not voluntarily terminate, wind up or liquidate MBWM Trust, except upon approval of the Federal Reserve if then so required, and to use its reasonable efforts to cause MBWM Trust to remain a business trust, except (a) in connection with a distribution of junior subordinated debentures to the holders of the preferred securities in liquidation of MBWM Trust, (b) the redemption of all of the trust securities or (c) in connection with mergers, consolidations, or amalgamations permitted by the trust agreement; and - to use its reasonable efforts to cause each holder of trust securities to be treated as owning an individual beneficial interest in the junior subordinated debentures. 93 97 BOOK-ENTRY ISSUANCE Depository Trust Company ("DTC") will act as securities depositary for all of the preferred securities and, in the event of the distribution of the junior subordinated debentures to holders of the preferred securities, may act as securities depositary for all of the junior subordinated debentures. The preferred securities and the junior subordinated debentures will be issued only as fully-registered securities registered in the name of Cede & Co., DTC's nominee. One or more fully-registered global certificates will be issued for the preferred securities and deposited with DTC. In the event of the distribution of the junior subordinated debentures to holders of the preferred securities, one or more fully-registered global certificates may be issued for the junior subordinated debentures and may be deposited with DTC. DTC is a limited purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered under the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds securities that its participants deposit with DTC. DTC also facilitates the settlement among participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct participants include securities brokers and dealers, banks, trust companies, clearing corporations and other organizations. DTC is owned by a number of its direct participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the depositary system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain custodial relationships with direct participants, either directly or indirectly. The rules applicable to DTC and its participants are on file with the Securities and Exchange Commission. Purchases of preferred securities or junior subordinated debentures within the depositary system must be made by or through direct participants, which will receive a credit for the preferred securities or junior subordinated debentures on DTC's records. The ownership interest of each actual purchaser of each preferred security or junior subordinated debenture is in turn to be recorded on the direct and indirect participants' records. Beneficial owners will not receive written confirmation from the DTC of their purchases, but beneficial owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the direct or indirect participants through which the beneficial owners purchased preferred securities or junior subordinated debentures. Transfers of ownership interests in the preferred securities or junior subordinated debentures are to be accomplished by entries made on the books of participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in preferred securities or junior subordinated debentures, except in the event that use of the book-entry system for the preferred securities or junior subordinated debentures is discontinued. DTC has no knowledge of the actual beneficial owners of the preferred securities or the junior subordinated debentures. DTC's records reflect only the identity of the direct participants to whose accounts the preferred securities or junior subordinated debentures are credited, which may or may not be the beneficial owners. The participants will remain responsible for keeping account of their holdings on behalf of their customers. 94 98 Conveyance of notices and other communications by DTC to direct participants, by direct participants to indirect participants, and by direct participants and indirect participants to beneficial owners and the voting rights of direct participants, indirect participants and beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices will be sent to Cede & Co. as the registered holder of the preferred securities or junior subordinated debentures. If less than all of the preferred securities or the junior subordinated debentures are being redeemed, DTC will determine the amount to be redeemed, in accordance with the terms of the trust agreement. Although voting regarding the preferred securities or the junior subordinated debentures is limited to the holders of record of the preferred securities or the junior subordinated debentures, in those instances in which a vote is required, neither DTC nor Cede & Co. will itself consent or vote regarding preferred securities or the junior subordinated debentures. Under its usual procedures, DTC would mail an omnibus proxy to the property trustee as soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s consenting or voting rights to those direct participants to whose accounts the preferred securities or junior subordinated debentures are credited on the record date and which are used and identified in a listing attached to the omnibus proxy. Distribution payments on the preferred securities or the junior subordinated debentures will be made by the property trustee to DTC. DTC's practice is to credit direct participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on the payment date. Payments by participants to beneficial owners will be governed by standing instructions and customary practices. Payments will be the responsibility of the participant and not of DTC, the relevant trustee, MBWM Trust or Mercantile, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of distributions to DTC is the responsibility of the property trustee, disbursement of the payments to direct participants is the responsibility of DTC, and disbursements of the payments to the beneficial owners is the responsibility of direct and indirect participants. DTC may discontinue providing its services as securities depositary regarding any of the preferred securities or the junior subordinated debentures at any time by giving reasonable notice to the property trustee and Mercantile. In the event that a successor securities depositary is not obtained, definitive preferred securities or subordinated debenture certificates representing the preferred securities or junior subordinated debentures are required to be printed and delivered. Mercantile, at its option, may, at any time, decide to discontinue use of the system of book-entry transfers through DTC, or any successor depositary. After a debenture event of default, the holders of a majority in liquidation preference of preferred securities or aggregate principal amount of junior subordinated debentures may determine to discontinue the system of book-entry transfers through DTC. In this event, definitive certificates for the preferred securities or junior subordinated debentures will be printed and delivered. The information in this section concerning DTC and its book-entry system has been obtained from sources that MBWM Trust and Mercantile believe to be accurate, but MBWM Trust and Mercantile assume no responsibility for the accuracy thereof. Neither MBWM Trust nor Mercantile has any responsibility for the performance by DTC or its participants of their respective obligations as described in this prospectus or under the rules and procedures governing their respective operations. 95 99 DESCRIPTION OF PREFERRED SECURITIES GUARANTEE The preferred securities guarantee agreement will be executed and delivered by Mercantile and Wilmington Trust Company concurrently with the issuance of the preferred securities. The preferred securities guarantee will be for the benefit of the holders of the preferred securities. Wilmington Trust Company will act as trustee under the preferred securities guarantee for the purposes of compliance with the Trust Indenture Act, and the preferred securities guarantee will be qualified under the Trust Indenture Act. The following is a summary of the material provisions of the preferred securities guarantee. Prospective investors are urged to read the form of the preferred securities guarantee which has been filed as an exhibit to the registration statement of which this prospectus forms a part. The guarantee trustee will hold the preferred securities guarantee for the benefit of the holders of the preferred securities. GENERAL OVERVIEW The preferred securities guarantee is an irrevocable guarantee on a subordinated basis of all of MBWM Trust's obligations to make payments under the preferred securities, but will apply only to the extent that MBWM Trust has funds sufficient to make the payments, and is not a guarantee of collection. Mercantile will irrevocably and unconditionally agree to pay in full on a subordinated basis, to the extent set forth in this prospectus, the preferred securities guarantee payments, as defined below, to the holders of the preferred securities, as and when due, regardless of any defense, right of set-off or counterclaim that MBWM Trust may have or assert other than the defense of payment. The following payments regarding the preferred securities, to the extent not paid by or on behalf of MBWM Trust, will be subject to the preferred securities guarantee of Mercantile: - any accrued and unpaid distributions required to be paid on the preferred securities, to the extent that MBWM Trust has available funds on hand at the time; - the redemption price regarding any preferred securities called for redemption to the extent that MBWM Trust has available funds on hand at the time; and - upon a voluntary or involuntary dissolution, winding up or liquidation of MBWM Trust, unless the junior subordinated debentures are distributed to holders of the preferred securities. The amount of the preferred securities guarantee will be the lesser of (a) the liquidation distribution and (b) the amount of assets of MBWM Trust remaining available for distribution to holders of preferred securities. Mercantile's obligation to make a preferred securities guarantee payment may be satisfied by direct payment of the required amounts by Mercantile to the holders of the preferred securities or by causing MBWM Trust to pay these amounts to the holders. If Mercantile does not make interest payments on the junior subordinated debentures held by MBWM Trust, MBWM Trust will not be able to pay distributions on the preferred securities and will not have funds legally available to pay distributions. The preferred securities guarantee will rank subordinate and junior in right of payment to all senior and subordinated debt of Mercantile. See "Status of the Preferred Securities Guarantee" below. Because Mercantile is a holding company, the right of Mercantile to participate in any distribution of assets of any subsidiary upon the subsidiary's liquidation 96 100 or reorganization or otherwise, is subject to the prior claims of creditors of that subsidiary, except to the extent Mercantile may itself be recognized as a creditor of that subsidiary. Accordingly, Mercantile's obligations under the preferred securities guarantee will be effectively subordinated to all existing and future liabilities of Mercantile's subsidiaries, and claimants should look only to the assets of Mercantile for payments under the preferred securities guarantee. Except as otherwise described in this prospectus, the preferred securities guarantee does not limit the incurrence or issuance of other secured or unsecured debt of Mercantile, including senior and subordinated debt whether under the indenture, any other indenture that Mercantile may enter into in the future, or otherwise. Mercantile has, through the preferred securities guarantee, the trust agreement, the junior subordinated debentures, the indenture and the expense agreement relating to MBWM Trust, taken together, fully, irrevocably and unconditionally guaranteed on a subordinated basis all of MBWM Trust's obligations under the preferred securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes this preferred securities guarantee. It is only the combined operation of these documents that has the effect of providing a full, irrevocable and unconditional guarantee on a subordinated basis of all of MBWM Trust's obligations under the preferred securities. See "Relationship Among the Preferred Securities, the Junior Subordinated Debentures and the Preferred Securities Guarantee." STATUS OF THE PREFERRED SECURITIES GUARANTEE The preferred securities guarantee will constitute an unsecured obligation of Mercantile and will rank subordinate and junior in right of payment to all senior and subordinated debt in the same manner as the junior subordinated debentures. The preferred securities guarantee will constitute a guarantee of payment and not of collection. The guaranteed party may institute a legal proceeding directly against Mercantile to enforce its rights under the preferred securities guarantee without first instituting a legal proceeding against any other person or entity. The preferred securities guarantee will be held for the benefit of the holders of the preferred securities. The preferred securities guarantee does not place a limitation on the amount of additional senior and subordinated debt that may be incurred by Mercantile. Mercantile expects from time to time to incur additional indebtedness constituting senior and subordinated debt. AMENDMENTS AND ASSIGNMENT Except regarding any changes which do not adversely affect the rights of holders of the preferred securities in a material manner, in which case no consent will be required, the preferred securities guarantee may not be amended without the prior approval of the holders of not less than a majority of the aggregate liquidation amount of the outstanding preferred securities. See "Description of the Preferred Securities -- Voting Rights; Amendment of the Trust Agreement." All guarantees and agreements contained in the preferred securities guarantee will bind the successors, assigns, receivers, trustees and representatives of Mercantile and will inure to the benefit of the holders of the preferred securities then outstanding. 97 101 EVENTS OF DEFAULT An event of default under the preferred securities guarantee will occur upon the failure of Mercantile to perform any of its payment or other obligations under the preferred securities guarantee. The holders of not less than a majority in aggregate liquidation amount of the preferred securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the guarantee trustee regarding the preferred securities guarantee or to direct the exercise of any trust or power conferred upon the guarantee trustee under the preferred securities guarantee. Any holder of preferred securities may institute a legal proceeding directly against Mercantile to enforce the holder's rights under the preferred securities guarantee without first instituting a legal proceeding against MBWM Trust, the guarantee trustee or any other person or entity. Mercantile, as guarantor, is required to file annually with the guarantee trustee a certificate as to whether Mercantile is in compliance with all the conditions and covenants applicable to it under the preferred securities guarantee. INFORMATION CONCERNING THE GUARANTEE TRUSTEE The guarantee trustee, other than during the occurrence and continuance of a default by Mercantile in performance of the preferred securities guarantee, undertakes to perform only the duties which are specifically set forth in the preferred securities guarantee. After default regarding the preferred securities guarantee, the guarantee trustee must exercise the same degree of care and skill as a prudent person would exercise or use in the conduct of his or her own affairs. Subject to this provision, the guarantee trustee is under no obligation to exercise any of the rights or powers vested in it by the preferred securities guarantee at the request or direction of any holder of the preferred securities unless it is offered reasonable indemnity against the costs, expenses and liabilities that might be incurred. TERMINATION OF THE PREFERRED SECURITIES GUARANTEE The preferred securities guarantee will terminate and be of no further force and effect upon full payment of the redemption price of the preferred securities, upon full payment of the amounts payable upon liquidation of MBWM Trust or upon distribution of junior subordinated debentures to the holders of the preferred securities. The preferred securities guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of the preferred securities must restore payment of any sums paid under the preferred securities or the preferred securities guarantee. GOVERNING LAW The preferred securities guarantee will be governed by and construed in accordance with the laws of the State of Michigan. THE EXPENSE AGREEMENT Under the agreement as to expenses and liabilities entered into by Mercantile under the trust agreement, Mercantile will irrevocably and unconditionally guarantee to each person or entity to whom MBWM Trust becomes indebted or liable, the full payment of 98 102 any costs, expenses or liabilities of MBWM Trust, other than obligations of MBWM Trust to pay to the holders of the preferred securities or other similar interests in MBWM Trust of the amounts due the holders under the terms of the preferred securities or the other similar interests, as the case may be. 99 103 RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE FULL AND UNCONDITIONAL PREFERRED SECURITIES GUARANTEE ON A SUBORDINATED BASIS Payments of distributions and other amounts due on the preferred securities, to the extent MBWM Trust has funds available for the payment of the distributions, are irrevocably guaranteed by Mercantile as and to the extent set forth under "Description of Preferred Securities Guarantee." Taken together, Mercantile's obligations under the junior subordinated debentures, the indenture, the trust agreement, the expense agreement and the preferred securities guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee on a subordinated basis of payments of distributions and other amounts due on the preferred securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes the preferred securities guarantee. It is only the combined operation of those documents that has the effect of providing a full, irrevocable and unconditional guarantee on a subordinated basis of MBWM Trust's obligations under the preferred securities. If and to the extent that Mercantile does not make payments on the junior subordinated debentures, MBWM Trust will not pay distributions or other amounts due on the preferred securities. The preferred securities guarantee does not cover payment of distributions when MBWM Trust does not have sufficient funds to pay the distributions. In this event, the remedy of a holder of the preferred securities is to institute a legal proceeding directly against Mercantile for enforcement of payment of the distributions to the holder. The obligations of Mercantile under the preferred securities guarantee are subordinate and junior in right of payment to all senior and subordinated debt. SUFFICIENCY OF PAYMENTS As long as payments of interest and other payments are made when due on the junior subordinated debentures, the payments will be sufficient to cover distributions and other payments due on the preferred securities, primarily because: (1) the aggregate principal amount of the junior subordinated debentures will be equal to the sum of the aggregate liquidation amount of the preferred securities and common securities; (2) the interest rate and interest and other payment dates on the junior subordinated debentures will match the distribution rate and distribution and other payment dates for the preferred securities; (3) Mercantile will pay for any and all costs, expenses and liabilities of MBWM Trust except MBWM Trust's obligations to holders of preferred securities; and (4) the trust agreement further provides that MBWM Trust will not engage in any activity that is not consistent with the limited purposes of MBWM Trust. Notwithstanding anything to the contrary in the indenture, Mercantile may satisfy any payment it is otherwise required to make to the trust under the indenture, by and to the extent that it has made, or is concurrently on the date of the payment required by the indenture making, a payment under the preferred securities guarantee. ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES UNDER THE PREFERRED SECURITIES GUARANTEE A holder of any of the preferred securities may institute a legal proceeding directly against Mercantile to enforce its rights under the preferred securities guarantee without 100 104 first instituting a legal proceeding against the guarantee trustee, MBWM Trust or any other person or entity. A default or event of default under any senior and subordinated debt would not constitute an event of default. However, in the event of payment defaults under, or acceleration of, senior and subordinated debt, the subordination provisions of the indenture provide that no payments may be made in respect of the junior subordinated debentures until the senior and subordinated debt has been paid in full or any payment default thereunder has been cured or waived. Failure to make required payments on junior subordinated debentures would constitute an event of default. LIMITED PURPOSE OF MBWM TRUST The preferred securities evidence a beneficial interest in MBWM Trust, and MBWM Trust exists for the sole purpose of issuing the trust securities and investing the proceeds from the sale of the trust securities in the junior subordinated debentures. A principal difference between the rights of a holder of the preferred securities and a holder of a junior subordinated debenture is that a holder of a junior subordinated debenture is entitled to receive from Mercantile the principal amount of and interest accrued on junior subordinated debentures held, while a holder of the preferred securities is entitled to receive distributions from MBWM Trust, or from Mercantile under the preferred securities guarantee, if and to the extent MBWM Trust has funds available for the payment of the distributions. RIGHTS UPON TERMINATION Upon any voluntary or involuntary termination, winding-up or liquidation of MBWM Trust involving the liquidation of the junior subordinated debentures, the holders of preferred securities will be entitled to receive, out of assets held by MBWM Trust, the liquidation distribution in cash. See "Description of the Preferred Securities -- Liquidation Distribution Upon Termination." Upon any voluntary or involuntary liquidation or bankruptcy of Mercantile, the property trustee, as holder of the junior subordinated debentures, would be a subordinated creditor of Mercantile, subordinated in right of payment to all senior and subordinated debt as set forth in the indenture, but entitled to receive payment in full of principal and interest, before any shareholders of Mercantile receive payments or distributions. Since Mercantile is the guarantor under the preferred securities guarantee and has agreed to pay for all costs, expenses and liabilities of MBWM Trust, other than MBWM Trust's obligations to the holders of its preferred securities, the positions of a holder of the preferred securities and a holder of junior subordinated debentures relative to other creditors and to shareholders of Mercantile in the event of liquidation or bankruptcy of Mercantile are expected to be substantially the same. 101 105 MATERIAL FEDERAL INCOME TAX CONSEQUENCES In the opinion of Dickinson Wright PLLC, special counsel to Mercantile, the following are the material United States federal income tax consequences to the purchase, ownership and disposition of preferred securities. Unless otherwise stated, this discussion deals only with preferred securities held as capital assets by United States persons, defined below, who are the beneficial holders of the preferred securities upon original issuance at their original offering price. As used in this prospectus, a United States person means a person that is (1) a citizen or resident of the United States, (2) a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, (3) an estate the income of which is subject to United States federal income taxation regardless of its source, or (4) any trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. The tax treatment of holders may vary depending on their particular situation. This discussion does not address all the tax consequences that may be relevant to a particular holder or to holders who may be subject to special tax treatment, such as financial institutions, banks, real estate investment trusts, regulated investment companies, insurance companies, dealers in securities or currencies, tax-exempt investors, individual retirement and certain tax deferred accounts, foreign investors, persons that will hold the preferred securities as part of a position in a "straddle" or as part of a "hedging" or other integrated transaction, or persons whose functional currency is not the United States dollar. In addition, this discussion does not include any description of any alternative minimum tax consequences or other collateral tax consequences under United States federal income tax laws, or the tax laws of any state, local or foreign government that may be applicable to a holder of preferred securities. This discussion is based on the Internal Revenue Code of 1986, as amended, the Treasury regulations promulgated thereunder and administrative and judicial interpretations of those authorities, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. Any change of this nature could cause the tax consequences to vary substantially from the consequences described below, possibly adversely affecting an owner of preferred securities. The following discussion does not discuss the tax consequences that might be relevant to persons that are not United States persons. Non-United States persons should consult their own tax advisors as to the specific United States federal income tax consequences of the purchase, ownership and disposition of preferred securities. The authorities on which this discussion is based are subject to various interpretations and the opinions of counsel are not binding on the Internal Revenue Service ("IRS") or the courts, either of which could take a contrary position. Moreover, no rulings have been or will be sought from the IRS regarding the transactions described in this prospectus. Accordingly, there can be no assurance that the IRS will not challenge the opinions expressed in this discussion or that a court would not sustain this type of challenge. It is therefore possible that the federal income tax treatment of the purchase, ownership and disposition of preferred securities may differ from the treatment described below. SECURITYHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR PERSONAL TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE PREFERRED SECURITIES IF A TAX EVENT 102 106 OCCURS, SEE "DESCRIPTION OF THE PREFERRED SECURITIES -- REDEMPTION -- MANDATORY AND OPTIONAL RIGHTS OF MERCANTILE." CLASSIFICATION OF MBWM TRUST In connection with the issuance of the preferred securities, counsel is of the opinion that, under current law and assuming full compliance with the terms of the trust agreement, and based on the facts and assumptions contained in the opinion, MBWM Trust will be classified as a grantor trust and not as an association taxable as a corporation for United States federal income tax purposes. As a result, each beneficial owner of the preferred securities, a securityholder, will be treated as owning an undivided beneficial interest in the junior subordinated debentures. Accordingly, each securityholder will be required to include in its gross income its pro rata share of the interest income or original issue discount that is paid or accrued on the junior subordinated debentures. See "-- Interest Income and Original Issue Discount." No amount included in income regarding the preferred securities will be eligible for the dividends received deduction. CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES Under current law, the junior subordinated debentures are expected to be classified for United States federal income tax purposes as indebtedness of Mercantile and, by acceptance of a preferred security, each holder covenants to treat the junior subordinated debentures (if distributed) as indebtedness and the preferred securities as evidence of an indirect beneficial ownership interest in the junior subordinated debentures. No assurance can be given, however, that this classification will not be challenged by the IRS or, if challenged, that such a challenge will not be successful. The remainder of this discussion assumes that the junior subordinated debentures will be classified for United States federal income tax purposes as indebtedness of Mercantile. See "Risk Factors -- You are subject to prepayment risk because possible tax law changes could result in a redemption of the preferred securities." INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT Except as set forth below, stated interest on the junior subordinated debentures generally will be included in income by a securityholder at the time the interest income is paid or accrued in accordance with the securityholder's regular method of tax accounting. If Mercantile exercises its right to defer payments of interest on the junior subordinated debentures, the junior subordinated debentures will become original issue discount instruments, and the amount of original issue discount would be equal to the aggregate of all future payments of interest on the junior subordinated debentures. In this event, all securityholders would be required to include those amounts treated as original issue discount on the junior subordinated debentures as a consequence of such reclassification in income on a daily economic accrual basis during the extension period, even though Mercantile would not be expected to pay the interest until the end of the extension period, and even though some securityholders may use the cash method of tax accounting. Moreover, thereafter the junior subordinated debentures would continue to be taxed as original issue discount instruments for as long as they remained outstanding. Thus, even after the end of the extension period, all securityholders would be required to continue to include those amounts treated as original issue discount on the junior subordinated debentures in income on a daily economic accrual basis, regardless of their 103 107 method of tax accounting and in advance of receipt of the cash attributable to this interest income. In this event, actual cash payments of interest on the junior subordinated debentures would not be reported separately as taxable income. In addition, Mercantile's option to defer the payment of interest on the junior subordinated debentures during an extension period might cause the junior subordinated debentures to be considered initially issued with original issue discount or treated as contingent payment debt instruments. Mercantile believes, and will take the position, that this result will not arise because of an exception in the treasury regulations that applies when there is only a remote likelihood that a contingency, such as election to defer, will occur. However, the Treasury regulations described above have not yet been addressed in any rulings or other definitive interpretations by the IRS. It is possible that the IRS could take a contrary position. If the IRS were to assert successfully that the junior subordinated debentures were issued with original issue discount regardless of whether Mercantile exercises its right to defer payments of interest on the debentures, all securityholders, including those utilizing the cash method of accounting, would be required to include the stated interest thereon in income on a daily economic accrual basis as described above. Mercantile does not anticipate that additional sums, as defined in the indenture, will be paid. However, if additional sums are paid, they will be taxable to the securityholder as ordinary income, generally as interest income. DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED SECURITIES Under current law, a distribution by MBWM Trust of the junior subordinated debentures as described under the caption "Description of the Preferred Securities -- Liquidation and Distribution Upon Termination" will be non-taxable and will result in the securityholder receiving directly its pro rata share of the junior subordinated debentures previously held indirectly through MBWM Trust, with a holding period and aggregate tax basis equal to the holding period and aggregate tax basis the securityholder had in its preferred securities before the distribution. If, however, the liquidation of MBWM Trust were to occur because MBWM Trust is subject to United States federal income tax regarding income accrued or received on the junior subordinated debentures as a result of a tax event or otherwise, the distribution of junior subordinated debentures to securityholders by MBWM Trust would be a taxable event to MBWM Trust and each securityholder, and a securityholder would recognize gain or loss as if the securityholder had sold or exchanged its preferred securities for the junior subordinated debentures it received upon the liquidation of MBWM Trust. See "-- Sales or Redemption of Preferred Securities." A securityholder would recognize interest income in respect of junior subordinated debentures received from MBWM Trust in the manner described above under "-- Interest Income and Original Issue Discount." SALES OR REDEMPTION OF PREFERRED SECURITIES Gain or loss will be recognized by a securityholder on a sale or other taxable disposition of preferred securities, including a redemption for cash, in an amount equal to the difference between the amount realized, which for this purpose will exclude amounts attributable to accrued interest or original issue discount not previously included in income, and the securityholder's adjusted tax basis in the preferred securities sold or so redeemed. A securityholder's adjusted tax basis will be its initial purchase price, increased by any accrued original issue discount previously included in the securityholder's gross income to 104 108 the date of disposition, and decreased by payments, other than stated interest on the junior subordinated debentures that does not constitute original issue discount, received on the preferred securities. Any gain or loss on the sale, exchange or retirement of the preferred securities generally will be treated as capital gain or loss. In general, amounts attributable to accrued interest regarding a securityholder's pro rata share of the junior subordinated debentures not previously included in income and which are excluded from the amount realized on a sale of preferred securities and therefore not part of the calculation of gain or loss, will be taxable as ordinary income. However, because there is conflicting authority regarding whether or not a cash basis taxpayer is required to include in income accrued interest in the event the preferred securities are sold for less than their principal amount, investors are advised to consult their own tax advisors in such circumstances. For taxpayers other than corporations, net capital gain, which is defined as net long-term capital gain over net short-term capital loss for the taxable year, realized from property, with limited exceptions, is subject to a maximum marginal stated tax rate of 20%, or 10% in the case of taxpayers in the lowest tax bracket. Capital gain or loss is long-term if the holding period for the asset is more than one year, and is short-term if the holding period for the asset is one year or less. Capital gains realized from assets held for one year or less are taxed at the same rates as ordinary income. Subject to limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. Should Mercantile exercise its option to defer any payment of interest on the junior subordinated debentures, the preferred securities may trade at a price that does not fully reflect the value of accrued but unpaid interest on the underlying junior subordinated debentures. In the event of a deferral under the option, a securityholder that disposes of its preferred securities between record dates for payments of distributions, and consequently does not receive a distribution from MBWM Trust for the period prior to the disposition, will nevertheless be required to include in income accrued original issue discount on the junior subordinated debentures through the date of disposition and will add this amount to its adjusted tax basis in its preferred securities. The securityholder will recognize a capital loss on the disposition of its preferred securities to the extent the selling price, which may not fully reflect the value of accrued but unpaid original issue discount, is less than the securityholder's adjusted tax basis in the preferred securities, which will include accrued but unpaid original issue discount that has been included in income. As stated previously, subject to limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. BACKUP WITHHOLDING TAX AND INFORMATION REPORTING The amount of interest paid or original issue discount accrued, if any, on the junior subordinated debentures, beneficial ownership of which is reflected in the preferred securities held of record by United States persons, other than corporations and other exempt securityholders, will be reported to the Service. Generally, income on the preferred securities will be reported to securityholders on Form 1099, which form should be mailed to securityholders by January 31 following each calendar year. Backup withholding at a rate of 31% will apply to payments of interest to non-exempt United States persons unless the securityholder furnishes its taxpayer identification number in the manner prescribed in applicable Treasury regulations, certifies that the number is correct, certifies as to no loss of exemption from backup withholding and meets other conditions. Any amounts withheld from a securityholder under the backup withholding rules will be allowed as a refund or a credit against the securityholder's United States federal income tax liability, provided the required information is furnished to the Service. Payment of the proceeds from the 105 109 disposition of preferred securities to or through the United States office of a broker is subject to information reporting and backup withholding unless the securityholder or beneficial owner establishes an exemption from information reporting and backup withholding. TAX LAW UNCERTAINTIES AND POSSIBLE TAX LAW CHANGES AFFECTING PREFERRED SECURITIES The combined tax effects of the trust's purchase of debt instruments such as the Junior Subordinated Debentures and simultaneous issuance of equity interests such as the Preferred Securities has not been addressed in any Treasury Regulations or court decision and has not been approved or disapproved by the IRS in any published ruling or notice. The IRS proposed disallowance in a recent audit of the deduction of the interest expense claimed by a corporation on subordinated debt instruments issued by such corporation and sold to a related trust. Although the IRS agreed to dismissal of the relevant adjustments in that case prior to litigation, it is not precluded from asserting similar adjustments against other taxpayers. A variation of the structure described in this Prospectus involving an intermediate limited life company rather than a trust was accepted by the IRS as creating debt giving rise to deductible interest in Private Letter Ruling 1999-10046. However, taxpayers (other than the taxpayer to whom a Private Letter Ruling is addressed) are not entitled to rely on IRS holdings in Private Letter Rulings. Legislative proposals have previously been made by the current administration, which if enacted, could have adversely affected the ability of Mercantile to deduct interest paid on the junior subordinated debentures. Although these proposals were not enacted, there can be no assurance that future legislative proposals or final legislation will not affect the ability of Mercantile to deduct interest on the junior subordinated debentures or otherwise adversely affect the tax treatment of the transactions described in this prospectus. Although the IRS agreed to dismissal of the adjustments in the litigation described above, it could assert similar adjustments against other taxpayers. It if were to do so and the issue was litigated to a conclusion in which the IRS's position on this matter was sustained, such a judicial determination could constitute a tax event which could result in an early redemption of the preferred securities. Similarly, if legislative proposals of the type described above were to be enacted, a change of this nature could give rise to a tax event, which may permit Mercantile to cause a redemption of the Trust preferred securities. See "Risk Factors -- You are subject to prepayment risk because possible tax law changes could result in a redemption of the preferred securities," "Description of the Preferred Securities -- Redemption -- Mandatory and Optional Rights of Mercantile" and "Description of Junior Subordinated Debentures -- Redemption." ERISA CONSIDERATIONS Employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), or Section 4975 of the Code, generally may purchase preferred securities subject to the investing fiduciary's determination that the investment in preferred securities satisfies ERISA's fiduciary standards and other requirements applicable to investments by the Plan. However, Mercantile and any of its affiliates may be considered a party in interest, within the meaning of Section 3(14) of ERISA, or a disqualified person, within the meaning of Section 4975 of the Code, regarding plans maintained or sponsored by, or 106 110 contributed to by, Mercantile or an affiliate, or regarding which Mercantile or an affiliate is a fiduciary, or plans for which Mercantile or an affiliate provide services. The acquisition and ownership of preferred securities by an individual retirement arrangement or other Plan described in Section 4975(e)(1) of the Code, regarding which Mercantile or any of its affiliates is considered a party in interest or a disqualified person, may constitute or result in a prohibited transaction under ERISA or Section 4975 of the Code, which could give rise to the imposition of substantial taxes unless the preferred securities are acquired under and in accordance with an applicable exemption. As a result, plans regarding which Mercantile and/or any of its affiliates is a party in interest or a disqualified person should not acquire preferred securities unless the preferred securities are acquired under and in accordance with an applicable exemption. Any plans or entities whose assets include Plan assets subject to ERISA or Section 4975 of the Code proposing to acquire preferred securities should consult with their own counsel. INDEMNIFICATION Mercantile's Articles of Incorporation provide that Mercantile shall indemnify its present and past directors, officers, and such other persons as the Board of Directors may authorize, to the fullest extent permitted by law. Mercantile's Bylaws contain indemnification provisions concerning third party actions as well as actions in the right of Mercantile. The Bylaws provide that Mercantile shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of Mercantile) by reason of the fact that he or she is or was a director or officer of Mercantile, or while serving as such a director or officer, is or was serving at the request of Mercantile as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorney's fees), judgments, penalties, fees and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Mercantile or its shareholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. FDIC regulations impose limitations on indemnification payments which could restrict, in certain circumstances, payments by Mercantile or the Bank to their respective directors or officers otherwise permitted under the Michigan Business Corporation Act or the Michigan Banking Code, respectively. With respect to derivative actions, the Bylaws provide that Mercantile shall indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of Mercantile to procure a judgment in its favor by reason of the fact that he or she is or was a director or officer of Mercantile, or, while serving as such a director or officer, is or was serving at the request of Mercantile as a director, officer, partner, trustee, employee or agent of another foreign or domestic company, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorney's fees) and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action or suit if he or she acted 107 111 in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Mercantile or its shareholders. No indemnification is provided in the Bylaws in respect of any claim, issue or matter in which such person has been found liable to Mercantile except to the extent that a court of competent jurisdiction determines upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. The Trust Agreement provides that Mercantile shall indemnify each of the Trustees or any predecessor Trustee for, and hold the Trustees harmless against, any loss, damage, claim, liability, penalty or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust agreement, including the cost and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties, except any cost or expense as may be attributable to the trustee's negligence, bad faith or willful misconduct. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Mercantile or MBWM Trust pursuant to the provisions discussed above or otherwise, Mercantile and MBWM Trust have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. Mercantile has purchased directors' and officers' liability insurance for directors and officers of Mercantile and the Bank. LIMITATION OF DIRECTOR LIABILITY The Michigan Business Corporation Act permits corporations to limit the personal liability of their directors in certain circumstances. Mercantile's Articles of Incorporation provide that a director of Mercantile shall not be personally liable to Mercantile or its shareholders for monetary damages for breach of the director's fiduciary duty. However, they do not eliminate or limit the liability of a director for any breach of a duty, act or omission for which the elimination or limitation of liability is not permitted by the Michigan Business Corporation Act, currently including, without limitation, the following: (1) breach of the director's duty of loyalty to Mercantile or its shareholders; (2) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (3) illegal loans, distributions of dividends or assets, or stock purchases as described in Section 551(1) of the Michigan Business Corporation Act; and (4) transactions from which the director derived an improper personal benefit. 108 112 UNDERWRITING Subject to the terms and conditions of the underwriting agreement among Mercantile, MBWM Trust and the underwriters named below, for whom Stifel, Nicolaus & Company, Incorporated and Tucker Anthony Cleary Gull are acting as representatives (the "Representatives"), the underwriters have severally agreed to purchase from MBWM Trust, and MBWM Trust has agreed to sell to them, an aggregate of 1,400,000 preferred securities in the amounts set forth below opposite their respective names.
NUMBER OF UNDERWRITERS PREFERRED SECURITIES - ------------ -------------------- Stifel, Nicolaus & Company, Incorporated.............. Tucker Anthony Cleary Gull............................ --------- Total............................................ 1,400,000 =========
In the underwriting agreement, the obligations of the underwriters are subject to approval of certain legal matters by their counsel and to various other conditions. Under the terms and conditions of the underwriting agreement, the underwriters are committed to accept and pay for all of the preferred securities, if any are taken. The underwriters propose to offer the preferred securities directly to the public at the public offering price set forth on the cover page of this prospectus, and to certain securities dealers (who may include the underwriters) at this price, less a concession not in excess of $ per preferred security. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per preferred security to certain brokers and dealers. After the preferred securities are released for sale to the public, the offering price and other selling terms may from time to time be changed by the underwriters. MBWM Trust has granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase up to 200,000 additional preferred securities at the same price per preferred security to be paid by the underwriters for the other preferred securities being offered. If the underwriters purchase any of the additional preferred securities under this option, each underwriter will be committed to purchase the additional shares in approximately the same proportion allocated to them in the table above. The underwriters may exercise the option only for the purpose of covering over- allotments, if any, made in connection with the distribution of the preferred securities being offered. If the underwriters exercise their option to purchase additional preferred securities, MBWM Trust will issue and sell to Mercantile additional common securities and Mercantile will issue and sell to MBWM Trust junior subordinated debentures in an aggregate principal amount equal to the total aggregate liquidation amount of the additional preferred securities being purchased under the option and the additional common securities sold to Mercantile. 109 113 The table below shows the price and proceeds on a per security and aggregate basis. The proceeds to be received by MBWM Trust as shown in the table below do not reflect estimated expenses of $ ,000 payable by Mercantile.
PER PREFERRED SECURITY TOTAL ---------------------- ----------- Public Offering Price................... $10.00 $14,000,000 Proceeds to MBWM Trust.................. $10.00 $14,000,000
In view of the fact that the proceeds of the sale of the preferred securities will be used by MBWM Trust to purchase the junior subordinated debentures from Mercantile, Mercantile has agreed to pay the underwriters $[0. ] per preferred security, or a total of $ ,000, as compensation for arranging the investment in the junior subordinated debentures. Should the underwriters exercise the over-allotment option, an aggregate of $ ,000 will be paid to the underwriters for arranging the investment in the junior subordinated debentures. During a period of 30 days from the date of this prospectus, neither MBWM Trust nor Mercantile will, subject to certain exceptions, without the prior written consent of the Representatives, directly or indirectly, sell, offer to sell, grant any option for sale of, or otherwise dispose of, any preferred securities, any security convertible into or exchangeable for preferred securities or junior subordinated debentures or any debt securities substantially similar to the junior subordinated debentures or equity securities substantially similar to the preferred securities (except for junior subordinated debentures and the preferred securities being offered). The offering of the preferred securities is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject any order for the purchase of the preferred securities. Mercantile and MBWM Trust have agreed to indemnify the several underwriters against several liabilities, including liabilities under the Securities Act of 1933. Application has been made to have the preferred securities approved for quotation on the Nasdaq National Market. The Representatives have advised MBWM Trust that they presently intend to make a market in the preferred securities after the commencement of trading on Nasdaq, but no assurances can be made as to the liquidity of the preferred securities or that an active and liquid market will develop or, if developed, that the market will continue. The offering price and distribution rate have been determined by negotiations among representatives of Mercantile and the underwriters, and the offering price of the preferred securities may not be indicative of the market price following the offering. The Representatives will have no obligation to make a market in the preferred securities, however, and may cease market-making activities, if commenced, at any time. In connection with the offering, the underwriters may engage in transactions that are intended to stabilize, maintain or otherwise affect the price of the preferred securities during and after the offering, such as the following: - the underwriters may over-allot or otherwise create a short position in the preferred securities for their own account by selling more preferred securities than have been sold to them; 110 114 - the underwriters may elect to cover any short position by purchasing preferred securities in the open market or by exercising the over-allotment option; - the underwriters may stabilize or maintain the price of the preferred securities by bidding; - the underwriters may engage in passive market making transactions; and - the underwriters may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in this offering are reclaimed if preferred securities previously distributed in the offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the preferred securities to the extent that it discourages resales. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Because the NASD may view the preferred securities as interests in a direct participation program, the offer and sale of the preferred securities is being made in compliance with the provisions of Rule 2810 under the NASD Conduct Rules. WHERE YOU CAN FIND MORE INFORMATION Mercantile is a reporting company under the Securities Exchange Act of 1934 and files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy, upon payment of a fee set by the Commission, any document that Mercantile files with the Commission at its public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, 13th Floor, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400, Chicago, Illinois 60661. You may also call the Commission at 1-800-SEC-0330 for more information on the public reference rooms. Mercantile's filings are also available to the public on the Internet, through the Commission's EDGAR database. You may access the EDGAR database at the Commission's web site at http://www.sec.gov. You may also obtain a copy of these filings from Mercantile at no cost upon your written or oral request. Please direct your requests to Mercantile's Secretary, Robert Kaminski, Mercantile Bank Corporation, 216 North Division Avenue, Grand Rapids, Michigan 49503, or by calling 616-242-9000. To obtain timely delivery, you must request the information no later than five business days prior to the date you decide to invest in the preferred securities. LEGAL MATTERS Certain matters of Delaware law relating to the validity of the preferred securities, the enforceability of the trust agreement and the formation of MBWM Trust will be passed upon by Richards, Layton & Finger, P.A., Wilmington, Delaware, special Delaware counsel to Mercantile and MBWM Trust. The validity of the preferred securities guarantee and the junior subordinated debentures will be passed upon for Mercantile by Dickinson Wright PLLC, Detroit, Michigan, counsel to Mercantile and MBWM Trust. Certain legal 111 115 matters in connection with this offering will be passed upon for the underwriters by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois. Dickinson Wright PLLC and Vedder, Price, Kaufman & Kammholz will rely on the opinions of Richards, Layton & Finger, P.A., as to matters of Delaware law. Certain matters relating to United States federal income tax consequences will be passed upon for Mercantile and MBWM Trust by Dickinson Wright PLLC. As of July 1, 1999, members of Dickinson Wright PLLC who perform services for Mercantile owned approximately 7,300 shares of Mercantile's common stock. EXPERTS The consolidated financial statements of Mercantile as of December 31, 1998 and for each of the years in the two-year period ended December 31, 1998 have been included in this prospectus in reliance upon the report of Crowe, Chizek & Company LLP, independent certified public accountants, appearing elsewhere in this prospectus, and upon their authority as experts in accounting and auditing. 112 116 MERCANTILE BANK CORPORATION CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED), DECEMBER 31, 1998 AND DECEMBER 31, 1997 CONTENTS Report of Independent Auditors.............................. F-2 Consolidated Financial Statements Consolidated Balance Sheets................................. F-3 Consolidated Statements of Income........................... F-4 Consolidated Statements of Comprehensive Income............. F-5 Consolidated Statements of Changes in Shareholders' Equity.................................................... F-6 Consolidated Statements of Cash Flows....................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 117 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 years 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 Corporation'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. Crowe, Chizek and Company LLP Grand Rapids, Michigan January 20, 1999 F-2 118 MERCANTILE BANK CORPORATION CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (UNAUDITED) ASSETS Cash and due from banks................................... $ 7,304,576 $ 5,940,713 $ 153,300 Short term investments.................................... 536,285 515,283 3,250,000 Federal funds sold........................................ 5,100,000 0 3,700,000 ------------ ------------ ----------- Total cash and cash equivalents......................... 12,940,861 6,455,996 7,103,300 Securities available for sale............................. 28,387,567 24,160,247 2,997,500 Securities held to maturity............................... 433,248 0 0 Federal Home Loan Bank stock.............................. 784,900 Total loans............................................... 246,724,786 184,744,602 12,886,763 Allowance for loan losses................................. (3,701,000) (2,765,100) (193,300) ------------ ------------ ----------- Total loans, net........................................ 243,023,786 181,979,502 12,693,463 Premises and equipment -- net............................. 3,214,138 1,857,805 953,982 Organizational costs -- net............................... 0 64,210 74,871 Accrued interest receivable............................... 1,437,276 1,147,832 52,811 Other assets.............................................. 1,713,118 571,265 233,258 ------------ ------------ ----------- Total assets............................................ $291,934,894 $216,236,857 $24,109,185 ============ ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing..................................... $ 16,331,118 $ 14,319,290 $ 7,207,482 Interest-bearing........................................ 229,480,131 157,678,729 2,480,782 ------------ ------------ ----------- Total.............................................. 245,811,249 171,998,019 9,688,264 Securities sold under agreements to repurchase............ 17,865,592 17,037,601 655,447 Other borrowed money...................................... 13,325 0 0 Accrued expenses and other liabilities.................... 1,184,289 500,721 292,204 ------------ ------------ ----------- Total liabilities....................................... 264,874,455 189,536,341 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 June 30, 1999 and December 31, 1998, and 1,495,000 shares outstanding at December 31, 1997....................................... 28,181,798 28,181,798 13,880,972 Retained earnings (deficit)............................... (657,955) (1,513,118) (404,071) Accumulated other comprehensive income.................... (463,404) 31,836 (3,631) ------------ ------------ ----------- Total shareholders' equity.............................. 27,060,439 26,700,516 13,473,270 ------------ ------------ ----------- Total liabilities and shareholders' equity.............. $291,934,894 $216,236,857 $24,109,185 ============ ============ ===========
See accompanying notes to consolidated financial statements. F-3 119 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED PERIOD ENDED ------------------------- --------------------------- JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) Interest income Loans, including fees............................. $8,757,526 $ 3,000,610 $ 9,007,668 $ 25,761 Investment securities............................. 811,697 256,363 880,639 7,661 Federal funds sold................................ 161,492 116,791 256,422 18,728 Interest-bearing balances......................... 12,924 9,914 23,487 101,479 ---------- ----------- ----------- --------- Total interest income.......................... 9,743,639 3,383,678 10,168,216 153,629 Interest expense Deposits.......................................... 5,196,684 1,746,196 5,140,788 5,760 Short term borrowings............................. 352,463 132,259 488,430 7,894 ---------- ----------- ----------- --------- Total interest expense......................... 5,549,147 1,878,455 5,629,218 13,654 Net interest income................................. 4,194,492 1,505,223 4,538,998 139,975 Provision for loan losses........................... 935,900 1,471,800 2,571,800 193,300 ---------- ----------- ----------- --------- Net interest income (loss) after provision for loan losses............................................ 3,258,592 33,423 1,967,198 (53,325) Noninterest income Service charges on accounts....................... 89,666 8,540 82,170 45 Gain on sale of securities........................ 0 0 128 0 Mortgage loan referral fees....................... 112,404 42,247 209,667 0 Letter of credit fees............................. 125,895 32,862 159,064 0 Other income...................................... 87,593 3,614 37,149 0 ---------- ----------- ----------- --------- Total noninterest income....................... 415,558 87,263 488,178 45 Noninterest expense Salaries and benefits............................. 1,435,369 818,267 1,891,264 254,771 Occupancy......................................... 182,280 138,925 304,231 39,101 Furniture and equipment........................... 131,970 71,741 176,756 5,907 Data processing................................... 144,464 64,800 170,990 0 Loan processing cost.............................. 38,482 105,428 153,835 421 Advertising....................................... 94,000 38,457 110,431 0 Other expense..................................... 616,212 319,269 756,916 50,591 ---------- ----------- ----------- --------- Total noninterest expenses..................... 2,642,777 1,556,887 3,564,423 350,791 Income (loss) before federal income tax............. 1,031,373 (1,436,201) (1,109,047) (404,071) Federal income tax expense.......................... 134,000 0 0 0 ---------- ----------- ----------- --------- Income (loss) before cumulative effect of change in accounting principle.............................. 897,373 (1,436,201) (1,109,047) (404,071) Cumulative effect of change in accounting principle (net of applicable income taxes).................. 42,210 0 0 0 ---------- ----------- ----------- --------- Net income (loss)................................... $ 855,163 $(1,436,201) $(1,109,047) $(404,071) ========== =========== =========== ========= Basic and diluted income (loss) per share........... $ 0.35 $ (0.96) $ (0.58) $ (0.27) ========== =========== =========== ========= Average shares outstanding.......................... 2,472,500 1,495,000 1,907,658 1,495,000 ========== =========== =========== =========
See accompanying notes to consolidated financial statements. F-4 120 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED PERIOD ENDED -------------------------- ---------------------------- JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) Net income (loss)......... $ 855,163 $(1,436,201) $(1,109,047) $(404,071) Other comprehensive income (loss), net of tax: Change in unrealized gains (losses) on securities available for sale............. (495,240) 1,259 35,467 (3,631) --------- ----------- ----------- --------- Comprehensive income (loss).................. $ 359,923 $(1,434,942) $(1,073,580) $(407,702) ========= =========== =========== =========
See accompanying notes to consolidated financial statements. F-5 121 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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 ----------- ----------- --------- ----------- BALANCE, DECEMBER 31, 1998... 28,181,798 (1,513,118) 31,836 26,700,516 Net income (Unaudited)....... 855,163 855,163 Change in net unrealized gain (loss) on securities available for sale, net of tax effect (Unaudited)..... (495,240) (495,240) ----------- ----------- --------- ----------- BALANCE, JUNE 30, 1999 (UNAUDITED)................ $28,181,798 $ (657,955) $(463,404) $27,060,439 =========== =========== ========= ===========
See accompanying notes to consolidated financial statements. F-6 122 MERCANTILE BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED PERIOD ENDED ---------------------------- ---------------------------- JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 ------------ ------------- ------------- ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)....................................... $ 855,163 $ (1,436,201) $ (1,109,047) $ (404,071) Adjustments to reconcile net income (loss)to net cash from operating activities Depreciation and amortization......................... 200,128 111,105 274,374 119 Provision for loan losses............................. 935,900 1,471,800 2,571,800 193,300 Gain on sale of securities............................ 0 0 (128) 0 Net change in: Accrued interest receivable......................... (289,444) (668,239) (1,095,021) (74,871) Other assets........................................ (886,730) (224,922) (432,695) (286,069) Accrued expenses and other liabilities.............. 683,568 15,564 208,517 292,204 ------------ ------------- ------------- ------------ Net cash from operating activities............... 1,498,585 (730,893) 417,790 (279,388) Cash flows from investing activities Net increase in loans................................... (61,980,184) (100,519,645) (171,857,839) (12,886,763) Purchase of: Federal Home Loan Bank stock.......................... (784,900) 0 0 0 Securities available for sale......................... (7,904,574) (13,528,853) (28,320,575) (3,001,250) Securities held to maturity........................... (433,227) 0 0 0 Premises and equipment, net........................... (1,479,818) (513,267) (1,082,815) (953,982) Proceeds from: Sales of available for sale securities................ 0 0 1,000,313 0 Maturities and repayments of available for sale securities.......................................... 2,914,437 2,000,000 6,203,087 0 ------------ ------------- ------------- ------------ Net cash from investing activities.................. (69,668,266) (112,561,765) (194,057,829) (16,841,995) Cash flows from financing activities Proceeds from sale of common stock...................... 0 0 14,300,826 13,880,972 Net increase in deposits................................ 73,813,230 107,002,922 162,309,755 9,688,264 Net increase in other borrowed money.................... 13,325 0 0 0 Net increase in securities sold under agreements to repurchase............................................ 827,991 9,899,848 16,382,154 655,447 ------------ ------------- ------------- ------------ Net cash from financing activities.................. 74,654,546 116,902,770 192,992,735 24,224,683 ------------ ------------- ------------- ------------ Net change in cash and cash equivalents................... 6,484,865 3,610,112 (647,304) 7,103,300 Cash and cash equivalents at beginning of period.......... 6,455,996 7,103,300 7,103,300 0 ------------ ------------- ------------- ------------ Cash and cash equivalents at end of period................ $ 12,940,861 $ 10,713,412 $ 6,455,996 $ 7,103,300 ============ ============= ============= ============ Supplemental disclosures of cash flow information Cash paid during the year for Interest.............................................. $ 5,248,375 $ 1,616,566 $ 5,237,738 $ 1,391 Federal income tax.................................... 730,773 0 165,000 0
See accompanying notes to consolidated financial statements. F-7 123 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED), DECEMBER 31, 1998 AND DECEMBER 31, 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 ("Mercantile") was incorporated on July 15, 1997 as a bank holding company 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 13.7% and 19.5% of the Bank's total loans at June 30, 1999 (Unaudited) and December 31, 1998. Commercial loans to holding and other investment offices comprise 18.8% and 28.6% of the Bank's total loans at June 30, 1999 (Unaudited) and 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. F-8 124 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in aggregate for smaller-balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when the internal grading system indicates a doubtful classification. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both straight-line and accelerated methods over the estimated useful lives of the respective assets. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur and major improvements are capitalized. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: In 1998, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants promulgated Statement of Position (SOP) 98-5. This SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires cost of start-up activities and organization costs to be expensed as incurred. Initial application of this SOP should be reported as a cumulative effect of a change in accounting principle. Mercantile elected to adopt the provisions of SOP 98-5 on January 1, 1999. Included in the June 30, 1999 Consolidated Statement of Income is a charge to operations of $42,210 reported as a cumulative effect of change in accounting principle. 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 or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the F-9 125 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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: Mercantile and the Bank are subject to banking regulations which require the maintenance of certain capital levels and positive retained earnings, which will prevent payment of dividends until positive retained earnings are achieved and may limit the amount of dividends thereafter. EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share is based on weighted average common shares outstanding. Diluted earnings (loss) per share further assumes issue of any dilutive potential common shares. F-10 126 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- INVESTMENT SECURITIES The amortized cost and fair values of investment securities were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUES ----------- ---------- ---------- ----------- AVAILABLE FOR SALE June 30, 1999 (Unaudited) U.S. Treasury securities................ $ 3,001,181 $ 3,349 $ 0 $ 3,004,530 U.S. Government agency debt obligations....... 12,003,093 0 256,223 11,746,870 Mortgage-backed securities............. 14,081,697 0 445,530 13,636,167 ----------- ------- -------- ----------- Totals................. $29,085,971 $ 3,349 $701,753 $28,387,567 =========== ======= ======== =========== December 31, 1998 U.S. Treasury securities............. $ 4,506,744 $16,376 $ 0 $ 4,523,120 U.S. Government agency debt obligations....... 12,015,020 45,207 29,437 12,030,790 Mortgage-backed securities............. 7,590,648 21,104 5,415 7,606,337 ----------- ------- -------- ----------- Totals................. $24,112,412 $82,687 $ 34,852 $24,160,247 =========== ======= ======== =========== December 31, 1997 U.S. Treasury securities............. $ 3,001,131 $ 0 $ 3,631 $ 2,997,500 =========== ======= ======== =========== HELD TO MATURITY June 30, 1999 (Unaudited) Municipal general obligation bonds....... $ 224,540 $ 0 $ 1 $ 224,539 Municipal revenue bonds... 208,708 0 11,728 196,980 ----------- ------- -------- ----------- Totals................. $ 433,248 $ 0 $ 11,729 $ 421,519 =========== ======= ======== ===========
F-11 127 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and fair values of debt investment securities 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 ------------- ----------- ----------- June 30, 1999 (Unaudited) Debt securities, excluding mortgage-backed securities: Due in one year or less............. 5.49% $ 3,001,181 $ 3,004,530 Due after one year through five years............................ 6.03 9,988,469 9,826,090 Due after five years through 15 years............................ 5.42 2,447,872 2,342,299 ----------- ----------- 15,437,522 15,172,919 Mortgage-backed securities............ 6.08 14,081,697 13,636,167 ----------- ----------- Total debt investment securities.... $29,519,219 $28,809,086 =========== =========== December 31, 1998 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 debt investment securities.... $24,112,412 $24,160,247 =========== ===========
The sale of an investment security for the year ended December 31, 1998 resulted in a realized gain of $128. There were no sales of securities during 1997 or during the first six months of 1999. The carrying value of investment securities that are pledged to secure securities sold under agreements to repurchase and other deposits was $24,058,947, $24,160,247, and $2,997,500 at June 30, 1999 (Unaudited), December 31, 1998, and December 31, 1997, respectively. F-12 128 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are as follows:
JUNE 30, 1999 (UNAUDITED) DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------- -------------------- ------------------- BALANCE % BALANCE % BALANCE % ------------ ----- ------------ ----- ----------- ----- Real Estate: Construction and land development...... $ 22,466,493 9.1% $ 13,656,284 7.4% $ 0 0.0% Secured by 1-4 family properties....... 15,577,437 6.3 10,655,703 5.8 171,872 1.3 Secured by multi- family properties....... 2,547,966 1.0 2,520,747 1.4 0 0.0 Secured by nonfarm nonresidential properties....... 139,199,347 56.4 100,742,487 54.5 5,421,302 42.1 Commercial............ 64,437,050 26.1 55,071,347 29.8 7,278,664 56.5 Consumer.............. 2,496,493 1.1 2,098,034 1.1 14,925 0.1 ------------ ----- ------------ ----- ----------- ----- Total Loans........... $246,724,786 100.0% $184,744,602 100.0% $12,886,763 100.0% ============ ===== ============ ===== =========== =====
Activity in the allowance for loan losses is as follows:
SIX MONTHS ENDED -------------------------- JUNE 30, JUNE 30, 1999 1998 DECEMBER 31, DECEMBER 31, (UNAUDITED) (UNAUDITED) 1998 1997 ----------- ----------- ------------ ------------ Beginning balance......... $2,765,100 $ 193,300 $ 193,300 $ 0 Provision charged to operating expense....... 935,900 1,471,800 2,571,800 193,300 ---------- ---------- ---------- -------- Ending balance....... $3,701,000 $1,665,100 $2,765,100 $193,300 ========== ========== ========== ========
There were no loans classified as impaired at June 30, 1999, December 31, 1998, or December 31, 1997 or during the periods then ended. F-13 129 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- PREMISES AND EQUIPMENT -- NET Premises and equipment are as follows:
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ----------- ------------ ------------ (UNAUDITED) Land and improvements.................. $ 315,020 $ 315,020 $ 0 Buildings and leasehold improvements... 1,992,790 759,942 545,401 Construction in process................ 0 100,638 0 Furniture and equipment................ 1,216,803 869,195 408,581 ---------- ---------- -------- 3,524,613 2,044,795 953,982 Less: accumulated depreciation......... 310,475 186,990 0 ---------- ---------- -------- $3,214,138 $1,857,805 $953,982 ========== ========== ========
F-14 130 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- DEPOSITS Deposits are summarized as follows:
JUNE 30, 1999 (UNAUDITED) DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------- -------------------- ------------------ BALANCE % BALANCE % BALANCE % ------------ ----- ------------ ----- ---------- ----- Noninterest-bearing demand............. $ 16,331,118 6.6% $ 14,319,290 8.3% $7,207,482 74.4% Interest-bearing checking........... 9,415,224 3.8 7,765,703 4.5 213,218 2.2 Money market......... 4,813,760 2.0 3,822,019 2.2 0 0.0 Savings.............. 41,798,368 17.0 28,796,603 16.8 2,089,539 21.6 Time, under $100,000........... 4,047,872 1.6 3,305,504 1.9 178,025 1.8 Time, $100,000 and over............... 19,832,561 8.2 16,718,705 9.7 0 0.0 ------------ ----- ------------ ----- ---------- ----- 96,238,903 39.2 74,727,824 43.4 9,688,264 100.0 Out-of-area time, under $100,000..... 97,045,443 39.4 77,847,412 45.3 0 0.0 Out-of-area time, $100,000 and over............... 52,526,903 21.4 19,422,783 11.3 0 0.0 ------------ ----- ------------ ----- ---------- ----- 149,572,346 60.8 97,270,195 56.6 0 0.0 ------------ ----- ------------ ----- ---------- ----- Total Deposits....... $245,811,249 100.0% $171,998,019 100.0% $9,688,264 100.0% ============ ===== ============ ===== ========== =====
Out-of-area certificates of deposit consist of certificates obtained from depositors outside of the primary market area. As of June 30, 1999 (Unaudited) and December 31, 1998, out-of-area certificates of deposit totaling $130,539,074 and $83,404,629 were obtained through deposit brokers, with the remaining $19,033,272 and $13,865,566 obtained directly from the depositors, respectively. F-15 131 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table depicts the maturity distribution for certificates of deposit.
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) 1999...................................... $154,023,757 $ 89,659,963 2000...................................... 16,247,964 22,649,689 2001...................................... 1,691,058 4,194,752 2002 and thereafter....................... 1,490,000 1,390,000 ------------ ------------ $173,452,779 $117,294,404 ============ ============
NOTE 6 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Information relating to securities sold under agreements to repurchase, is summarized below:
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ----------- ------------ ------------ (UNAUDITED) Outstanding balance at end of period.............................. $17,865,592 $17,037,601 $655,447 Average interest rate at end of period.............................. 4.12% 4.20% 4.70% Average balance during the period..... 17,230,642 10,305,728 3,853 Average interest rate during the period.............................. 4.12% 4.72% 4.70% Maximum month end balance during the period.............................. 17,865,592 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. F-16 132 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- FEDERAL INCOME TAXES The provision (benefit) for federal taxes consists of the following:
JUNE 30, 1999 ----------- (UNAUDITED) Current income tax........................................ $ 694,203 Deferred income tax....................................... (353,216) Change in valuation allowance for deferred tax assets..... (206,987) $ 134,000
The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities:
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ----------- ------------ ------------ (UNAUDITED) Deferred tax assets Provision for loan losses.............. $1,105,628 $787,422 $ 65,722 Start-up/pre-opening expenses.......... 86,258 76,713 97,811 Deferred loan fees..................... 62,360 52,273 Depreciation........................... 11,248 8,146 ---------- -------- -------- $1,504,217 $924,554 $163,533 ========== ======== ======== Deferred tax liabilities Unrealized gain on securities available for sale............................ $ 16,400 Miscellaneous expenses................. 13,600 Accretion.............................. $ 3,500 2,176 ---------- -------- -------- $ 3,500 $ 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.
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ----------- ------------ ------------ (UNAUDITED) Net deferred tax asset before valuation allowance.............................. $1,500,717 $892,378 $163,533 Valuation allowance for deferred tax assets................................. (685,391) (892,378) (163,533) ---------- -------- -------- $ 815,326 $ 0 $ 0 ========== ======== ========
F-17 133 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- STOCK OPTION PLAN
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ----------- ------------ ------------ (UNAUDITED) Stock options outstanding Beginning................................ 121,750 77,750 0 Granted.................................. 0 44,000 77,750 --------- ----------- --------- Ending................................ 121,750 121,750 77,750 ========= =========== ========= Options exercisable at end of period..... 54,500 50,166 22,918 --------- ----------- --------- Minimum exercise price................... $ 10.00 $ 10.00 $ 10.00 Maximum exercise price................... 13.63 13.63 11.75 Average exercise price................... 11.50 11.50 10.75 Average remaining option term............ 8.9 years 9.0 years 9.8 years Estimated fair value of stock options granted.................................. 0 172,510 340,863 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 income (loss)........................ $ 778,187 $(1,299,991) $(539,585) Basic and diluted income (loss) per share................................. 0.31 (0.68) (0.36)
NOTE 9 -- RELATED PARTIES Certain directors and executive officers of Mercantile, including their immediate families and companies in which they are principal owners, were loan customers of the Bank. At June 30, 1999 (Unaudited), December 31, 1998, and December 31, 1997, the Bank had approximately $12,516,000, $12,815,000 and $5,940,000 in loan commitments to directors and executive officers, of which approximately $8,753,000, $9,095,000 and F-18 134 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $2,147,000 were outstanding at June 30, 1999 (Unaudited), December 31, 1998 and December 31, 1997, respectively, as reflected in the following table.
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (UNAUDITED) Beginning balance..................... $9,095,000 $2,147,000 $ 0 New loans............................. 0 7,222,000 2,147,000 Repayments............................ (342,000) (274,000) 0 ---------- ---------- ---------- Ending balance................... $8,753,000 $9,095,000 $2,147,000 ========== ========== ==========
Related party deposits and repurchase agreements totaled approximately $10,252,000, $7,978,000 and $416,000 at June 30, 1999 (Unaudited), December 31, 1998 and December 31, 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 June 30, 1999 and December 31, 1998, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties. F-19 135 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Bank's maximum exposure to credit losses for loan commitments and standby letters of credit outstanding was as follows:
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (UNAUDITED) Commercial unused lines of credit....... $ 65,154,486 $ 61,600,909 $ 3,701,272 Unused lines of credit secured by 1 - 4 family residential properties......... 6,242,134 3,434,290 64,356 Credit card unused lines of credit...... 2,850,696 2,251,329 0 Other consumer unused lines of credit... 3,517,546 1,534,497 0 Commitments to make loans............... 29,065,700 21,751,900 7,198,584 Standby letters of credit............... 24,876,358 19,271,848 0 ------------ ------------ ----------- $131,706,920 $109,844,773 $10,964,212 ============ ============ ===========
Management does not anticipate any significant losses as a result of these commitments. At June 30, 1999 (Unaudited), December 31, 1998 and December 31, 1997, reserves of $216,000, $185,000 and $0 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 was $151,349. Rental expense through June 30, 1999 (Unaudited) was $77,173. Future minimum rentals under this lease as follows:
JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) 1999................................................. $ 77,172 $ 154,344 2000................................................. 154,344 154,344 2001................................................. 154,344 154,344 2002................................................. 154,344 154,344 2003................................................. 154,344 154,344 Thereafter........................................... 565,928 565,928 ---------- ---------- $1,337,648 $1,337,648 ========== ==========
NOTE 11 -- EMPLOYEE BENEFIT PLANS Mercantile established a 401(k) plan effective January 1, 1998, covering substantially all of its employees. Mercantile's matching 401(k) contribution charged to expense was $34,945, $27,167, $59,705, and $0 for each of the periods ending June 30, 1999 (Unaudited), June 30, 1998, (Unaudited) December 31, 1998 and December 31, 1997. The percent of Mercantile's matching contributions to the 401(k) is determined annually by the Board of Directors. F-20 136 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 -- FAIR VALUES OF FINANCIAL INSTRUMENTS Financial instruments are as follows (in thousands):
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------------- ------------------- ------------------ (UNAUDITED) CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUES VALUES VALUES VALUES VALUES VALUES -------- -------- -------- -------- -------- ------- Financial assets Cash and cash equivalents....... $ 12,941 $ 12,941 $ 6,456 $ 6,456 $ 7,103 $ 7,103 Securities........... 29,606 29,594 24,160 24,160 2,998 2,998 Loans, net........... 243,024 242,289 181,980 181,963 12,693 12,693 Accrued interest receivable........ 1,437 1,437 1,148 1,148 53 53 Financial liabilities Deposits............. 245,811 244,464 171,998 173,665 9,688 9,688 Securities sold under agreements to repurchase........... 17,866 17,866 17,038 17,038 655 655 Accrued interest payable........... 740 740 423 423 4 4
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 the end of the period 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 the end of the year 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 Mercantile completed a secondary stock offering, selling 977,500 shares. Net of issuance expenses the common stock sale raised $14.3 million. Substantially all of the net proceeds were contributed to the Bank, which were used to support the anticipated growth in assets, fund investments in loans and securities, and for general corporate purposes. F-21 137 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14 -- REGULATORY MATTERS Mercantile 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. 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
F-22 138 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At June 30, 1999, (Unaudited) December 31, 1998 and December 31, 1997, actual capital levels (in thousands) and minimum required levels for Mercantile and the Bank were:
MINIMUM REQUIRED TO BE WELL MINIMUM REQUIRED CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS ---------------- ------------------ ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- -------- ------ -------- ------ June 30, 1999 (Unaudited) Total capital (to risk weighted assets) Consolidated........ $31,138 10.8% $23,124 8.0% $28,905 10.0% Bank................ 30,311 10.5 23,120 8.0 28,900 10.0 Tier 1 capital (to risk weighted assets) Consolidated........ 27,524 9.5 11,566 4.0 17,348 6.0 Bank................ 26,698 9.2 11,564 4.0 17,345 6.0 Tier 1 capital (to average assets) Consolidated........ 27,524 10.0 10,980 4.0 13,725 5.0 Bank................ 26,698 9.7 10,974 4.0 13,717 5.0 December 31, 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
F-23 139 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MINIMUM REQUIRED TO BE WELL MINIMUM REQUIRED CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS ---------------- ------------------ ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- -------- ------ -------- ------ December 31, 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 1,392 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 74.5 696 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 June 30, 1999 (Unaudited), and December 31, 1998 and 1997. F-24 140 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15 -- MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS Following are condensed parent company only financial statements. CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ----------- ------------ ------------ (UNAUDITED) ASSETS Cash and cash equivalents............... $ 773,728 $ 910,068 $ 536,824 Investment in subsidiary................ 26,234,514 25,720,043 12,862,806 Other assets............................ 52,197 81,905 126,545 ----------- ----------- ----------- Total assets......................... $27,060,439 $26,712,016 $13,526,175 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities............................. $ 0 $ 11,500 $ 52,905 Shareholders' equity.................... 27,060,439 26,700,516 13,473,270 ----------- ----------- ----------- Total liabilities and shareholders' equity............................. $27,060,439 $26,712,016 $13,526,175 =========== =========== ===========
F-25 141 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENTS OF INCOME
SIX MONTHS ENDED -------------------------- JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) Income Other.................. $ 16,802 $ 7,400 $ 28,868 $ 32,781 ---------- ----------- ----------- --------- Total income........ 16,802 7,400 28,868 32,781 Expenses Other operating expenses............ 193,350 48,267 187,797 303,289 ---------- ----------- ----------- --------- Total expenses...... 193,350 48,267 187,797 303,289 Income (loss) before income tax and equity in undistributed net loss of subsidiaries... (176,548) (40,867) (158,929) (270,508) Federal income tax expense................ (22,000) 0 0 0 Equity in undistributed net income (loss) of subsidiary............. 1,009,711 (1,395,334) (950,118) (133,563) ---------- ----------- ----------- --------- Net income (loss)........ $ 855,163 $(1,436,201) $(1,109,047) $(404,071) ========== =========== =========== =========
F-26 142 MERCANTILE BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED -------------------------- JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1999 1998 1998 1997 ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).... $ 855,163 $(1,436,201) $(1,109,047) $ (404,071) Adjustments to reconcile net income (loss) to net cash from operating activities Equity in undistributed (income) loss of subsidiary...... (1,009,711) 1,395,334 950,118 133,563 Change in other assets.......... 29,708 (39,188) 44,640 (126,545) Change in other liabilities..... (11,500) (52,905) (41,405) 52,905 ----------- ----------- ----------- ------------ Net cash from operating activities... (136,340) (132,960) (155,694) (344,148) Cash flows from financing activities Proceeds from sale of common stock...... 0 0 14,300,826 13,880,972 Capital investment into Mercantile Bank of West Michigan.......... 0 0 (13,771,888) (13,000,000) ----------- ----------- ----------- ------------ Net cash from financing activities...... 0 0 528,938 880,972 ----------- ----------- ----------- ------------ Net change in cash and cash equivalents..... (136,340) (132,960) 373,244 536,824 Cash and cash equivalents at beginning of period............... 910,068 536,824 536,824 0 ----------- ----------- ----------- ------------ Cash and cash equivalents at end of period............... $ 773,728 $ 403,864 $ 910,068 $ 536,824 =========== =========== =========== ============
F-27 143 - ------------------------------------------------------ - ------------------------------------------------------ TABLE OF CONTENTS
PAGE ---- Special Note Regarding Forward-Looking Statements......... i Prospectus Summary................... 1 Risk Factors......................... 9 Use of Proceeds...................... 18 Accounting Treatment................. 20 Capitalization....................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 22 Business............................. 42 Management........................... 50 Security Ownership................... 59 Related Party Transactions........... 61 Supervision and Regulation........... 62 Description of the Preferred Securities......................... 67 Description of Junior Subordinated Debentures......................... 83 Book-Entry Issuance.................. 94 Description of Preferred Securities Guarantee.......................... 96 Relationship Among the Preferred Securities, the Junior Subordinated Debentures and the Preferred Securities Guarantee.......................... 100 Material Federal Income Tax Consequences....................... 102 ERISA Considerations................. 106 Indemnification...................... 107 Underwriting......................... 109 Where You Can Find More Information........................ 111 Legal Matters........................ 111 Experts.............................. 112 Index to Financial Statements........ F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL AND IS NOT SOLICITING AN OFFER TO BUY THE SECURITIES IN ANY STATE WHERE OFFERS OR SALES ARE NOT PERMITTED. ------------------------- UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 1,400,000 PREFERRED SECURITIES MBWM CAPITAL TRUST I % CUMULATIVE PREFERRED SECURITIES (LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY) FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED ON A SUBORDINATED BASIS, AS DESCRIBED IN THIS PROSPECTUS, BY MERCANTILE BANK CORPORATION MERCANTILE LOGO ------------------------- $14,000,000 % SUBORDINATED DEBENTURES OF MERCANTILE BANK CORPORATION ------------------------- Prospectus , 1999 ------------------------- STIFEL, NICOLAUS & COMPANY INCORPORATED TUCKER ANTHONY CLEARY GULL - ------------------------------------------------------ - ------------------------------------------------------ 144 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Mercantile's Articles of Incorporation provide that Mercantile shall indemnify its present and past directors, officers, and such other persons as the Board of Directors may authorize, to the full extent permitted by law. Mercantile's Bylaws contain indemnification provisions concerning third party actions as well as actions in the right of Mercantile. The Bylaws provide that Mercantile shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of Mercantile by reason of the fact that he or she is or was a director or officer of Mercantile or is, or while serving as such a director or officer was, serving at the request of Mercantile as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorney's fees), judgments, penalties, fees and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Mercantile or its shareholders, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. With respect to derivative actions, the Bylaws provide that Mercantile shall indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of Mercantile to procure a judgment in its favor by reason of the fact that he or she is or was a director or officer of Mercantile or is or was serving at the request of Mercantile as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise against expenses, including attorney's fees, actually and reasonably incurred by him or her in connection with the defense or settlement of the judgment or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Mercantile or its shareholders and except that no indemnification shall be made in respect of any claim, issue or matter as to which the person has been found liable to Mercantile unless and only to the extent that the court in which the action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, the person is fairly and reasonably entitled to indemnify for the expenses which the court shall deem proper. Mercantile's Articles of Incorporation provide that a director of Mercantile shall not be personally liable to Mercantile or its shareholders for monetary damages for breach of the director's fiduciary duty. However, it does not eliminate or limit the liability of a director for any breach of a duty, act or omission for which the elimination or limitation of liability is not permitted by the Michigan Business Corporation Act, currently including, without limitations the following: (1) breach of the director's duty of loyalty to Mercantile or its shareholders; (2) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (3) illegal loans, distributions of dividends or assets, or stock purchases as described in Section 551(l) of Michigan Business Corporation Act; and (4) transactions from which the director derived an improper personal benefit. II-1 145 Mercantile has purchased directors' and officers' liability insurance for directors and officers of Mercantile and the Bank. The Trust Agreement provides that Mercantile shall indemnify each of the Trustees or any predecessor Trustee for, and hold the Trustees harmless against, any loss, damage, claim, liability, penalty or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust agreement, including the cost and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties, except any cost or expense as may be attributable to the trustee's negligence, bad faith or willful misconduct. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses in connection with the sale and distribution of the preferred securities being registered, other than underwriting discounts and commissions. All amounts shown are estimates, except the SEC registration fee and the NASD filing fee, and assume the sale of 1,400,000 preferred securities in the offering. SEC registration fee........................................ $ 4,448 NASD filing fee............................................. $ 2,100 Printing and mailing expenses............................... $ 80,000 Fees and expenses of counsel................................ $120,000 Accounting and related expenses............................. $ 15,000 Blue Sky fees and expenses (including counsel fees)......... $ 5,000 Registrar and Transfer Agent fees........................... $ 5,000 Miscellaneous............................................... $ 48,452 Total....................................................... $280,000 ========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. During the period from July 1997 through October 1997, Mercantile borrowed approximately $278,500 from members of its initial Board of Directors to pay organizational and related expenses. These loans were repaid in October 1997 from the net proceeds of the Mercantile's initial public offering. To the extent that such transactions would be deemed to involve the offer or sale of a security, Mercantile would claim an exemption under Rule 504 of Regulation D or Section 4(2) of the Securities Act of 1933 for such transactions. In July, 1997, Mercantile sold one share of its common stock to Gerald R. Johnson, Jr., Chairman of the Board and Chief Executive Officer of Mercantile, for $10. Mercantile claims an exemption for such sale pursuant to Rule 504 of Regulation D or Section 4(2). During the period from July 1997 through July 1, 1999, Mercantile granted options for 121,750 shares of its common stock to seven employees pursuant to Mercantile's 1997 Employee Stock Option Plan. These options have exercise prices ranging from $10 to $13 per share. Such option grants either do not constitute a sale, or if they do, Mercantile claims an exemption for such sales pursuant to Rule 504 of Regulation D or Section 4(2). Mercantile established a 401(k) plan effective January 1, 1998. One of the investment options under the plan permits employees to self-direct some or all of the contributions to the plan. Under this option, employees may choose to invest II-2 146 in stock of Mercantile, or other securities through the plan. In such case, the plan purchases the common stock or other securities in the open market. Mercantile registered the Mercantile common stock that may be purchased under the self-directed option of the plan, and an indeterminate amount of interests in the plan, on April 2, 1999, on a Form S-8 registration statement filed with the SEC. ITEM 27. EXHIBITS.
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 1.1 Form of Underwriting Agreement(2). 3.1 Articles of Incorporation of Mercantile Bank Corporation are incorporated by reference to Exhibit 3.1 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997. 3.2 Bylaws of Mercantile Bank Corporation are incorporated by reference to Exhibit 3.2 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997. 4.1 Form of Subordinated Indenture dated , 1999 to be entered into between Mercantile Bank Corporation and Wilmington Trust Company as Indenture Trustee(1). 4.2 Form of Junior Subordinated Debenture (included as an exhibit to Exhibit 4.1). 4.3 Form of Certificate of Trust of MBWM Trust (included as Exhibit A to Exhibit 4.5). 4.4 Form of Trust Agreement of MBWM Trust dated as of July 23, 1999(1). 4.5 Form of Amended and Restated Trust Agreement of MBWM Trust dated August , 1999(1). 4.6 Form of Preferred Security Certificate of MBWM Trust (included as an exhibit to Exhibit 4.5). 4.7 Form of Preferred Securities Guarantee Agreement(1). 4.8 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.5). 5.1 Opinion of Dickinson Wright PLLC regarding legality(1). 5.2 Opinion of Richards, Layton & Finger, P.A. regarding legality(1). 8.1 Opinion of Dickinson Wright PLLC, as to material federal income tax consequences(1). 10.1 Employment Agreement between Gerald R. Johnson, Jr. and Mercantile Bank Corporation dated December 1, 1998, is incorporated by reference to Exhibit 10.4 of Mercantile's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 (Commission File No. 333-33081). 10.2 Employment Agreement between Michael H. Price and Mercantile Bank Corporation dated December 1, 1998, is incorporated by reference to Exhibit 10.5 of Mercantile's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 (Commission File No. 333-33081).
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EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 10.3 1997 Employee Stock Option Plan of Mercantile Bank Corporation is incorporated by reference to Exhibit 10.1 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997. 10.4 Lease Agreement between Mercantile and Division Partners, L.L.C. dated August 16, 1997, is incorporated by reference to Exhibit 10.2 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective October 23, 1997. 10.5 Agreement between Mercantile and Visser Brothers Construction Inc. dated November 16, 1998, on modified Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is also the Constructor is incorporated by reference to Exhibit 10.3 of Mercantile's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 (Commission File No. 333-33081). 10.6 Mercantile Bank of West Michigan Deferred Compensation Plan for Members of the Board of Directors(1). 10.7 Agreement between Fiserv Solutions, Inc. and Mercantile Bank of West Michigan dated September 10, 1997 is incorporated by reference to Exhibit 10.3 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997. 21 List of Subsidiaries of Mercantile Bank Corporation is incorporated by reference to Exhibit 21 of Mercantile's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (Commission File No. 333-33081). 23.1 Consent of Crowe, Chizek & Company LLP(1). 23.2 Consent of Dickinson Wright PLLC (included in Exhibit 5.1). 23.3 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.2). 23.4 Consent of Dickinson Wright PLLC (included in Exhibit 8.1). 24 Power of Attorney (included in Part II of this Registration Statement). 25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company regarding Subordinated Indenture(2). 25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company regarding Amended and Restated Trust Agreement(2). 25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company regarding Preferred Securities Guarantee Agreement(2). 27 Financial Data Schedule(1).
- ------------------------- (1) Filed with this Registration Statement. (2) To be filed by Amendment. II-4 148 ITEM 28. UNDERTAKINGS. The undersigned registrants hereby undertake as follows: (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities arising under the Securities Act (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (2) The registrants will: (i) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrants under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective; and (ii) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-5 149 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the co-registrant certifies that it has reasonable grounds to believe it meets all of the requirements of filing on Form SB-2 and has authorized this registration statement to be signed on its behalf by the undersigned, in the City of Grand Rapids, State of Michigan, on August 2, 1999. MERCANTILE BANK CORPORATION By: /s/ GERALD R. JOHNSON, JR. ----------------------------------- Gerald R. Johnson, Jr., Chairman of the Board and Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, the co-registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form SB-2 and has authorized this registration statement to be signed on its behalf by the undersigned, in the City of Grand Rapids, State of Michigan on August 2, 1999. MBWM CAPITAL TRUST I By: MERCANTILE BANK CORPORATION, as depositor By: /s/ GERALD R. JOHNSON, JR. ----------------------------------- Gerald R. Johnson, Jr., Chairman of the Board and Chief Executive Officer II-6 150 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Gerald R. Johnson, Jr., Michael H. Price and Charles E. Christmas and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting upon said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities indicated on August 2, 1999.
SIGNATURES TITLE ---------- ----- /s/ BETTY S. BURTON Director - --------------------------------------------------- Betty S. Burton /s/ EDWARD J. CLARK Director - --------------------------------------------------- Edward J. Clark /s/ PETER A. CORDES Director - --------------------------------------------------- Peter A. Cordes /s/ C. JOHN GILL Director - --------------------------------------------------- C. John Gill Director - --------------------------------------------------- David M. Hecht /s/ GERALD R. JOHNSON, JR. Chairman of the Board, Chief Executive Officer, and - --------------------------------------------------- Director (principal executive officer) Gerald R. Johnson, Jr. /s/ SUSAN K. JONES Director - --------------------------------------------------- Susan K. Jones /s/ LAWRENCE W. LARSEN Director - --------------------------------------------------- Lawrence W. Larsen /s/ CALVIN D. MURDOCK Director - --------------------------------------------------- Calvin D. Murdock /s/ MICHAEL H. PRICE President, Chief Operating Officer and Director - --------------------------------------------------- Michael H. Price /s/ DALE J. VISSER Director - --------------------------------------------------- Dale J. Visser
II-7 151
SIGNATURES TITLE ---------- ----- /s/ DONALD WILLIAMS, SR. Director - --------------------------------------------------- Donald Williams, Sr. Director - --------------------------------------------------- Robert M. Wynalda /s/ CHARLES E. CHRISTMAS Chief Financial Officer and Treasurer (principal financial - --------------------------------------------------- and accounting officer) Charles E. Christmas
II-8 152 In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities indicated on August 2, 1999. Administrative Trustees of MBWM Capital Trust I /s/ GERALD R. JOHNSON, JR. -------------------------------------- Gerald R. Johnson, Jr., as administrative trustee /s/ MICHAEL H. PRICE -------------------------------------- Michael H. Price, as administrative trustee /s/ CHARLES E. CHRISTMAS -------------------------------------- Charles E. Christmas, as administrative trustee II-9 153 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 1.1 Form of Underwriting Agreement(2). 3.1 Articles of Incorporation of Mercantile Bank Corporation are incorporated by reference to Exhibit 3.1 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) that became effective on October 23, 1997. 3.2 Bylaws of Mercantile Bank Corporation are incorporated by reference to Exhibit 3.2 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997. 4.1 Form of Subordinated Indenture dated , 1999 to be entered into between Mercantile Bank Corporation and Wilmington Trust Company as Indenture Trustee(1). 4.2 Form of Junior Subordinated Debenture (included as an exhibit to Exhibit 4.1). 4.3 Form of Certificate of Trust of MBWM Trust (included as Exhibit A to Exhibit 4.5). 4.4 Form of Trust Agreement of MBWM Trust dated as of July 23, 1999(1). 4.5 Form of Amended and Restated Trust Agreement of MBWM Trust dated August , 1999(1). 4.6 Form of Preferred Security Certificate of MBWM Trust (included as an exhibit to Exhibit 4.5). 4.7 Form of Preferred Securities Guarantee Agreement(1). 4.8 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.5). 5.1 Opinion of Dickinson Wright PLLC regarding legality(1). 5.2 Opinion of Richards, Layton & Finger, P.A. regarding legality(1). 8.1 Opinion of Dickinson Wright PLLC, as to material federal income tax consequences(1). 10.1 Employment Agreement between Gerald R. Johnson, Jr. and Mercantile Bank Corporation dated December 1, 1998, is incorporated by reference to Exhibit 10.4 of Mercantile's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 (Commission File No. 333-33081). 10.2 Employment Agreement between Michael H. Price and Mercantile Bank Corporation dated December 1, 1998, is incorporated by reference to Exhibit 10.5 of Mercantile's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 (Commission File No. 333-33081). 10.3 1997 Employee Stock Option Plan of Mercantile Bank Corporation is incorporated by reference to Exhibit 10.1 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997.
154
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 10.4 Lease Agreement between Mercantile and Division Partners, L.L.C. dated August 16, 1997, is incorporated by reference to Exhibit 10.2 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective October 23, 1997. 10.5 Agreement between Mercantile and Visser Brothers Construction Inc. dated November 16, 1998, on modified Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is also the Constructor is incorporated by reference to Exhibit 10.3 of Mercantile's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 (Commission File No. 333-33081) 10.6 Mercantile Bank of West Michigan Deferred Compensation Plan for Members of the Board of Directors(1) 10.7 Agreement between Fiserv Solutions, Inc. and Mercantile Bank of West Michigan dated September 10, 1997 is incorporated by reference to Exhibit 10.3 of Mercantile's Registration Statement on Form SB-2 (Commission File No. 333-33081) which became effective on October 23, 1997. 21 List of Subsidiaries of Mercantile Bank Corporation is incorporated by reference to Exhibit 21 of Mercantile's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (Commission File No. 333-33081). 23.1 Consent of Crowe, Chizek & Company LLP(1). 23.2 Consent of Dickinson Wright PLLC (included in Exhibit 5.1). 23.3 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.2). 23.4 Consent of Dickinson Wright PLLC (included in Exhibit 8.1). 24 Power of Attorney (included in Part II of this Registration Statement). 25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company regarding Subordinated Indenture(2). 25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company regarding Amended and Restated Trust Agreement(2). 25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company regarding Preferred Securities Guarantee Agreement(2). 27 Financial Data Schedule(1).
- ------------------------- (1) Filed with this Registration Statement. (2) To be filed by Amendment. EX-4.1 2 FORM OF SUBORDINATED INDENTURE 1 EXHIBIT 4.1 MERCANTILE BANK CORPORATION AS ISSUER TO WILMINGTON TRUST COMPANY, AS TRUSTEE SUBORDINATED INDENTURE DATED AS OF AUGUST , 1999 % Junior Subordinated Debentures 2 TABLE OF CONTENTS
Page ARTICLE I. DEFINITIONS...............................................................................2 ARTICLE II. DESCRIPTION, TERMS, CONDITIONS, REGISTRATION AND EXCHANGE OF THE JUNIOR SUBORDINATED DEBENTURES............................................9 2.1 DESIGNATION AND PRINCIPAL AMOUNT..........................................................9 2.2 MATURITY.................................................................................10 2.3 FORM AND PAYMENT.........................................................................10 2.4 GLOBAL SUBORDINATED DEBENTURE............................................................10 2.5 INTEREST.................................................................................12 2.6 EXECUTION, AUTHENTICATION, DELIVERY AND DATING...........................................13 2.7 REGISTRATION AND TRANSFER................................................................13 2.8 MUTILATED, DESTROYED, LOST AND STOLEN JUNIOR SUBORDINATED DEBENTURES..................................................................14 ARTICLE III. REDEMPTION OF JUNIOR SUBORDINATED DEBENTURES.............................................15 3.1 REDEMPTION...............................................................................15 3.2 SPECIAL EVENT REDEMPTION.................................................................15 3.3 OPTIONAL REDEMPTION BY COMPANY...........................................................16 3.4 NOTICE OF REDEMPTION.....................................................................16 3.5 PAYMENT UPON REDEMPTION..................................................................17 3.6 NO SINKING FUND..........................................................................18 ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD.....................................................18 4.1 EXTENSION OF INTEREST PAYMENT PERIOD.....................................................18 4.2 NOTICE OF EXTENSION......................................................................19 4.3 LIMITATION OF TRANSACTIONS DURING EXTENSION..............................................19 ARTICLE V. PARTICULAR COVENANTS OF THE COMPANY......................................................19 5.1 PAYMENT OF PRINCIPAL AND INTEREST........................................................19
i 3 5.2 MAINTENANCE OF AGENCY....................................................................19 5.3 PAYING AGENTS............................................................................20 5.4 APPOINTMENT TO FILL VACANCY IN OFFICE OF TRUSTEE.........................................21 5.5 COMPLIANCE WITH CONSOLIDATION PROVISIONS.................................................21 5.6 RESTRICTIONS ON CERTAIN PAYMENTS.........................................................21 5.7 COVENANTS AS TO THE TRUST................................................................22 ARTICLE VI. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE..........................................................................22 6.1 COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF SECURITYHOLDERS.......................................................................22 6.2 PRESERVATION OF INFORMATION; COMMUNICATIONS WITH SECURITYHOLDERS..........................................................................22 6.3 REPORTS BY THE COMPANY...................................................................23 6.4 REPORTS BY THE TRUSTEE...................................................................23 ARTICLE VII. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT.........................................................................24 7.1 EVENTS OF DEFAULT........................................................................24 7.2 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE...................................................................25 7.3 APPLICATION OF MONEYS COLLECTED..........................................................27 7.4 LIMITATION ON SUITS......................................................................27 7.5 RIGHTS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER...............................................................................28 7.6 CONTROL BY SECURITYHOLDERS...............................................................28 7.7 UNDERTAKING TO PAY COSTS.................................................................29 ARTICLE VIII. FORM OF JUNIOR SUBORDINATED DEBENTURE AND ORIGINAL ISSUE...........................................................................29 8.1 FORM OF JUNIOR SUBORDINATED DEBENTURE....................................................29 8.2 ORIGINAL ISSUE OF JUNIOR SUBORDINATED DEBENTURES.........................................29 ARTICLE IX. CONCERNING THE TRUSTEE...................................................................30
ii 4 9.1 CERTAIN DUTIES AND RESPONSIBILITIES OF THE TRUSTEE.......................................30 9.2 CERTAIN RIGHTS OF TRUSTEE................................................................31 9.3 TRUSTEE NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF THE JUNIOR SUBORDINATED DEBENTURES.......................................................32 9.4 MAY HOLD JUNIOR SUBORDINATED DEBENTURES..................................................32 9.5 MONEYS HELD IN TRUST.....................................................................32 9.6 COMPENSATION AND REIMBURSEMENT...........................................................33 9.7 RELIANCE ON OFFICERS' CERTIFICATE........................................................33 9.8 DISQUALIFICATION; CONFLICTING INTERESTS..................................................33 9.9 CORPORATE TRUSTEE REQUIRED; ELIGIBILITY..................................................34 9.10 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR................................................................................34 9.11 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR...................................................35 9.12 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS..............................................................................36 9.13 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY..................................................................................36 9.14 APPOINTMENT OF AUTHENTICATING AGENT......................................................36 ARTICLE X. CONCERNING THE SECURITYHOLDERS...........................................................38 10.1 EVIDENCE OF ACTION BY SECURITYHOLDERS....................................................38 10.2 PROOF OF EXECUTION BY SECURITYHOLDERS....................................................38 10.3 WHO MAY BE DEEMED OWNERS.................................................................39 10.4 CERTAIN JUNIOR SUBORDINATED DEBENTURES OWNED BY COMPANY DISREGARDED......................................................................39 10.5 ACTIONS BINDING ON FUTURE SECURITYHOLDERS................................................39 ARTICLE XI. SUPPLEMENTAL INDENTURES..................................................................40 11.1 SUPPLEMENTAL INDENTURES WITHOUT THE CONSENT OF SECURITYHOLDERS..........................................................................40
iii 5 11.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF SECURITYHOLDERS..........................................................................41 11.3 EFFECT OF SUPPLEMENTAL INDENTURES........................................................41 11.4 JUNIOR SUBORDINATED DEBENTURES AFFECTED BY SUPPLEMENTAL INDENTURES..................................................................41 11.5 EXECUTION OF SUPPLEMENTAL INDENTURES.....................................................42 ARTICLE XII. SUCCESSOR CORPORATION....................................................................42 12.1 COMPANY MAY CONSOLIDATE, ETC.............................................................42 12.2 SUCCESSOR SUBSTITUTED....................................................................43 12.3 EVIDENCE OF CONSOLIDATION, ETC., TO TRUSTEE..............................................43 ARTICLE XIII. SATISFACTION AND DISCHARGE...............................................................43 13.1 SATISFACTION AND DISCHARGE OF INDENTURE..................................................43 13.2 DISCHARGE OF OBLIGATIONS.................................................................44 13.3 DEPOSITED MONEYS TO BE HELD IN TRUST.....................................................44 13.4 PAYMENT OF MONIES HELD BY PAYING AGENTS..................................................44 13.5 REPAYMENT TO COMPANY.....................................................................44 ARTICLE XIV. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS............................................................................45 14.1 NO RECOURSE..............................................................................45 ARTICLE XV. MISCELLANEOUS PROVISIONS.................................................................45 15.1 EFFECT ON SUCCESSORS AND ASSIGNS.........................................................45 15.2 ACTIONS BY SUCCESSOR.....................................................................46 15.3 SURRENDER OF COMPANY POWERS..............................................................46 15.4 NOTICES..................................................................................46 15.5 GOVERNING LAW............................................................................46 15.6 TREATMENT OF JUNIOR SUBORDINATED DEBENTURES AS DEBT.....................................................................................46 15.7 COMPLIANCE CERTIFICATES AND OPINIONS.....................................................46 15.8 PAYMENTS ON BUSINESS DAYS................................................................47
iv 6 15.9 CONFLICT WITH TRUST INDENTURE ACT........................................................47 15.10 COUNTERPARTS.............................................................................47 15.11 SEPARABILITY.............................................................................47 15.12 ASSIGNMENT...............................................................................48 15.13 ACKNOWLEDGMENT OF RIGHTS.................................................................48 ARTICLE XVI. SUBORDINATION OF JUNIOR SUBORDINATED DEBENTURES..........................................48 16.1 AGREEMENT TO SUBORDINATE.................................................................48 16.2 DEFAULT ON SENIOR AND SUBORDINATED DEBT..................................................49 16.3 LIQUIDATION; DISSOLUTION; BANKRUPTCY.....................................................49 16.4 SUBROGATION..............................................................................50 16.5 TRUSTEE TO EFFECTUATE SUBORDINATION......................................................51 16.6 NOTICE BY THE COMPANY....................................................................51 16.7 RIGHTS OF THE TRUSTEE; HOLDERS OF SENIOR AND SUBORDINATED DEBT........................................................................52 16.8 SUBORDINATION MAY NOT BE IMPAIRED........................................................53
v 7 MERCANTILE BANK CORPORATION RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939, AS AMENDED, AND SUBORDINATED INDENTURE, DATED AS OF AUGUST, 1999 Trust Indenture Act Section Subordinated Indenture Section Section 310(a)(1), (2) 9.9; 15.9 Section 310(a)(3) n/a Section 310(b) 9.8 Section 311 15.9 Section 311(a) 9.13 Section 311(b) 9.13 Section 311(c) n/a Section 312 15.9 Section 312(a) 6.1; 6.2(a) Section 312(b) 6.2(c) Section 313 15.9 Section 313(a) 6.4(a) Section 313(b) 6.4(b) Section 313(c) 6.4(b) Section 313(d) 6.4(c) Section 314 6.3; 15.9 Section 315 15.9 Section 316 15.9 Section 317 15.9 NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Subordinated Indenture. vi 8 SUBORDINATED INDENTURE (the "Indenture"), dated as of , 1999, between Mercantile Bank Corporation, a Michigan corporation (the "Company") and Wilmington Trust Company, a Delaware banking corporation duly organized and existing under the laws of the State of Delaware, as trustee (acting not in its individual capacity but solely as trustee, the "Trustee"); WHEREAS, for its lawful corporate purposes, the Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its securities to be known as its % Junior Subordinated Debentures due , 2029 (hereinafter referred to as the "Junior Subordinated Debentures"), the form and substance of such Junior Subordinated Debentures and the terms, provisions and conditions thereof to be set forth as provided in this Indenture; and WHEREAS, MBWM Trust, a Delaware statutory business trust (the "Trust"), has offered to the public $14,000,000, and a possible additional amount of up to $2,000,000 pursuant to the Underwriters' Over-Allotment Option, for a total of up to $16,000,000 aggregate liquidation amount of its % Cumulative Preferred Securities (the "Preferred Securities"), representing undivided beneficial interests in the assets of the Trust and proposes to invest the proceeds from such offering, together with the proceeds of the issuance and sale by the Trust to the Company of $[432,990], and a possible additional amount of up to $[61,856] related to the Underwriters' Over-Allotment Option with respect to the Preferred Securities, for a total of up to $[494,846] aggregate liquidation amount of its % Common Securities, in $[16,432,990], and a possible additional amount of up to $[61,856] related to the Underwriters' Over-Allotment Option with respect to the Preferred Securities, for a total of up to $[16,494,846] aggregate principal amount of the Junior Subordinated Debentures; and WHEREAS, the Company has requested that the Trustee execute and deliver this Indenture and all requirements necessary to make this Indenture a valid instrument in accordance with its terms, and to make the Junior Subordinated Debentures, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company; and WHEREAS, to provide the terms and conditions upon which the Junior Subordinated Debentures are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, all things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, in consideration of the premises and the purchase of the Junior Subordinated Debentures by the holders thereof, it is mutually covenanted and agreed as follows for the equal and ratable benefit of the holders of Junior Subordinated Debentures: 1 9 ARTICLE I. DEFINITIONS The terms defined in this Section (except as in this Indenture otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section and shall include the plural as well as the singular. All other terms used in this Indenture that are defined in the Trust Indenture Act of 1939, as amended, or that are by reference in said Trust Indenture Act defined in the Securities Act of 1933, as amended (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles. "Accelerated Maturity Date" means, if the Company elects to accelerate the Maturity Date in accordance with Section 2.2, the date selected by the Company which is prior to the Scheduled Maturity Date, but is on or after , 2004. "Additional Sums" shall have the meaning set forth in Section 2.5(c). "Administrative Trustees" has the meaning set forth in the Trust Agreement. "Affiliate" means, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities or other ownership interests of the specified Person, (b) any Person 10% or more of whose outstanding voting securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person, (c) any Person directly or indirectly controlling, controlled by, or under common control with the specified Person, (d) a partnership in which the specified Person is a general partner, (e) any officer or director of the specified Person, and (f) if the specified Person is an individual, any entity of which the specified Person is an officer, director or general partner. "Authenticating Agent" means an authenticating agent with respect to the Junior Subordinated Debentures appointed by the Trustee pursuant to Section 9.14. "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" means the Board of Directors of the Company or any duly authorized committee of such Board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. 2 10 "Business Day" means any day other than a day on which federal or state banking institutions in the State of Michigan are authorized or obligated by law, executive order or regulation to close or a day on which the Trustee is closed. "Capital Treatment Event" means the receipt by the Company and the Trust of an Opinion of Counsel rendered by a law firm experienced in such matters to the extent that, as a result of any amendment to, or change (including any proposed change) in, the laws (or any regulations thereunder) of the United States or any political subdivision thereof or therein, or as a result of any official or administrative pronouncement or action or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such proposed change, pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under the Trust Agreement, there is more than an insubstantial risk of impairment of the Company's ability to treat the Preferred Securities (or any substantial portion thereof) as "Tier I Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company, provided, however that the Trust or the Company shall have requested and received such an Opinion of Counsel with regard to such matters within a reasonable period of time after the Trust or Company shall have become aware of the possible occurrence of any such event. "Certificate" means a certificate signed by the principal executive officer, the principal financial officer or the principal accounting officer of the Company. The Certificate need not comply with the provisions of Section 15.7. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Securities" means undivided beneficial interests in the assets of the Trust which rank pari passu with Preferred Securities issued by the Trust; provided, however, that upon the occurrence of an Event of Default, the rights of holders of Common Securities to payment in respect of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of Preferred Securities. "Company" means Mercantile Bank Corporation, a corporation duly organized and existing under the laws of the State of Michigan, and, subject to the provisions of Article XII, shall also include its successors and assigns. "Compounded Interest" shall have the meaning set forth in Section 4.1. "Corporate Trust Office" means the office of the Trustee at which, at any particular time, its corporate trust business shall be principally administered, which office at the date hereof is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration. "Coupon Rate" shall have the meaning set forth in Section 2.5(a). 3 11 "Custodian" means any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law. "Debt" means with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; and (vi) every obligation of the type referred to in clauses (i) through (v) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or for which such Person is responsible or liable, directly or indirectly, as obligor or otherwise. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Deferred Interest" shall have the meaning set forth in Section 4.1. "Depositary" means, with respect to Junior Subordinated Debentures issued as a Global Subordinated Debenture, The Depository Trust Company, New York, New York, another clearing agency, or any successor registered as a clearing agency under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to either Section 2.1 or 2.4. "Dissolution Event" means that as a result of the occurrence and continuation of a Special Event, the Trust is to be dissolved in accordance with the Trust Agreement and the Junior Subordinated Debentures held by the Property Trustee are to be distributed to the holders of the Trust Securities issued by the Trust pro rata in accordance with the Trust Agreement. "Distributions" shall have the meaning set forth in the Trust Agreement. "Event of Default" means any event specified in Section 7.1, continued for the period of time, if any, and after the giving of notices, if any, therein designated. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Extended Interest Payment Period" shall have the meaning set forth in Section 4.1. "Federal Reserve" means the Board of Governors of the Federal Reserve System. "Global Subordinated Debenture" means a Junior Subordinated Debenture executed by the Company and delivered by the Trustee to the Depositary or pursuant to the Depositary's 4 12 instruction, all in accordance with this Indenture, which shall be registered in the name of the Depositary or its nominee. "Governmental Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America that, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended) as custodian with respect to any such Governmental Obligation or a specific payment of principal of or interest on any such Governmental Obligation held by such custodian for the account of the holder of such depositary receipt; provided, however, that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the Governmental Obligation or the specific payment of principal of or interest on the Governmental Obligation evidenced by such depositary receipt. "Herein," "hereof," and "hereunder," and other words of similar import, refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into in accordance with the terms hereof. "Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Interest Payment Date," when used with respect to any installment of interest on the Junior Subordinated Debentures, means the date specified in the Junior Subordinated Debenture as the fixed date on which an installment of interest with respect to the Junior Subordinated Debentures is due and payable. "Investment Company Act" means the Investment Company Act of 1940, as amended. "Investment Company Event" means the receipt by the Company and the Trust of an Opinion of Counsel rendered by a law firm experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in Investment Company Act Law"), the Trust is or will be considered an "investment company" that is required to be registered under the Investment Company Act, which Change in Investment Company Act Law becomes effective on or after the date of original issuance of the Preferred Securities under the Trust Agreement, provided, however, that the Trust shall have requested and received such an Opinion of Counsel with regard to such matters within a reasonable period of time after the Trust or the Company shall have become aware of the possible occurrence of any such event. 5 13 "Junior Subordinated Debentures" means the % Junior Subordinated Debentures due 2029 authenticated and delivered under this Indenture. "Liquidation Amount" means the stated amount of $10 per Trust Security. "Maturity Date" shall have the meaning set forth in Section 2.2. "Non Book-Entry Preferred Securities" shall have the meaning set forth in Section 2.4(a). "Officers' Certificate" means a certificate signed by the Vice Chairman, the President or a Vice President and by the Chief Accounting Officer or the Controller or an Assistant Controller or the Secretary or an Assistant Secretary of the Company that is delivered to the Trustee in accordance with the terms hereof. Each such certificate shall include the statements provided for in Section 15.7, if and to the extent required by the provisions thereof. "Opinion of Counsel" means an opinion in writing of legal counsel, who may be an employee of or counsel for the Company, that is delivered to the Trustee in accordance with the terms hereof. Each such opinion shall include the statements provided for in Section 15.7, if and to the extent required by the provisions thereof. "Outstanding," when used with reference to the Junior Subordinated Debentures means, subject to the provisions of Section 10.4, as of any particular time, all Junior Subordinated Debentures theretofore authenticated and delivered by the Trustee under this Indenture, except (a) Junior Subordinated Debentures theretofore canceled by the Trustee or any paying agent, or delivered to the Trustee or any paying agent for cancellation or that have previously been canceled; (b) Junior Subordinated Debentures or portions thereof for the payment or redemption of which moneys or Governmental Obligations in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, however, that if such Junior Subordinated Debentures or portions of such Junior Subordinated Debentures are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in Article Three, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Junior Subordinated Debentures in lieu of or in substitution for which other Junior Subordinated Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.8, provided, however, that in determining whether the holding of the requisite percentage of Junior Subordinated Debentures have given any request, notice, or consents or waiver hereunder, Junior Subordinated Debentures held by the Company or any Affiliate of the Company shall not be included; provided, further, that the Trustee shall be protected in acting upon any request, notice, consent or waiver unless a Responsible Officer of the Trustee shall have actual knowledge that the holder of such Junior Subordinated Debenture is the Company or an Affiliate thereof. "Person" means any individual, corporation, partnership, joint venture, joint-stock company, unincorporated organization or government or any agency or political subdivision thereof. 6 14 "Predecessor Junior Subordinated Debenture" means every previous Junior Subordinated Debenture evidencing all or a portion of the same debt as that evidenced by such particular Junior Subordinated Debenture; and, for the purposes of this definition, any Junior Subordinated Debenture authenticated and delivered under Section 2.8 in lieu of a lost, destroyed or stolen Junior Subordinated Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Junior Subordinated Debenture. "Preferred Securities" means undivided beneficial interests in the assets of the Trust which rank pari passu with Common Securities issued by the Trust; provided, however, that upon the occurrence of an Event of Default, the rights of holders of Common Securities to payment in respect of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of Preferred Securities. "Preferred Securities Certificate" has the meaning set forth in the Trust Agreement. "Preferred Securities Guarantee" means any guarantee that the Company may enter into with a trustee or other Persons that operates directly or indirectly for the benefit of holders of Preferred Securities of the Trust. "Property Trustee" has the meaning set forth in the Trust Agreement. "Redemption Price" means the amount equal to 100% of the principal amount of Junior Subordinated Debentures to be redeemed plus any accrued and unpaid interest thereon to the date of the redemption of such Junior Subordinated Debentures. "Responsible Officer" when used with respect to the Trustee means the Chairman of the Board of Directors, the President, any Vice President, the Secretary, the Treasurer, any trust officer, any corporate trust officer or any other officer or assistant officer or authorized signatory of the Trustee customarily performing functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Scheduled Maturity Date" means , 2029. "Securities Register" and "Securities Registrar" have the respective meanings specified in Section 2.7. "Securityholder," "Holder," "Registered Holder," or other similar term, means the Person or Persons in whose name or names particular Junior Subordinated Debentures shall be registered in the Securities Register. "Senior and Subordinated Debt" means the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such claim for post-petition interest is allowed in such proceeding), on Debt of the Company, whether incurred on or prior to the date 7 15 of this Indenture or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior in right of payment to the Junior Subordinated Debentures or to other Debt which is pari passu with, or subordinated to, the Junior Subordinated Debentures; provided, however, that Senior and Subordinated Debt shall not be deemed to include (i) any Debt of the Company which when incurred and without respect to any election under section of the United States Bankruptcy Code of 1978, as amended, was without recourse to the Company, (ii) any Debt of the Company to any of its Subsidiaries, (iii) any Debt to any employee of the Company, (iv) any Debt which by its terms is subordinated to any trade accounts payable or accrued liabilities arising in the ordinary course of business to the extent that payments made to the holders of such Debt by the Holders of the Junior Subordinated Debentures as a result of the subordination provisions of this Indenture would be greater than they otherwise would have been as a result of any obligation of such holders to pay amounts over to the obligees on such trade accounts payable or accrued liabilities arising in the ordinary course of business as a result of subordination provisions to which such Debt is subject, (v) the Preferred Securities Guarantee, and (vi) any other debt securities issued pursuant to this Indenture. "Special Event" means a Tax Event, an Investment Company Event or a Capital Treatment Event. "Subsidiary" means, with respect to any Person, (i) any corporation at least a majority of whose outstanding Voting Stock shall at the time be owned, directly or indirectly, by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of whose outstanding partnership or similar interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. "Tax Event" means the receipt by the Company and the Trust of an Opinion of Counsel rendered by a law firm experienced in such matters to the effect that, as a result amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of issuance of the Junior Subordinated Debentures, there is more than an insubstantial risk that (i) interest payable by the Company on the Junior Subordinated Debentures is not, or within 90 days after the date of such Opinion of Counsel will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, (ii) the Trust is, or will be within 90 days after the date of such Opinion of Counsel, subject to United States federal income tax with respect to income received or accrued on the Junior Subordinated Debentures, or (iii) the Trust is, or will be within 90 days after the date of such Opinion of Counsel, subject to more than a de minimis amount of other taxes, duties, assessments or other governmental charges, provided, however, that the Trust shall have requested and received such an Opinion of Counsel with regard to such matters within a reasonable period of time after the Trust or the Company shall have become aware of the possible occurrence of any such event. 8 16 "Trust" means MBWM Capital Trust I, a Delaware statutory business trust created for the purpose of issuing Trust Securities in connection with the issuance of Junior Subordinated Debentures under this Indenture. "Trust Agreement" means the Amended and Restated Trust Agreement, dated as of , 1999, of the Trust. "Trustee" means Wilmington Trust Company not in its individual capacity but solely as trustee and, subject to the provisions of Article IX, shall also include its successors and assigns, and, if at any time there is more than one acting in such capacity hereunder, "Trustee" shall mean each such Person. The Trustee shall be the initial paying agent. "Trust Indenture Act," means the Trust Indenture Act of 1939 as in force at the date of execution of this Indenture; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Securities" means Common Securities and Preferred Securities of the Trust. "Underwriters' Over-Allotment Option" means the option, exercisable within 30 days after the date of the prospectus, granted to the underwriters in the offering to the public of Preferred Securities, to purchase up to $2,000,000 additional Preferred Securities at the same price per Preferred Security as paid for the other Preferred Securities issued pursuant to the prospectus. "Voting Stock," as applied to stock of any Person, means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. ARTICLE II. DESCRIPTION, TERMS, CONDITIONS, REGISTRATION AND EXCHANGE OF THE JUNIOR SUBORDINATED DEBENTURES ---------------------------------------------- 2.1 DESIGNATION AND PRINCIPAL AMOUNT. --------------------------------- There is hereby authorized a series of Securities designated the " % Junior Subordinated Debentures due 2029," limited in aggregate principal amount to $14,000,000, and a possible additional amount of up to $2,000,000 related to the Underwriters' Over-Allotment Option with respect to the Preferred Securities, for a total of up to $16,000,000 aggregate principal amount, which amount shall be as set forth in any written order of the Company for the authentication and delivery of Junior Subordinated Debentures pursuant to Section 8.2 of this Indenture. 9 17 2.2 MATURITY. (a) The Maturity Date will be either: (i) the Scheduled Maturity Date; or (ii) if the Company elects to accelerate the Maturity Date to be a date prior to the Scheduled Maturity Date in accordance with Section 2.2(b), the Accelerated Maturity Date. (b) The Company may, at any time before the day which is 90 days before the Scheduled Maturity Date and after , 2004, elect to shorten the Maturity Date only once to the Accelerated Maturity Date, provided that the Company has received the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. (c) If the Company elects to accelerate the Maturity Date in accordance with Section 2.2(b), the Company shall give notice to the Registered Holders of the Junior Subordinated Debentures, the Property Trustee and the Trustee of the acceleration of the Maturity Date and the Accelerated Maturity Date at least 90 days before the Accelerated Maturity Date and not more than 130 days before the Accelerated Maturity Date. 2.3 FORM AND PAYMENT. Except as provided in Section 2.4, the Junior Subordinated Debentures shall be issued in fully registered certificated form without interest coupons. Principal and interest on the Junior Subordinated Debentures issued in certificated form will be payable, the transfer of such Junior Subordinated Debentures will be registrable and such Junior Subordinated Debentures will be exchangeable for Junior Subordinated Debentures bearing identical terms and provisions at the office or agency of the Trustee; provided, however, that payment of interest may be made at the option of the Company by check mailed to the Holder at such address as shall appear in the Securities Register or by wire transfer to an account maintained by the Holder as specified in the Securities Register, provided that the Holder provides proper transfer instructions by the regular record date. Notwithstanding the foregoing, so long as the Holder of any Junior Subordinated Debentures is the Property Trustee, the payment of the principal of and interest (including Compounded Interest and Additional Sums, if any) on such Junior Subordinated Debentures held by the Property Trustee will be made at such place and to such account as may be designated by the Property Trustee. 2.4 GLOBAL SUBORDINATED DEBENTURE. (a) In connection with a Dissolution Event, (i) the Junior Subordinated Debentures in certificated form may be presented to the Trustee by the Property Trustee in exchange for a Global Subordinated Debenture in an aggregate principal amount equal to the aggregate principal amount of all outstanding Junior Subordinated Debentures (a "Global Subordinated Debenture"), to be 10 18 registered in the name of the Depositary, or its nominee, and delivered by the Trustee to the Depositary for crediting to the accounts of its participants pursuant to the instructions of the Administrative Trustees. The Company upon any such presentation shall execute a Global Subordinated Debenture in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with this Indenture. Payments on the Junior Subordinated Debentures issued as a Global Subordinated Debenture will be made to the Depositary; and (ii) if any Preferred Securities are held in non book-entry certificated form, the Junior Subordinated Debentures in certificated form may be presented to the Trustee by the Property Trustee and any Preferred Securities Certificate which represents Preferred Securities other than Preferred Securities held by the Depositary or its nominee ("Non Book-Entry Preferred Securities") will be deemed to represent beneficial interests in Junior Subordinated Debentures presented to the Trustee by the Property Trustee having an aggregate principal amount equal to the aggregate Liquidation Amount of the Non Book-Entry Preferred Securities until such Preferred Securities Certificates are presented to the Securities Registrar for transfer or reissuance at which time such Preferred Securities Certificates will be canceled and a Junior Subordinated Debenture, registered in the name of the holder of the Preferred Securities Certificate or the transferee of the holder of such Preferred Securities Certificate, as the case may be, with an aggregate principal amount equal to the aggregate Liquidation Amount of the Preferred Securities Certificate canceled, will be executed by the Company and delivered to the Trustee for authentication and delivery in accordance with this Indenture. On issue of such Junior Subordinated Debentures, Junior Subordinated Debentures with an equivalent aggregate principal amount that were presented by the Property Trustee to the Trustee will be deemed to have been canceled. (b) A Global Subordinated Debenture may be transferred, in whole but not in part, only to another nominee of the Depositary, or to a successor Depositary selected or approved by the Company or to a nominee of such successor Depositary. (c) If at any time the Depositary notifies the Company that it is unwilling or unable to continue as Depositary or if at any time the Depositary for such series shall no longer be registered or in good standing under the Exchange Act or other applicable statute or regulation, and a successor Depositary for such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, the Company will execute, and the Trustee, upon written notice from the Company, will authenticate and deliver the Junior Subordinated Debentures in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Subordinated Debenture in exchange for such Global Subordinated Debenture. In addition, the Company may at any time determine that the Junior Subordinated Debentures shall no longer be represented by a Global Subordinated Debenture. In such event the Company will execute, and the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and deliver the Junior Subordinated Debentures in 11 19 definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Subordinated Debenture in exchange for such Global Subordinated Debenture. Upon the exchange of the Global Subordinated Debenture for such Junior Subordinated Debentures in definitive registered form without coupons, in authorized denominations, the Global Subordinated Debenture shall be canceled by the Trustee. Such Junior Subordinated Debentures in definitive registered form issued in exchange for the Global Subordinated Debenture shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Junior Subordinated Debentures to the Depositary for delivery to the Persons in whose names such Junior Subordinated Debentures are so registered. 2.5 INTEREST. (a) Each Junior Subordinated Debenture will bear interest at the rate of % per annum (the "Coupon Rate") from the original date of issuance until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the Coupon Rate, compounded quarterly, payable (subject to the provisions of Article IV) quarterly in arrears on the 15th day of April, July, October and January in each year (each, an "Interest Payment Date"), commencing on October 15, 1999, to the Person in whose name such Junior Subordinated Debenture or any Predecessor Junior Subordinated Debenture is registered at the close of business on the regular record date for such interest installment, which, in respect of (i) Junior Subordinated Debentures of which the Property Trustee is the Holder and the Preferred Securities are in book-entry only form or (ii) a Global Subordinated Debenture, shall be the close of business on the Business Day next preceding that Interest Payment Date. Notwithstanding the foregoing sentence, if (i) the Junior Subordinated Debentures are held by the Property Trustee and the Preferred Securities are no longer in book-entry only form or (ii) the Junior Subordinated Debentures are not represented by a Global Subordinated Debenture, the record date for such interest installment shall be the first day of the month in which such payment is to be made. The amount of each interest payment due with respect to the Junior Subordinated Debentures will include amounts accrued through the date the interest payment is due. (b) The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the following sentence, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed will be computed on the basis of the actual number of days elapsed in such a quarterly period. In the event that any date on which interest is payable on the Junior Subordinated Debentures is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day (and without any reduction of interest or any other payment in respect of any such acceleration) in each case with the same force and effect as if made on such date. (c) If, at any time while the Property Trustee is the Holder of any Junior Subordinated Debentures, the Trust or the Property Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any case, the Company will pay as additional interest ("Additional Sums") on the Junior Subordinated Debentures held by the Property Trustee such additional amounts as shall be required so that the net amounts received 12 20 and retained by the Trust and the Property Trustee after paying such taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust and the Property Trustee would have received had no such taxes, duties, assessments or other government charges been imposed. 2.6 EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Junior Subordinated Debentures shall be executed on behalf of the Company by its Chairman, its President or any Vice President and attested by its Secretary or Assistant Secretary. The signature of any of these officers on the Junior Subordinated Debentures may be manual or facsimile. Junior Subordinated Debentures bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Junior Subordinated Debentures or did not hold such offices at the date of such Junior Subordinated Debentures. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Junior Subordinated Debentures executed by the Company to the Trustee for authentication, together with a Company order for the authentication and delivery of such Junior Subordinated Debentures. The Trustee, in accordance with such Company order, shall authenticate and deliver such Junior Subordinated Debentures as in this Indenture provided and not otherwise. Upon the initial issuance, each Junior Subordinated Debenture shall be dated , 1999, and thereafter Junior Subordinated Debentures issued hereunder shall be dated the date of their authentication. No Junior Subordinated Debenture shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Junior Subordinated Debenture a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Junior Subordinated Debenture shall be conclusive evidence, and the only evidence, that such Junior Subordinated Debenture has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. 2.7 REGISTRATION AND TRANSFER. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office or any other office or agency pursuant to Section 5.2 being herein sometimes referred to as the "Securities Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of the Junior Subordinated Debentures and transfers of the Junior Subordinated Debentures. The Trustee is hereby appointed "Securities Registrar" for the purpose of registering the Junior Subordinated Debentures and transfers of the Junior Subordinated Debentures as herein provided. 13 21 Upon surrender for registration of transfer of any Junior Subordinated Debenture at an office or agency of the Company designated pursuant to Section 5.2 for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, a new Junior Subordinated Debenture of the authorized denomination. All Junior Subordinated Debentures issued upon any registration of transfer of Junior Subordinated Debentures shall be valid obligations of the Company, evidencing the same debt and entitled to the same benefits under this Indenture as the Junior Subordinated Debentures surrendered upon such registration of transfer. Every Junior Subordinated Debenture presented or surrendered for exchange or registration of transfer shall be duly endorsed for transfer (if so required by the Company or the Trustee), or shall be accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar duly executed by the Holder thereof or such Holder's attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Junior Subordinated Debentures or issue new Junior Subordinated Debentures in the case of partial redemption, but the Company and the Trustee payment of a sum sufficient to cover any expense, tax or other governmental charge that may be imposed in connection with any registration of transfer of Junior Subordinated Debentures. The Company shall not be required (i) to issue, exchange or register the transfer of any Junior Subordinated Debenture during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of less than all the outstanding Junior Subordinated Debentures selected for redemption pursuant to Article III and ending at the close of business on the day of such mailing; nor (ii) to register the transfer or exchange of any Junior Subordinated Debentures or portions thereof called for redemption. 2.8 MUTILATED, DESTROYED, LOST AND STOLEN JUNIOR SUBORDINATED DEBENTURES. If any mutilated Junior Subordinated Debenture is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Junior Subordinated Debenture of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Junior Subordinated Debenture and (ii) such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Junior Subordinated Debenture has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Junior Subordinated Debenture, a new Junior Subordinated Debenture of like tenor and principal amount and bearing a number not contemporaneously outstanding. 14 22 In case any such mutilated, destroyed, lost or stolen Junior Subordinated Debenture has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Junior Subordinated Debenture, pay such Junior Subordinated Debenture. Upon the issuance of any new Junior Subordinated Debenture under this Section, the Company and the Trustee may require the payment of a sum sufficient to cover any expense, tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Junior Subordinated Debenture issued pursuant to this Section in lieu of any destroyed, lost or stolen Junior Subordinated Debenture shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Junior Subordinated Debenture shall be at any time enforceable by anyone, and shall be entitled to all of the benefits of this Indenture. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Junior Subordinated Debentures. ARTICLE III. REDEMPTION OF JUNIOR SUBORDINATED DEBENTURES 3.1 REDEMPTION. Subject to the Company having received prior approval of the Federal Reserve, if then required under the applicable capital guidelines or policies of the Federal Reserve, the Company may redeem the Junior Subordinated Debentures in accordance with this Article III. 3.2 SPECIAL EVENT REDEMPTION. Subject to the Company having received the prior approval of the Federal Reserve, if then required under the applicable capital guidelines or policies of the Federal Reserve, if a Special Event has occurred and is continuing, then, notwithstanding Section 3.3, the Company shall have the right upon not less than 30 days nor more than 60 days notice to the Holders of the Junior Subordinated Debentures to redeem the Junior Subordinated Debentures, in whole but not in part, for cash within 90 days following the occurrence of such Special Event (the "90-Day Period") at the Redemption Price, provided that if at the time there is available to the Company the opportunity to eliminate, within the 90-Day Period, the Tax Event by taking some ministerial action ("Ministerial Action"), such as filing a form or making an election, or pursuing some other similar reasonable measure which has no adverse effect on the Company, the Trust or the Holders of the Trust Securities issued by the Trust, the Company shall pursue such Ministerial Action in lieu of redemption, and, provided, further, that the Company shall have no right to redeem the Junior Subordinated Debentures while the Trust is pursuing any Ministerial Action to eliminate the Tax Event. The Redemption Price shall be paid prior to 2:00 p.m., Detroit, Michigan time, on the date of such redemption or such earlier time as the Company determines, provided that the Company shall deposit with the Trustee an amount sufficient to pay the 15 23 Redemption Price by 12:00 noon, Detroit, Michigan time, on the date such Redemption Price is to be paid. 3.3 OPTIONAL REDEMPTION BY COMPANY. (a) Except as otherwise may be specified in this Indenture, the Company shall have the right to redeem the Junior Subordinated Debentures, in whole or in part, from time to time, on or after , 2004, at the Redemption Price. Any redemption pursuant to this Section 3.3 will be made upon not less than 30 days nor more than 60 days notice to the Holders of the Junior Subordinated Debentures, at the Redemption Price. If the Junior Subordinated Debentures are only partially redeemed pursuant to this Section 3.3, the Junior Subordinated Debentures will be redeemed pro rata or by lot or by any other method utilized by the Trustee; provided, that if at the time of redemption the Junior Subordinated Debentures are registered as a Global Subordinated Debenture, the Depositary shall determine, in accordance with its procedures, the principal amount of such Junior Subordinated Debentures held by each Holder of Junior Subordinated Debentures to be redeemed. The Redemption Price shall be paid prior to 2:00 p.m., Detroit, Michigan time, on the date of such redemption or at such earlier time as the Company determines provided that the Company shall deposit with the Trustee an amount sufficient to pay the Redemption Price by 12:00 noon, Detroit, Michigan time, on the date such Redemption Price is to be paid. (b) If a partial redemption of the Junior Subordinated Debentures would result in the delisting of the Preferred Securities issued by the Trust from any national securities exchange, quotation system or other organization on which the Preferred Securities may then be listed, if any, the Company shall not be permitted to effect such partial redemption and may only redeem the Junior Subordinated Debentures in whole or in part to such extent as would not cause such delisting. 3.4 NOTICE OF REDEMPTION. (a) In case the Company shall desire to exercise such right to redeem all or, as the case may be, a portion of the Junior Subordinated Debentures in accordance with the right reserved so to do, the Company shall, or shall cause the Trustee to upon 45 days' written notice from the Company, give notice of such redemption to Holders of the Junior Subordinated Debentures to be redeemed by mailing, first class postage prepaid, a notice of such redemption not less than 30 days and not more than 60 days before the date fixed for redemption to such Holders at their last addresses as they shall appear upon the Securities Register. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Registered Holder receives the notice. In any case, failure duly to give such notice to the Holder of any Junior Subordinated Debenture designated for redemption in whole or in part, or any defect in the notice, shall not affect the validity of the proceedings for the redemption of any other Junior Subordinated Debentures. In the case of any redemption of Junior Subordinated Debentures prior to the expiration of any restriction on such redemption provided elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with any such restriction. 16 24 Each such notice of redemption shall specify the date fixed for redemption and the Redemption Price, and shall state that payment of the Redemption Price of such Junior Subordinated Debentures to be redeemed will be made at the office or agency of the Company in Grand Rapids, Michigan, upon presentation and surrender of such Junior Subordinated Debentures, that interest accrued to the date fixed for redemption will be paid as specified in said notice, that from and after said date interest will cease to accrue. If less than all the Junior Subordinated Debentures are to be redeemed, the notice to the Holders of Junior Subordinated Debentures to be redeemed in whole or in part shall specify the particular Junior Subordinated Debentures to be so redeemed. In case any Junior Subordinated Debenture is to be redeemed in part only, the notice that relates to such Junior Subordinated Debenture shall state the portion of the principal amount thereof to be redeemed, and shall state that on and after the redemption date, upon surrender of such Junior Subordinated Debenture, a new Junior Subordinated Debenture or Junior Subordinated Debentures in principal amount equal to the unredeemed portion thereof shall be issued to the Holder. (b) If less than all the Junior Subordinated Debentures are to be redeemed, the Company shall give the Trustee at least 45 days notice in advance of the date fixed for redemption as to the aggregate principal amount of Junior Subordinated Debentures to be redeemed, and thereupon the Trustee shall select, pro rata or by lot or in such other manner as it shall deem appropriate and fair in its discretion and that may provide for the selection of a portion or portions (equal to ten U.S. dollars ($10) or any integral multiple thereof), the Junior Subordinated Debentures to be redeemed and shall thereafter promptly notify the Company in writing of the numbers of the Junior Subordinated Debentures to be redeemed, in whole or in part. The Company may, if and whenever it shall so elect, by delivery of instructions signed on its behalf by its Vice Chairman, its President or any Vice President, instruct the Trustee or any paying agent to call all or any part of the Junior Subordinated Debentures for redemption and to give notice of redemption in the manner set forth in this Section, such notice to be in the name of the Company or in the name of the Trustee or the paying agent, as the Trustee or such paying agent may deem advisable. In any case in which notice of redemption is to be given by the Trustee or any such paying agent, the Company shall deliver or cause to be delivered to, or permit to remain with, the Trustee or such paying agent, as the case may be, such Securities Register, transfer books or other records, or suitable copies or extracts therefrom, sufficient to enable the Trustee or such paying agent to give any notice by mail that may be required under the provisions of this Section. 3.5 PAYMENT UPON REDEMPTION. (a) If the giving of notice of redemption shall have been completed as above provided, the Junior Subordinated Debentures or portions of Junior Subordinated Debentures to be redeemed specified in such notice shall become due and payable on the date and at the place stated in such notice at the Redemption Price (which includes interest accrued to the date fixed for redemption) and interest on such Junior Subordinated Debentures or portions of Junior Subordinated Debentures shall cease to accrue on and after the date fixed for redemption, unless the Company shall default in the payment of such Redemption Price with respect to any such Junior Subordinated Debentures or portions thereof. On presentation and surrender of such 17 25 Junior Subordinated Debentures on or after the date fixed for redemption at the place of payment specified in the notice, such Junior Subordinated Debentures shall be paid and redeemed at the Redemption Price (which includes the interest accrued thereon to the date fixed for redemption) (but if the date fixed for redemption is an Interest Payment Date, the interest installment payable on such date shall be payable to the Registered Holder at the close of business on the applicable record date pursuant to Section 2.5(a)). (b) Upon presentation of any Junior Subordinated Debenture that is to be redeemed in part only, the Company shall execute and the Trustee shall authenticate and the office or agency where the Junior Subordinated Debenture is presented shall deliver to the Holder thereof, at the expense of the Company, a new Junior Subordinated Debenture or Junior Subordinated Debentures of authorized denominations in principal amount equal to the unredeemed portion of the Junior Subordinated Debenture so presented. 3.6 NO SINKING FUND. The Junior Subordinated Debentures are not entitled to the benefit of any sinking fund. ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD 4.1 EXTENSION OF INTEREST PAYMENT PERIOD. So long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Junior Subordinated Debentures, to defer payments of interest by extending the interest payment period of such Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters (the "Extended Interest Payment Period"), during which Extended Interest Payment Period no interest shall be due and payable; provided that no Extended Interest Payment Period may extend beyond the Maturity Date or end on a date other than an Interest Payment Date. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 4.1, will bear interest thereon at the Coupon Rate compounded quarterly for each quarter of the Extended Interest Payment Period ("Compounded Interest"). At the end of the Extended Interest Payment Period, the Company shall pay all interest accrued and unpaid on the Junior Subordinated Debentures, including any Additional Sums and Compounded Interest (together, "Deferred Interest") that shall be payable to the Holders of the Junior Subordinated Debentures in whose names the Junior Subordinated Debentures are registered in the Securities Register on the record date for the Interest Payment Date coinciding with the end of the Extended Interest Payment Period. Before the termination of any Extended Interest Payment Period, the Company may further extend such period, provided that such period together with all such further extensions thereof shall not exceed 20 consecutive quarters, or extend beyond the Maturity Date or end on a date other than an Interest Payment Date. Upon the termination of any Extended Interest Payment Period and upon the payment of all Deferred Interest then due, the Company may commence a new Extended Interest Payment Period, subject to the foregoing requirements. No interest shall be due and payable during an Extended Interest Payment Period, except at the end thereof, but the Company may prepay at any time all or any portion of the interest accrued during an Extended Interest Payment Period. 18 26 4.2 NOTICE OF EXTENSION. (a) If the Property Trustee is the only Registered Holder of the Junior Subordinated Debentures at the time the Company selects an Extended Interest Payment Period, the Company shall give written notice to the Administrative Trustees, the Property Trustee and the Trustee of its selection of such Extended Interest Payment Period one Business Day before the earlier of (i) the next succeeding date on which Distributions are payable, or (ii) the date the Trust is required to give notice of the record date, or the date such Distributions are payable, to the Preferred Securities holders or to the Nasdaq National Market or other applicable self-regulatory organization, if any, but in any event at least one Business Day before such record date. (b) If the Property Trustee is not the only Holder of the Junior Subordinated Debentures at the time the Company selects an Extended Interest Payment Period, the Company shall give the Holders of the Junior Subordinated Debentures and the Trustee written notice of its selection of such Extended Interest Payment Period at least one Business Day before the earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the Company is required to give notice of the record or payment date of such interest payment to the Holders of the Junior Subordinated Debentures or to the Nasdaq National Market or other applicable self regulatory organization, if any. (c) The quarter in which any notice is given pursuant to paragraph (a) or paragraph (b) of this Section 4.2 shall be counted as one of the 20 quarters permitted in the maximum Extended Interest Payment Period permitted under Section 4.1. 4.3 LIMITATION OF TRANSACTIONS DURING EXTENSION. If (i) the Company shall exercise its right to defer payment of interest as provided in Section 4.1; or (ii) there shall have occurred and be continuing any Event of Default, then the Company shall be subject to the restrictions on payments set forth under Section 5.6. ARTICLE V. PARTICULAR COVENANTS OF THE COMPANY 5.1 PAYMENT OF PRINCIPAL AND INTEREST. The Company will duly and punctually pay or cause to be paid the principal of and interest on the Junior Subordinated Debentures at the time and place and in the manner provided herein and established with respect to such Junior Subordinated Debentures. Notwithstanding anything to the contrary in this Indenture, the Company may satisfy any payment it is otherwise required to make to the Trust under this Indenture, by and to the extent that the Company has made, or is concurrently on the date of the payment required by this Indenture making, a payment under the Preferred Securities Guarantee. 5.2 MAINTENANCE OF AGENCY. So long as any Junior Subordinated Debentures remain Outstanding, the Company agrees to maintain an office or agency in Grand Rapids, Michigan, or at such other location or locations as may be designated as provided in this Section 5.2, where (i) Junior Subordinated Debentures may be presented for payment, (ii) Junior Subordinated Debentures may be presented as hereinabove authorized for registration of transfer and exchange, and (iii) notices and demands to or upon the Company in respect of the Junior Subordinated Debentures and this Indenture may 19 27 be given or served, such designation to continue with respect to such office or agency until the Company shall, by written notice signed by its Chairman, President or a Vice President and delivered to the Trustee, designate some other office or agency for such purposes or any of them. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, notices and demands. 5.3 PAYING AGENTS. (a) If the Company shall appoint one or more paying agents for the Junior Subordinated Debentures, other than the Trustee, the Company will cause each such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section: (i) that it will hold all sums held by it as such agent for the payment of the principal of or interest on the Junior Subordinated Debentures (whether such sums have been paid to it by the Company or by any other obligor) in trust for the benefit of the Persons entitled thereto; (ii) that it will give the Trustee notice of any failure by the Company (or by any other obligor) to make any payment of the principal of or interest on the Junior Subordinated Debentures when the same shall be due and payable; (iii) that it will, at any time during the continuance of any failure referred to in the preceding paragraph (a)(ii) above, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent; and (iv) that it will perform all other duties of paying agent as set forth in this Indenture. (b) If the Company shall act as its own paying agent with respect to the Junior Subordinated Debentures, it will on or before each due date of the principal of or interest on Junior Subordinated Debentures, set aside, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay such principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of such action, or any failure (by it or any other obligor) to take such action. Whenever the Company shall have one or more paying agents for the Junior Subordinated Debentures, it will, prior to each due date of the principal of or interest on the Junior Subordinated Debentures, deposit with the paying agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of this action or failure so to act. (c) Notwithstanding anything in this Section to the contrary, (i) the agreement to hold sums in trust as provided in this Section is subject to the provisions of Section 13.5, and (ii) the Company may at any time, for the purpose of obtaining the satisfaction and discharge of 20 28 this Indenture or for any other purpose, pay, or direct any paying agent to pay, to the Trustee (upon the Trustee's consent) all sums held in trust by the Company or such paying agent, such sums to be held by the Trustee upon the same terms and conditions as those upon which such sums were held by the Company or such paying agent; and, upon such payment by any paying agent to the Trustee, such paying agent shall be released from all further liability with respect to such money. 5.4 APPOINTMENT TO FILL VACANCY IN OFFICE OF TRUSTEE. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 9.10, a Trustee, so that there shall at all times be a Trustee hereunder. 5.5 COMPLIANCE WITH CONSOLIDATION PROVISIONS. The Company will not, while any of the Junior Subordinated Debentures remain Outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other company unless the provisions of Article XII hereof are complied with. 5.6 RESTRICTIONS ON CERTAIN PAYMENTS. If at any time (i) there shall have occurred any event of which the Company has actual knowledge that (a) with the giving of notice or the lapse of time, or both, would constitute an Event of Default and (b) in respect to which the Company shall not have taken reasonable steps to cure, or (ii) the Company shall have given notice of its election of an Extended Interest Payment Period as provided herein with respect to the Junior Subordinated Debentures and shall not have rescinded such notice, or such Extended Interest Payment Period, or any extension thereof, shall be continuing; or (iii) while the Junior Subordinated Debentures are held by the Property Trustee, the Company shall be in default with respect to its payment of any obligation under the Preferred Securities Guarantee, then the Company will not (1) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock (other than a reclassification of its capital stock) or (2) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company (including the Junior Subordinated Debentures) that rank pari passu with or junior in interest to the Junior Subordinated Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any Subsidiary of the Company if such guarantee ranks pari passu or junior in interest to the Junior Subordinated Debentures (other than (a) dividends or distributions in common stock, (b) any declaration of a dividend in connection with the implementation of a shareholders' rights plan, or the issuance of stock under any such plan in the future or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Preferred Securities Guarantee and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans for its directors, officers or employees). 21 29 5.7 COVENANTS AS TO THE TRUST. For so long as the Trust Securities of the Trust remain outstanding, the Company will (i) maintain 100% direct or indirect ownership of the Common Securities of the Trust; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company's ownership of the Common Securities,(ii) not voluntarily terminate, wind up or liquidate the Trust, except upon approval of the Federal Reserve if then so required and use its reasonable efforts to cause the Trust (a) to remain a business trust, except in connection with a distribution of Junior Subordinated Debentures, the redemption of all of the Trust Securities of the Trust or certain mergers, consolidations or amalgamations, each as permitted by the Trust Agreement, and (b) to otherwise continue not to be treated as an association taxable as a corporation or partnership for United States federal income tax purposes, and (iii) to use its reasonable efforts to cause each Holder of Trust Securities to be treated as owning an individual beneficial interest in the Junior Subordinated Debentures. If the Junior Subordinated Debentures are to be issued as a Global Subordinated Debenture in connection with the distribution of the Junior Subordinated Debentures to the holders of the Preferred Securities issued by the Trust upon a Dissolution Event, the Company will use reasonable efforts to list such Junior Subordinated Debentures on a national securities exchange or quotation system. ARTICLE VI. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE 6.1 COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF SECURITYHOLDERS. The Company will furnish or cause to be furnished to the Trustee (a) on each regular record date (as defined in Section 2.5(a)) a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such regular record date, provided that the Company shall not be obligated to furnish or cause to furnish such list at any time that the list shall not differ in any respect from the most recent list furnished to the Trustee by the Company and (b) at such other times as the Trustee may request in writing within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, that, in either case, no such list need be furnished if the Trustee shall be the Securities Registrar. 6.2 PRESERVATION OF INFORMATION; COMMUNICATIONS WITH SECURITYHOLDERS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the Holders contained in the most recent list furnished to it as provided in Section 6.1 and as to the names and addresses of Holders received by the Trustee in its capacity as Securities Registrar (if acting in such capacity). (b) The Trustee may destroy any list furnished to it as provided in Section 6.1 upon receipt of a new list so furnished. 22 30 (c) Securityholders may communicate as provided in Section 312(b) of the Trust Indenture Act with other Securityholders with respect to their rights under this Indenture or under the Junior Subordinated Debentures. 6.3 REPORTS BY THE COMPANY. (a) The Company covenants and agrees to file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) that the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports that may be required pursuant to any applicable rules and regulations of the Commission. (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Company covenants and agrees to transmit by mail, first-class postage prepaid, or reputable over-night delivery service that provides for evidence of receipt, to the Securityholders, as their names and addresses appear upon the Securities Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. 6.4 REPORTS BY THE TRUSTEE. (a) Beginning January 31, 2000, on or before January 31 in each year in which any of the Junior Subordinated Debentures are Outstanding, the Trustee shall transmit by mail, first class postage prepaid, to the Securityholders, as their names and addresses appear upon the Securities Register, a brief report dated as of the preceding December 31, if and to the extent required under Section 313(a) of the Trust Indenture Act. (b) The Trustee shall comply with Section 313(b) and 313(c) of the Trust Indenture Act. (c) A copy of each such report shall, at the time of such transmission to Securityholders, be filed by the Trustee with the Company which shall file such report with each exchange upon which any Junior Subordinated Debentures are listed (if any), and also with the Commission. 23 31 ARTICLE VII. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT 7.1 EVENTS OF DEFAULT. (a) Whenever used herein, "Event of Default" means any one or more of the following events that has occurred and is continuing: (i) the Company defaults in the payment of any installment of interest upon any of the Junior Subordinated Debentures, as and when the same shall become due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms of this Indenture shall not constitute a default in the payment of interest for this purpose; (ii) the Company defaults in the payment of the principal of any of the Junior Subordinated Debentures as and when the same shall become due and payable whether at maturity, upon redemption, by declaration or otherwise; (iii) the Company fails to observe or perform any other of its covenants or agreements hereunder with respect to the Junior Subordinated Debentures for a period of 90 days after the date on which written notice of such failure, requiring the same to be remedied and stating that such notice is a "Notice of Default" hereunder, shall have been given to the Company by the Trustee, by registered or certified mail, or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Junior Subordinated Debentures at the time Outstanding; (iv) the Company pursuant to or within the meaning of any Bankruptcy Law (1) commences a voluntary case, (2) consents to the entry of an order for relief against it in an involuntary case, (3) consents to the appointment of a custodian of it or for all or substantially all of its property or (4) makes a general assignment for the benefit of its creditors; (v) a court of competent jurisdiction enters an order under any Bankruptcy Law that (1) is for relief against the Company in an involuntary case, (2) appoints a custodian of the Company for all or substantially all of its property, or (3) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days; or (vi) in the event Junior Subordinated Debentures are issued to the Trust or a trustee of the Trust in connection with the issuance of Trust Securities by the Trust, the Trust shall have voluntarily or involuntarily dissolved, wound-up its business or otherwise terminated its existence, except in connection with (1) the distribution of Junior Subordinated Debentures to holders of Trust Securities in liquidation of their interests in the Trust, (2) the redemption of all of the outstanding Trust Securities of the Trust or (3) certain mergers, consolidations or amalgamations, each as permitted by the Trust Agreement. 24 32 (b) In each and every such case, unless the principal of all the Junior Subordinated Debentures shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of the Junior Subordinated Debentures then Outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by such Securityholders) may declare the principal of all the Junior Subordinated Debentures to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, notwithstanding anything contained in this Indenture or in the Junior Subordinated Debentures to the contrary. (c) At any time after the principal of the Junior Subordinated Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Holders of a majority in aggregate principal amount of the Junior Subordinated Debentures then Outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (i) the Company has paid or deposited with the Trustee a sum sufficient to pay all matured installments of interest upon all the Junior Subordinated Debentures and the principal of any and all Junior Subordinated Debentures that shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that such payment is enforceable under applicable law, upon overdue installments of interest, at the rate per annum expressed in the Junior Subordinated Debentures to the date of such payment or deposit) and the amount payable to the Trustee under Section 9.6, and (ii) any and all Events of Default under this Indenture, other than the nonpayment of principal on Junior Subordinated Debentures that shall not have become due by their terms, shall have been remedied or waived as provided in Section 7.6. Should the Holders fail to annul such declaration and waive such default, then the holders of a majority in aggregate Liquidation Amount of the Preferred Securities shall have such right. No such rescission and annulment shall extend to or shall affect any subsequent default or impair any right consequent thereon. (d) In case the Trustee shall have proceeded to enforce any right with respect to Junior Subordinated Debentures under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Company and the Trustee shall continue as though no such proceedings had been taken. 7.2 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. (a) The Company covenants that (i) in case it shall default in the payment of any installment of interest on any of the Junior Subordinated Debentures as and when the same shall have become due and payable, and such default shall have continued for a period of 90 Business Days, or (ii) in case it shall default in the payment of the principal of any of the Junior Subordinated Debentures when the same shall have become due and payable, whether upon maturity of the Junior Subordinated Debentures or upon redemption or upon declaration or otherwise, then, upon demand of the Trustee, the Company will pay to the Trustee, for the 25 33 benefit of the Holders of the Junior Subordinated Debentures, the whole amount that then shall have become due and payable on all such Junior Subordinated Debentures for principal or interest, or both, as the case may be, with interest upon the overdue principal and (to the extent that payment of such interest is enforceable under applicable law and, if the Junior Subordinated Debentures are held by the Trust or a trustee of the Trust, without duplication of any other amounts paid by the Trust or trustee in respect thereof) upon overdue installments of interest at the rate per annum expressed in the Junior Subordinated Debentures; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, and the amount payable to the Trustee under Section 9.6. (b) If the Company shall fail to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or other obligor upon the Junior Subordinated Debentures and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or other obligor upon the Junior Subordinated Debentures, wherever situated. (c) In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, readjustment, arrangement, composition or judicial proceedings affecting the Company or the creditors or property of either, the Trustee shall have power to intervene in such proceedings and take any action therein that may be permitted by the court and shall (except as may be otherwise provided by law) be entitled to file such proofs of claim and other papers and documents as may be necessary or advisable in order to have the claims of the Trustee and of the Holders of Junior Subordinated Debentures allowed for the entire amount due and payable by the Company under this Indenture at the date of institution of such proceedings and for any additional amount that may become due and payable by the Company after such date, and to collect and receive any moneys or other property payable or deliverable on any such claim, and to distribute the same after the deduction of the amount payable to the Trustee under Section 9.6; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Holders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to such Securityholders, to pay to the Trustee any amount due it under Section 9.6. (d) All rights of action and of asserting claims under this Indenture may be enforced by the Trustee without the possession of any of the Junior Subordinated Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for payment to the Trustee of any amounts due under Section 9.6, be for the ratable benefit of the Holders of the Junior Subordinated Debentures. In case of an Event of Default hereunder, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of 26 34 any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Nothing contained herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Junior Subordinated Debentures or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. 7.3 APPLICATION OF MONEYS COLLECTED. Any moneys collected by the Trustee pursuant to this Article with respect to the Junior Subordinated Debentures shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal or interest, upon presentation of the Junior Subordinated Debentures, and notation thereon the payment, if only partially paid, and upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses of collection and of all amounts payable to the Trustee under Section 9.6; SECOND: To the payment of all Senior and Subordinated Debt of the Company if and to the extent required by Article Sixteen; and THIRD: To the payment of the amounts then due and unpaid upon Junior Subordinated Debentures for principal and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Junior Subordinated Debentures for principal and interest, respectively. 7.4 LIMITATION ON SUITS. No Holder shall have any right by virtue of or by availing any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (i) such Holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof; (ii) the Holders of not less than 25% in aggregate principal amount of the Junior Subordinated Debentures then Outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as trustee hereunder; (iii) such Holder or Holders shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby; (iv) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding; and (v) during such 60 day period, the Holders of a majority in principal amount of the Junior Subordinated Debentures do not give the Trustee a direction inconsistent with the request. Notwithstanding any other provisions of this Indenture to the contrary, the right of any Holder to receive payment of the principal of and interest on the Junior Subordinated Debentures 27 35 on or after the respective due dates (or in the case of redemption, on the redemption date), or to institute suit for the enforcement of any such payment on or after such respective dates or redemption date, shall not be impaired or affected without the consent of such Holder; and by accepting a Junior Subordinated Debenture hereunder it is expressly understood, intended and covenanted by the Holder thereof with every other such Holder and the Trustee, that no one or more Holders shall have any right in any manner whatsoever by virtue of or by availing any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or seek to obtain priority over or preference to any such other Holders, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Junior Subordinated Debentures. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. 7.5 RIGHTS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER. (a) Except as otherwise provided in Section 7.2, all powers and remedies given by this Article VII to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the Holders of the Junior Subordinated Debentures, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to such Junior Subordinated Debentures. (b) No delay or omission of the Trustee or of any Holder of any of the Junior Subordinated Debentures to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or on acquiescence therein; and, subject to the provisions of Section 7.4, every power and remedy given by this Article or by law to the Trustee or the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. 7.6 CONTROL BY SECURITYHOLDERS. The Holders of a majority in aggregate principal amount of the Junior Subordinated Debentures at the time Outstanding, determined in accordance with Section 10.4, shall have the right to direct the Trustee and the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that such direction shall not be in conflict with any rule of law or with this Indenture. Subject to the provisions of Section 9.1, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by a Responsible Officer or Officers of the Trustee, determine that the proceeding so directed would involve the Trustee in personal liability. The Holders of a majority in aggregate principal amount of the Junior Subordinated Debentures at the time Outstanding, determined in accordance with Section 10.4, may on behalf of the Holders of all of the Junior Subordinated Debentures waive any past default in the performance of any of the covenants contained herein and its consequences, except (i) a default in the payment of the principal of or interest on any of the Junior Subordinated Debentures as and when the same shall become due by its terms otherwise than by acceleration (unless such 28 36 default has been cured and a sum sufficient to pay all matured installments of interest and principal has been deposited with the Trustee in accordance with Section 7.1(c)), (ii) a default in the covenants contained in Section 5.6 or (iii) in respect of a covenant or provision hereof which under Article Eleven cannot be modified or amended without the consent of the Holder of each Outstanding Junior Subordinated Debenture; provided, however, that if the Junior Subordinated Debentures are held by the Trust or a Trustee of the Trust, such waiver or modification to such waiver shall not be effective until the Holders of a majority in Liquidation Amount of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver; provided further, that if the consent of the Holder of each Outstanding Junior Subordinated Debenture is required, such waiver shall not be effective until each Holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the Holders of the Junior Subordinated Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. 7.7 UNDERTAKING TO PAY COSTS. All parties to this Indenture agree, and each Holder of any Junior Subordinated Debentures by such Holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding more than 10% in aggregate principal amount of the Outstanding Junior Subordinated Debentures, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on the Junior Subordinated Debentures on or after the due dates thereof. ARTICLE VIII. FORM OF JUNIOR SUBORDINATED DEBENTURE AND ORIGINAL ISSUE 8.1 FORM OF JUNIOR SUBORDINATED DEBENTURE. The Junior Subordinated Debenture and the Trustee's Certificate of Authentication to be endorsed thereon are to be substantially in the forms contained as Exhibit A to this Indenture, attached hereto and incorporated herein by reference. 8.2 ORIGINAL ISSUE OF JUNIOR SUBORDINATED DEBENTURES. Junior Subordinated Debentures in the aggregate principal amount of $14,000,000 may, upon execution of this Indenture, and a possible additional amount of up to $2,000,000 related to the Underwriters' Over-Allotment Option with respect to the Preferred Securities may, upon 29 37 exercise of the Underwriters' Over-Allotment Option, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver the Junior Subordinated Debentures to or upon the written order of the Company, signed by its Chairman, President or any Vice President, without any further action by the Company. ARTICLE IX. CONCERNING THE TRUSTEE 9.1 CERTAIN DUTIES AND RESPONSIBILITIES OF THE TRUSTEE. (a) The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform with respect to the Junior Subordinated Debentures such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default has occurred (that has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (1) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or Opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirement of this Indenture; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee; (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Company pursuant to this Indenture or of the Holders of not less than a majority in principal amount of the Junior 30 38 Subordinated Debentures at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture; and (iv) none of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. 9.2 CERTAIN RIGHTS OF TRUSTEE. Except as otherwise provided in Section 9.1: (a) The Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) Any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by a Board Resolution or an instrument signed in the name of the Company by the Chairman, the President or any Vice President and by the Secretary or an Assistant Secretary or the Chief Accounting Officer thereof (unless other evidence in respect thereof is specifically prescribed herein); (c) The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted hereunder in good faith and in reliance thereon; (d) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (that has not been cured or waived) to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (e) The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security, or other papers or documents, unless requested in writing so to do by the Holders of not less than a majority in principal amount of the 31 39 Outstanding Junior Subordinated Debentures (determined as provided in Section 10.4); provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such costs, expenses or liabilities as a condition to so proceeding. The reasonable expense of every such examination shall be paid by the Company or, if paid by the Trustee, shall be repaid by the Company upon demand; (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed in good faith by it hereunder; and (h) The Trustee shall not be deemed to have knowledge of default or an Event of Default, unless and until it receives written notification of such Event of Default from the Company or by the holders of at least 25% of the aggregate principal amount of Junior Subordinated Debentures at the tie outstanding. 9.3 TRUSTEE NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF THE JUNIOR SUBORDINATED DEBENTURES. (a) The recitals contained herein and in the Junior Subordinated Debentures shall be taken as the statements of the Company and the Trustee assumes no responsibility for the correctness of the same. (b) The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Junior Subordinated Debentures. (c) The Trustee shall not be accountable for the use or application by the Company of any of the Junior Subordinated Debentures or of the proceeds of such Junior Subordinated Debentures, or for the use or application of any moneys paid over by the Trustee in accordance with any provision of this Indenture, or for the use or application of any moneys received by any paying agent other than the Trustee. 9.4 MAY HOLD JUNIOR SUBORDINATED DEBENTURES. The Trustee or any paying agent or Securities Registrar, in its individual or any other capacity, may become the owner or pledgee of Junior Subordinated Debentures with the same rights it would have if it were not Trustee, paying agent or Securities Registrar. 9.5 MONEYS HELD IN TRUST. Subject to the provisions of Section 13.5, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any moneys received by it hereunder except such as it may agree with the Company to pay thereon. 32 40 9.6 COMPENSATION AND REIMBURSEMENT. (a) The Company covenants and agrees to pay to the Trustee, and the Trustee shall be entitled to, such reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), as the Company and the Trustee shall agree in writing in a separate fee agreement, for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and, except as otherwise expressly provided herein, the Company will pay or reimburse the Trustee upon its request for all reasonable costs, expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee, including in its individual capacity, (and its officers, agents, directors and employees) for, and to hold it harmless against, any loss, liability, claim or expense incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. (b) The obligations of the Company under this Section to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall continue beyond the termination of this Indenture. Such additional indebtedness shall be secured by a lien prior to that of the Junior Subordinated Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of the Junior Subordinated Debentures. 9.7 RELIANCE ON OFFICERS' CERTIFICATE. Except as otherwise provided in Section 9.1, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting to take any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted to be taken by it under the provisions of this Indenture upon the faith thereof. 9.8 DISQUALIFICATION; CONFLICTING INTERESTS. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the Company shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. 33 41 9.9 CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a Trustee with respect to the Junior Subordinated Debentures issued hereunder which shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia, or a corporation or other Person permitted to act as trustee by the Commission, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 9.10. 9.10 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) The Trustee, or any successor hereafter appointed, may at any time resign by giving written notice thereof to the Company and by transmitting notice of resignation by mail, first-class postage prepaid, to the Securityholders, as their names and addresses appear upon the Securities Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide Holder of Junior Subordinated Debentures for at least six months may, subject to the provisions of Section 7.7, on behalf of such Securityholder and all other Holders, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any one of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 9.8 after written request therefor by the Company or by any Securityholder who has been a bona fide Holder of Junior Subordinated Debentures for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 9.9 and shall fail to resign after written request therefor by the Company or by any such Securityholder; or (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or commence a voluntary bankruptcy proceeding, or a receiver of the 34 42 Trustee or of its property shall be appointed or consented to, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.7, unless the Trustee's duty to resign is stayed as provided herein, any Securityholder who has been a bona fide Holder of Junior Subordinated Debentures for at least six months may, on behalf of that Holder and all other Holders, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The Holders of a majority in aggregate principal amount of the Junior Subordinated Debentures at the time Outstanding may at any time remove the Trustee by so notifying the Trustee and the Company and may appoint a successor Trustee with the consent of the Company. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor trustee as provided in Section 9.11. (e) Any successor trustee appointed pursuant to this Section may be appointed with respect to the Junior Subordinated Debentures, and at any time there shall be only one Trustee with respect to the Junior Subordinated Debentures. 9.11 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. (a) In case of the appointment hereunder of a successor trustee, every such successor trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor trustee all the rights, powers, and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring Trustee hereunder. (b) Upon request of any such successor trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor trustee all such rights, powers and trusts referred to in paragraph (a) of this Section. (c) No successor trustee shall accept its appointment unless at the time of such acceptance such successor trustee shall be qualified and eligible under this Article IX. 35 43 (d) Upon acceptance of appointment by a successor trustee as provided in this Section, the Company shall transmit notice of the succession of such trustee hereunder by mail, first-class postage prepaid, to the Securityholders, as their names and addresses appear upon the Securities Register. If the Company fails to transmit such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be transmitted at the expense of the Company. 9.12 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be qualified and eligible under the provisions of this Article Nine, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case any Junior Subordinated Debentures shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Junior Subordinated Debentures so authenticated with the same effect as if such successor Trustee had itself authenticated such Junior Subordinated Debentures. 9.13 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY. The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent included therein. 9.14 APPOINTMENT OF AUTHENTICATING AGENT. At any time when any of the Junior Subordinated Debentures remain Outstanding, the Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Junior Subordinated Debentures issued upon original issuance, exchange, registration of transfer or partial redemption thereof or pursuant to Section 2.8, and Junior Subordinated Debentures so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Junior Subordinated Debentures by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $10,000,000 and subject to supervision or examination by federal or state authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of such 36 44 supervision or examining authority, for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such notice of resignation or upon such termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Securityholders as their names and addresses appear in the Securities Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with the like effect as if originally named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and to the extent such fees are paid by the Trustee the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 9.6. If an appointment is made pursuant to this Section, the Junior Subordinated Debentures may have endorsed thereon, in lieu of the form of certificate of authentication set forth in Section 8.1, a certificate of authentication in the following form: "This is one of the Junior Subordinated Debentures described in the within mentioned Indenture." WILMINGTON TRUST COMPANY, As Trustee By: ---------------------- As Authenticating Agent 37 45 By:______________________ Authorized Signature ARTICLE X. CONCERNING THE SECURITYHOLDERS 10.1 EVIDENCE OF ACTION BY SECURITYHOLDERS. Whenever in this Indenture it is provided that the Holders of a majority or specified percentage in aggregate principal amount of the Junior Subordinated Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the Holders of such majority or specified percentage have joined therein may be evidenced by any instrument or any number of instruments of similar tenor executed by such Holders in Person or by agent or proxy appointed in writing. If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of Outstanding Junior Subordinated Debentures have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the Outstanding Junior Subordinated Debentures shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. 10.2 PROOF OF EXECUTION BY SECURITYHOLDERS. Subject to the provisions of Section 6.1, proof of the execution of any instrument by a Securityholder (such proof will not require notarization) or his agent or proxy and proof of the holding by any Person of any of the Junior Subordinated Debentures shall be sufficient if made in the following manner: (a) The fact and date of the execution by any such Person of any instrument may be proved in any reasonable manner acceptable to the Trustee. (b) The ownership of Junior Subordinated Debentures shall be proved by the Securities Register or by a certificate of the Securities Registrar thereof. 38 46 (c) The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. 10.3 WHO MAY BE DEEMED OWNERS. Prior to the due presentment for registration of transfer of any Junior Subordinated Debenture, the Company, the Trustee, any paying agent and any Securities Registrar may deem and treat the Person in whose name such Junior Subordinated Debenture shall be registered upon the books of the Company as the absolute owner of such Junior Subordinated Debenture (whether or not such Junior Subordinated Debenture shall be overdue and notwithstanding any notice of ownership or writing thereon made by anyone other than the Securities Registrar) for the purpose of receiving payment of or on account of the principal of and (subject to Section 2.3) interest on such Junior Subordinated Debenture and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any Securities Registrar shall be affected by any notice to the contrary. 10.4 CERTAIN JUNIOR SUBORDINATED DEBENTURES OWNED BY COMPANY DISREGARDED. In determining whether the Holders of the requisite aggregate principal amount of Junior Subordinated Debentures have concurred in any direction, consent or waiver under this Indenture, the Junior Subordinated Debentures that are owned by the Company or any other obligor on the Junior Subordinated Debentures or by any Person directly or indirectly controlling or controlled by or under common control with the Company or any other obligor on the Junior Subordinated Debentures shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Junior Subordinated Debentures that the Trustee has been notified are so owned shall be so disregarded. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. 10.5 ACTIONS BINDING ON FUTURE SECURITYHOLDERS. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 10.1, of the taking of any action by the Holders of the majority or percentage in aggregate principal amount of the Junior Subordinated Debentures specified in this Indenture in connection with such action, any Holder who is shown by the evidence to have consented to such action may, by filing written notice with the Trustee, and upon proof of holding as provided in Section 10.2, revoke such action so far as concerns such Holder's Junior Subordinated Debentures. Except as aforesaid any such action taken by the Holder shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Holder's Junior Subordinated Debentures, and of any Junior Subordinated Debentures issued in exchange therefor, on registration of transfer thereof or in place thereof, irrespective of whether or not any notation in regard thereto is made upon such Junior Subordinated Debentures. Any action taken by the Holders of the majority or percentage in aggregate principal amount of the Junior Subordinated Debentures specified in this Indenture in connection with such action shall be conclusively 39 47 binding upon the Company, the Trustee and the Holders of all the Junior Subordinated Debentures. ARTICLE XI. SUPPLEMENTAL INDENTURES 11.1 SUPPLEMENTAL INDENTURES WITHOUT THE CONSENT OF SECURITYHOLDERS. In addition to any supplemental indenture otherwise authorized by this Indenture, the Company and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect), without the consent of the Securityholders, for one or more of the following purposes: (a) to cure any ambiguity, defect, or inconsistency herein, or in the Junior Subordinated Debentures, provided that any such action does not materially adversely affect the interests of the Holders or the holders of the Preferred Securities so long as they remain outstanding; (b) to comply with Article XII; (c) to provide for uncertificated Junior Subordinated Debentures in addition to or in place of certificated Junior Subordinated Debentures; (d) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; (e) to add to, delete from, or revise the conditions, limitations, and restrictions on the authorized amount, terms, or purposes of issue, authentication, and delivery of Junior Subordinated Debentures, as herein set forth; (f) to make any change that does not adversely affect the rights of any Securityholder in any material respect; (g) to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or to add to the rights of the Holders; or (h) qualify or maintain the qualification of this Indenture under the Trust Indenture Act. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into any such supplemental indenture that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. 40 48 Any supplemental indenture authorized by the provisions of this Section may be executed by the Company and the Trustee without the consent of the Holders of any of the Junior Subordinated Debentures at the time Outstanding, notwithstanding any of the provisions of Section 11.2. 11.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF SECURITYHOLDERS. With the consent (evidenced as provided in Section 10.1) of the Holders of not less than a majority in aggregate principal amount of the Junior Subordinated Debentures at the time Outstanding, the Company, when authorized by Board Resolutions, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner not covered by Section 11.1 the rights of the Holders of the Junior Subordinated Debentures under this Indenture; provided, however, that no such supplemental indenture shall without the consent of the Holders of each Junior Subordinated Debenture then Outstanding, (i) change (except as expressly provided herein pursuant to Section 2.2) the stated maturity of the Junior Subordinated Debentures or reduce the principal amount thereof; or reduce the rate or extend (except as expressly provided herein pursuant to Section 4.1) the time of payment of interest thereon; or (ii) reduce the percentage of principal amount of Junior Subordinated Debentures, the Holders of which are required to consent to any such supplemental indenture; provided, further, that if the Junior Subordinated Debentures are held by the Trust or a trustee of the Trust, such supplemental indenture shall not be effective until the holders of a majority in aggregate Liquidation Amount of Preferred Securities shall have consented to such supplemental indenture; provided further, that if the consent of the Holder of each Outstanding Junior Subordinated Debenture is required, such supplemental indenture shall not be effective until each Holder of the Trust Securities shall have consented to such supplemental indenture. It shall not be necessary for the consent of the Securityholders to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. 11.3 EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture pursuant to the provisions of this Article or of Section 12.1, this Indenture shall be deemed to be modified and amended in accordance therewith. 11.4 JUNIOR SUBORDINATED DEBENTURES AFFECTED BY SUPPLEMENTAL INDENTURES. Junior Subordinated Debentures, affected by a supplemental indenture, authenticated and delivered after the execution of such supplemental indenture pursuant to the provisions of this Article or of Section 12.1, may bear a notation in form approved by the Company, as to any matter provided for in such supplemental indenture. If the Company shall so determine, new 41 49 Junior Subordinated Debentures so modified as to conform, in the opinion of the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Junior Subordinated Debentures then Outstanding. 11.5 EXECUTION OF SUPPLEMENTAL INDENTURES. Upon the request of the Company, accompanied by Board Resolutions authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders required to consent thereto as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. The Trustee, subject to the provisions of Section 9.1, may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Company shall transmit by mail, first-class postage prepaid, a notice, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Securities Register. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. ARTICLE XII. SUCCESSOR CORPORATION 12.1 COMPANY MAY CONSOLIDATE, ETC. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and no Person shall consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless (i) in case the Company consolidates with or merges into another Person or conveys or transfers its properties and assets substantially as an entirety to any Person, the successor Person is organized under the laws of the United States or any state or the District of Columbia, and such successor Person expressly assumes the Company's obligations on the Junior Subordinated Debentures issued under this Indenture; (ii) immediately after giving effect thereto, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing; and (iii) such successor Person expressly assumes the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept and performed by the Company by executing and delivering a supplemental indenture in form and substance satisfactory to the Trustee. 42 50 12.2 SUCCESSOR SUBSTITUTED. (a) In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon consent of the Trustee and the assumption by the successor Person by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and interest on all of the Junior Subordinated Debentures Outstanding and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor Person shall succeed to and be substituted for the Company, with the same effect as if it had been named as the Company herein, and thereupon the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Junior Subordinated Debentures. (b) In case of any such consolidation, merger, sale, conveyance, transfer or other disposition such changes in phraseology and form (but not in substance) may be made in the Junior Subordinated Debentures thereafter to be issued as may be appropriate. (c) Nothing contained in this Indenture or in any of the Junior Subordinated Debentures will prevent the Company from merging into itself or acquiring by purchase or otherwise all or any part of the property of any other Person (whether or not affiliated with the Company). 12.3 EVIDENCE OF CONSOLIDATION, ETC., TO TRUSTEE. The Trustee, subject to the provisions of Section 9.1, may receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or other disposition, and any such assumption, comply with the provisions of this Article. ARTICLE XIII. SATISFACTION AND DISCHARGE 13.1 SATISFACTION AND DISCHARGE OF INDENTURE. If at any time: (a) the Company shall have delivered to the Trustee for cancellation all Junior Subordinated Debentures theretofore authenticated (other than any Junior Subordinated Debentures that shall have been destroyed, lost or stolen and that shall have been replaced or paid as provided in Section 2.8) and Junior Subordinated Debentures for whose payment money or Governmental Obligations have theretofore been deposited in trust or segregated and held in trust by the Company (and thereupon repaid to the Company or discharged from such trust, as provided in Section 13.5); or (b) all such Junior Subordinated Debentures not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit or cause to be deposited with the Trustee as trust funds the entire amount in moneys or Governmental Obligations sufficient or a combination thereof sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay at maturity or upon redemption all Junior 43 51 Subordinated Debentures not theretofore delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company; then this Indenture shall thereupon cease to be of further effect except for the provisions of Sections 2.2, 2.3, 2.4, 2.5, 4.1, 4.2, 4.3 and 9.10, that shall survive until the date of maturity or redemption date, as the case may be, and Sections 9.6 and 13.5, that shall survive to such date and thereafter, and the Trustee, on demand of the Company and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. 13.2 DISCHARGE OF OBLIGATIONS. If at any time all such Junior Subordinated Debentures not theretofore delivered to the Trustee for cancellation or that have not become due and payable as described in Section 13.1 shall have been paid by the Company by depositing irrevocably with the Trustee, as trust funds, moneys or an amount of Governmental Obligations sufficient to pay at maturity or upon redemption all such Junior Subordinated Debentures not theretofore delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then after the date such moneys or Governmental Obligations, as the case may be, are deposited with the Trustee the obligations of the Company under this Indenture shall cease to be of further effect except for the provisions of Sections 2.2, 2.3, 2.4, 2.5, 4.1, 4.2, 4.3, 9.6, 9.10 and 13.5 hereof that shall survive until such Junior Subordinated Debentures shall mature and be paid. Thereafter, Sections 9.6 and 13.5 shall survive. 13.3 DEPOSITED MONEYS TO BE HELD IN TRUST. All monies or Governmental Obligations deposited with the Trustee pursuant to Sections 13.1 or 13.2 shall be held in trust and shall be available for payment as due, either directly or through any paying agent (including the Company acting as its own paying agent), to the Holders of the Junior Subordinated Debentures for the payment or redemption of which such moneys or Governmental Obligations have been deposited with the Trustee. 13.4 PAYMENT OF MONIES HELD BY PAYING AGENTS. In connection with the satisfaction and discharge of this Indenture all moneys or Governmental Obligations then held by any paying agent under the provisions of this Indenture shall, upon demand of the Company, be paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys or Governmental Obligations. 13.5 REPAYMENT TO COMPANY. Any monies or Governmental Obligations deposited with any paying agent or the Trustee, or then held by the Company in trust for payment of principal of or interest on the Junior Subordinated Debentures that are not applied but remain unclaimed by the Holders of 44 52 such Junior Subordinated Debentures for at least two years after the date upon which the principal of or interest on such Junior Subordinated Debentures shall have respectively become due and payable, shall be repaid to the Company on of each year or (if then held by the Company) shall be discharged from such trust; and thereupon the paying agent and the Trustee shall be released from all further liability with respect to such moneys or Governmental Obligations, and the Holder of any of the Junior Subordinated Debentures entitled to receive such payment shall thereafter, as an unsecured general creditor, look only to the Company for the payment thereof. ARTICLE XIV. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS 14.1 NO RECOURSE. No recourse under or upon any obligation, covenant or agreement of this Indenture, or of any Junior Subordinated Debenture, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director as such, past, present or future, of the Company or of any predecessor or successor corporation, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors as such, of the Company or of any predecessor or successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Junior Subordinated Debentures or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Junior Subordinated Debentures or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of such Junior Subordinated Debentures. ARTICLE XV. MISCELLANEOUS PROVISIONS 15.1 EFFECT ON SUCCESSORS AND ASSIGNS. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Company or the Trustee shall bind their respective successors and assigns, whether so expressed or not. 45 53 15.2 ACTIONS BY SUCCESSOR. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the corresponding board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. 15.3 SURRENDER OF COMPANY POWERS. The Company by instrument in writing executed by authority of 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company and as to any successor corporation. 15.4 NOTICES. Except as otherwise expressly provided herein any notice or demand that by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Junior Subordinated Debentures to or on the Company may be given or served by being deposited first-class postage prepaid in a post-office letterbox addressed (until another address is filed in writing by the Company with the Trustee), as follows: c/o Mercantile Bank Corporation, 216 North Division Avenue, Grand Rapids, Michigan, 49503 Attention: Chairman. Any notice, election, request or demand by the Company or any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the Corporate Trust Office of the Trustee. 15.5 GOVERNING LAW. This Indenture and each Junior Subordinated Debenture shall be deemed to be a contract made under the internal laws of the State of Michigan and for all purposes shall be construed in accordance with the laws of said state, provided that the duties, rights, immunities and the standard of care of the Trustee shall be governed by Delaware law. 15.6 TREATMENT OF JUNIOR SUBORDINATED DEBENTURES AS DEBT. It is intended that the Junior Subordinated Debentures will be treated as indebtedness and not as equity for federal income tax purposes. The provisions of this Indenture shall be interpreted to further this intention. 15.7 COMPLIANCE CERTIFICATES AND OPINIONS. (a) Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents 46 54 is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. (b) Every certificate or opinion delivered to the Trustee with respect to compliance with a condition or covenant in this Indenture shall include (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, such Person has made such examination or investigation as is necessary to enable such Person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with; provided, however, that each such certificate shall comply with the provisions of Section 314 of the Trust Indenture Act. 15.8 PAYMENTS ON BUSINESS DAYS. In any case where the date of maturity of interest or principal of the Junior Subordinated Debentures or the date of redemption of the Junior Subordinated Debentures shall not be a Business Day, then payment of interest or principal will be made on the next succeeding Business Day (without any additional interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. 15.9 CONFLICT WITH TRUST INDENTURE ACT. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. 15.10 COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. 15.11 SEPARABILITY. In case any one or more of the provisions contained in this Indenture or in the Junior Subordinated Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of the Junior Subordinated Debentures, but this Indenture and the Junior Subordinated Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. 47 55 15.12 ASSIGNMENT. The Company will have the right at all times to assign any of its respective rights or obligations under this Indenture to a direct or indirect wholly-owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties thereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties hereto. 15.13 ACKNOWLEDGMENT OF RIGHTS. The Company acknowledges that, with respect to any Junior Subordinated Debentures held by the Trust or a trustee of the Trust, if the Property Trustee of the Trust fails to enforce its rights under this Indenture as the Holder of the Junior Subordinated Debentures held as the assets of the Trust, any holder of Preferred Securities may institute legal proceedings directly against the Company to enforce such Property Trustee's rights under this Indenture without first instituting any legal proceedings against such Property Trustee or any other Person or entity. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest or principal on the Junior Subordinated Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), the Company acknowledges that a holder of Preferred Securities may directly institute a proceeding for enforcement of payment to such holder of the principal of or interest on the Junior Subordinated Debentures having a principal amount equal to the aggregate Liquidation Amount of the Preferred Securities of such holder on or after the respective due date specified in the Junior Subordinated Debentures. This Section 15.13 may not be amended without the prior written consent of the holders of all of the Preferred Securities. ARTICLE XVI. SUBORDINATION OF JUNIOR SUBORDINATED DEBENTURES 16.1 AGREEMENT TO SUBORDINATE. The Company covenants and agrees, and each Holder of Junior Subordinated Debentures issued hereunder by such Holder's acceptance thereof likewise covenants and agrees, that all Junior Subordinated Debentures shall be issued subject to the provisions of this Article Sixteen; and each Holder, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of and interest on all Junior Subordinated Debentures issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior and Subordinated Debt, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XVI shall prevent the occurrence of any default or Event of Default hereunder. 48 56 16.2 DEFAULT ON SENIOR AND SUBORDINATED DEBT. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior and Subordinated Debt of the Company or in the event that the maturity of any Senior and Subordinated Debt of the Company has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the principal of or interest on the Junior Subordinated Debentures. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 16.2, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior and Subordinated Debt or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior and Subordinated Debt may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior and Subordinated Debt (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior and Subordinated Debt and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior and Subordinated Debt. 16.3 LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior and Subordinated Debt of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company on account of the principal or interest on the Junior Subordinated Debentures; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article Sixteen, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Holders or by the Trustee under the Indenture if received by them or it, directly to the holders of Senior and Subordinated Debt of the Company (pro rata to such holders on the basis of the respective amounts of Senior and Subordinated Debt held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior and Subordinated Debt may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior and Subordinated Debt in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior and Subordinated Debt, before any payment or distribution is made to the Holders or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior and Subordinated Debt of the 49 57 Company is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior and Subordinated Debt or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior and Subordinated Debt may have been issued, and their respective interests may appear, as calculated by the Company, for application to the payment of all Senior and Subordinated Debt of the Company, as the case may be, remaining unpaid to the extent necessary to pay such Senior and Subordinated Debt in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior and Subordinated Debt. For purposes of this Article XVI, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article Sixteen with respect to the Junior Subordinated Debentures to the payment of all Senior and Subordinated Debt of the Company, as the case may be, that may at the time be outstanding, provided that (i) such Senior and Subordinated Debt is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior and Subordinated Debt are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XII of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 16.3 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article Twelve of this Indenture. Nothing in Section 16.2 or in this Section 16.3 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 9.6 of this Indenture. 16.4 SUBROGATION. Subject to the payment in full of all Senior and Subordinated Debt of the Company, the rights of the Holders of the Junior Subordinated Debentures shall be subrogated to the rights of the holders of such Senior and Subordinated Debt to receive payments or distributions of cash, property or securities of the Company, as the case may be, applicable to such Senior and Subordinated Debt until the principal of and interest on the Junior Subordinated Debentures shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior and Subordinated Debt of any cash, property or securities to which the Holders of the Junior Subordinated Debentures or the Trustee would be entitled except for the provisions of this Article XVI, and no payment over pursuant to the provisions of this Article XVI to or for the benefit of the holders of such Senior and Subordinated Debt by Holders of the Junior Subordinated Debentures or the Trustee, shall, as between the Company, its creditors other than holders of Senior and Subordinated Debt of the Company, and the Holders of the Junior Subordinated Debentures, be deemed to be a payment by the Company to or on account of such Senior and Subordinated Debt. It is understood that the provisions of this Article XVI are and are intended solely for the purposes of defining the relative rights of the Holders of the 50 58 Junior Subordinated Debentures, on the one hand, and the holders of such Senior and Subordinated Debt on the other hand. Nothing contained in this Article XVI or elsewhere in this Indenture or in the Junior Subordinated Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Senior and Subordinated Debt of the Company, and the Holders of the Junior Subordinated Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Junior Subordinated Debentures the principal of and interest on the Junior Subordinated Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Junior Subordinated Debentures and creditors of the Company, other than the holders of Senior and Subordinated Debt of the Company, nor shall anything herein or therein prevent the Trustee or the Holder of any Junior Subordinated Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Sixteen of the holders of such Senior and Subordinated Debt in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XVI, the Trustee, subject to the provisions of Section 9.1, and the Holders of the Junior Subordinated Debentures shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of the Junior Subordinated Debentures, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior and Subordinated Debt and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XVI. 16.5 TRUSTEE TO EFFECTUATE SUBORDINATION. Each Holder of Junior Subordinated Debentures by such Holder's acceptance thereof authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XVI and appoints the Trustee such Holder's attorney-in-fact for any and all such purposes. 16.6 NOTICE BY THE COMPANY. The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Junior Subordinated Debentures pursuant to the provisions of this Article XVI. Notwithstanding the provisions of this Article Sixteen or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Junior Subordinated Debentures pursuant to the provisions of this Article XVI, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Company 51 59 or a holder or holders of Senior and Subordinated Debt or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Section 9.1, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 16.6 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of or interest on any Junior Subordinated Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Trustee, subject to the provisions of Section 9.1, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior and Subordinated Debt of the Company (or a trustee on behalf of such holder), to establish that such notice has been given by a holder of such Senior and Subordinated Debt or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior and Subordinated Debt to participate in any payment or distribution pursuant to this Article XVI, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior and Subordinated Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XVI, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. 16.7 RIGHTS OF THE TRUSTEE; HOLDERS OF SENIOR AND SUBORDINATED DEBT. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XVI in respect of any Senior and Subordinated Debt at any time held by it, to the same extent as any other holder of Senior and Subordinated Debt, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior and Subordinated Debt of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XVI, and no implied covenants or obligations with respect to the holders of such Senior and Subordinated Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior and Subordinated Debt and, subject to the provisions of Section 9.1, the Trustee shall not be liable to any holder of such Senior and Subordinated Debt if it shall pay over or deliver to Holders of Junior Subordinated Debentures, the Company or any other Person money or assets to which any holder of such Senior and Subordinated Debt shall be entitled by virtue of this Article XVI or otherwise. 52 60 16.8 SUBORDINATION MAY NOT BE IMPAIRED. No right of any present or future holder of any Senior and Subordinated Debt of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior and Subordinated Debt of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Junior Subordinated Debentures, without incurring responsibility to the Holders of the Junior Subordinated Debentures and without impairing or releasing the subordination provided in this Article XVI or the obligations hereunder of the Holders of the Junior Subordinated Debentures to the holders of such Senior and Subordinated Debt, do any one or more of the following:(i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior and Subordinated Debt, or otherwise amend or supplement in any manner such Senior and Subordinated Debt or any instrument evidencing the same or any agreement under which such Senior and Subordinated Debt is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior and Subordinated Debt; (iii) release any Person liable in any manner for the collection of such Senior and Subordinated Debt; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. MERCANTILE BANK CORPORATION By:_________________________________ Name: Gerald R. Johnson, Jr. Title: Chairman and CEO WILMINGTON TRUST COMPANY, AS TRUSTEE By:____________________________ Name:__________________________ Title:_________________________ 53 61 STATE OF MICHIGAN ) )ss: COUNTY OF KENT ) On the day of , 1999, before me personally came Gerald R. Johnson, Jr., to me known, who, being by me duly sworn, did depose and say that he is the Chairman of MERCANTILE BANK CORPORATION, one of the corporations described in and which executed the above instrument; and that he signed his name thereto on behalf of said corporation by authority of the Board of Directors of said corporation. Witness my hand and official seal: _________________________________ Notary Public My Commission Expires:________________________ 54 62 STATE OF DELAWARE ) )ss: COUNTY OF NEWCASTLE ) On the day of , 1999, before me personally came , to me known, who, being by me duly sworn, did depose and say that he/she is the of WILMINGTON TRUST COMPANY, a Delaware banking corporation described in and which executed the above instrument; and that he/she signed his/her name thereto on behalf of said entity. Witness my hand and official seal: __________________________________ Notary Public My Commission Expires:________________________ 55 63 EXHIBIT A (FORM OF FACE OF JUNIOR SUBORDINATED DEBENTURE) This Junior Subordinated Debenture is a Global Subordinated Debenture within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depositary or a nominee of a Depositary. This Junior Subordinated Debenture is exchangeable for Junior Subordinated Debentures registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Junior Subordinated Debenture (other than a transfer of this Junior Subordinated Debenture as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in such limited circumstances. Unless this Junior Subordinated Debenture is presented by an authorized representative of Wilmington Trust Company (Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001) to the issuer or its agent for registration of transfer, exchange or payment, and any Junior Subordinated Debenture issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of Wilmington Trust Company (and any payment hereon is made to Cede & Co. or to such other entity as is requested by an authorized representative of Wilmington Trust Company), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch the registered owner hereof, Cede & Co., has an interest herein. Certificate No. Registered Principal Amount _____________ $14,000,000 CUSIP No. MERCANTILE BANK CORPORATION % JUNIOR SUBORDINATED DEBENTURE DUE , 2029 Mercantile Bank Corporation, a Michigan corporation (the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to Wilmington Trust Company, as Property Trustee, or registered assigns, the principal sum of Fourteen Million Dollars ($14,000,000) on , 2029 (which date may be shortened as provided in the Indenture, the "Stated Maturity"), and to pay interest on said principal sum from , 1999, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on the 15th day of April, July, October and January in each year commencing October 15, 1999, at the rate of % per annum until the principal hereof shall have become due and payable, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per A- 64 annum compounded quarterly. The amount of each interest payment due with respect to the Junior Subordinated Debentures will include amounts accrued through the date the interest payment is due. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on this Junior Subordinated Debenture is not a Business Day (as defined in the Indenture), then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Junior Subordinated Debenture (or one or more Predecessor Junior Subordinated Debentures, as defined in the Indenture) is registered at the close of business on the regular record date for such interest installment, which shall be the close of business on the business day next preceding such Interest Payment Date unless otherwise provided in the Indenture. The principal of and the interest on this Junior Subordinated Debenture shall be payable at the office or agency of the Trustee (as defined in the Indenture) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the Registered Holder (as defined in the Indenture) at such address as shall appear in the Securities Register (as defined in the Indenture).Notwithstanding the foregoing, so long as the Holder of this Junior Subordinated Debenture is the Property Trustee (as defined in the Indenture), the payment of the principal of and interest on this Junior Subordinated Debenture will be made at such place and to such account as may be designated by the Property Trustee. The Stated Maturity may be shortened at any time by the Company to any date not earlier than , 2004, subject to the Company having received prior approval of the Federal Reserve (as defined in the Indenture) if then required under applicable capital guidelines or policies of the Federal Reserve. The indebtedness evidenced by this Junior Subordinated Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior and Subordinated Debt (as defined in the Indenture), and this Junior Subordinated Debenture is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Junior Subordinated Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior and Subordinated Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. A- 65 This Junior Subordinated Debenture shall not be entitled to any benefit under the Indenture, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Junior Subordinated Debenture are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has caused this instrument to be executed. Dated: __________, 1999 MERCANTILE BANK CORPORATION By:____________________________ Name: Gerald R. Johnson, Jr. Title: Chairman and CEO ATTEST: By:___________________________________ Name: Robert B. Kaminski Title: Secretary [FORM OF CERTIFICATE OF AUTHENTICATION] A- 66 CERTIFICATE OF AUTHENTICATION This is one of the Junior Subordinated Debentures described in the within-mentioned Indenture. Dated: __________, 1999 WILMINGTON TRUST COMPANY, as Trustee By:______________________ Authorized Signature A- 67 [FORM OF REVERSE OF JUNIOR SUBORDINATED DEBENTURE] _____% JUNIOR SUBORDINATED DEBENTURE (CONTINUED) This Junior Subordinated Debenture is one of the junior subordinated debentures of the Company (herein sometimes referred to as the "Junior Subordinated Debentures"), specified in the Indenture, all issued under and pursuant to a Subordinated Indenture dated as of , 1999 (the "Indenture") duly executed and delivered between the Company and Wilmington Trust Company, as Trustee (the "Trustee"), to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Junior Subordinated Debentures. The Junior Subordinated Debentures are limited in aggregate principal amount as specified in the Indenture. Because of the occurrence and continuation of a Special Event (as defined in the Indenture), in certain circumstances, this Junior Subordinated Debenture may become due and payable at the option of the Company at the principal amount together with any interest accrued thereon (the "Redemption Price").The Redemption Price shall be paid prior to 2:00 p.m. Detroit, Michigan time, on the date of such redemption or at such earlier time as the Company determines. The Company shall have the right to redeem this Junior Subordinated Debenture at the option of the Company, in whole or in part, from time to time, on or after , 2004, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued but unpaid interest thereon to the date of such redemption. Any redemption pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days notice. If the Junior Subordinated Debentures are only partially redeemed by the Company pursuant to this paragraph, the Junior Subordinated Debentures will be redeemed pro rata or by lot or by any other method utilized by the Trustee; provided that if, at the time of redemption, the Junior Subordinated Debentures are registered as a Global Subordinated Debenture (as defined in the Indenture), the Depositary (as defined in the Indenture) shall determine the principal amount of such Junior Subordinated Debentures held by each Junior Subordinated Debenture Holder to be redeemed in accordance with its procedures. In the event of redemption of this Junior Subordinated Debenture in part only, a new Junior Subordinated Debenture for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. In case an Event of Default (as defined in the Indenture), shall have occurred and be continuing, the principal of all of the Junior Subordinated Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of the Junior Subordinated Debentures at the time Outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner A- 68 or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Junior Subordinated Debentures; provided, however, that no such supplemental indenture shall (i) change the stated maturity of the Junior Subordinated Debentures except as provided in the Indenture, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, without the consent of the Holder of each Junior Subordinated Debenture so affected, or (ii) reduce the aforesaid percentage of Junior Subordinated Debentures, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holders of each Junior Subordinated Debenture then Outstanding and affected thereby. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Junior Subordinated Debentures at the time Outstanding, on behalf of all of the Holders of the Junior Subordinated Debentures, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except a default in the payment of the principal of or interest on any of the Junior Subordinated Debentures. Any such consent or waiver by the registered Holder of this Junior Subordinated Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Junior Subordinated Debenture and of any Junior Subordinated Debenture issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Junior Subordinated Debenture. No reference herein to the Indenture and no provision of this Junior Subordinated Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Junior Subordinated Debenture at the time and place and at the rate and in the money herein prescribed. The Company shall have the right at any time during the term of the Junior Subordinated Debentures and from time to time to extend the interest payment period of such Junior Subordinated Debentures for up to 20 consecutive quarters (an "Extended Interest Payment Period"), at the end of which period the Company shall pay all interest then accrued and unpaid (together with interest thereon at the rate specified for the Junior Subordinated Debentures to the extent that payment of such interest is enforceable under applicable law).Before the termination of any such Extended Interest Payment Period, the Company may further extend such Extended Interest Payment Period, provided that such Extended Interest Payment Period together with all such further extensions thereof shall not exceed 20 consecutive quarters or extend beyond the Stated Maturity. At the termination of any such Extended Interest Payment Period and upon the payment of all accrued and unpaid interest and any additional amounts then due, the Company may commence a new Extended Interest Payment Period. The Company has agreed that if at any time (i) there shall have occurred any event of which the Company has actual knowledge that (a) with the giving of notice or the lapse of time, or both, would constitute an Event of Default and (b) in respect to which the Company shall not have taken reasonable steps to cure, or (ii) the Company shall have given notice of its election of an Extended Interest Payment Period as provided herein and shall not have rescinded such notice, or such Extended Interest Payment Period, or any extension thereof, shall be continuing; or (iii) while the Junior Subordinated Debentures are held by the Trust, the Company shall be in default with respect to its payment of any obligation under the Preferred Securities Guarantee, A- 69 then the Company will not (1) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (2) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company (including the Junior Subordinated Debentures) that rank pari passu with or junior in interest to the Junior Subordinated Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu or junior in interest to the Junior Subordinated Debentures (other than (a) dividends or distributions in common stock, (b) any declaration of a dividend in connection with the implementation of a shareholders' rights plan, or the issuance of stock under any such plan in the future or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Preferred Securities Guarantee and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans for its directors, officers or employees). As provided in the Indenture and subject to certain limitations therein set forth, this Junior Subordinated Debenture is transferable by the registered Holder hereof on the Securities Register of the Company, upon surrender of this Junior Subordinated Debenture for registration of transfer at the office or agency of the Trustee accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered Holder hereof or such Holder's attorney duly authorized in writing, and thereupon one or more new Junior Subordinated Debentures of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Trustee and the Company may require payment of a sum sufficient to cover any expense, tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Junior Subordinated Debenture, the Company, the Trustee, any paying agent and the Securities Registrar (as defined in the Indenture) may deem and treat the Registered Holder hereof as the absolute owner hereof (whether or not this Junior Subordinated Debenture shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Securities Registrar) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Securities Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Junior Subordinated Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Junior Subordinated Debentures are issuable only in registered form without coupons in denominations of $10 and any integral multiple thereof. This Global Subordinated Debenture is exchangeable for Junior Subordinated Debentures in definitive form only under certain limited A- 70 circumstances set forth in the Indenture. Junior Subordinated Debentures so issued are issuable only in registered form without coupons in denominations of $10 and any integral multiple thereof. All terms used in this Junior Subordinated Debenture that are defined in the Indenture shall have the meanings assigned to them in the Indenture. A- EX-4.4 3 FORM OF TRUST AGREEMENT OF MBWM TRUST 1 EXHIBIT 4.4 TRUST AGREEMENT TRUST AGREEMENT, dated as of July 23, 1999 (this "Trust Agreement"), by and among (i) Mercantile Bank Corporation, a Michigan corporation (the "Depositor"), (ii) Wilmington Trust Company, a Delaware banking corporation, as trustee (the "Delaware Trustee"), and (iii) Gerald R. Johnson, Jr., Michael H. Price and Charles E. Christmas, each an individual, as trustees (each of such trustees in (iii) an "Administrative Trustee" and together with the Delaware Trustee collectively, the "Trustees"). SECTION 1. THE TRUST. The trust created hereby shall be known as MBWM Capital Trust I (the "Trust"), in which name the Trustees, or the Depositor to the extent provided herein, may conduct the business of the Trust, make and execute contracts, and sue and be sued. SECTION 2. THE TRUST ESTATE. The Depositor hereby assigns, transfers, conveys and sets over to the Trustees the sum of $10.00. The Trustees hereby acknowledge receipt of such amount in trust from the Depositor, which amount shall constitute the initial trust estate. The Trustees hereby declare that they will hold the trust estate in trust for the Depositor. It is the intention of the parties hereto that the Trust created hereby constitute a business trust under Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. Section 3801, et seq. (the "Business Trust Act"), and that this document constitute the governing instrument of the Trust. The Trustees are hereby authorized and directed to execute and file a certificate of trust with the Delaware Secretary of State in accordance with the provisions of the Business Trust Act. SECTION 3. AMENDED AND RESTATED TRUST AGREEMENT. The Depositor and the Trustees will enter into an amended and restated Trust Agreement, satisfactory to each such party and substantially in the form to be included as an exhibit to the 1933 Act Registration Statement (as defined below), to provide for the contemplated operation of the Trust created hereby and the issuance of the Preferred Securities and Common Securities of the Trust to be referred to therein. Prior to the execution and delivery of such amended and restated Trust Agreement, the Trustees shall not have any duty or obligation hereunder or with respect to the trust estate, except as otherwise required by applicable law or as may be necessary to obtain prior to such execution and delivery any licenses, consents or approvals required by applicable law or otherwise. SECTION 4. CERTAIN AUTHORIZATIONS. The Depositor and the Trustees hereby authorize and direct the Depositor, as the sponsor of the Trust, (i) to file with the Securities and Exchange Commission (the "Commission") and execute, in each case on behalf of the Trust, (a) the Registration Statement on Form SB-2 (the "1933 Act Registration Statement"), including any pre-effective or post-effective amendments to such 1933 Act Registration Statement (including the prospectus and exhibits contained therein), relating to the registration under the Securities Act of 1933, as amended, of the Preferred Securities of the Trust and certain other securities of the Depositor and (b) a Registration Statement on Form 8-A (including all pre-effective and post-effective amendments thereto) relating to the registration of the Preferred Securities of the Trust 2 under the Securities Exchange Act of 1934, as amended; (ii) to file with the Nasdaq National Market and execute on behalf of the Trust a listing application or applications and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Preferred Securities to be listed on the Nasdaq National Market; (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Preferred Securities under the securities or "Blue Sky" laws of such jurisdictions as the Depositor, on behalf of the Trust, may deem necessary or desirable; and (iv) to execute on behalf of the Trust such Underwriting Agreements with one or more underwriters relating to the offering of the Preferred Securities as the Depositor, on behalf of the Trust, may deem necessary or desirable, substantially in the form included as an exhibit to the 1933 Act Registration Statement. In the event that any filing referred to in clauses (i), (ii) and (iii) above is required by the rules and regulations of the Commission, the Nasdaq National Market or state securities or "Blue Sky" laws, to be executed on behalf of the Trust by one or more of the Trustees, the Depositor is hereby authorized and, to the extent required, directed to join in any such filing and to execute on behalf of the Trust any and all of the foregoing, it being understood that the Delaware Trustee shall not be required to join in any such filing or execute on behalf of the Trust any such document unless required by the rules and regulations of the Commission, the Nasdaq National Market or state securities or "Blue Sky" laws. SECTION 5. COUNTERPARTS. This Trust Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. SECTION 6. TRUSTEES. The number of Trustees initially shall be four and thereafter the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by the Depositor, which may increase or decrease the number of Trustees; provided, however, that to the extent required by the Business Trust Act, one Trustee shall be either a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable Delaware law. Subject to the foregoing, the Depositor is entitled to appoint or remove without cause any Trustee at any time. Any of the Trustees may resign upon thirty days' prior notice to the Depositor. SECTION 7. GOVERNING LAW. This Trust Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to conflicts of law of principles). SECTION 8. This Trust Agreement may be amended by written agreement of the parties hereto. 2 3 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed as of the day and year first above written. MERCANTILE BANK CORPORATION, as Depositor By: ------------------------------------- Name: Gerald R. Johnson, Jr. Title: Chairman of the Board and Chief Executive Officer WILMINGTON TRUST COMPANY, as Trustee By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- ADMINISTRATIVE TRUSTEES ---------------------------------------- Gerald R. Johnson, Jr., as Administrative Trustee ---------------------------------------- Michael H. Price, as Administrative Trustee ---------------------------------------- Charles E. Christmas, as Administrative Trustee 3 EX-4.5 4 FORM OF AMENDED AND RESTATED TRUST AGREEMENT 1 EXHIBIT 4.5 MBWM CAPITAL TRUST I AMENDED AND RESTATED TRUST AGREEMENT AMONG MERCANTILE BANK CORPORATION, AS DEPOSITOR WILMINGTON TRUST COMPANY, AS PROPERTY TRUSTEE WILMINGTON TRUST COMPANY, AS DELAWARE TRUSTEE AND THE ADMINISTRATIVE TRUSTEES NAMED HEREIN 2 TABLE OF CONTENTS
Page ARTICLE I DEFINED TERMS.................................................. 2 Section 101 Definitions.................................................... 2 ARTICLE II ESTABLISHMENT OF THE TRUST.....................................10 Section 201 Name .......................................................10 Section 202 Office of The Delaware Trustee; Principal Place of Business......................................10 Section 203 Initial Contribution of Trust Property; Organizational Expenses................................10 Section 204 Issuance of The Preferred Securities...........................10 Section 205 Issuance of the Common Securities; Subscription and Purchase of Junior Subordinated Debentures.............11 Section 206 Declaration of Trust...........................................11 Section 207 Authorization to Enter into Certain Transactions...............12 Section 208 Assets of Trust................................................15 Section 209 Title to Trust Property........................................15 ARTICLE III PAYMENT ACCOUNT................................................15 Section 301 Payment Account................................................15 ARTICLE IV DISTRIBUTIONS; REDEMPTION......................................16 Section 401 Distributions..................................................16 Section 402 Redemption.....................................................17 Section 403 Subordination of Common Securities.............................19 Section 404 Payment Procedures.............................................19 Section 405 Tax Returns and Reports........................................19 Section 406 Payment of Taxes, Duties, Etc. of the Trust....................20 Section 407 Payments Under Indenture.......................................20 Section 408 Taxes; Withholding.............................................20 ARTICLE V TRUST SECURITIES CERTIFICATES..................................21 Section 501 Initial Ownership..............................................21 Section 502 The Trust Securities Certificates..............................21 Section 503 Execution and Delivery of Trust Securities Certificates........21 Section 504 Registration of Transfer and Exchange of Trust Securities Certificates................................21 Section 505 Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates................................22 Section 506 Persons Deemed SecurityHolders.................................23 Section 507 Access to List of Securityholders' Names and Addresses.........23 Section 508 Maintenance of Office or Agency................................23
i 3 Section 509 Appointment of Paying Agent....................................23 Section 510 Ownership of Common Securities By Depositor....................24 Section 511 Book-Entry Preferred Securities Certificates; Common Securities Certificate..........................24 Section 512 Notices to Clearing Agency.....................................25 Section 513 Definitive Preferred Securities Certificates...................25 Section 514 Rights of SecurityHolders......................................26 ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING.................................................27 Section 601 Limitations on Voting Rights...................................27 Section 602 Notice of Meetings.............................................28 Section 603 Meetings of Holders of Preferred Securities....................28 Section 604 Voting Rights..................................................29 Section 605 Proxies, Etc...................................................28 Section 606 Securityholder Action by Written Consent.......................29 Section 607 Record Date For Voting and Other Purposes......................29 Section 608 Acts of Securityholders........................................29 Section 609 Inspection of Records..........................................30 ARTICLE VII REPRESENTATIONS AND WARRANTIES.................................30 Section 701 Representations and Warranties of the Bank and The Property Trustee...................................30 Section 702 Representations and Warranties of The Delaware Bank and The Delaware Trustee...............................31 Section 703 Representations and Warranties of Depositor....................32 ARTICLE VIII THE TRUSTEES Section 801 Certain Duties and Responsibilities............................33 Section 802 Certain Notices................................................34 Section 803 Certain Rights of Property Trustee.............................35 Section 804 Not Responsible For Recitals or Issuance of Securities.........37 Section 805 May Hold Securities............................................37 Section 806 Compensation; Indemnity; Fees..................................37 Section 807 Corporate Property Trustee Required; Eligibility of Trustees...38 Section 808 Conflicting Interests..........................................38 Section 809 Co-Trustees and Separate Trustee...............................38 Section 810 Resignation and Removal; Appointment of Successor..............40 Section 811 Acceptance of Appointment By Successor.........................41 Section 812 Merger, Conversion, Consolidation or Succession to Business............................................42 Section 813 Preferential Collection of Claims Against Depositor or Trust...............................................42 Section 814 Reports By Property Trustee....................................42 Section 815 Reports to the Property Trustee................................42 Section 816 Evidence of Compliance with Conditions Precedent...............43
ii 4 Section 817 Number of Trustees.............................................43 Section 818 Delegation of Power............................................43 Section 819 Voting .......................................................43 ARTICLE IX TERMINATION, LIQUIDATION AND MERGER............................44 Section 901 Termination Upon Expiration Date...............................44 Section 902 Early Termination..............................................44 Section 903 Termination....................................................44 Section 904 Liquidation....................................................44 Section 905 Mergers, Consolidations, Amalgamations or Replacements of the Trust...........................................46 ARTICLE X MISCELLANEOUS PROVISIONS.......................................47 Section 1001 Limitation of Rights of Securityholders........................47 Section 1002 Amendment......................................................47 Section 1003 Separability...................................................48 Section 1004 Governing Law..................................................48 Section 1005 Payments Due on Non-Business Day...............................48 Section 1006 Successors.....................................................49 Section 1007 Headings49 Section 1008 Reports, Notices and Demands...................................49 Section 1009 Agreement Not to Petition......................................49 Section 1010 Trust Indenture Act; Conflict with Trust Indenture Act.........50 Section 1011 Acceptance of Terms of Trust Agreement, Guarantee and Indenture................................50 Exhibit A CERTIFICATE OF TRUST....................................................52 Exhibit C CERTIFICATE EVIDENCING COMMON SECURITIES................................54 Exhibit D AGREEMENT AS TO EXPENSES AND LIABILITIES................................55 Exhibit E CERTIFICATE EVIDENCING PREFERRED SECURITIES.............................58
iii 5 AMENDED AND RESTATED TRUST AGREEMENT, dated as of August , 1999, among (i) Mercantile Bank Corporation, a Michigan corporation (including any successors or assigns, the "Depositor"), (ii) Wilmington Trust Company, a Delaware banking corporation duly organized and existing under the laws of the State of Delaware, as property trustee (the "Property Trustee" and, in its separate corporate capacity and not in its capacity as Property Trustee, the "Bank"), (iii) Wilmington Trust Company, a Delaware banking corporation duly organized and existing under the laws of the State of Delaware, as Delaware trustee (the "Delaware Trustee," and, in its separate corporate capacity and not in its capacity as Delaware Trustee, the "Delaware Bank"), (iv) Gerald R. Johnson, Jr., an individual, Michael H. Price, an individual, and Charles E. Christmas, an individual, each of whose address is c/o Mercantile Bank Corporation (each an "Administrative Trustee" and, collectively the "Administrative Trustees") (the Property Trustee, the Delaware Trustee and the Administrative Trustees referred to collectively as the "Trustees") and (v) the several Holders, as hereinafter defined. WITNESSETH: WHEREAS, the Depositor, the Delaware Bank, and the Administrative Trustees have heretofore duly declared and established MBWM Capital Trust I, a business trust (the "Trust"), pursuant to the Delaware Business Trust Act by the entering into of that certain Trust Agreement, dated as of July 23, 1999 (the "Original Trust Agreement"), and by the execution and filing by the Delaware Trustee with the Secretary of State of the State of Delaware of the Certificate of Trust, filed on July 26, 1999, the form of which is attached as EXHIBIT A; and WHEREAS, the Depositor and the Trustees desire to amend and restate the Original Trust Agreement in its entirety as set forth herein to provide for, among other things, (i) the issuance of the Common Securities (as defined below) by the Trust to the Depositor, (ii) the issuance and sale of the Preferred Securities (as defined below) by the Trust pursuant to the Underwriting Agreement (as defined below), (iii) the acquisition by the Trust from the Depositor of all of the right, title and interest in the Junior Subordinated Debentures (as defined below), and (iv) the appointment of the Property Trustee; NOW THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, each party, for the benefit of the other parties and for the benefit of the Securityholders (as defined below), hereby amends and restates the Original Trust Agreement in its entirety and agrees as follows: 1 6 ARTICLE I. DEFINED TERMS SECTION 101. DEFINITIONS. For all purposes of this Trust Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (b) all other terms used herein that are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Trust Agreement; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or other subdivision. "Accelerated Maturity Date" has the meaning set forth in Section 2.2 of the Indenture. "Act" has the meaning specified in Section 608. "Additional Amount" means, with respect to Trust Securities of a given Liquidation Amount and/or a given period, the amount of additional interest accrued on interest in arrears and paid by the Depositor on a Like Amount of Junior Subordinated Debentures for such period. "Additional Sums" has the meaning specified in Section 2.5 of the Indenture. "Administrative Trustee" means each of Gerald R. Johnson, Jr., Michael H. Price and Charles E. Christmas, solely in such person's capacity as Administrative Trustee of the Trust formed and continued hereunder and not in such person's individual capacity, or such Administrative Trustee's successor in interest in such capacity, or any successor Administrative Trustee appointed as herein provided. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Bank" has the meaning specified in the preamble to this Trust Agreement. 2 7 "Bankruptcy Event" means, with respect to any Person: (a) the entry of a decree or order by a court having jurisdiction in the premises adjudging such Person a bankrupt or insolvent, or approving as properly filed a petition seeking liquidation or reorganization of or in respect of such Person under the Federal Bankruptcy Code or any other similar applicable federal or state law, and the continuance of any such decree or order unvacated and unstayed for a period of 90 days; or the commencement of an involuntary case under the Federal Bankruptcy Code in respect of such Person, which shall continue undismissed for a period of 90 days or entry of an order for relief in such case; or the entry of a decree or order of a court having jurisdiction in the premises for the appointment on the ground of insolvency or bankruptcy of a receiver, custodian, liquidator, trustee or assignee in bankruptcy or insolvency of such Person or of its property, or for the winding up or liquidation of its affairs, and such decree or order shall have remained in force unvacated and unstayed for a period of 90 days; or (b) the institution by such Person of proceedings to be adjudicated a voluntary bankrupt, or the consent by such Person to the filing of a bankruptcy proceeding against it, or the filing by such Person of a petition or answer or consent seeking liquidation or reorganization under the Federal Bankruptcy Code or other similar applicable federal or state law, or the consent by such Person to the filing of any such petition or to the appointment on the ground of insolvency or bankruptcy of a receiver or custodian or liquidator or trustee or assignee in bankruptcy or insolvency of such Person or of its property, or such Person shall make a general assignment for the benefit of creditors. "Bankruptcy Laws" has the meaning specified in Section 1009. "Book-Entry Preferred Securities Certificates" means certificates representing Preferred Securities issued in global, fully registered form to the Clearing Agency as described in Section 511. "Business Day" means a day other than (a) a Saturday or Sunday, (b) a day on which banking institutions in the State of Michigan are authorized or required by law or executive order to remain closed, or (c) a day on which the Property Trustee's Corporate Trust Office or the Corporate Trust Office of the Debenture Trustee is closed for business. "Certificate Depository Agreement" means the agreement among the Trust, the Depositor and The Depository Trust Company, as the initial Clearing Agency, dated as of the Closing Date, relating to the Trust Securities Certificates, substantially in the form attached as EXHIBIT B, as the same may be amended and supplemented from time to time. "Certificate of Trust" means, as stated in the recitals to this Trust Agreement, the certificate of trust filed with the Secretary of State of the State of Delaware with respect to the Trust, in the form attached as EXHIBIT A, as the same may be amended or restated from time to time. 3 8 "Clearing Agency" means an organization registered as a "clearing agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. The Depository Trust Company will be the initial Clearing Agency. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Date" means the date of execution and delivery of this Trust Agreement. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this Trust Agreement such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Security" means a common undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $10 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Common Securities Certificate" means a certificate evidencing ownership of Common Securities, substantially in the form attached as EXHIBIT C. "Corporate Trust Office" means the principal corporate trust office of the Property Trustee located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware, 19890-0001, Attn: Corporate Trust Administration. "Debenture Event of Default" means an "Event of Default" as defined in the Indenture. "Debenture Redemption Date" means, with respect to any Junior Subordinated Debentures to be redeemed under the Indenture, the date fixed for redemption under the Indenture. "Debenture Trustee" means Wilmington Trust Company, a Delaware banking corporation organized under the laws of the State of Delaware and any successor thereto, not in its individual capacity but solely as trustee under the Indenture. "Definitive Preferred Securities Certificates" means either or both (as the context requires) of (a) Preferred Securities Certificates issued as Book-Entry Preferred Securities Certificates as provided in Section 511(a), and (b) Preferred Securities Certificates issued in certificated, fully registered form as provided in Section 513. "Delaware Bank" has the meaning specified in the preamble to this Trust Agreement. 4 9 "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Delaware Code Sections 3801 et. seq. as it may be amended from time to time. "Delaware Trustee" means the commercial bank or trust company identified as the "Delaware Trustee" in the preamble to this Trust Agreement solely in its capacity as Delaware Trustee of the Trust formed and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor Delaware Trustee appointed as herein provided. "Depositor" has the meaning specified in the preamble to this Trust Agreement. "Distribution Date" has the meaning specified in Section 401(a). "Distributions" means amounts payable in respect of the Trust Securities as provided in Section 401. "Event of Default" means any one of the following events that shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the occurrence of a Debenture Event of Default; or (b) default by the Trust in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of 30 days; or (c) default by the Trust in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or (d) default in the performance, or breach, in any material respect, of any covenant or warranty of the Trustees in this Trust Agreement (other than a covenant or warranty, a default in the performance of which or the breach of which is dealt with in clause (b) or (c), above) and continuation of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the defaulting Property Trustee by the Holders of at least 25% in aggregate Liquidation Amount of the Outstanding Preferred Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) the occurrence of a Bankruptcy Event with respect to the Property Trustee and the failure by the Depositor to appoint a successor Property Trustee within 60 days thereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expense Agreement" means the Agreement as to Expenses and Liabilities between the Depositor and the Trust, substantially in the form attached as EXHIBIT D, as amended from time to time. 5 10 "Expiration Date" has the meaning specified in Section 901. "Extension Period" means the "Extended Interest Payment Period" as defined in the Indenture. "Global Subordinated Debenture" has the meaning specified in the Indenture. "Guarantee" means the Preferred Securities Guarantee Agreement executed and delivered by the Depositor and Wilmington Trust Company as trustee, contemporaneously with the execution and delivery of this Trust Agreement, for the benefit of the Holders of the Preferred Securities, as amended from time to time. "Holder" means a Securityholder. "Indenture" means the Subordinated Indenture, dated as of July __, 1999, between the Depositor and the Debenture Trustee, as trustee, as amended or supplemented from time to time. "Investment Company Act" means the Investment Company Act of 1940, as amended. "Junior Subordinated Debentures" means the $14,432,990, and a possible additional amount of up to $2,061,860 related to the Underwriters' Over-Allotment Option with respect to the Preferred Securities, for a total of up to $16,494,850 aggregate principal amount of the Depositor's _____% Junior Subordinated Debentures due 2029, issued pursuant to the Indenture. "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of trust, adverse ownership interest, hypothecation, assignment, security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever. "Like Amount" means (a) with respect to a redemption of Trust Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Junior Subordinated Debentures to be contemporaneously redeemed in accordance with the Indenture and the proceeds of which will be used to pay the Redemption Price of such Trust Securities and (b) with respect to a distribution of Junior Subordinated Debentures to Holders of Trust Securities in connection with a termination or liquidation of the Trust, Junior Subordinated Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities of the Holder to whom such Junior Subordinated Debentures are distributed. "Liquidation Amount" means the stated amount of $10 per Trust Security. "Liquidation Date" means the date on which Junior Subordinated Debentures are to be distributed to Holders of Trust Securities in connection with a termination and liquidation of the Trust pursuant to Section 904(a). "Liquidation Distribution" has the meaning specified in Section 904(d). 6 11 "Maturity Date" has the meaning set forth in Section 2.2 of the Indenture. "Officers' Certificate" means a certificate signed by the Chairman, the President, a Senior Vice President, the Chief Financial Officer, a Vice President, the Chief Accounting Officer or the Controller or an Assistant Controller or the Secretary or an Assistant Secretary, of the Depositor, and delivered to the appropriate Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 816 shall be the principal executive, financial or accounting officer of the Depositor. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Trust Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Trust, the Property Trustee, the Delaware Trustee or the Depositor, but not an employee of any thereof, and who shall be reasonably acceptable to the Property Trustee. "Original Trust Agreement" has the meaning specified in the recitals to this Trust Agreement. "Outstanding," when used with respect to Preferred Securities, means, as of the date of determination, all Preferred Securities theretofore executed and delivered under this Trust Agreement, except: (a) Preferred Securities theretofore canceled by the Property Trustee or delivered to the Property Trustee for cancellation; (b) Preferred Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Property Trustee or any Paying Agent for the Holders of such Preferred Securities; provided that, if such Preferred Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Trust Agreement; and (c) Preferred Securities which have been paid or in exchange for or in lieu of which other Preferred Securities have been executed and delivered pursuant to Sections 504, 505, 511 and 513; provided, however, that in determining whether the Holders of the requisite Liquidation Amount of the Outstanding Preferred Securities have given any request, demand, authorization, 7 12 direction, notice, consent or waiver hereunder, Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded and deemed not to be Outstanding, except that (i) in determining whether any Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Preferred Securities that such Trustee knows to be so owned shall be so disregarded and (ii) the foregoing shall not apply at any time when all of the Outstanding Preferred Securities are owned by the Depositor, one or more of the Trustees and/or any such Affiliate. Preferred Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Administrative Trustees the pledgee's right as to such Preferred Securities so owned. "Owner" means each Person who is the beneficial owner of a Book-Entry Preferred Securities Certificate as reflected in the records of the Clearing Agency or, if a Clearing Agency Participant is not the Owner, then as reflected in the records of a Person maintaining an account with such Clearing Agency (directly or indirectly, in accordance with the rules of such Clearing Agency). "Paying Agent" means any paying agent or co-paying agent appointed pursuant to Section 509 and shall initially be the Property Trustee. "Payment Account" means a segregated non-interest-bearing corporate trust account maintained by the Property Trustee with the Bank in its trust department for the benefit of the Securityholders in which all amounts paid in respect of the Junior Subordinated Debentures will be held and from which the Property Trustee shall make payments to the Securityholders in accordance with Sections 401 and 402. "Person" means any individual, corporation, partnership, joint venture, trust, limited liability company or corporation, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Security" means an undivided beneficial interest in the assets of the Trust, designated "_____% Cumulative Preferred Securities," having a Liquidation Amount of $10 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Preferred Securities Certificate" means a certificate evidencing ownership of Preferred Securities, substantially in the form attached as EXHIBIT E. "Property Trustee" means the commercial bank or trust company identified as the "Property Trustee" in the preamble to this Trust Agreement solely in its capacity as Property Trustee of the Trust heretofore formed and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor Property Trustee appointed as herein provided. "Redemption Date" means, with respect to any Trust Security to be redeemed, the date fixed for such redemption by or pursuant to this Trust Agreement; provided that each Debenture 8 13 Redemption Date and the Maturity Date of the Junior Subordinated Debentures shall be a Redemption Date for a Like Amount of Trust Securities. "Redemption Price" means, with respect to any Trust Security to be redeemed, the Liquidation Amount of such Trust Security, plus accumulated and unpaid Distributions to the Redemption Date allocated on a pro rata basis (based on Liquidation Amounts) among the Trust Securities to be redeemed. "Relevant Trustee" shall have the meaning specified in Section 810. "Securities Register" and "Securities Registrar" have the respective meanings specified in Section 504. "Securityholder" means a Person in whose name a Trust Security or Securities is registered in the Securities Register; any such Person is a beneficial owner within the meaning of the Delaware Business Trust Act. "Trust" means MBWM Trust, the Delaware business trust continued hereby and which was created as stated in the recitals to this Trust Agreement. "Trust Agreement" means this Amended and Restated Trust Agreement, as the same may be modified, amended or supplemented in accordance with the applicable provisions hereof, including all exhibits hereto, including, for all purposes of this Trust Agreement and any such modification, amendment or supplement, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this Trust Agreement and any such modification, amendment or supplement, respectively. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this Trust Agreement was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Property" means (a) the Junior Subordinated Debentures, (b) the rights of the Property Trustee under the Guarantee, (c) any cash on deposit in, or owing to, the Payment Account and (d) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Property Trustee pursuant to the trusts of this Trust Agreement. "Trust Security" means any one of the Common Securities or the Preferred Securities. "Trust Securities Certificate" means any one of the Common Securities Certificates or the Preferred Securities Certificates. "Trustee" or "Trustees" means, individually or collectively, any of the Property Trustee, the Delaware Trustee and the Administrative Trustees. 9 14 "Underwriting Agreement" means the Underwriting Agreement dated as of July , 1999, among the Trust, the Depositor and the underwriter named therein. "Underwriters' Over-Allotment Option" means the option, exercisable within 30 days after the date of the prospectus, granted to the underwriters in the offering to the public of Preferred Securities, to purchase up to $2,000,000 in Liquidation Amount of additional Preferred Securities at the same price per Preferred Security as paid for the other Preferred Securities issued pursuant to the prospectus. ARTICLE II. ESTABLISHMENT OF THE TRUST SECTION 201. NAME. The Trust created pursuant to the Certificate of Trust and continued hereby shall continue to be known as "MBWM Capital Trust I," as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders of Trust Securities and the other Trustees, and amendment of the Certificate of Trust, in which name the Trustees may engage in the transactions contemplated hereby, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. SECTION 202. OFFICE OF THE DELAWARE TRUSTEE; PRINCIPAL PLACE OF BUSINESS. The address of the Delaware Trustee in the State of Delaware is c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration, or such other address in the State of Delaware as the Delaware Trustee may designate by written notice to the Securityholders and the Depositor. The principal executive office of the Trust is c/o Mercantile Bank Corporation, 216 North Division Avenue N.W., Grand Rapids, Michigan 49503. SECTION 203. INITIAL CONTRIBUTION OF TRUST PROPERTY; ORGANIZATIONAL EXPENSES. The Trustees acknowledge receipt in trust from the Depositor in connection with the Original Trust Agreement of the sum of $10, which constituted the initial Trust Property. The Depositor shall pay organizational expenses of the Trust as they arise or shall, upon request of any Trustee, promptly reimburse such Trustee for any such expenses paid by such Trustee. The Depositor shall make no claim upon the Trust Property for the payment of such expenses. SECTION 204. ISSUANCE OF THE PREFERRED SECURITIES. On July ___, 1999, the Depositor and an Administrative Trustee, on behalf of the Trust and pursuant to the Original Trust Agreement, executed and delivered the Underwriting Agreement. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 502 and deliver, in accordance with the Underwriting Agreement, a Preferred Securities Certificate, registered in the name of the nominee of the initial Clearing Agency, in an aggregate amount of Preferred Securities having an aggregate Liquidation Amount of $14,000,000 against receipt of the 10 15 aggregate purchase price of such Preferred Securities of $14,000,000, which amount such Administrative Trustee shall promptly deliver to the Property Trustee. Contemporaneously with the exercise of the Underwriter's Over-Allotment Option, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 502 and deliver, in accordance with the Underwriting Agreement, a Preferred Securities Certificate, registered in the name of the nominee of the initial Clearing Agency, in an aggregate amount of Preferred Securities having an aggregate Liquidation Amount of $10 for each Preferred Security as to which the option is being exercised, up to $2,000,000, against receipt of the aggregate purchase price of such Preferred Securities in such Liquidation Amount, which amount such Administrative Trustee shall promptly deliver to the Property Trustee. SECTION 205. ISSUANCE OF THE COMMON SECURITIES; SUBSCRIPTION AND PURCHASE OF JUNIOR SUBORDINATED DEBENTURES. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 502 and deliver to the Depositor a Common Securities Certificate, registered in the name of the Depositor, in an aggregate amount of Common Securities having an aggregate Liquidation Amount of $432,990 against payment by the Depositor of such amount. Contemporaneously therewith, an Administrative Trustee, on behalf of the Trust, shall subscribe to and purchase from the Depositor Junior Subordinated Debentures, registered in the name of the Property Trustee on behalf of the Trust and having an aggregate principal amount equal to $14,432,990 and, in satisfaction of the purchase price for such Junior Subordinated Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor the sum of $14,432,990. Contemporaneously with the exercise of the Underwriter's Over-Allotment Option, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 502 and deliver to the Depositor a Common Securities Certificate, registered in the name of the Depositor, in an aggregate amount of Common Securities having an aggregate Liquidation Amount equal to quotient of the Liquidation Amount of Preferred Securities purchased upon exercise of the option divided by 32.333, rounded up to the nearest $10, up to $61,860 in such Liquidation Amount, against payment by the Depositor of such amount. Contemporaneously therewith, an Administrative Trustee, on behalf of the Trust, shall subscribe to and purchase from the Depositor Junior Subordinated Debentures, registered in the name of the Property Trustee on behalf of the Trust and having an aggregate principal amount equal to the sum of the Liquidation Amount of the Common Securities determined in accordance with the foregoing sentence and the Liquidation Amount of the Preferred Securities purchased upon exercise of the Underwriters' Over-Allotment Option, and, in satisfaction of the purchase price for such Junior Subordinated Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor such sum. SECTION 206. DECLARATION OF TRUST. The exclusive purposes and functions of the Trust are (a) to issue and sell Trust Securities and use the proceeds from such sale to acquire the Junior Subordinated Debentures, and (b) to engage in those activities necessary, convenient or incidental thereto. The Depositor hereby appoints the Trustees as trustees of the Trust, to have all the rights, powers and duties to the extent set forth herein, and the Trustees 11 16 hereby accept such appointment. The Property Trustee hereby declares that it will hold the Trust Property in trust upon and subject to the conditions set forth herein for the benefit of the Securityholders. The Administrative Trustees shall have all rights, powers and duties set forth herein and in accordance with applicable law with respect to accomplishing the purposes of the Trust. The Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities, of the Property Trustee or the Administrative Trustees set forth herein. The Delaware Trustee shall be one of the Trustees of the Trust for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Delaware Business Trust Act. SECTION 207. AUTHORIZATION TO ENTER INTO CERTAIN TRANSACTIONS. (a) The Trustees shall conduct the affairs of the Trust in accordance with the terms of this Trust Agreement. Subject to the limitations set forth in paragraph (b) of this Section and Article VIII, and in accordance with the following provisions (i) and (ii), the Administrative Trustees shall have the authority to enter into all transactions and agreements determined by the Administrative Trustees to be appropriate in exercising the authority, express or implied, otherwise granted to the Administrative Trustees under this Trust Agreement, and to perform all acts in furtherance thereof, including without limitation, the acts set forth in the following provision (i) and the Property Trustee shall have the authority to act, each as set forth below: (i) As among the Trustees, each Administrative Trustee, acting singly or jointly, shall have the power and authority to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Trust Securities and the compliance with the Underwriting Agreement in connection therewith; (B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, the Expense Agreement and the Certificate Depository Agreement and such other agreements or documents as may be necessary or desirable in connection with the purposes and function of the Trust; (C) assisting in the registration of the Preferred Securities under the Securities Act of 1933, as amended, and under state securities or blue sky laws, and the qualification of this Trust Agreement as a trust indenture under the Trust Indenture Act; (D) assisting in the listing of the Preferred Securities upon the American Stock Exchange or such securities exchange, or exchanges or quotation systems as shall be determined by the Depositor and, if required, the registration of the Preferred Securities under the Securities Exchange Act of 1934, as amended, and the preparation and filing of all periodic and other reports and other documents pursuant to the foregoing; (E) the sending of notices (other than notices of default) and other information regarding the Trust Securities and the Junior Subordinated Debentures to the Securityholders in accordance with this Trust Agreement; 12 17 (F) the appointment of a Paying Agent, authenticating agent and Securities Registrar in accordance with this Trust Agreement; (G) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (H) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders of the Preferred Securities or to enable the Trust to effect the purposes for which the Trust was created; and (I) the taking of any action incidental to the foregoing as the Administrative Trustees may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder). (ii) As among the Trustees, the Property Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters: (A) the establishment of the Payment Account; (B) the receipt of the Junior Subordinated Debentures; (C) the collection of interest, principal and any other payments made in respect of the Junior Subordinated debentures in the Payment Account; (D) the distribution of amounts owed to the Securityholders in respect of the Trust Securities in accordance with the terms of this Trust Agreement; (E) the exercise of all of the rights, powers and privileges of a holder of the Junior Subordinated Debentures; (F) the sending of notices of default and other information regarding the Trust Securities and the Junior Subordinated Debentures to the Securityholders in accordance with this Trust Agreement; (G) the distribution of the Trust Property in accordance with the terms of this Trust Agreement; (H) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust; 13 18 (I) after an Event of Default the taking of any action incidental to the foregoing as the Property Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement and protect and conserve the Trust Property for the benefit of the Security holders (without consideration of the effect of any such action on any particular Securityholder); (J) so long as the Property Trustee is the Securities Registrar, registering transfers of the Trust Securities in accordance with this Trust Agreement; and (K) except as otherwise provided in this Section 207(a)(ii), the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 207(a)(i). (b) So long as this Trust Agreement remains in effect, the Trust (or the Trustees acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, the Trustees shall not (i) acquire any investments or engage in any activities not authorized by this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Securityholders, except as expressly provided herein, (iii) take any action that would cause the Trust to fail or cease to qualify as a "grantor trust" for United States federal income tax purposes, (iv) incur any indebtedness for borrowed money or issue any other debt or (v) take or consent to any action that would result in the placement of a Lien on any of the Trust Property. The Administrative Trustees shall defend all claims and demands of all Persons at any time claiming any Lien on any of the Trust Property adverse to the interest of the Trust or the Securityholders in their capacity as Securityholders. (c) In connection with the issue and sale of the Preferred Securities, the Depositor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Depositor in furtherance of the following prior to the date of this Trust Agreement are hereby ratified and confirmed in all respects): (i) the preparation and filing by the Trust with the Commission and the execution on behalf of the Trust of a registration statement on the appropriate form in relation to the Preferred Securities and the Junior Subordinated Debentures, including any amendments thereto; (ii) the determination of the states in which to take appropriate action to qualify or register for sale all or part of the Preferred Securities and to do any and all such acts, other than actions which must be taken by or on behalf of the Trust, and advise the Trustees of actions they must take on behalf of the Trust, and prepare for execution and filing any documents to be executed and filed by the Trust or on behalf of the Trust, as the Depositor deems necessary or advisable in order to comply with the applicable laws of any such states; (iii) the preparation for filing by the Trust and execution on behalf of the Trust of an application to the American Stock Exchange or other national stock exchange or other organizations for listing upon notice of issuance of any Preferred Securities and to file or cause 14 19 an Administrative Trustee to file thereafter with such exchange or organization such notifications and documents as may be necessary from time to time; (iv) if required, the preparation for filing by the Trust with the Commission and the execution on behalf of the Trust of a registration statement on Form 8-A relating to the registration of the Preferred Securities under Section 12(b) or 12(g) of the Exchange Act, including any amendments thereto; (v) the negotiation of the terms of, and the execution and delivery of, the Underwriting Agreement providing for the sale of the Preferred Securities; and (vi) the taking of any other actions necessary or desirable to carry out any of the foregoing activities. (d) Notwithstanding anything herein to the contrary, the Administrative Trustees are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act, will be classified as a "grantor trust" and not as an association taxable as a corporation for United States federal income tax purposes and so that the Junior Subordinated Debentures will be treated as indebtedness of the Depositor for United States federal income tax purposes. In this connection, subject to Section 1002, the Depositor and the Administrative Trustees are authorized to take any action, not inconsistent with applicable law or this Trust Agreement, that each of the Depositor and the Administrative Trustees determines in their discretion to be necessary or desirable for such purposes. SECTION 208. ASSETS OF TRUST. The assets of the Trust shall consist of the Trust Property. SECTION 209. TITLE TO TRUST PROPERTY. Legal title to all Trust Property shall be vested at all times in the Property Trustee (in its capacity as such) and shall be held and administered by the Property Trustee for the benefit of the Securityholders in accordance with this Trust Agreement. ARTICLE III. PAYMENT ACCOUNT SECTION 301. PAYMENT ACCOUNT. (a) On or prior to the Closing Date, the Property Trustee shall establish the Payment Account. The Property Trustee and any agent of the Property Trustee shall have exclusive control and sole right of withdrawal with respect to the Payment Account for the purpose of making deposits and withdrawals from the Payment Account in accordance with this Trust Agreement. All monies and other property deposited or held from time to time in the Payment Account shall be held by the Property Trustee in the Payment Account for the exclusive benefit 15 20 of the Securityholders and for distribution as herein provided, including (and subject to) any priority of payments provided for herein. (b) The Property Trustee shall deposit in the Payment Account, promptly upon receipt, all payments of principal of or interest on, and any other payments or proceeds with respect to, the Junior Subordinated Debentures. Amounts held in the Payment Account shall not be invested by the Property Trustee pending distribution thereof. ARTICLE IV. DISTRIBUTIONS; REDEMPTION SECTION 401. DISTRIBUTIONS. (a) Distributions on the Trust Securities shall be cumulative, and will accumulate whether or not there are funds of the Trust available for the payment of Distributions. Distributions shall accumulate from , 1999, and, except during any Extension Period with respect to the Junior Subordinated Debentures, shall be payable quarterly in arrears on the 15th day of April, July, October, and January in each year, commencing October , 1999. The amount of each Distribution due with respect to the Trust Securities will include amounts accrued through the date the Distribution payment is due. If any date on which a Distribution is otherwise payable on the Trust Securities is not a Business Day, then the payment of such Distribution shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, payment of such Distribution shall be made on the immediately preceding Business Day (and without any reduction of interest or any other payment in respect of any such acceleration), in each case with the same force and effect as if made on such date (each date on which Distributions are payable in accordance with this Section 401(a) is a "Distribution Date"). (b) The Trust Securities represent undivided beneficial interests in the Trust Property, and, as a practical matter, the Distributions on the Trust Securities shall be payable at a rate of % per annum of the Liquidation Amount of the Trust Securities. The amount of Distributions payable for any full period shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of Distributions for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. During any Extension Period with respect to the Junior Subordinated Debentures, Distributions on the Preferred Securities will be deferred for a period equal to the Extension Period. The amount of Distributions payable for any period shall include the Additional Amounts, if any. (c) Distributions on the Trust Securities shall be made by the Property Trustee solely from the Payment Account and shall be payable on each Distribution Date only to the extent that the Trust has funds then on hand and immediately available in the Payment Account for the payment of such Distributions. 16 21 (d) Distributions on the Trust Securities with respect to a Distribution Date shall be payable to the Holders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be one Business Day prior to such Distribution Date; provided, however, that in the event that the Preferred Securities do not remain in book-entry-only form, the relevant record date shall be the 1st day of the month in which the relevant Distribution Date occurs. SECTION 402. REDEMPTION. (a) On each Debenture Redemption Date and on the Maturity Date of the Junior Subordinated Debentures, the Trust will be required to redeem a Like Amount of Trust Securities at the Redemption Price. (b) Notice of redemption shall be given by the Property Trustee upon instruction from the Administrative Trustees by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date to each Holder of Trust Securities to be redeemed, at such Holder's address appearing in the Securities Register. The Property Trustee shall have no responsibility for the accuracy of any CUSIP number contained in such notice. All notices of redemption shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the CUSIP number; (iv) if less than all the Outstanding Trust Securities are to be redeemed, the identification and the aggregate Liquidation Amount of the particular Trust Securities to be redeemed; and (v) that, on the Redemption Date, the Redemption Price will become due and payable upon each such Trust Security to be redeemed and that Distributions thereon will cease to accumulate on and after said date. (c) The Trust Securities redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption of Junior Subordinated Debentures. Redemptions of the Trust Securities shall be made and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has immediately available funds then on hand and available in the Payment Account for the payment of such Redemption Price. (d) If the Property Trustee gives a notice of redemption in respect of any Preferred Securities, then, by 12:00 noon, Detroit, Michigan time, on the Redemption Date, subject to Section 402(c), the Property Trustee will, so long as the Preferred Securities are in book-entry-only form, deposit with the Clearing Agency for the Preferred Securities funds sufficient to pay 17 22 the applicable Redemption Price and will give such Clearing Agency irrevocable instructions and authority to pay the Redemption Price to the Holders thereof. If the Preferred Securities are no longer in book-entry-only form, the Property Trustee, subject to Section 402(c), will deposit with the Paying Agent funds sufficient to pay the applicable Redemption Price and will give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the Holders thereof upon surrender of their Preferred Securities Certificates. Notwithstanding the foregoing, Distributions payable on or prior to the Redemption Date for any Trust Securities called for redemption shall be payable to the Holders of such Trust Securities as they appear on the Securities Register for the Trust Securities on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit, all rights of Securityholders holding Trust Securities so called for redemption will cease, except the right of such Securityholders to receive the Redemption Price, but without interest on such Redemption Price, and such Securities will cease to be Outstanding. In the event that any date on which any Redemption Price is payable is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of any Trust Securities called for redemption is improperly withheld or refused and not paid either by the Trust or by the Depositor pursuant to the Guarantee, Distributions on such Trust Securities will continue to accumulate, at the then applicable rate, from the Redemption Date originally established by the Trust for such Trust Securities to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price. (e) Payment of the Redemption Price on the Trust Securities shall be made to the record Holders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be one Business Day prior to the relevant Redemption Date; provided, however, that in the event that the Preferred Securities do not remain in book-entry-only form, the relevant record date shall be the date fifteen days prior to the relevant Redemption Date. (f) Subject to Section 403(a), if less than all the Outstanding Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be redeemed shall be allocated on a pro rata basis (based on Liquidation Amounts) among the Common Securities and the Preferred Securities. The particular Preferred Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Property Trustee from the outstanding Preferred Securities not previously called for redemption, by such method (including, without limitation, by lot) as the Property Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $10 or an integral multiple of $10 in excess thereof) of the Liquidation Amount of Preferred Securities of a denomination larger than $10. The Property Trustee shall promptly notify the Securities Registrar in writing of the Preferred Securities selected for redemption and, in the case of any Preferred Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of this Trust Agreement, unless the context otherwise requires, all 18 23 provisions relating to the redemption of Preferred Securities shall relate, in the case of any Preferred Securities redeemed or to be redeemed only in part, to the portion of the Liquidation Amount of Preferred Securities which has been or is to be redeemed. SECTION 403. SUBORDINATION OF COMMON SECURITIES. (a) Payment of Distributions (including Additional Amounts, if applicable) on, and the Redemption Price of, the Trust Securities, as applicable, shall be made, subject to Section 402(f), pro rata among the Common Securities and the Preferred Securities based on the Liquidation Amount of the Trust Securities; provided, however, that if on any Distribution Date or Redemption Date any Event of Default resulting from a Debenture Event of Default shall have occurred and be continuing, no payment of any Distribution (including Additional Amounts, if applicable) on, or Redemption Price of, any Common Security, and no other payment on account of the redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions (including Additional Amounts, if applicable) on all Outstanding Preferred Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all Outstanding Preferred Securities then called for redemption, shall have been made or provided for, and all funds immediately available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions (including Additional Amounts, if applicable) on, or the Redemption Price of, Preferred Securities then due and payable. (b) In the case of the occurrence of any Event of Default resulting from a Debenture Event of Default, the Holder of Common Securities will be deemed to have waived any right to act with respect to any such Event of Default under this Trust Agreement until the effect of all such Events of Default with respect to the Preferred Securities shall have been cured, waived or otherwise eliminated. Until any such Event of Default under this Trust Agreement with respect to the Preferred Securities shall have been so cured, waived or otherwise eliminated, the Property Trustee shall take direction from the Holders of the Preferred Securities and not the Holder of the Common Securities, and only the Holders of the Preferred Securities will have the right to direct the Property Trustee to act on their behalf. SECTION 404. PAYMENT PROCEDURES. Payments of Distributions (including Additional Amounts, if applicable) in respect of the Preferred Securities shall be made by check mailed to the address of the Person entitled thereto as such address shall appear on the Securities Register or, if the Preferred Securities are held by a Clearing Agency, such Distributions shall be made to the Clearing Agency in immediately available funds, which shall credit the relevant Persons' accounts at such Clearing Agency on the applicable Distribution Dates. Payments in respect of the Common Securities shall be made in such manner as shall be mutually agreed between the Property Trustee and the Holder of the Common Securities. SECTION 405. TAX RETURNS AND REPORTS. The Administrative Trustees shall prepare (or cause to be prepared), at the Depositor's expense, and file all United States federal, state and local tax and information returns and reports required to be filed by or in respect of the Trust. In this regard, the Administrative Trustees shall (a) prepare and file (or cause to be 19 24 prepared and filed) the appropriate Internal Revenue Service Form required to be filed in respect of the Trust in each taxable year of the Trust and (b) prepare and furnish (or cause to be prepared and furnished) to each Securityholder the appropriate Internal Revenue Service form required to be furnished to such Securityholder or the information required to be provided on such form. The Administrative Trustees shall provide the Depositor with a copy of all such returns and reports promptly after such filing or furnishing. The Property Trustee shall comply with United States federal withholding and backup withholding tax laws and information reporting requirements with respect to any payments to Securityholders under the Trust Securities. SECTION 406. PAYMENT OF TAXES, DUTIES, ETC. OF THE TRUST. Upon receipt under the Junior Subordinated Debentures of Additional Sums, the Property Trustee, at the direction of an Administrative Trustee or the Depositor, shall promptly pay any taxes, duties or governmental charges of whatsoever nature (other than withholding taxes) imposed on the Trust by the United States or any other taxing authority. SECTION 407. PAYMENTS UNDER INDENTURE. Any amount payable hereunder to any Holder of Preferred Securities shall be reduced by the amount of any corresponding payment such Holder has directly received under the Indenture pursuant to Section 514(b) or (c) hereof. SECTION 408. TAXES; WITHHOLDING The Property Trustee agrees, to the extent required by the Internal Revenue Code of 1986, as amended (the "Code"), and applicable federal regulations thereunder, to withhold from each payment due hereunder or under any Trust Securities, United States withholding taxes at the appropriate rate, and, on a timely basis, to deposit such amounts with an authorized depository and make such returns, filings and other reports in connection therewith as are required by the Code. In the event that any withholding tax is imposed on a payment to a Securityholder, such tax shall reduce the amount otherwise distributable to the Securityholder in accordance with this Section. Any Securityholder which is organized under the laws of a jurisdiction outside the United State shall, on or prior to the date such Securityholder becomes a Securityholder, (a) so notify the Property Trustee, (b)(i) provide the Property Trustee with Internal Revenue Service form 1001, 4224, 8709 or W-8, as appropriate, or (ii) notify the Property Trustee that it is not entitled to an exemption from United States withholding tax or a reduction in the rate thereof on payments of interest. Any such Securityholder agrees by its acceptance of a Trust Security, on an ongoing basis, to provide like certification for each taxable year and to notify the Property Trustee in clauses (a) and (b) above. The Property Trustee shall be fully protected in relying upon, and each Securityholder by its acceptance of a Security agrees to indemnify and hold the Property Trustee harmless against all claims or liability of any kind arising in connection with or related to the Property Trustee's reliance upon any documents, forms or information provided by any Securityholder to the Property Trustee. In addition, if the Property Trustee has not withheld taxes on any payment made to any Securityholder, and the Property Trustee is subsequently required to remit to any taxing authority any such amount not withheld, such Securityholder shall return such amount to the Property Trustee upon written demand by the Property Trustee. The Property Trustee shall be liable only for direct (but not consequential) damages to any Securityholder due to the Property Trustee's violation of the Code and only to the extent such liability is caused by the Property Trustee's gross negligence or willful misconduct. 20 25 ARTICLE V. TRUST SECURITIES CERTIFICATES SECTION 501. INITIAL OWNERSHIP. Upon the creation of the Trust and the contribution by the Depositor pursuant to Section 203 and until the issuance of the Trust Securities, and at any time during which no Trust Securities are outstanding, the Depositor shall be the sole beneficial owner of the Trust. SECTION 502. THE TRUST SECURITIES CERTIFICATES. The Preferred Securities Certificates shall be issued in minimum denominations of $10 Liquidation Amount and integral multiples of $10 in excess thereof, and the Common Securities Certificates shall be issued in denominations of $10 Liquidation Amount and integral multiples of $10 in excess thereof. The Trust Securities Certificates shall be executed on behalf of the Trust by manual signature of at least one Administrative Trustee. Trust Securities Certificates bearing the manual signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be validly issued and entitled to the benefits of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Trust Securities Certificates or did not hold such offices at the date of delivery of such Trust Securities Certificates. A transferee of a Trust Securities Certificate shall become a Securityholder, and shall be entitled to the rights and subject to the obligations of a Securityholder hereunder, upon due registration of such Trust Securities Certificate in such transferee's name pursuant to Sections 504, 511 and 513. SECTION 503. EXECUTION AND DELIVERY OF TRUST SECURITIES CERTIFICATES. On the Closing Date, the Administrative Trustees shall cause Trust Securities Certificates, in an aggregate Liquidation Amount as provided in Sections 204 and 205, to be executed on behalf of the Trust by at least one of the Administrative Trustees and delivered to or upon the written order of the Depositor, signed by its Chairman, its President, any Senior Vice President or any Vice President without further corporate action by the Depositor, in authorized denominations. SECTION 504. REGISTRATION OF TRANSFER AND EXCHANGE OF TRUST SECURITIES CERTIFICATES. The Depositor shall keep or cause to be kept, at the office or agency maintained pursuant to Section 508, a register or registers for the purpose of registering Trust Securities Certificates and transfers and exchanges of Preferred Securities Certificates (herein referred to as the "Securities Register") in which the registrar designated by the Depositor (the "Securities Registrar"), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Preferred Securities Certificates and Common Securities Certificates (subject to Section 510 in the case of the Common Securities Certificates) and registration of transfers and exchanges of Preferred Securities Certificates as herein provided. The Property Trustee shall be the initial Securities Registrar. 21 26 Upon surrender for registration of transfer of any Preferred Securities Certificate at the office or agency maintained pursuant to Section 508, the Administrative Trustees or any one of them shall execute and deliver, in the name of the designated transferee or transferees, one or more new Preferred Securities Certificates in authorized denominations of a like aggregate Liquidation Amount dated the date of execution by such Administrative Trustee or Trustees. The Securities Registrar shall not be required to register the transfer of any Preferred Securities that have been called for redemption. At the option of a Holder, Preferred Securities Certificates may be exchanged for other Preferred Securities Certificates in authorized denominations of the same class and of a like aggregate Liquidation Amount upon surrender of the Preferred Securities Certificates to be exchanged at the office or agency maintained pursuant to Section 508. Every Preferred Securities Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Property Trustee and the Securities Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Preferred Securities Certificate surrendered for registration of transfer or exchange shall be canceled and subsequently disposed of by the Property Trustee in accordance with its customary practice. The Trust shall not be required to (i) issue, register the transfer of, or exchange any Preferred Securities during a period beginning at the opening of business 15 calendar days before the date of mailing of a notice of redemption of any Preferred Securities called for redemption and ending at the close of business on the day of such mailing or (ii) register the transfer of or exchange any Preferred Securities so selected for redemption, in whole or in part, except the unredeemed portion of any such Preferred Securities being redeemed in part. No service charge shall be made for any registration of transfer or exchange of Preferred Securities Certificates, but the Securities Registrar may require payment of a sum sufficient to cover any expense, tax or governmental charge that may be imposed in connection with any transfer or exchange of Preferred Securities Certificates. Preferred Securities may only be transferred, in whole or in part, in accordance with the terms and conditions of this Trust Agreement. Any transfer or purported transfer of any Preferred Securities not made in accordance with this Trust Agreement shall be null and void. SECTION 505. MUTILATED, DESTROYED, LOST OR STOLEN TRUST SECURITIES CERTIFICATES. If (a) any mutilated Trust Securities Certificate shall be surrendered to the Securities Registrar, or if the Securities Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Securities Certificate and (b) there shall be delivered to the Securities Registrar and the Administrative Trustees such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Securities Certificate shall have been acquired by a bona fide purchaser, the Administrative Trustees, or any one of them, on behalf of the Trust shall execute and make available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust Securities Certificate of like class, tenor and denomination. In connection with the issuance of any new Trust Securities Certificate under this Section, the Administrative Trustees or the Securities Registrar may require the payment of a 22 27 sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Securities Certificate issued pursuant to this Section shall constitute conclusive evidence of an undivided beneficial interest in the assets of the Trust, as if originally issued, whether or not the lost, stolen or destroyed Trust Securities Certificate shall be found at any time. SECTION 506. PERSONS DEEMED SECURITYHOLDERS. The Trustees, the Paying Agent and the Securities Registrar shall treat the Person in whose name any Trust Securities Certificate shall be registered in the Securities Register as the owner of such Trust Securities Certificate for the purpose of receiving Distributions and for all other purposes whatsoever, and neither the Trustees nor the Securities Registrar shall be bound by any notice to the contrary. SECTION 507. ACCESS TO LIST OF SECURITYHOLDERS' NAMES AND ADDRESSES. At any time when the Property Trustee is not also acting as the Securities Registrar, the Administrative Trustees or the Depositor shall furnish or cause to be furnished to the Property Trustee (a) semi-annually on or before January 15 and July 15 in each year, a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Securityholders as of the most recent regular record date (as provided in Section 401(d)) and (b) promptly after receipt by any Administrative Trustee or the Depositor of a request therefor from the Property Trustee, such other information as the Property Trustee may reasonably require in order to enable the Property Trustee to discharge its obligations under this Trust Agreement, in each case to the extent such information is in the possession or control of the Administrative Trustees or the Depositor and is not identical to a previously supplied list or has not otherwise been received by the Property Trustee in its capacity as Securities Registrar. The rights of Securityholders to communicate with other Securityholders with respect to their rights under this Trust Agreement or under the Trust Securities, and the corresponding rights of the Trustee shall be as provided in the Trust Indenture Act. Each Holder, by receiving and holding a Trust Securities Certificate, and each Owner shall be deemed to have agreed not to hold the Depositor, the Property Trustee or the Administrative Trustees accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. SECTION 508. MAINTENANCE OF OFFICE OR AGENCY. The Administrative Trustees shall maintain an office or offices or agency or agencies where Preferred Securities Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Trustees in respect of the Trust Securities Certificates may be served. The Administrative Trustees initially designate the principal corporate trust office of the Property Trustee, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attn: Corporate Trust Administration, as the principal corporate trust office for such purposes. The Administrative Trustees shall give prompt written notice to the Depositor and to the Securityholders of any change in the location of the Securities Register or any such office or agency. SECTION 509. APPOINTMENT OF PAYING AGENT. The Paying Agent shall make Distributions to Securityholders from the Payment Account and shall report the amounts of such Distributions to the Property Trustee and the Administrative Trustees. Any Paying Agent 23 28 shall have the revocable power to withdraw funds from the Payment Account for the purpose of making the Distributions referred to above. The Administrative Trustees may revoke such power and remove the Paying Agent if such Trustees determine in their sole discretion that the Paying Agent shall have failed to perform its obligations under this Trust Agreement in any material respect. The Paying Agent shall initially be the Property Trustee, and any co-paying agent chosen by the Property Trustee, and acceptable to the Administrative Trustees and the Depositor. Any Person acting as Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Administrative Trustees, the Property Trustee and the Depositor. In the event that the Property Trustee shall no longer be the Paying Agent or a successor Paying Agent shall resign or its authority to act be revoked, the Administrative Trustees shall appoint a successor that is acceptable to the Property Trustee and the Depositor to act as Paying Agent (which shall be a bank or trust company). The Administrative Trustees shall cause such successor Paying Agent or any additional Paying Agent appointed by the Administrative Trustees to execute and deliver to the Trustees an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Trustees that as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Securityholders in trust for the benefit of the Securityholders entitled thereto until such sums shall be paid to such Securityholders. The Paying Agent shall return all unclaimed funds to the Property Trustee and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Property Trustee. The provisions of Sections 801, 803 and 806 shall apply to the Property Trustee also in its role as Paying Agent, for so long as the Property Trustee shall act as Paying Agent and, to the extent applicable, to any other Paying Agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. SECTION 510. OWNERSHIP OF COMMON SECURITIES BY DEPOSITOR. On the Closing Date, the Depositor shall acquire and retain beneficial and record ownership of the Common Securities. To the fullest extent permitted by law, any attempted transfer of the Common Securities (other than a transfer in connection with a merger or consolidation of the Depositor into another corporation pursuant to Section 12.1 of the Indenture) shall be void. The Administrative Trustees shall cause each Common Securities Certificate issued to the Depositor to contain a legend stating "THIS CERTIFICATE IS NOT TRANSFERABLE". SECTION 511. BOOK-ENTRY PREFERRED SECURITIES CERTIFICATES; COMMON SECURITIES CERTIFICATE. (a) The Preferred Securities Certificates, upon original issuance, will be issued in the form of a typewritten Preferred Securities Certificate or Certificates representing Book-Entry Preferred Securities Certificates, to be delivered to or held on behalf of The Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the Trust. Such Book-Entry Preferred Securities Certificate or Certificates shall initially be registered on the Securities Register in the name of Cede & Co., the nominee of the initial Clearing Agency, and no beneficial owner will receive a Definitive Preferred Securities Certificate representing such beneficial owner's interest in such Preferred Securities, except as provided in Section 513. Unless and until Definitive Preferred Securities Certificates have been issued to beneficial owners pursuant to Section 513: 24 29 (i) the provisions of this Section 511(a) shall be in full force and effect; (ii) the Securities Registrar, the Paying Agent and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Trust Agreement relating to the Book-Entry Preferred Securities Certificates (including the payment of the Liquidation Amount of and Distributions on the Book-Entry Preferred Securities) as the sole Holder of Book-Entry Preferred Securities and shall have no obligations to the Owners thereof; (iii) to the extent that the provisions of this Section 511 conflict with any other provisions of this Trust Agreement, the provisions of this Section 511 shall control; and (iv) the rights of the Owners of the Book-Entry Preferred Securities Certificates shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Owners and the Clearing Agency and/or the Clearing Agency Participants. Pursuant to the Certificate Depository Agreement, unless and until Definitive Preferred Securities Certificates are issued pursuant to Section 513, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and will receive and transmit payments on the Preferred Securities to such Clearing Agency Participants. Any Clearing Agency designated pursuant hereto will not be deemed an agent of the Trustees for any purpose. (b) Upon the execution and delivery of this Trust Agreement, a single Common Securities Certificate representing the Common Securities shall be issued to the Depositor in the form of a definitive Common Securities Certificate. Upon exercise of the Underwriters' Over-Allotment Option, an additional, single Common Securities Certificate representing the Common Securities shall be issued to the Depositor in the form of a definitive Common Securities Certificate. SECTION 512. NOTICES TO CLEARING AGENCY. To the extent that a notice or other communication to the Owners is required under this Trust Agreement, unless and until Definitive Preferred Securities Certificates shall have been issued to Owners pursuant to Section 513, the Trustees shall give all such notices and communications specified herein to be given to Owners to the Clearing Agency, and shall have no obligations to the Owners. SECTION 513. DEFINITIVE PREFERRED SECURITIES CERTIFICATES. If (a) the Depositor advises the Trustees in writing that the Clearing Agency is no longer willing, or eligible to properly discharge its responsibilities with respect to the Preferred Securities Certificates, and the Depositor is unable to locate a qualified successor within 90 days, (b) the Depositor at its option advises the Trustees in writing that it elects to terminate the book-entry system through the Clearing Agency, or (c) after the occurrence of a Debenture Event of Default, Owners of Preferred Securities Certificates representing beneficial interests aggregating at least a majority of the Liquidation Amount advise the Property Trustee in writing that the continuation of a book-entry system through the Clearing Agency is no longer in the best interests of the Owners of Preferred Securities Certificates, then the Property Trustee shall notify the Clearing Agency, and the Clearing Agency shall notify all Owners of Preferred Securities Certificates, of the occurrence of any such event and of the availability of the Definitive Preferred Securities 25 30 Certificates to Owners of such class or classes, as applicable, requesting the same. Upon surrender to the Property Trustee of the typewritten Preferred Securities Certificate or Certificates representing the Book-Entry Preferred Securities Certificates by the Clearing Agency, accompanied by registration instructions, the Administrative Trustees, or any one of them, shall execute the Definitive Preferred Securities Certificates in accordance with the instructions of the Clearing Agency. Neither the Securities Registrar nor the Trustees shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon the issuance of Definitive Preferred Securities Certificates, the Trustees shall recognize the Holders of the Definitive Preferred Securities Certificates as Securityholders. The Definitive Preferred Securities Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrative Trustees, as evidenced by the execution thereof by the Administrative Trustees or any one of them. SECTION 514. RIGHTS OF SECURITYHOLDERS. (a) The legal title to the Trust Property is vested exclusively in the Property Trustee (in its capacity as such) in accordance with Section 209, and the Securityholders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Trust Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Trust Securities shall be personal property giving only the rights specifically set forth therein and in this Trust Agreement. The Trust Securities shall have no preemptive or similar rights. When issued and delivered to Holders of the Preferred Securities against payment of the purchase price therefor, the Preferred Securities will be fully paid and nonassessable interests in the Trust. The Holders of the Preferred Securities, in their capacities as such, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. (b) For so long as any Preferred Securities remain Outstanding, if, upon a Debenture Event of Default, the Debenture Trustee fails or the holders of not less than 25% in principal amount of the outstanding Junior Subordinated Debentures fail to declare the principal of all of the Junior Subordinated Debentures to be immediately due and payable, the Holders of at least 25% in Liquidation Amount of the Preferred Securities then Outstanding shall have such right by a notice in writing to the Depositor and the Debenture Trustee; and upon any such declaration such principal amount of and the accrued interest on all of the Junior Subordinated Debentures shall become immediately due and payable, provided that the payment of principal and interest on such Junior Subordinated Debentures shall remain subordinated to the extent provided in the Indenture. If, as a result of a Debenture Event of Default, the Debenture Trustee or the holders of not less than 25% in aggregate outstanding principal amount of the Junior Subordinated Debentures have declared the Junior Subordinated Debentures due and payable and if such default has been cured and a sum sufficient to pay all matured installments due (otherwise than by acceleration) under the Junior Subordinated Debentures has been deposited with the Debenture Trustee, then (if the holders of not less than a majority in aggregate outstanding principal amount of Junior Subordinated Debentures have not annulled such declaration and 26 31 waived such default) the Holders of a majority in aggregate Liquidation Amount of the Preferred Securities may annul such declaration and waive such default. (c) For so long as any Preferred Securities remain outstanding, upon a Debenture Event of Default arising from the failure to pay interest or principal on the Junior Subordinated Debentures, the Holders of any Preferred Securities then Outstanding shall, to the fullest extent permitted by law, have the right to directly institute proceedings for enforcement of payment to such Holders of principal of or interest on the Junior Subordinated Debentures having a principal amount equal to the Liquidation Amount of the Preferred Securities of such Holders. ARTICLE VI. ACTS OF SECURITYHOLDERS; MEETINGS; VOTING SECTION 601. LIMITATIONS ON VOTING RIGHTS. (a) Except as provided herein and in the Indenture and as otherwise required by law, no Holder of Preferred Securities shall have any right to vote or in any manner otherwise control the administration, operation and management of the Trust or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Trust Securities Certificates, be construed so as to constitute the Securityholders from time to time as partners or members of an association. (b) So long as any Junior Subordinated Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on the Debenture Trustee with respect to such Junior Subordinated Debentures, (ii) waive any past default which is waivable under Article Seven of the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Junior Subordinated Debentures shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Junior Subordinated Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of at least a majority in Liquidation Amount of all Outstanding Preferred Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of outstanding Junior Subordinated Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior written consent of each Holder of Preferred Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Outstanding Preferred Securities, except by a subsequent vote of the Holders of the Outstanding Preferred Securities. The Property Trustee shall notify each Holder of the Outstanding Preferred Securities of any notice of default received from the Debenture Trustee with respect to the Junior Subordinated Debentures. In addition to obtaining the foregoing approvals of the Holders of the Preferred Securities, prior to taking any of the foregoing actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion of Counsel experienced in such matters to the effect that the Trust will not, as a consequence of the proposed actions by the Property Trustee, cease to be classified as a grantor 27 32 trust and not as an association taxable as a corporation for United States federal income tax purposes on account of such action. (c) If any proposed amendment to the Trust Agreement provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect in any material respect the powers, preferences or special rights of the Preferred Securities, whether by way of amendment to the Trust Agreement or otherwise, or (ii) the dissolution, winding-up or termination of the Trust, other than pursuant to the terms of this Trust Agreement, then the Holders of Outstanding Preferred Securities as a class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of at least a majority in Liquidation Amount of the Outstanding Preferred Securities. No amendment to this Trust Agreement may be made if, as a result of such amendment, the Trust would cease to be classified as a grantor trust or would be classified as an association taxable as a corporation for United States federal income tax purposes. SECTION 602. NOTICE OF MEETINGS. Notice of all meetings of the Holders of Preferred Securities, stating the time, place and purpose of the meeting, shall be given by one of the Administrative Trustees pursuant to Section 1008 to each Holder of Preferred Securities of record, at such Securityholder's registered address, at least 15 days and not more than 90 days before the meeting. At any such meeting, any business properly before the meeting may be so considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice. SECTION 603. MEETINGS OF HOLDERS OF PREFERRED SECURITIES. No annual meeting of Securityholders is required to be held. The Administrative Trustees, however, shall call a meeting of Securityholders to vote on any matter upon the written request of the Holders of 25% of the Outstanding Preferred Securities (based upon their aggregate Liquidation Amount) and the Administrative Trustees or the Property Trustee may, at any time in their discretion, call a meeting of Holders of the Preferred Securities to vote on any matters as to which the Holders of the Preferred Securities are entitled to vote. Holders of at least 50% of the Outstanding Preferred Securities (based upon their aggregate Liquidation Amount), present in person or by proxy, shall constitute a quorum at any meeting of such Securityholders. If a quorum is present at a meeting, an affirmative vote by the Holders of record present, in person or by proxy, holding more than a majority of the Preferred Securities (based upon their aggregate Liquidation Amount) held by the Holders of Preferred Securities of record present, either in person or by proxy, at such meeting shall constitute the action of the Holders of the Preferred Securities, unless this Trust Agreement requires a greater number of affirmative votes. SECTION 604. VOTING RIGHTS. Securityholders shall be entitled to one vote for each $10 of Liquidation Amount represented by their Trust Securities in respect of any matter as to which such Securityholders are entitled to vote. 28 33 SECTION 605. PROXIES, ETC. At any meeting of Securityholders, any Securityholder entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Administrative Trustees, or with such other officer or agent of the Trust as the Administrative Trustees may direct, for verification prior to the time at which such vote shall be taken. When Trust Securities are held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Trust Securities, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Trust Securities. A proxy purporting to be executed by or on behalf of a Securityholder shall be deemed valid unless challenged at or prior to its exercise, and, the burden of proving invalidity shall rest on the challenger. No proxy shall be valid more than three years after its date of execution. SECTION 606. SECURITYHOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken by Securityholders at a meeting may be taken without a meeting if Securityholders holding more than a majority of all Outstanding Trust Securities (based upon their aggregate Liquidation Amount) entitled to vote in respect of such action (or such larger proportion thereof as shall be required by any express provision of this Trust Agreement) shall consent to the action in writing (based upon their aggregate Liquidation Amount). SECTION 607. RECORD DATE FOR VOTING AND OTHER PURPOSES. For the purposes of determining the Securityholders who are entitled to notice of and to vote at any meeting or by written consent, or to participate in any distribution on the Trust Securities in respect of which a record date is not otherwise provided for in this Trust Agreement, or for the purpose of any other action, the Administrative Trustees may from time to time fix a date, not more than 90 days prior to the date of any meeting of Securityholders or the payment of any distribution or other action, as the case may be, as a record date for the determination of the identity of the Securityholders of record for such purposes. SECTION 608. ACTS OF SECURITYHOLDERS. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Trust Agreement to be given, made or taken by Securityholders or Owners may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders or Owners in person or by an agent duly appointed in writing; and, except as otherwise expressly provided herein, such action shall become effective when such instrument or instruments are delivered to an Administrative Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Securityholders or Owners signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Trust Agreement and (subject to Section 801) conclusive in favor of the Trustees, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where 29 34 such execution is by a signer acting in a capacity other than such signer's individual capacity, such certificate or affidavit shall also constitute sufficient proof of such signer's authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which any Trustee receiving the same deems sufficient. The ownership of Preferred Securities shall be proved by the Securities Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Securityholder of any Trust Security shall bind every future Securityholder of the same Trust Security and the Securityholder of every Trust Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees or the Trust in reliance thereon, whether or not notation of such action is made upon such Trust Security. Without limiting the foregoing, a Securityholder entitled hereunder to take any action hereunder with regard to any particular Trust Security may do so with regard to all or any part of the Liquidation Amount of such Trust Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such Liquidation Amount. A Holder of Preferred Securities may institute a legal proceeding directly against the Depositor under the Guarantee to enforce its rights under the Guarantee without first instituting a legal proceeding against the Guarantee Trustee (as defined in the Guarantee), the Trust or any Person. SECTION 609. INSPECTION OF RECORDS. Upon reasonable notice to the Administrative Trustees and the Property Trustee, the records of the Trust shall be open to inspection by Securityholders during normal business hours for any purpose reasonably related to such Securityholder's interest as a Securityholder. ARTICLE VII. REPRESENTATIONS AND WARRANTIES SECTION 701. REPRESENTATIONS AND WARRANTIES OF THE BANK AND THE PROPERTY TRUSTEE. The Bank and Property Trustee, as of the date hereof, and each successor Property Trustee at the time of the successor Property Trustee's acceptance of its appointment as Property Trustee hereunder (the term "Bank" being used hereafter in this Article VII to refer to such successor Property Trustee in its separate corporate capacity and as Property Trustee), hereby represents and warrants as to itself (as applicable) for the benefit of the Depositor and the Securityholders that: (a) the Bank is a Delaware banking corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; 30 35 (b) the Bank has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Bank and constitutes the valid and legally binding agreement of the Bank enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (d) the execution, delivery and performance by the Bank of this Trust Agreement has been duly authorized by all necessary corporate or other action on the part of the Bank and does not require any approval of the stockholders of the Bank and such execution, delivery and performance will not (i) violate the Bank's charter or by-laws, (ii) violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of, any Lien on any properties included in the Trust Property pursuant to the provisions of, any indenture, mortgage, credit agreement, license or other agreement or instrument to which the Bank is a party or by which it is bound, or (iii) violate any law, governmental rule or regulation of the United States or the State of Delaware, as the case may be, governing the banking or trust powers of the Bank, or any order, judgment or decree applicable to the Bank; (e) neither the authorization, execution or delivery by the Bank of this Trust Agreement nor the consummation of any of the transactions by the Bank contemplated herein or therein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to, any governmental authority or agency under any existing law of the State of Delaware or federal law governing the banking or trust powers of the Bank; (f) there are no proceedings pending or, to the best of the Bank's knowledge, threatened against or affecting the Bank in any court or before any governmental authority, agency or arbitration board or tribunal which, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Bank to enter into or perform its obligations as one of the Trustees under this Trust Agreement; and (g) The Bank is a person eligible pursuant to the Trust Indenture Act to act as such and has combined capital and surplus of at least $50,000,000. SECTION 702. REPRESENTATIONS AND WARRANTIES OF THE DELAWARE BANK AND THE DELAWARE TRUSTEE. The Delaware Bank and the Delaware Trustee, each severally on behalf of and as to itself, as of the date hereof, and each successor Delaware Trustee at the time of the successor Delaware Trustee's acceptance of its appointment as Delaware Trustee hereunder (the term "Delaware Bank" being used hereafter in this Article VIII to refer to such successor Delaware Trustee in its separate corporate capacity 31 36 and as Delaware Trustee), hereby represents and warrants (as applicable) for the benefit of the Depositor and the Securityholders that: (a) the Delaware Bank is a Delaware banking corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) the Delaware Bank has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Delaware Bank and constitutes the valid and legally binding agreement of the Delaware Bank enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (d) the execution, delivery and performance by the Delaware Bank of this Trust Agreement has been duly authorized by all necessary corporate or other action on the part of the Delaware Bank and does not require any approval of the stockholders of the Delaware Bank and such execution, delivery and performance will not (i) violate the Delaware Bank's charter or by-laws, (ii) violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of, any Lien on any properties included in the Trust Property pursuant to the provisions of, any indenture, mortgage, credit agreement, license or other agreement or instrument to which the Delaware Bank is a party or by which it is bound, or (iii) violate any law, governmental rule or regulation of the United States or the State of Delaware, as the case may be, governing the banking or trust powers of the Delaware Bank, or any order, judgment or decree applicable to the Delaware Bank; (e) neither the authorization, execution or delivery by the Delaware Bank of this Trust Agreement nor the consummation of any of the transactions by the Delaware Bank contemplated herein or therein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to, any governmental authority or agency under any existing law of the State of Delaware or any federal law governing the banking or trust powers of the Delaware Bank; and (f) there are no proceedings pending or, to the best of the Delaware Bank's knowledge, threatened against or affecting the Delaware Bank in any court or before any governmental authority, agency or arbitration board or tribunal which, individually or in the aggregate, would materially and adversely affect the Trust or the right, power and authority of the Delaware Bank to enter into or perform its obligations as one of the Trustees under this Trust Agreement. SECTION 703. REPRESENTATIONS AND WARRANTIES OF DEPOSITOR. The Depositor hereby represents and warrants for the benefit of the Securityholders that: 32 37 (a) the Trust Securities Certificates issued on the Closing Date on behalf of the Trust have been duly authorized and will have been duly and validly executed, issued and delivered by the Administrative Trustees pursuant to the terms and provisions of, and in accordance with the requirements of, this Trust Agreement and the Securityholders will be, as of such date, entitled to the benefits of this Trust Agreement; and (b) there are no taxes, fees or other governmental charges payable by the Trust (or the Trustees on behalf of the Trust) under the laws of the State of Delaware or any political subdivision thereof in connection with the execution, delivery and performance by the Bank, the Property Trustee, the Delaware Bank or the Delaware Trustee, as the case may be, of this Trust Agreement. ARTICLE VIII. THE TRUSTEES SECTION 801. CERTAIN DUTIES AND RESPONSIBILITIES. (a) The duties and responsibilities of the Trustees shall be as provided by this Trust Agreement and, in the case of the Property Trustee, by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Trust Agreement shall require the Trustees to expend or risk their own funds or otherwise incur any financial liability in the performance of any of their duties hereunder, or in the exercise of any of their rights or powers, if they shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. No Administrative Trustee nor the Delaware Trustee shall be liable for such Trustee's acts or omissions hereunder except as a result of such Trustee's own gross negligence or willful misconduct. The Property Trustee's liability shall be determined under the Trust Indenture Act. Whether or not therein expressly so provided, every provision of this Trust Agreement relating to the conduct or affecting the liability of or affording protection to the Trustees shall be subject to the provisions of this Section. To the extent that, at law or in equity, the Delaware Trustee or an Administrative Trustee has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to the Securityholders, the Delaware Trustee or such Administrative Trustee shall not be liable to the Trust or to any Securityholder for such Trustee's good faith reliance on the provisions of this Trust Agreement. The provisions of this Trust Agreement, to the extent that they restrict the duties and liabilities of the Delaware Trustee or the Administrative Trustees otherwise existing at law or in equity, are agreed by the Depositor and the Securityholders to replace such other duties and liabilities of the Delaware Trustee and the Administrative Trustees. (b) All payments made by the Property Trustee or a Paying Agent in respect of the Trust Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Property Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Securityholder, by such Securityholder's acceptance of a Trust Security, agrees that such Securityholder will look solely to the revenue and proceeds from the Trust Property to the 33 38 extent legally available for distribution to such Securityholder as herein provided and that the Trustees are not personally liable to such Securityholder for any amount distributable in respect of any Trust Security or for any other liability in respect of any Trust Security. This Section 801(b) does not limit the liability of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the case of the Property Trustee, in the Trust Indenture Act. (c) No provision of this Trust Agreement shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) the Property Trustee shall not be liable for any error of judgment made in good faith by an authorized officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (ii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in Liquidation Amount of the Trust Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement; (iii) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Junior Subordinated Debentures and the Payment Account shall be to deal with such Property in a manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Trust Agreement and the Trust Indenture Act; (iv) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree with the Depositor and money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Payment Account maintained by the Property Trustee pursuant to Section 301 and except to the extent otherwise required by law; and (v) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Depositor with their respective duties under this Trust Agreement, nor shall the Property Trustee be liable for the negligence, default or misconduct of the Administrative Trustees or the Depositor. SECTION 802. CERTAIN NOTICES. (a) Within five Business Days after the occurrence of any Event of Default actually known to an officer in the Corporate Trust Administration office of the Property Trustee, the Property Trustee shall transmit, in the manner and to the extent provided in Section 1008, notice of such Event of Default to the Securityholders, the Administrative Trustees and the Depositor, unless such Event of Default shall have been cured or waived. For purposes of this Section the term "Event of Default" means any event that is, or after notice or lapse of time or both would 34 39 become, an Event of Default, and the Property Trustee will not be deemed to have knowledge of such an event unless it has received notice thereof. (b) The Administrative Trustees shall transmit, to the Securityholders in the manner and to the extent provided in Section 1008, notice of the Depositor's election to begin or further extend an Extension Period on the Junior Subordinated Debentures (unless such election shall have been revoked) within the time specified for transmitting such notice to the holders of the Junior Subordinated Debentures pursuant to the Indenture as originally executed. (c) In the event the Depositor elects to accelerate the Maturity Date in accordance with Section 2.2 of the Indenture, upon request the Property Trustee shall give notice to each Holder of Trust Securities of the acceleration of the Maturity Date and the Accelerated Maturity Date not later than five Business Days after the Property Trustee receives the notice provided in Section 2.2(c) of the Indenture. SECTION 803. CERTAIN RIGHTS OF PROPERTY TRUSTEE. Subject to the provisions of Section 801: (a) the Property Trustee may rely and shall be protected in acting or refraining from acting in good faith upon any resolution, Opinion of Counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) if (i) in performing its duties under this Trust Agreement the Property Trustee is required to decide between alternative courses of action or (ii) in construing any of the provisions of this Trust Agreement the Property Trustee finds the same ambiguous or inconsistent with other provisions contained herein or (iii) the Property Trustee is unsure of the application of any provision of this Trust Agreement, then, except as to any matter as to which the Holders of the Preferred Securities are entitled to vote under the terms of this Trust Agreement, the Property Trustee shall deliver a notice to the Depositor requesting written instructions of the Depositor as to the course of action to be taken and the Property Trustee shall take such action, or refrain from taking such action, as the Property Trustee shall be instructed in writing to take, or to refrain from taking, by the Depositor; provided, however, that if the Property Trustee does not receive such instructions of the Depositor within 10 Business Days after it has delivered such notice, or such reasonably shorter period of time set forth in such notice (which to the extent practicable shall not be less than two Business Days), it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Trust Agreement as it shall deem advisable and in the best interests of the Securityholders, in which event the Property Trustee shall have no liability except for its own bad faith, negligence or willful misconduct; (c) any direction or act of the Depositor or the Administrative Trustees contemplated by this Trust Agreement shall be sufficiently evidenced by an Officers' Certificate; 35 40 (d) whenever in the administration of this Trust Agreement, the Property Trustee shall deem it desirable that a matter be established before undertaking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Depositor or the Administrative Trustees; (e) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof; (f) the Property Trustee may consult with counsel of its choice and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice (such counsel may be counsel to the Depositor or any of its Affiliates, and may include any of its employees); the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Trust Agreement from any court of competent jurisdiction; (g) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Securityholders pursuant to this Trust Agreement, unless such Securityholders shall have offered to the Property Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (h) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Securityholders, but the Property Trustee may make such further inquiry or investigation into such facts or matters as it may see fit; (i) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, provided that the Property Trustee shall be responsible for its own bad faith respect to selection of any agent or attorney appointed by it hereunder; (j) whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Property Trustee (i) may request instructions from the Holders of the Trust Securities which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Trust Securities as would be entitled to direct the Property Trustee under the terms of the Trust Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in acting in accordance with such instructions; and 36 41 (k) except as otherwise expressly provided by this Trust Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Trust Agreement. No provision of this Trust Agreement shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. SECTION 804. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The recitals contained herein and in the Trust Securities Certificates shall be taken as the statements of the Trust, and the Trustees do not assume any responsibility for their correctness. The Trustees shall not be accountable for the use or application by the Depositor of the proceeds of the Junior Subordinated Debentures. SECTION 805. MAY HOLD SECURITIES. Any Trustee or any other agent of any Trustee or the Trust, in its individual or any other capacity, may become the owner or pledgee of Trust Securities and, subject to Sections 808 and 813 and except as provided in the definition of the term "Outstanding" in Article I, may otherwise deal with the Trust with the same rights it would have if it were not a Trustee or such other agent. SECTION 806. COMPENSATION; INDEMNITY; FEES. The Depositor agrees: (a) to pay to the Bank and Delaware Bank such fees as are agreed to in a separate fee agreement and to pay to the Administrative Trustees from time to time reasonable compensation for all services rendered by them hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Bank, the Delaware Bank and the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Trust Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to such Trustee's negligence, bad faith or willful misconduct (or, in the case of the Administrative Trustees or the Delaware Trustee, any such expense, disbursement or advance as may be attributable to its, his or her gross negligence, bad faith or willful misconduct); and (c) to indemnify each of the Trustees or any predecessor Trustee, the Bank and the Delaware Bank including their officers, directors, employees, agents and assigns for, and to hold the Trustees harmless against, any cost, loss, damage, claim, liability, penalty or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Trust Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder, except any such cost or expense as may be attributable to such Trustee's negligence, bad faith or willful misconduct (or, in the case of the Administrative 37 42 Trustees or the Delaware Trustee, any such cost or expense as may be attributable to its, his or her gross negligence, bad faith or willful misconduct). No Trustee may claim any Lien on any Trust Property as a result of any amount due pursuant to this Section 806. SECTION 807. CORPORATE PROPERTY TRUSTEE REQUIRED; ELIGIBILITY OF TRUSTEES. (a) There shall at all times be a Property Trustee hereunder with respect to the Trust Securities. The Property Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Property Trustee with respect to the Trust Securities shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. (b) There shall at all times be one or more Administrative Trustees hereunder with respect to the Trust Securities. Each Administrative Trustee shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more persons authorized to bind that entity. (c) There shall at all times be a Delaware Trustee with respect to the Trust Securities. The Delaware Trustee shall either be (i) a natural person who is at least 21 years of age and a resident of the State of Delaware or (ii) a legal entity with its principal place of business in the State of Delaware and that otherwise meets the requirements of applicable Delaware law that shall act through one or more persons authorized to bind such entity. SECTION 808. CONFLICTING INTERESTS. If the Property Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Property Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Trust Agreement. SECTION 809. CO-TRUSTEES AND SEPARATE TRUSTEE. Unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust Property may at the time be located, the Depositor and the Administrative Trustees shall have power to appoint, and upon the written request of the Property Trustee, the Depositor and the Administrative Trustees shall for such purpose join with the Property Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to appoint, one or more Persons approved by the Property Trustee either to act as co-trustee, jointly with the Property Trustee, of all or any part of such Trust Property, or to the extent required by law to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in the capacity 38 43 aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Section. If the Depositor and the Administrative Trustees do not join in such appointment within 15 days after the receipt by them of a request so to do, or in case a Debenture Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make such appointment. Any co-trustee or separate trustee appointed pursuant to this Section shall either be (i) a natural person who is at least 21 years of age and a resident of the United States or (ii) a legal entity with its principal place of business in the United States that shall act through one or more persons authorized to bind such entity. Should any written instrument from the Depositor be required by any co-trustee or separate trustee so appointed for more fully confirming to such co-trustee or separate trustee such property, title, right, or power, any and all such instruments shall, on request, be executed, acknowledged, and delivered by the Depositor. Every co-trustee or separate trustee shall, to the extent permitted by law, but to such extent only, be appointed subject to the following terms, namely: (a) The Trust Securities shall be executed and delivered and all rights, powers, duties and obligations hereunder in respect of the custody of securities, cash and other personal property held by, or required to be deposited or pledged with, the Trustees specified hereunder, shall be exercised, solely by such Trustees and not by such co-trustee or separate trustee. (b) The rights, powers, duties and obligations hereby conferred or imposed upon the Property Trustee in respect of any property covered by such appointment shall be conferred or imposed upon and exercised or performed by the Property Trustee or by the Property Trustee and such co-trustee or separate trustee jointly, as shall be provided in the instrument appointing such co-trustee or separate trustee, except to the extent that under any law of any jurisdiction in which any particular act is to be performed, the Property Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties and obligations shall be exercised and performed by such co-trustee or separate trustee. (c) The Property Trustee at any time, by an instrument in writing executed by it, with the written concurrence of the Depositor, may accept the resignation of or remove any co-trustee or separate trustee appointed under this Section, and, in case a Debenture Event of Default has occurred and is continuing, the Property Trustee shall have power to accept the resignation of, or remove, any such co-trustee or separate trustee without the concurrence of the Depositor. Upon the written request of the Property Trustee, the Depositor shall join with the Property Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to effectuate such resignation or removal. A successor to any co-trustee or separate trustee so resigned or removed may be appointed in the manner provided in this Section 809. (d) No co-trustee or separate trustee hereunder shall be personally liable by reason of any act or omission of the Property Trustee or any other trustee hereunder. (e) The Trustees shall not be liable by reason of any act of a co-trustee or separate trustee. 39 44 (f) Any Act of Holders delivered to the Property Trustee shall be deemed to have been delivered to each such co-trustee and separate trustee. SECTION 810. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 811. Subject to the immediately preceding paragraph, the Relevant Trustee may resign at any time with respect to the Trust Securities by giving written notice thereof to the Securityholders. If the instrument of acceptance by the successor Trustee required by Section 811 shall not have been delivered to the Relevant Trustee within 30 days after the giving of such notice of resignation, the Relevant Trustee may petition, at the expense of the Depositor, any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Trust Securities. Unless a Debenture Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by Act of the Holder of the Common Securities. If a Debenture Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed at such time by Act of the Holders of a majority in Liquidation Amount of the Preferred Securities, delivered to such Relevant Trustee (in its individual capacity and on behalf of the Trust). An Administrative Trustee may be removed by the Holder of the Common Securities at any time. In no event will the Holders of the Preferred Securities have the right to vote to appoint, remove or replace the Administrative Trustees. If the Relevant Trustee shall resign, be removed or become incapable of acting as Trustee, or if a vacancy shall occur in the office of such Relevant Trustee for any cause, at a time when no Debenture Event of Default shall have occurred and be continuing, the Holder of the Common Securities, by Act of the Holder of the Common Securities delivered to the retiring Relevant Trustee, shall promptly appoint a successor Trustee or Trustees with respect to the Trust Securities and the Trust, and the successor Trustee shall comply with the applicable requirements of Section 811. If the Property Trustee or the Delaware Trustee shall resign, be removed or become incapable of continuing to act as the Property Trustee or the Delaware Trustee, as the case may be, at a time when a Debenture Event of Default shall have occurred and is continuing, the Holders of the Preferred Securities by Act of the Holders of a majority in Liquidation Amount of the Preferred Securities then Outstanding delivered to the retiring Relevant Trustee, shall promptly appoint a successor Trustee or Trustees with respect to the Trust Securities and the Trust, and such successor Trustee shall comply with the applicable requirements of Section 811. If an Administrative Trustee shall resign, be removed or become incapable of acting as Administrative Trustee, at a time when a Debenture Event of Default shall have occurred and be continuing, the Holder of the Common Securities, by Act of the Holder of the Common Securities delivered to an Administrative Trustee, shall promptly appoint a successor Administrative Trustee or Administrative Trustees with respect to the Trust Securities and the Trust, and such successor Administrative Trustee or Administrative Trustees shall 40 45 comply with the applicable requirements of Section 811. If no successor Trustee with respect to the Trust Securities shall have been so appointed by the Holder of the Common Securities or the Holders of the Preferred Securities and accepted appointment in the manner required by Section 811, any Securityholder who has been a Securityholder for at least six months may, on behalf of such Securityholder and all others similarly situated, petition a court of competent jurisdiction for the appointment of a successor Trustee with respect to the Trust Securities. The Property Trustee shall give notice of each resignation and each removal of a Relevant Trustee and each appointment of a successor Trustee to all Securityholders in the manner provided in Section 1008 and shall give notice to the Depositor. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust office if it is the Property Trustee. Notwithstanding, the foregoing or any other provision of this Trust Agreement, in the event any Administrative Trustee or a Delaware Trustee who is a natural person dies or becomes, in the opinion of the Depositor, incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by (a) the unanimous act of the remaining Administrative Trustees if there are at least two of them or (b) otherwise by the Depositor (with the successor in each case being a Person who satisfies the eligibility requirement for Administrative Trustees or the Delaware Trustee, as the case may be, set forth in Section 807). SECTION 811. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. In case of the appointment hereunder of a successor Trustee with respect to the Trust Securities and the Trust, the retiring Relevant Trustee and each successor Trustee with respect to the Trust Securities shall execute and deliver an instrument hereto wherein each successor Trustee shall accept such appointment and which shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust, and upon the execution and delivery of such instrument, the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust; but, on request of the Trust or any successor Trustee such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Trust Securities and the Trust. Upon request of any such successor Trustee, the Trust shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the immediately preceding paragraph, as the case may be. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. 41 46 SECTION 812. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any Person into which the Property Trustee, the Delaware Trustee or any Administrative Trustee that is not a natural person may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Relevant Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of such Relevant Trustee, shall be the successor of such Relevant Trustee hereunder, provided such Person shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. SECTION 813. PREFERENTIAL COLLECTION OF CLAIMS AGAINST DEPOSITOR OR TRUST. If and when the Property Trustee or the Delaware Trustee shall be or become a creditor of the Depositor or the Trust (or any other obligor upon the Junior Subordinated Debentures or the Trust Securities), the Property Trustee or the Delaware Trustee, as the case may be, shall be subject to and shall take all actions necessary in order to comply with the provisions of the Trust Indenture Act regarding the collection of claims against the Depositor or Trust (or any such other obligor). SECTION 814. REPORTS BY PROPERTY TRUSTEE. (a) Not later than January 31 of each year commencing with January 31, 2000, the Property Trustee shall transmit to all Securityholders in accordance with Section 1008, and to the Depositor, a brief report dated as of the preceding December 31 with respect to: (i) its eligibility under Section 807 or, in lieu thereof, if to the best of its knowledge it has continued to be eligible under said Section, a written statement to such effect; and (ii) any change in the property and funds in its possession as Property Trustee since the date of its last report. (b) In addition the Property Trustee shall transmit to Securityholders such reports concerning the Property Trustee and its actions under this Trust Agreement as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (c) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Depositor with each national securities exchange or other organization upon which the Trust Securities may be listed, with the Commission and with the Depositor. SECTION 815. REPORTS TO THE PROPERTY TRUSTEE. The Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314(a) of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. 42 47 SECTION 816. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT. Each of the Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with the conditions precedent, if any, provided for in this Trust Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act shall be given in the form of an Officers' Certificate. SECTION 817. NUMBER OF TRUSTEES. (a) The initial number of Trustees shall be five, provided that the Holder of the Common Securities by written instrument may increase or decrease the number of Administrative Trustees. The Property Trustee and the Delaware Trustee may be the same Person. (b) If a Trustee ceases to hold office for any reason and the number of Administrative Trustees is not reduced pursuant to Section 817(a), or if the number of Trustees is increased pursuant to Section 817(a), a vacancy shall occur. The vacancy shall be filled with a Trustee appointed in accordance with Section 810. (c) The death, resignation, retirement, removal, bankruptcy, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul the Trust. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 810, the Administrative Trustees in office, regardless of their number (and notwithstanding any other provision of this Agreement), shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Trust Agreement. SECTION 818. DELEGATION OF POWER. (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 207(a)(i); and (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to the Depositor the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. SECTION 819. VOTING. Except as otherwise provided in this Trust Agreement, the consent or approval of the Administrative Trustees shall require consent or approval by not less than a majority of the Administrative Trustees, unless there are only two, in which case both must consent. 43 48 ARTICLE IX. TERMINATION, LIQUIDATION AND MERGER SECTION 901. TERMINATION UPON EXPIRATION DATE. Unless earlier dissolved, the Trust shall automatically dissolve on , 2029 (the "Expiration Date") subject to distribution of the Trust Property in accordance with Section 904. SECTION 902. EARLY TERMINATION. The first to occur of any of the following events is an "Early Termination Event": (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution or liquidation of, the Depositor; (b) delivery of written direction to the Property Trustee by the Depositor at any time (which direction is wholly optional and within the discretion of the Depositor, subject to Depositor having received prior approval of the Board of Governors of the Federal Reserve System if so required under applicable guidelines, policies or regulations thereof) to dissolve the Trust and distribute the Junior Subordinated Debentures to Securityholders in exchange for the Preferred Securities in accordance with Section 904; (c) the redemption of all of the Preferred Securities in connection with the redemption of all of the Junior Subordinated Debentures; or (d) an order for dissolution of the Trust shall have been entered by a court of competent jurisdiction. SECTION 903. TERMINATION. The respective obligations and responsibilities of the Trustees and the Trust created and continued hereby shall terminate upon the latest to occur of the following: (a) the distribution by the Property Trustee to Securityholders upon the liquidation of the Trust pursuant to Section 904, or upon the redemption of all of the Trust Securities pursuant to Section 402, of all amounts required to be distributed hereunder upon the final payment of the Trust Securities; (b) the payment of any expenses owed by the Trust; (c) the discharge of all administrative duties of the Administrative Trustees, including the performance of any tax reporting obligations with respect to the Trust or the Securityholders, and (d) the filing of a certificate of cancellation by the Administrative Trustee under the Delaware Business Trust Act. SECTION 904. LIQUIDATION. (a) If an Early Termination Event specified in clause (a), (b), or (d) of Section 902 occurs or upon the Expiration Date, the Trust shall be liquidated by the Trustees as expeditiously as the Trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to each Securityholder a Like Amount of Junior Subordinated Debentures, subject to Section 904(d). Notice of liquidation shall be given 44 49 by the Property Trustee, pursuant to instruction from the Administrative Trustees, by first-class mail, postage prepaid, mailed not later than 30 nor more than 60 days prior to the Liquidation Date to each Holder of Trust Securities at such Holder's address appearing in the Securities Register. All notices of liquidation shall: (i) state the Liquidation Date; (ii) state that from and after the Liquidation Date, the Trust Securities will no longer be deemed to be Outstanding and any Trust Securities Certificates not surrendered for exchange will be deemed to represent a Like Amount of Junior Subordinated Debentures; and (iii) provide such information with respect to the mechanics by which Holders may exchange Trust Securities certificates for Junior Subordinated Debentures, or if Section 904(d) applies receive a Liquidation Distribution, as the Administrative Trustees or the Property Trustee shall deem appropriate. (b) Except where Section 902(c) or 904(d) applies, in order to effect the liquidation of the Trust and distribution of the Junior Subordinated Debentures to Securityholders, the Property Trustee shall establish a record date for such distribution (which shall be not more than 45 days prior to the Liquidation Date) and, either itself acting as exchange agent or through the appointment of a separate exchange agent, shall establish such procedures as it shall deem appropriate to effect the distribution of Junior Subordinated Debentures in exchange for the Outstanding Trust Securities Certificates. (c) Except where Section 902(c) or 904(d) applies, after the Liquidation Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii) certificates (or, at the election of the Depositor a Global Subordinated Debenture, subject to the provisions of the Indenture) representing a Like Amount of Junior Subordinated Debentures will be issued to Holders of Trust Securities Certificates upon surrender of such certificates to the Administrative Trustees or their agent for exchange, (iii) the Depositor shall use its reasonable efforts to have the Junior Subordinated Debentures listed on a national securities exchange or quotation system, (iv) any Trust Securities Certificates not so surrendered for exchange will be deemed to represent a Like Amount of Junior Subordinated Debentures, accruing interest at the rate provided for in the Junior Subordinated Debentures from the last Distribution Date on which a Distribution was made on such Trust Securities Certificates until such certificates are so surrendered (and until such certificates are so surrendered, no payments of interest or principal will be made to Holders of Trust Securities Certificates with respect to such Junior Subordinated Debentures) and (v) all rights of Securityholders holding Trust Securities will cease, except the right of such Securityholders to receive Junior Subordinated Debentures upon surrender of Trust Securities Certificates. (d) In the event that, notwithstanding the other provisions of this Section 904, whether because of an order for dissolution entered by a court of competent jurisdiction or otherwise, distribution of the Junior Subordinated Debentures in the manner provided herein is determined by the Property Trustee not to be practical, the Trust Property shall be liquidated, and the Trust shall be dissolved, wound-up or terminated, by the Property Trustee in such manner as 45 50 the Property Trustee determines. In such event, on the date of the dissolution, winding-up or other termination of the Trust, Securityholders will be entitled to receive out of the assets of the Trust available for distribution to Securityholders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the Liquidation Amount per Trust Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If, upon any such dissolution, winding-up or termination, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then, subject to the next succeeding sentence, the amounts payable by the Trust on the Trust Securities shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder of the Common Securities will be entitled to receive Liquidation Distributions upon any such dissolution, winding-up or termination pro rata (determined as aforesaid) with Holders of Preferred Securities, except that, if a Debenture Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities. SECTION 905. MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST. The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any trust or other Person, except pursuant to this Section 905. At the request of the Depositor, with the consent of the Administrative Trustees and without the consent of the Holders of the Preferred Securities, the Property Trustee or the Delaware Trustee, the Trust may merge with or into, consolidate, amalgamate, be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any state; provided, that (i) such successor entity either (a) expressly assumes all of the obligations of the Trust with respect to the Preferred Securities or (b) substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Preferred Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) the Depositor expressly appoints a trustee of such successor entity possessing substantially the same powers and duties as the Property Trustee as the holder of the Junior Subordinated Debentures, (iii) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect, (iv) such successor entity has a purpose identical to that of the Trust, (v) the Successor Securities will be listed or traded on any national securities exchange or other organization on which the Preferred Securities may then be listed, (vi) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Depositor has received an Opinion of Counsel experienced in such matters to the effect that (a) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect, and (b) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an "investment company" under the Investment Company Act and (vii) the Depositor owns all of the Common Securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee. Notwithstanding the foregoing, the Trust shall not, except with the consent of 46 51 Holders of 100% in Liquidation Amount of the Preferred Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other Person or permit any other Person to consolidate, amalgamate, merge with or into, or replace it, if such consolidation, amalgamation, merger or replacement would cause the Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. ARTICLE X. MISCELLANEOUS PROVISIONS SECTION 1001. LIMITATION OF RIGHTS OF SECURITYHOLDERS. The death or incapacity of any Person having an interest, beneficial or otherwise, in Trust Securities shall not operate to terminate this Trust Agreement, nor entitle the legal representatives or heirs of such Person, to claim an accounting, take any action or bring any proceeding in any court for a partition or winding-up of the arrangements contemplated hereby, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. SECTION 1002. AMENDMENT. (a) This Trust Agreement may be amended from time to time by the Trustees and the Depositor, without the consent of any Securityholders, (i) as provided in Section 811 with respect to acceptance of appointment by a successor Trustee, (ii) to cure any ambiguity, correct or supplement any provision herein or therein which may be inconsistent with any other provision herein or therein, or to make any other provisions with respect to matters or questions arising under this Trust Agreement, that shall not be inconsistent with the other provisions of this Trust Agreement, or (iii) to modify, eliminate or add to any provisions of this Trust Agreement to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Trust Securities are Outstanding or to ensure that the Trust will not be required to register as an "investment company" under the Investment Company Act; provided, however, that in the case of clause (ii), such action shall not adversely affect in any material respect the interests of any Securityholder, and any amendments of this Trust Agreement shall become effective when notice thereof is given to the Securityholders. (b) Except as provided in Section 601(c) or Section 1002(c) hereof, any provision of this Trust Agreement may be amended by the Trustees and the Depositor (i) with the consent of Securityholders representing not less than a majority (based upon Liquidation Amounts) of the Trust Securities then Outstanding and (ii) upon receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status of an "investment company" under the Investment Company Act. (c) In addition to and notwithstanding any other provision in this Trust Agreement, without the consent of each affected Securityholder (such consent being obtained in accordance 47 52 with Section 603 or 606 hereof), this Trust Agreement may not be amended to (i) change the amount or timing of any distribution on the Trust Securities or otherwise adversely affect the amount of any distribution required to be made in respect of the Trust Securities as of a specified date or (ii) restrict the right of a Securityholder to institute suit for the enforcement of any such payment on or after such date; notwithstanding any other provision herein, without the unanimous consent of the Securityholders (such consent being obtained in accordance with Section 603 or 606 hereof), this paragraph (c) of this Section 1002 may not be amended. (d) Notwithstanding any other provisions of this Trust Agreement, no Trustee shall enter into or consent to any amendment to this Trust Agreement which would cause the Trust to fail or cease to qualify for the exemption from status of an "investment company" under the Investment Company Act or to fail or cease to be classified as a grantor trust for United States federal income tax purposes. (e) Notwithstanding anything in this Trust Agreement to the contrary, without the consent of the Depositor, this Trust Agreement may not be amended in a manner which imposes any additional obligation on the Depositor. (f) In the event that any amendment to this Trust Agreement is made, the Administrative Trustees shall promptly provide to the Depositor a copy of such amendment. (g) Neither the Property Trustee nor the Delaware Trustee shall be required to enter into any amendment to this Trust Agreement which affects its own rights, duties or immunities under this Trust Agreement. The Property Trustee shall be entitled to receive an Opinion of Counsel and an Officers' Certificate stating that any amendment to this Trust Agreement is in compliance with this Trust Agreement. SECTION 1003. SEPARABILITY. In case any provision in this Trust Agreement or in the Trust Securities Certificates shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1004. GOVERNING LAW. THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE (WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES). SECTION 1005. PAYMENTS DUE ON NON-BUSINESS DAY. If the date fixed for any payment on any Trust Security shall be a day that is not a Business Day, then such payment need not be made on such date but may be made on the next succeeding day which is a Business Day (except as otherwise provided in Sections 401(a) and 402(d)), with the same force and effect as though made on the date fixed for such payment, and no Distribution shall accumulate thereon for the period after such date. 48 53 SECTION 1006. SUCCESSORS. This Trust Agreement shall be binding upon and shall inure to the benefit of any successor to the Depositor, the Trust or the Relevant Trustee(s), including any successor by operation of law. Except in connection with a consolidation, merger or sale involving the Depositor that is permitted under Article XII of the Indenture and pursuant to which the assignee agrees in writing to perform the Depositor's obligations hereunder, the Depositor shall not assign its obligations hereunder. SECTION 1007. HEADINGS. The Article and Section headings are for convenience only and shall not affect the construction of this Trust Agreement. SECTION 1008. REPORTS, NOTICES AND DEMANDS. Any report, notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon any Securityholder or the Depositor may be given or served in writing by deposit thereof, first-class postage prepaid, in the United States mail, hand delivery or facsimile transmission, in each case, addressed, (a) in the case of a Holder of Preferred Securities, to such Securityholder as such Securityholder's name and address may appear on the Securities Register; and (b) in the case of the Holder of the Common Securities or the Depositor, to Mercantile Bank Corporation, 216 North Division Avenue, N.W. Grand Rapids, MI 48503, Attention: Chairman; Fax: (616) 454-3815. Any notice to the Holders of the Preferred Securities shall also be given to such Owners as have, within two years preceding the giving of such notice, filed their names and addresses with the Property Trustee for that purpose. Such notice, demand or other communication to or upon a Securityholder shall be deemed to have been sufficiently given or made, for all purposes, upon hand delivery, mailing or transmission. Any notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon the Trust, the Property Trustee or the Administrative Trustees shall be given in writing addressed (until another address is published by the Trust) as follows: (a) with respect to the Property Trustee to Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration; (b) with respect to the Delaware Trustee, to Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration; and (c) with respect to the Administrative Trustees, to them at the address above for notices to the Depositor, marked "Attention: Administrative Trustees of MBWM Trust." Such notice, demand or other communication to or upon the Trust or the Property Trustee shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by the Trust or the Property Trustee. SECTION 1009. AGREEMENT NOT TO PETITION. Each of the Trustees and the Depositor agree for the benefit of the Securityholders that, until at least one year and one day after the Trust has been terminated in accordance with Article IX, they shall not file, or join in the filing of, a petition against the Trust under any bankruptcy, insolvency, reorganization or other similar law (including, without limitation, the United States Bankruptcy Code) (collectively, "Bankruptcy Laws") or otherwise join in the commencement of any proceeding against the Trust under any Bankruptcy Law. In the event the Depositor takes action in violation 49 54 of this Section 1009, the Property Trustee agrees, for the benefit of Securityholders, that at the expense of the Depositor (which expense shall be paid prior to the filing), it shall file an answer with the bankruptcy court or otherwise properly contest the filing of such petition by the Depositor against the Trust or the commencement of such action and raise the defense that the Depositor has agreed in writing not to take such action and should be stopped and precluded therefrom. The provisions of this Section 1009 shall survive the termination of this Trust Agreement. SECTION 1010. TRUST INDENTURE ACT; CONFLICT WITH TRUST INDENTURE ACT. (a) This Trust Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Trust Agreement and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Trust Agreement by any of the provisions of the Trust Indenture Act, such required provision shall control. If any provision of this Trust Agreement modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Trust Agreement as so modified or to be excluded, as the case may be. (d) The application of the Trust Indenture Act to this Trust Agreement shall not affect the nature of the Trust Securities as equity securities representing undivided beneficial interests in the assets of the Trust. SECTION 1011. ACCEPTANCE OF TERMS OF TRUST AGREEMENT, GUARANTEE AND INDENTURE. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER AND SUCH OTHERS. 50 55 MERCANTILE BANK CORPORATION, as Depositor By: ________________________________ Name: ________________________________ Title: ________________________________ WILMINGTON TRUST COMPANY, as Property Trustee By: ________________________________ Name: ________________________________ Title: ________________________________ WILMINGTON TRUST COMPANY, as Delaware Trustee By: ___________________________________________________ Name: ___________________________________________________ Title: ___________________________________________________ By: ___________________________________________________ Gerald R. Johnson, Jr., as Administrative Trustee By: ___________________________________________________ Michael H. Price, as Administrative Trustee By: ___________________________________________________ Charles E. Christmas, as Administrative Trustee 51 56 EXHIBIT A CERTIFICATE OF TRUST OF MBWM CAPITAL TRUST I This Certificate of Trust of MBWM Capital Trust I (the "Trust"), dated July 23, 1999, is being duly executed and filed by the undersigned, as trustees, to form a business trust under the Delaware Business Trust Act (12 Del. C. Section 3801 et seq.) (the "Act"). 1. NAME. The name of the business trust formed hereby is MBWM Capital Trust I. 2. DELAWARE TRUSTEE. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attn: Corporate Trust Administration. 3. EFFECTIVE DATE. This Certificate of Trust shall be effective upon its filing. IN WITNESS WHEREOF, the undersigned, being all the trustees of the Trust, have executed this Certificate of Trust as of the date first above written in accordance with Section 3811 of the Act. WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as trustee By: ________________________________ Name: ________________________________ Title: ________________________________ 52 57 ADMINISTRATIVE TRUSTEES ____________________________________________ Gerald R. Johnson, Jr., not in his individual capacity, but solely as trustee ____________________________________________ Michael H. Price, not in his individual capacity, but solely as trustee ____________________________________________ Charles E. Christmas, not in his individual capacity, but solely as trustee 53 58 EXHIBIT C THIS CERTIFICATE IS NOT TRANSFERABLE CERTIFICATE NUMBER NUMBER OF SECURITIES **1** 43,299 CERTIFICATE EVIDENCING COMMON SECURITIES OF MBWM CAPITAL TRUST I % Common Securities (liquidation amount $10 per Common Security) MBWM Capital Trust I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Mercantile Bank Corporation (the "Holder") is the registered owner of Forty-Three Thousand Two Hundred and Ninety Nine (43,299) securities of the Trust representing undivided beneficial interests in the assets of the Trust and designated the % Common Securities (liquidation amount $10 per Common Security) (the "Common Securities"). In accordance with Section 510 of the Trust Agreement (as defined below), the Common Securities are not transferable and any attempted transfer hereof shall be void. The designations, rights, privileges, restrictions, preferences, and other terms and provisions of the Common Securities are set forth in, and this certificate and the Common Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of August , 1999, as the same may be amended from time to time (the "Trust Agreement"), including the designation of the terms of Common Securities as set forth therein. The Trust will furnish a copy of the Trust Agreement to the Holder without charge upon written request to the Trust at its principal place of business or registered office. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this day of August , 1999. MERCANTILE BANK CORPORATION By: ---------------------------- Name: ---------------------------- Title: Administrative Trustee 54 59 EXHIBIT D AGREEMENT AS TO EXPENSES AND LIABILITIES AGREEMENT dated as of August , 1999, between Mercantile Bank Corporation, a Michigan corporation (the "Company"), and MBWM Capital Trust I, a Delaware business trust (the "Trust"). WHEREAS, the Trust intends to issue its Common Securities (the "Common Securities") to, and receive % Junior Subordinated Debentures due 2029 (the "Junior Subordinated Debentures") from, the Company and to issue and sell % Cumulative Preferred Securities (the "Preferred Securities") with such powers, preferences and special rights and restrictions as are set forth in the Amended and Restated Trust Agreement of the Trust dated as of August , 1999, as the same may be amended from time to time (the "Trust Agreement"); and WHEREAS, the Company will directly or indirectly own all of the Common Securities of the Trust and will issue the Junior Subordinated Debentures. NOW, THEREFORE, in consideration of the purchase by each holder of the Preferred Securities, which purchase the Company hereby agrees shall benefit the Company and which purchase the Company acknowledges will be made in reliance upon the execution and delivery of this Agreement, the Company, including in its capacity as holder of the Common Securities, and the Trust hereby agree as follows: ARTICLE I SECTION 1.1. GUARANTEE BY THE COMPANY. Subject to the terms and conditions hereof, the Company, including in its capacity as holder of the Common Securities, hereby irrevocably and unconditionally guarantees to each person or entity to whom the Trust is now or hereafter becomes indebted or liable (the "Beneficiaries") the full payment, when and as due, of any and all Obligations (as hereinafter defined) to such Beneficiaries. As used herein, "Obligations" means any costs, expenses or liabilities of the Trust other than obligations of the Trust to pay to holders of any Preferred Securities or other similar interests in the Trust the amounts due such holders pursuant to the terms of the Preferred Securities or such other similar interests, as the case may be. This Agreement is intended to be for the benefit of, and to be enforceable by, all such Beneficiaries, whether or not such Beneficiaries have received notice hereof. SECTION 1.2. TERM OF AGREEMENT. This Agreement shall terminate and be of no further force and effect upon the later of (a) the date on which full payment has been made of all amounts payable to all holders of all the Preferred Securities (whether upon redemption, liquidation, exchange or otherwise) and (b) the date on which there are no Beneficiaries remaining; provided, however, that this Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time any holder of Preferred Securities or any Beneficiary must restore payment of any sums paid under the Preferred Securities, under any 55 60 Obligation, under the Preferred Securities Guarantee Agreement dated the date hereof by the Company and Wilmington Trust Company as guarantee trustee or under this Agreement, for any reason whatsoever. This Agreement is continuing, irrevocable, unconditional and absolute. SECTION 1.3. WAIVER OF NOTICE. The Company hereby waives notice of acceptance of this Agreement and of any Obligation to which it applies or may apply, and the Company hereby waives presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 1.4. NO IMPAIRMENT. The obligations, covenants, agreements and duties of the Company under this Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the extension of time for the payment by the Trust of all or any portion of the Obligations or for the performance of any other obligation under, arising out of, or in connection with, the Obligations; (b) any failure, omission, delay or lack of diligence on the part of the Beneficiaries to enforce, assert or exercise any right, privilege, power or remedy conferred on the Beneficiaries with respect to the Obligations or any action on the part of the Trust granting indulgence or extension of any kind; or (c) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Trust or any of the assets of the Trust. The Beneficiaries shall not be obligated to give notice to, or obtain the consent of, the Company with respect to the happening of any of the foregoing. SECTION 1.5. ENFORCEMENT. A Beneficiary may enforce this Agreement directly against the Company, and the Company waives any right or remedy to require that any action be brought against the Trust or any other person or entity before proceeding against the Company. ARTICLE II SECTION 2.1. BINDING EFFECT. All guarantees and agreements contained in this Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Company and shall inure to the benefit of the Beneficiaries. SECTION 2.2. AMENDMENT. So long as there remains any Beneficiary or any Preferred Securities are outstanding, this Agreement shall not be modified or amended in any manner adverse to such Beneficiary or to the holders of the Preferred Securities. SECTION 2.3. NOTICES. Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by delivering the same by facsimile 56 61 transmission (confirmed by mail), telex, or by registered or certified mail, addressed as follows (and if so given, shall be deemed given when mailed or upon receipt of an answer back, if sent by telex): MBWM Capital Trust I c/o Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, DE 19890-0001 Facsimile No.: (302) 651-8882 Attention: Corporate Trust Administration Mercantile Bank Corporation 216 North Division Avenue, N.W. Grand Rapids, Michigan 49503 Facsimile No.: (616) 454-5815 Attention: Chairman SECTION 2.4. GOVERNING LAW. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Michigan (without regard to conflict of laws principles). THIS AGREEMENT is executed as of the day and year first above written. MERCANTILE BANK CORPORATION, By: --------------------------------- Name: --------------------------------- Title: Chairman MBWM CAPITAL TRUST I By: --------------------------------- Name: --------------------------------- Title: Administrative Trustee 57 62 EXHIBIT E This Preferred Security is a Book-Entry Preferred Securities Certificate within the meaning of the Trust Agreement hereinafter referred to and is registered in the name of The Depository Trust Company, a New York corporation (the "Depositary") or a nominee of the Depositary. This Preferred Security is exchangeable for Preferred Securities registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Trust Agreement (as defined below) and no transfer of this Preferred Security (other than a transfer of this Preferred Security as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in limited circumstances. Unless this Preferred Security is presented by an authorized representative of the Depositary to MBWM Capital Trust I or its agent for registration of transfer, exchange or payment, and any Preferred Security issued is registered in the name of Cede & Co., or such other name as requested by an authorized representative of the Depositary (and any payment hereon is made to Cede & Co. or to such other entity as is requested by an authorized representative of the Depositary), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co. has an interest herein. Certificate Number Number of Preferred Securities **1** 1,400,000 CUSIP NO.______________ CERTIFICATE EVIDENCING PREFERRED SECURITIES OF MBWM CAPITAL TRUST I % Cumulative Preferred Securities (liquidation amount $10 per Preferred Security) MBWM Capital Trust I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the "Holder") is the registered owner of One Million Four Hundred Thousand (1,400,000) preferred securities of the Trust representing undivided beneficial interests in the assets of the Trust and designated the % Cumulative Preferred Securities (liquidation amount $10 per Preferred Security) (the "Preferred Securities"). The Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer as provided in Section 504 of the Trust Agreement (as defined below). The designations, rights, privileges, restrictions, preferences, and other terms and provisions of the Preferred Securities are set forth in, and this certificate and the Preferred Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of August , 1999, as the same may be amended from time to time (the "Trust Agreement"), including the designation of the terms of Preferred Securities as set forth therein. The Holder is entitled to the benefits of the Preferred 58 63 Securities Guarantee Agreement entered into by Mercantile Bank Corporation, a Michigan corporation, and Wilmington Trust Company, as guarantee trustee, dated as of August , 1999 (the "Guarantee"), to the extent provided therein. The Trust will furnish a copy of the Trust Agreement and the Guarantee to the Holder without charge upon written request to the Trust at its principal place of business or registered office. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this day of , 1999. MERCANTILE BANK CORPORATION By: ----------------------------- Name: ----------------------------- Title: Administrative Trustee 59 EX-4.7 5 FORM OF PREFERRED SECURITIES GUARANTEE AGREEMENT 1 EXHIBIT 4.7 PREFERRED SECURITIES GUARANTEE AGREEMENT MERCANTILE BANK CORPORATION AND WILMINGTON TRUST COMPANY DATED: AUGUST , 1999 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS AND INTERPRETATION......................................................1 SECTION 1.1 Definitions and Interpretation .....................................................1 ARTICLE II TRUST INDENTURE ACT.................................................................5 SECTION 2.1 Trust Indenture Act; Application....................................................5 SECTION 2.2 Lists of Holders of Securities......................................................5 SECTION 2.3 Reports by the Preferred Guarantee Trustee..........................................5 SECTION 2.4 Periodic Reports to Preferred Guarantee Trustee.....................................6 SECTION 2.5 Evidence of Compliance with Conditions Precedent....................................6 SECTION 2.6 Events of Default; Waiver...........................................................6 SECTION 2.7 Event of Default; Notice............................................................6 SECTION 2.8 Conflicting Interests ..............................................................6 ARTICLE III POWERS, DUTIES AND RIGHTS OF PREFERRED GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Preferred Guarantee Trustee................................7 SECTION 3.2 Certain Rights of Preferred Guarantee Trustee.......................................8 SECTION 3.3 Not Responsible for Recitals or Issuance of Guarantee...............................10 ARTICLE IV PREFERRED GUARANTEE TRUSTEE.........................................................10 SECTION 4.1 Preferred Guarantee Trustee; Eligibility............................................10 SECTION 4.2 Appointment, Removal and Resignation of Preferred Guarantee Trustees............................................................................11 ARTICLE V GUARANTEE...........................................................................12 SECTION 5.1 Guarantee...........................................................................12 SECTION 5.2 Waiver of Notice and Demand.........................................................12 SECTION 5.3 Obligations Not Affected............................................................12 SECTION 5.4 Rights of Holders...................................................................13 SECTION 5.5 Guarantee of Payment................................................................13 SECTION 5.6 Subrogation.........................................................................13 SECTION 5.7 Independent Obligations.............................................................14 ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION...........................................14 SECTION 6.1 Limitation of Transactions..........................................................14 SECTION 6.2 Ranking.............................................................................14 ARTICLE VII TERMINATION.........................................................................14 SECTION 7.1 Termination.........................................................................14
i 3 ARTICLE VIII INDEMNIFICATION; FEES...............................................................15 SECTION 8.1 Exculpation.........................................................................15 SECTION 8.2 Indemnification.....................................................................15 SECTION 8.3 Fees................................................................................15 ARTICLE IX MISCELLANEOUS.......................................................................16 SECTION 9.1 Successors and Assigns..............................................................16 SECTION 9.2 Amendments..........................................................................16 SECTION 9.3 Notices.............................................................................16 SECTION 9.4 Benefit.............................................................................17 SECTION 9.5 Governing Law.......................................................................17
ii 4 CROSS REFERENCE TABLE Section of Trust Section of Indenture Act of Guarantee 1939, as Amended Agreement ---------------- --------- 310(a) 4.1(a) 310(b) 4.1(c), 2.8 310(c) Inapplicable 311(a) 2.2(b) 311(b) 2.2(b) 311(c) Inapplicable 312(a) 2.2(a) 312(b) 2.2(b) 313 2.3 314(a) 2.4 314(b) Inapplicable 314(c) 2.5 314(d) Inapplicable 314(e) 1.1, 2.5, 3.2 314(f) 2.1, 3.2 315(a) 3.1(d) 315(b) 2.7 315(c) 3.1(c) 315(d) 3.1(d) 316(a) 1.1, 3.6, 5.4 316(b) 5.3 316(c) 8.2 317(a) Inapplicable 317(b) Inapplicable 318(a) 2.1(b) 318(b) 2.1 318(c) 2.1(a) NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of this Guarantee. iii 5 PREFERRED SECURITIES GUARANTEE AGREEMENT This PREFERRED SECURITIES GUARANTEE AGREEMENT (the "Preferred Securities Guarantee"), dated as of July , 1999, is executed and delivered by Mercantile Bank Corporation, a Michigan corporation (the "Guarantor"), and Wilmington Trust Company, a Delaware banking corporation duly organized under the laws of the State of Delaware, as trustee (acting not in its individual capacity but solely as trustee, the "Preferred Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of MBWM Capital Trust I, a Delaware statutory business trust (the "Trust"). WHEREAS, pursuant to an Amended and Restated Trust Agreement (the "Trust Agreement") dated as of August , 1999 among the trustees of the Trust named therein, the Guarantor, as sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, the Trust is issuing on the date hereof 1,400,000 preferred securities, and within 30 days after the date of the prospectus relating to the public offering of the preferred securities, a possible additional amount of up to 200,000 preferred securities pursuant to an underwriters' over-allotment option, having an aggregate liquidation amount of $14,000,000 to $16,000,000, designated the % Cumulative Preferred Securities (the "Preferred Securities"); and WHEREAS, as incentive for the Holders to purchase the Preferred Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Preferred Securities Guarantee, to pay to the Holders of the Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the purchase by each Holder of Preferred Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Preferred Securities Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1 DEFINITIONS AND INTERPRETATION. In this Preferred Securities Guarantee, unless the context otherwise requires: (a) capitalized terms used in this Preferred Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined in the Trust Agreement has the same meaning when used in this Preferred Securities Guarantee, unless otherwise defined in this Preferred Securities Guarantee; (c) a term defined anywhere in this Preferred Securities Guarantee has the same meaning throughout; 1 6 (d) all references to "the Preferred Securities Guarantee" or "this Preferred Securities Guarantee" are to this Preferred Securities Guarantee as modified, supplemented or amended from time to time; (e) all references in this Preferred Securities Guarantee to Articles and Sections are to Articles and Sections of this Preferred Securities Guarantee, unless otherwise specified; (f) a term defined in the Trust Indenture Act has the same meaning when used in this Preferred Securities Guarantee, unless otherwise defined in this Preferred Securities Guarantee or unless the context otherwise requires; and (g) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act of 1933, as amended, or any successor rule thereunder. "Business Day" means any day other than (a) a Saturday or Sunday, (b) a day on which banking institutions in the State of Michigan are authorized or required by law or executive order to remain closed, or (c) a day on which the Preferred Guarantee Trustee's Corporate Trust Office is closed for business. "Corporate Trust Office" means the office of the Preferred Guarantee Trustee at which the corporate trust business of the Preferred Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attn: Corporate Trust Administration. "Covered Person" means any Holder or beneficial owner of Preferred Securities. "Debt" means with respect to any person, whether recourse is to all or a portion of the assets of such person and whether or not contingent: (i) every obligation of such person for money borrowed; (ii) every obligation of such person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such person; (iv) every obligation of such person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such person; and (vi) every obligation of the type referred to in clauses (i) through (v) of another person and all dividends of another person the payment of which, in either case, such person has guaranteed or for which such person is responsible or liable, directly or indirectly, as obligor or otherwise. "Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Preferred Securities Guarantee. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by the Trust: (i) any accrued and unpaid Distributions (as defined in the Trust Agreement) that are required to 2 7 be paid on such Preferred Securities to the extent the Trust shall have funds available therefor, (ii) the redemption price, including all accrued and unpaid Distributions to the date of redemption (the "Redemption Price") to the extent the Trust has funds available therefor, with respect to any Preferred Securities called for redemption by the Trust, and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of the Trust (other than in connection with the distribution of Junior Subordinated Debentures to the Holders in exchange for Preferred Securities as provided in the Trust Agreement), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid Distributions on the Preferred Securities to the date of payment, to the extent the Trust shall have funds available therefor, and (b) the amount of assets of the Trust remaining available for distribution to Holders in liquidation of the Trust (such lesser amount, the "Liquidation Distribution"). "Holder" shall mean any holder, as registered on the books and records of the Trust of any Preferred Securities; provided, however, that, in determining whether the holders of the requisite percentage of Preferred Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor, the Preferred Guarantee Trustee or any of their respective Affiliates. "Indemnified Person" means the Preferred Guarantee Trustee including in its individual capacity, any Affiliate of the Preferred Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Preferred Guarantee Trustee. "Indenture" means the Subordinated Indenture dated as of August , 1999, among the Guarantor (the "Debenture Issuer") and Wilmington Trust Company, as trustee, and any indenture supplemental thereto pursuant to which the Junior Subordinated Debentures are to be issued to the Property Trustee of the Trust. "Junior Subordinated Debentures" means the series of junior subordinated deferrable interest debt securities of the Guarantor designated the % Junior Subordinated Debentures due 2029 held by the Property Trustee of the Trust. "Liquidation Amount" means the stated valued of $10 per Trust Security. "Liquidation Distribution" has the meaning in the definition of Guarantee Payments. "Majority in Liquidation Amount of the Preferred Securities" means, except as provided by the Trust Indenture Act, a vote by Holders of Preferred Securities, voting separately as a class, of more than 50% of the liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all Preferred Securities. "Officers' Certificate" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Preferred Securities Guarantee shall include: 3 8 (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definition relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Preferred Guarantee Trustee" means Wilmington Trust Company not in its individual capacity but solely as trustee, until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Preferred Securities Guarantee and thereafter means each such Successor Preferred Guarantee Trustee. "Redemption Price" has the meaning provided in the definition of Guarantee Payments. "Responsible Officer" means, with respect to the Preferred Guarantee Trustee, any officer within the Corporate Trust Administration or Business Development Office of the Preferred Guarantee Trustee, including any vice-president, any assistant vice-president, any assistant secretary, the treasurer, any assistant treasurer or other officer of the Corporate Trust Office of the Preferred Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Successor Preferred Guarantee Trustee" means a successor Preferred Guarantee Trustee possessing the qualifications to act as Preferred Guarantee Trustee under Section 4.1. "Senior and Subordinated Debt" means the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Guarantor whether or not such claim for post-petition interest is allowed in such proceeding), on Debt of the Guarantor, whether incurred on or prior to the date of the Indenture or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior in right of payment to the Preferred Securities Guarantee or to other Debt which is pari passu with, or subordinated to, the Preferred Securities Guarantee; provided, however, that Senior and Subordinated Debt shall not be deemed to include (i) any Debt of the Guarantor which when incurred and without respect to any election under section 1111(b) of the United States Bankruptcy Code of 1978, as amended, was without recourse to the Guarantor, (ii) any Debt of 4 9 the Guarantor to any of its subsidiaries, (iii) any Debt to any employee of the Guarantor, (iv) any Debt which by its terms is subordinated to trade accounts payable or accrued liabilities arising in the ordinary course of business to the extent that payments made to the holders of such Debt by the holders of the Junior Subordinated Debentures as a result of the subordination provisions of the Indenture would be greater than they otherwise would have been as a result of any obligation of such holders to pay amounts over to the obligees on such trade accounts payable or accrued liabilities arising in the ordinary course of business as a result of the subordination provisions to which such Debt is subject, (v) the Junior Subordinated Debentures, and (vi) any other debt securities issued pursuant to the Indenture. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 TRUST INDENTURE ACT; APPLICATION. (a) This Preferred Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Preferred Securities Guarantee and shall, to the extent applicable, be governed by such provisions; and (b) If and to the extent that any provision of this Preferred Securities Guarantee limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.2 LISTS OF HOLDERS OF SECURITIES. (a) In the event the Preferred Guarantee Trustee is not also acting in the capacity of the Property Trustee under the Trust Agreement, the Guarantor shall provide the Preferred Guarantee Trustee with a list, in such form as the Preferred Guarantee Trustee may reasonably require, of the names and addresses of the Holders of the Preferred Securities ("List of Holders") (i) on or before [6 MONTHS AFTER ISSUANCE] 15 and [ISSUANCE ANNIVERSARY MONTH] 15 of each year, and (ii) at any other time within 30 days of receipt by the Guarantor of a written request for a List of Holders, as of a date no more than 15 days before such List of Holders is given to the Preferred Guarantee Trustee provided, that the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Preferred Guarantee Trustee by the Guarantor. The Preferred Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Preferred Guarantee Trustee shall comply with its obligations under Sections 311(a), 311(b) and Section 312(b) of the Trust Indenture Act. SECTION 2.3 REPORTS BY THE PREFERRED GUARANTEE TRUSTEE. On or before [ISSUANCE ANNIVERSARY MONTH] 15 of each year, the Preferred Guarantee Trustee shall provide to the Holders of the Preferred Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the 5 10 Trust Indenture Act. The Preferred Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 PERIODIC REPORTS TO PREFERRED GUARANTEE TRUSTEE. The Guarantor shall provide to the Preferred Guarantee Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act, if any, and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5 EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT. The Guarantor shall provide to the Preferred Guarantee Trustee such evidence of compliance with the conditions precedent, if any, provided for in this Preferred Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 EVENTS OF DEFAULT; WAIVER. The Holders of a Majority in liquidation amount of Preferred Securities may, by vote, on behalf of the Holders of all of the Preferred Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Preferred Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.7 EVENT OF DEFAULT; NOTICE. (a) The Preferred Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Preferred Securities, notices of all Events of Default actually known to a Responsible Officer of the Preferred Guarantee Trustee, unless such defaults have been cured before the giving of such notice. (b) The Preferred Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Preferred Guarantee Trustee shall have received a properly addressed written notice, or of which a Responsible Officer of the Preferred Guarantee Trustee charged with the administration of the Trust Agreement shall have obtained actual knowledge. SECTION 2.8 CONFLICTING INTERESTS. The Trust Agreement shall be deemed to be specifically described in this Preferred Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. 6 11 ARTICLE III POWERS, DUTIES AND RIGHTS OF PREFERRED GUARANTEE TRUSTEE SECTION 3.1 POWERS AND DUTIES OF THE PREFERRED GUARANTEE TRUSTEE. (a) This Preferred Securities Guarantee shall be held by the Preferred Guarantee Trustee for the benefit of the Holders of the Preferred Securities, and the Preferred Guarantee Trustee shall not transfer this Preferred Securities Guarantee to any Person except a Holder of Preferred Securities exercising such Holder's rights pursuant to Section 5.4(b) or to a Successor Preferred Guarantee Trustee on acceptance by such Successor Preferred Guarantee Trustee of its appointment to act as Successor Preferred Guarantee Trustee. The right, title and interest of the Preferred Guarantee Trustee shall automatically vest in any Successor Preferred Guarantee Trustee, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Preferred Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Preferred Guarantee Trustee has occurred and is continuing, the Preferred Guarantee Trustee shall enforce this Preferred Securities Guarantee for the benefit of the Holders of the Preferred Securities. (c) The Preferred Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants shall be read into this Preferred Securities Guarantee against the Preferred Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) and is actually known to a Responsible Officer of the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall exercise such of the rights and powers vested in it by this Preferred Securities Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (d) No provision of this Preferred Securities Guarantee shall be construed to relieve the Preferred Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Preferred Guarantee Trustee shall be determined solely by the express provisions of this Preferred Securities Guarantee, and the Preferred Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants or obligations shall be read into this Preferred Securities Guarantee against the Preferred Guarantee Trustee; and 7 12 (B) in the absence of bad faith on the part of the Preferred Guarantee Trustee, the Preferred Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Preferred Guarantee Trustee and conforming to the requirements of this Preferred Securities Guarantee; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Preferred Securities Guarantee; (ii) the Preferred Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Preferred Guarantee Trustee; (iii) the Preferred Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Preferred Guarantee Trustee, or exercising any trust or power conferred upon the Preferred Guarantee Trustee under this Preferred Securities Guarantee; and (iv) no provision of this Preferred Securities Guarantee shall require the Preferred Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers if the Preferred Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Preferred Securities Guarantee or indemnity, reasonably satisfactory to the Preferred Guarantee Trustee, against such risk or liability is not reasonably assured to it. SECTION 3.2 CERTAIN RIGHTS OF PREFERRED GUARANTEE TRUSTEE. (a) Subject to the provisions of Section 3.1: (i) The Preferred Guarantee Trustee may conclusively rely upon, and shall be fully protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. 8 13 (ii) Any direction or act of the Guarantor contemplated by this Preferred Securities Guarantee shall be sufficiently evidenced by an Officers' Certificate or other written notice or instruction signed by the Guarantor. (iii) Whenever, in the administration of this Preferred Securities Guarantee, the Preferred Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Preferred Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor. (iv) The Preferred Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any rerecording, refiling or registration thereof). (v) The Preferred Guarantee Trustee may consult with counsel, and the written advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Preferred Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Preferred Securities Guarantee from any court of competent jurisdiction. (vi) The Preferred Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Preferred Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Preferred Guarantee Trustee such security and indemnity, reasonably satisfactory to the Preferred Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Preferred Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Preferred Guarantee Trustee; provided that, nothing contained in this Section 3.2(a)(vi) shall be taken to relieve the Preferred Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Preferred Securities Guarantee. (vii) The Preferred Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Preferred Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. 9 14 (viii) The Preferred Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Preferred Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed in good faith by it hereunder. (ix) Any action taken by the Preferred Guarantee Trustee or its agents hereunder shall bind the Holders of the Preferred Securities, and the signature of the Preferred Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Preferred Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Preferred Securities Guarantee, both of which shall be conclusively evidenced by the Preferred Guarantee Trustee's or its agent's taking such action. (x) Whenever in the administration of this Preferred Securities Guarantee the Preferred Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Preferred Guarantee Trustee (i) may request instructions from the Holders of a Majority in liquidation amount of the Preferred Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions. (b) No provision of this Preferred Securities Guarantee shall be deemed to impose any duty or obligation on the Preferred Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Preferred Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Preferred Guarantee Trustee shall be construed to be a duty. SECTION 3.3 NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF GUARANTEE. The recitals contained in this Preferred Securities Guarantee shall be taken as the statements of the Guarantor, and the Preferred Guarantee Trustee does not assume any responsibility for their correctness. The Preferred Guarantee Trustee makes no representation as to the validity or sufficiency of this Preferred Securities Guarantee. ARTICLE IV PREFERRED GUARANTEE TRUSTEE SECTION 4.1 PREFERRED GUARANTEE TRUSTEE; ELIGIBILITY. (a) There shall at all times be a Preferred Guarantee Trustee which shall: 10 15 (i) not be an Affiliate of the Guarantor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia, or a corporation or Person permitted by the Securities and Exchange Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.1(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Preferred Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Preferred Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Preferred Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Preferred Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2 APPOINTMENT, REMOVAL AND RESIGNATION OF PREFERRED GUARANTEE TRUSTEES. (a) Subject to Section 4.2(b), the Preferred Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor. (b) The Preferred Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Preferred Guarantee Trustee and delivered to the Guarantor. (c) The Preferred Guarantee Trustee appointed to office shall hold office until a Successor Preferred Guarantee Trustee shall have been appointed or until its removal or resignation. The Preferred Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Preferred Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Preferred Guarantee Trustee and delivered to the Guarantor and the resigning Preferred Guarantee Trustee. (d) If no Successor Preferred Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 30 days after delivery to the Guarantor of an instrument of resignation, the resigning Preferred Guarantee Trustee may 11 16 petition any court of competent jurisdiction for appointment of a Successor Preferred Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Preferred Guarantee Trustee. (e) No Preferred Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Preferred Guarantee Trustee. (f) Upon termination of this Preferred Securities Guarantee or removal or resignation of the Preferred Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Preferred Guarantee Trustee all amounts accrued to the date of such termination, removal or resignation. ARTICLE V GUARANTEE SECTION 5.1 GUARANTEE. The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Trust), as and when due, regardless of any defense, right of set-off or counterclaim that the Trust may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Trust to pay such amounts to the Holders. SECTION 5.2 WAIVER OF NOTICE AND DEMAND. The Guarantor hereby waives notice of acceptance of this Preferred Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Trust or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3 OBLIGATIONS NOT AFFECTED. The obligations, covenants, agreements and duties of the Guarantor under this Preferred Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Trust of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Trust; (b) the extension of time for the payment by the Trust of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities (other than an extension of time for payment of Distributions, Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Junior Subordinated Debentures or any extension of the maturity date of the Junior Subordinated Debentures permitted by the Indenture); (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders 12 17 pursuant to the terms of the Preferred Securities, or any action on the part of the Trust granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Trust or any of the assets of the Trust; (e) any invalidity of, or defect or deficiency in, the Preferred Securities; (f) any failure or omission to receive any regulatory approval or consent required in connection with the Preferred Securities (or the Common Securities issued by the Trust), including the failure to receive a approval of the Board of Governors of the Federal Reserve System required for the redemption of the Preferred Securities; (g) the settlement or compromise of any obligation guarantied hereby or hereby incurred; or (h) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4 RIGHTS OF HOLDERS. (a) The Holders of a Majority in Liquidation Amount of the Preferred Securities have the right to direct the time, method and place of conducting of any proceeding for any remedy available to the Preferred Guarantee Trustee in respect of this Preferred Securities Guarantee or exercising any trust or power conferred upon the Preferred Guarantee Trustee under this Preferred Securities Guarantee. (b) Any Holder of Preferred Securities may institute a legal proceeding directly against the Guarantor to enforce its rights under this Preferred Securities Guarantee, without first instituting a legal proceeding against the Trust, the Preferred Guarantee Trustee or any other Person. SECTION 5.5 GUARANTEE OF PAYMENT. This Preferred Securities Guarantee creates a guarantee of payment and not of collection. SECTION 5.6 SUBROGATION. The Guarantor shall be subrogated to all (if any) rights of the Holders of Preferred Securities against the Trust in respect of any amounts paid to such Holders by the Guarantor under this Preferred Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this 13 18 Preferred Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Preferred Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7 INDEPENDENT OBLIGATIONS. The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Trust with respect to the Preferred Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Preferred Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3. ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1 LIMITATION OF TRANSACTIONS. So long as any Preferred Securities remain outstanding, if there shall have occurred and be continuing an Event of Default or an event of default under the Trust Agreement, then (a) the Guarantor shall not declare or pay any dividend or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of its capital stock, (b) the Guarantor shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Guarantor (including other Junior Subordinated Debentures) which rank pari passu with or junior in interest to the Junior Subordinated Debentures or (c) the Guarantor shall not make any guarantee payments with respect to any guarantee by the guarantor of the debt securities of any subsidiary of the Guarantor if such guarantee ranks pari passu or junior in interest to the Junior Subordinated Debentures (other than (a) dividends or distributions payable in common stock, (b) any declaration of a dividend in connection with the implementation of a shareholders' rights plan, or the issuance of stock under any such plan in the future or the redemption or repurchase of any such rights pursuant thereto, (c) payments under this Preferred Securities Guarantee and (d) purchases of common stock related to the issuances of common stock or rights under any of the Guarantor's benefit plans for its directors, officers or employees). SECTION 6.2 RANKING. This Preferred Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank subordinate and junior in right of payment to all Senior and Subordinated Debt of the Guarantor. ARTICLE VII TERMINATION SECTION 7.1 TERMINATION. This Preferred Securities Guarantee shall terminate upon (i) full payment of the Redemption Price of all Preferred Securities, (ii) upon full payment of the amounts payable in accordance with the Trust Agreement upon liquidation of the Trust or (iii) upon distribution of the Junior Subordinated Debentures to the Holders of the Preferred Securities. Notwithstanding the foregoing, this Preferred Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Preferred 14 19 Securities must restore payment of any sums paid under the Preferred Securities or under this Preferred Securities Guarantee. ARTICLE VIII INDEMNIFICATION; FEES SECTION 8.1 EXCULPATION. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Preferred Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Preferred Securities Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Preferred Securities might properly be paid. SECTION 8.2 INDEMNIFICATION. The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any cost, loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 8.2 shall survive the termination of this Preferred Securities Guarantee. SECTION 8.3 FEES. The Guarantor agrees except as otherwise expressly provided herein, to reimburse the Preferred Trustee upon request for all reasonable expenses, disbursements and advances incurred or made by the Preferred Trustee in accordance with any provision of this Preferred Securities Guarantee (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to such Guarantee Trustee's negligence, bad faith or willful misconduct. 15 20 ARTICLE IX MISCELLANEOUS SECTION 9.1 SUCCESSORS AND ASSIGNS. All guaranties and agreements contained in this Preferred Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. SECTION 9.2 AMENDMENTS. Except with respect to any changes that do not materially adversely affect the rights of Holders (in which case no consent of Holders will be required), this Preferred Securities Guarantee may only be amended with the prior approval of the Holders of at least a Majority in liquidation amount of the Preferred Securities. The provisions of Article VI of the Trust Agreement with respect to meetings of Holders of the Securities apply to the giving of such approval. SECTION 9.3 NOTICES. All notices provided for in this Preferred Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (a) If given to the Preferred Guarantee Trustee, at the Preferred Guarantee Trustee's mailing address set forth below (or such other address as the Preferred Guarantee Trustee may give notice of to the Holders of the Preferred Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, DE 19890-0001 Attention: Corporate Trust Administration (b) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Preferred Securities): Mercantile Bank Corporation 216 North Division Avenue Grand Rapids, Michigan 49503 Attention: Jerry R. Johnson, Jr. (c) If given to any Holder of Preferred Securities, at the address set forth on the books and records of the Trust. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. 16 21 SECTION 9.4 BENEFIT. This Preferred Securities Guarantee is solely for the benefit of the Holders of the Preferred Securities and, subject to Section 3.1(a), is not separately transferable from the Preferred Securities. SECTION 9.5. GOVERNING LAW. THIS PREFERRED SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MICHIGAN; PROVIDED THAT THE RIGHTS, IMMUNITIES, DUTIES AND THE STANDARD OF CARE OF THE PREFERRED GUARANTEE TRUSTEE SHALL BE GOVERNED BY DELAWARE LAW. THIS PREFERRED SECURITIES GUARANTEE is executed as of the day and year first above written. MERCANTILE BANK CORPORATION, as Guarantor By:____________________________________ Gerald R. Johnson, Jr. WILMINGTON TRUST COMPANY, As Preferred Guarantee Trustee By:____________________________________ Name:__________________________________ Title:_________________________________ 17 EX-5.1 6 OPINION OF DICKINSON WRIGHT PLLC 1 EXHIBIT 5.1 DICKINSON WRIGHT PLLC 500 WOODWARD AVENUE, SUITE 4000 DETROIT, MICHIGAN 48226 TELEPHONE (313) 223-3500 FACSIMILE (313) 223-3598 August 2, 1999 Mercantile Bank Corporation 216 North Division Grand Rapids, Michigan 49503 Re: Registration Statement on Form SB-2 Ladies and Gentlemen: In connection with the Registration Statement on Form SB-2 filed by Mercantile Bank Corporation (the "Company") and MBWM Capital Trust I ( the "Trust") with the Securities and Exchange Commission on or about August 2, 1999 relating to a public offering by the Trust of up to 1,600,000 Cumulative Preferred Securities (the "Preferred Securities"), please be advised that as counsel to the Company, upon examination of such corporate documents and records as we have deemed necessary or advisable for the purposes of this opinion, it is our opinion that: 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Michigan. 2. The Guarantee, when executed and delivered as contemplated by the Registration Statement, and the Junior Subordinated Debentures, when executed, authenticated, issued and paid for as contemplated by the Registration Statement, will be validly issued obligations of the Company enforceable in accordance with their terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity whether applied in an action at law or a suit in equity. Capitalized terms used herein shall have the definitions given to such terms in the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the headings "Material Federal Income Tax Consequences" and "Legal Matters" in the Prospectus comprising a part of the Registration Statement. Very truly yours, /s/ DICKINSON WRIGHT PLLC EX-5.2 7 OPINION OF RICHARDS, LAYTON & FINGER, P.A. 1 RICHARDS, LAYTON & FINGER A PROFESSIONAL ASSOCIATION ONE RODNEY SQUARE P.O. BOX 551 WILMINGTON, DELAWARE 19899 TELEPHONE: (302) 658-6541 TELECOPIER: (302) 658-6548 WEBSITE: WWW.RLF.COM EXHIBIT 5.2 August 2, 1999 MBWM Capital Trust I 216 North Division Avenue NW Grand Rapids, MI 49503 Re: Mercantile Bank Corporation MBWM Capital Trust I - Offering of Trust Preferred Securities Ladies and Gentlemen: We have acted as special Delaware counsel for Mercantile Bank Corporation, a Michigan corporation (the "Company"), and MBWM Capital Trust I, a Delaware business trust (the "Trust"), in connection with the matters set forth herein. At your request, this opinion is being furnished to you. For purposes of giving the opinions hereinafter set forth, our examination of documents has been limited to the examination of originals or copies of the following: (a) The Certificate of Trust of the Trust, dated as of July 23, 1999, as filed with the office of the Secretary of State of the State of Delaware (the "Secretary of State") on July 26, 1999; (b) The Trust Agreement of the Trust, dated as of July 26, 1999 among the Company and the Trustees of the Trust named therein; (c) The Registration Statement (the "Registration Statement") on Form SB-2, including a preliminary prospectus with respect to the Trust (the "Prospectus"), relating to the Preferred Securities of the Trust representing preferred undivided beneficial interests in the assets of the Trust (each, a "Preferred Security" and collectively, the "Preferred Securities"), filed by the Company and the Trust with the Securities and Exchange Commission on or about August 2, 1999; 2 MBWM Capital Trust I August 2, 1999 Page 2 (d) A form of Amended and Restated Trust Agreement for the Trust, to be entered into among the Company, the Trustees of the Trust named therein, and the holders, from time to time, of the undivided beneficial interests in the assets of the Trust (including Exhibits C and E thereto) (the "Trust Agreement"), attached as an exhibit to the Registration Statement; and (e) A Certificate of Good Standing for the Trust, dated August 2, 1999, obtained from the Secretary of State. Initially capitalized terms used herein and not otherwise defined are used as defined in the Trust Agreement. For purposes of this opinion, we have not reviewed any documents other than the documents listed in paragraphs (a) through (e) above. In particular, we have not reviewed any document (other than the documents listed in paragraphs (a) through (e) above) that is referred to in or incorporated by reference into the documents reviewed by us. We have assumed that there exists no provision in any document that we have not reviewed that is inconsistent with the opinions stated herein. We have conducted no independent factual investigation of our own but rather have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. With respect to all documents examined by us, we have assumed (i) the authenticity of all documents submitted to us as authentic originals, (ii) the conformity with the originals of all documents submitted to us as copies or forms, and (iii) the genuineness of all signatures. For purposes of this opinion, we have assumed (i) that the Trust Agreement and the Certificate of Trust are in full force and effect and have not been amended, (ii) except to the extent provided in paragraph 1 below, the due organization or due formation, as the case may be, and valid existence in good standing of each party to the documents examined by us under the laws of the jurisdiction governing its creation, organization or formation, (iii) the legal capacity of natural persons who are parties to the documents examined by us, (iv) that each of the parties to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, (v) the due authorization, execution and delivery by all parties thereto of all documents examined by us, (vi) the receipt by each Person to whom a Preferred Security is to be issued by the Trust (collectively, the "Preferred Security Holders") of a Preferred Securities Certificate for such Preferred Security and the payment for such Preferred Security, in accordance with the Trust Agreement and the Registration Statement, and (vii) that the Preferred Securities are issued and sold to the Preferred Security Holders in accordance with the Trust Agreement and the Registration Statement. We have not participated in the preparation of the Registration Statement and assume no responsibility for its contents. 3 MBWM Capital Trust I August 2, 1999 Page 3 This opinion is limited to the laws of the State of Delaware, and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders thereunder which are currently in effect. Based upon the foregoing, and upon our examination of such questions of law and statutes of the State of Delaware as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that: 1. The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Business Trust Act. 2. The Preferred Securities of the Trust will represent valid and, subject to the qualifications set forth in paragraph 3 below, fully paid and nonassessable undivided beneficial interests in the assets of the Trust. 3. The Preferred Security Holders, as beneficial owners of the Trust, will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. We note that the Preferred Security Holders may be obligated to make payments as set forth in the Trust Agreement. We consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement. We hereby consent to the use of our name under the heading "Legal Matters" in the Prospectus. In giving the foregoing consents, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Richards, Layton & Finger ---------------------------- WF/TJH/gmh EX-8.1 8 EXHIBIT 8.1 1 Mercantile Bank Corporation MBWM Capital Trust I August 2, 1999 EXHIBIT 8.1 DICKINSON WRIGHT PLLC 500 WOODWARD AVENUE, SUITE 4000 DETROIT, MICHIGAN 48226 TELEPHONE (313) 223-3500 FACSIMILE (313) 223-3598 August 2, 1999 Mercantile Bank Corporation MBWM Capital Trust I 216 North Division 216 North Division Grand Rapids, Michigan 49503 Grand Rapids, Michigan 49503 RE: OPINION OF COUNSEL RELATED TO THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE AND OWNERSHIP OF PREFERRED SECURITIES ISSUED BY MBWM CAPITAL TRUST I Ladies and Gentlemen: We have acted as special counsel to Mercantile Bank Corporation ("Company") in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), on or about August 2, 1999 of a Form SB-2 Registration Statement (the "Registration Statement"). The Registration Statement relates to the offer for sale of up to 1,600,000 Cumulative Preferred Securities (the "Preferred Securities") of MBWM Capital Trust I (the "Trust"), a statutory business trust formed by the Company under the laws of the State of Delaware, and the Junior Subordinated Debentures to be issued by the Company to the Trust in connection with the sale of the Preferred Securities. This opinion letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991). As a consequence, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage and other limitations, all as more particularly described in the Accord, and this letter should be read in conjunction therewith. This opinion letter relates to the material federal income tax consequences of the purchase and ownership of the Preferred Securities by investors. All capitalized terms used in this opinion letter and not otherwise defined herein are used as described in the Registration Statement. The consequences described herein are not applicable to investors who may be subject to special tax treatment, such as financial institutions, banks, real estate investment trusts, regulated investment companies, insurance companies, dealers in securities or currencies, tax-exempt investors, individual retirement and certain tax deferred accounts, non-United States Persons or persons 1 2 Mercantile Bank Corporation MBWM Capital Trust I August 2, 1999 that will hold the Preferred Securities as part of a position in a "straddle" or as part of a "hedging" or other integrated transaction. In addition, this opinion does not include any description of any alternative minimum tax consequences or the tax laws of any state, local or foreign government that may be applicable to an investor. We have examined the Registration Statement and such other documents as we have deemed necessary to render our opinion expressed below. In our examination of such material, we have relied upon the current and continued accuracy of the factual matters we have considered, and we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to original documents of all copies of documents submitted to us. In addition, we also have assumed that the Trust was formed and will be maintained in compliance with the terms of the Trust Agreement and that the transactions related to the issuance of the Junior Subordinated Debentures and the Preferred Securities will be consummated in accordance with the terms and forms of the documents. As to any facts material to the opinions expressed herein which were not independently established or verified, we have relied upon oral or written statements and representations of officers, trustees, and other representatives of the Company, the Trust and others. Should any of the above facts, circumstances, or assumptions be subsequently determined incorrect or inaccurate, our conclusions may vary from those set forth below and such variance could be material. Based on the foregoing and the qualifications and limitations stated herein it is our opinion that: (1) The Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation for United States federal income tax purposes, and as a result, each beneficial owner of Preferred Securities will be treated as owning an undivided beneficial interest in the Junior Subordinated Debentures. (2) The summary contained in the portion of the Registration Statement titled "Material Federal Income Tax Consequences" accurately describes the material United States federal income tax consequences that may be relevant to the purchase and ownership of the Preferred Securities by an investor described in the third paragraph hereof. This opinion is based upon the Internal Revenue Code of 1986, as amended, the Treasury regulations promulgated thereunder and other relevant authorities and law, all as in effect on the date hereof. All of the above are subject to change or modification by subsequent legislative, regulatory, administrative or judicial decisions which could adversely affect our opinions. Consequently, future changes in the law, or administrative or judicial interpretations thereof, may cause the tax treatment of the transactions referred to herein to be materially different from that described above. Other than the specific tax opinions set forth in this letter, no other opinion has been rendered with respect to the tax treatment of the proposed issuance and sale of the Junior Subordinated Debentures or the Preferred Securities, including, but not limited to, the tax 2 3 Mercantile Bank Corporation MBWM Capital Trust I August 2, 1999 treatment of the proposed transactions under other provisions of the Code and the regulations, the tax treatment of any conditions existing at the time of, or effects resulting from, the proposed transactions that are not specifically covered by the above opinions, or the tax treatment of the proposed transactions under state, local, foreign or any other tax laws. Except as provided in the following paragraph, this opinion is not to be used, circulated, quoted or otherwise referred to for any purpose without our express written consent. We hereby consent to the filing of this letter as an exhibit to the Registration Statement and the use of our name in the Registration Statement under the captions "Material Federal Income Tax Consequences" and "Legal Matters." In giving the foregoing consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder. Very truly yours, /s/DICKINSON WRIGHT PLLC 3 EX-10.6 9 MERCANTILE BANK DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.6 MERCANTILE BANK OF WEST MICHIGAN DEFERRED COMPENSATION PLAN FOR MEMBERS OF THE BOARD OF DIRECTORS \ SECTION I PURPOSE The purpose of the Mercantile Bank of West Michigan Deferred Compensation Plan for members of the Board of Directors (the "Plan") is to enable each Director of Mercantile Bank of West Michigan (the "Company") to defer all or a portion of his or her cash fees for future services as a member of the Board of Directors, or as a member of any committee thereof. The Plan is intended to be unfunded for tax purposes and an unfunded arrangement for Directors not acting as employees for purpose of Title I of ERISA. SECTION II ELIGIBILITY Any Director of the Company who is not an employee of the Company, or a subsidiary thereof, shall be eligible to participate in the Plan. SECTION III ELECTION, MODIFICATION, AND TERMINATION PROCEDURES Any Director wishing to participate in the Plan must file with the Secretary of the Company either (i) within thirty (30) days from the effective date of this Plan, or (ii) on or before December 31 of any calendar year, or (iii) within thirty (30) days after first becoming eligible to participate in the Plan, a written Notice of Election in the form attached as Exhibit A to defer payment of his Director's fees which are payable in cash. The election shall be effective in the case of (i) and (iii) above on the first day of the month following the month of receipt by the Secretary of the Notice of Election and effective in the case of (ii) above on the January 1st following receipt by the Secretary of the Company of the Notice of Election. An effective election with respect to Director's fees that have been deferred under the terms of the Plan may not be revoked and shall remain in effect until the election is terminated by the Director or the Director is no longer eligible to participate in the Plan. An effective election may be terminated by filing a Notice of Termination in the form attached as Exhibit B prior to December 31 of a year and shall be effective for fees that will be earned during subsequent calendar years. A Director who shall have terminated an effective election may thereafter file a new election covering a subsequent calendar year, all subject to the provision in such a case that an effective election to defer must be filed by December 31 of the year preceding the year in which the deferred fees are to be earned. 2 SECTION IV ESTABLISHMENT AND ADMINISTRATION OF DEFERRED DIRECTORS' FEE ACCOUNT The amount of any Directors' fees deferred in accordance with an election shall be credited to a deferred Directors' fee account maintained by the Company and such account shall remain a part of the general funds of the Company. Nothing contained in the Plan shall be deemed to create a trust or fund of any kind or create any fiduciary relationship, and the Director shall have the status of a general unsecured creditor of the Company and the Plan constitutes a mere promise of the Company to make payments in the future to the Director or to his designated beneficiary. As of the last day of each calendar quarter the deferred fee account of each Director who has filed an effective deferral election shall be adjusted as follows: (1) The account balance shall be credited as of the last day of each quarter with an amount equivalent to interest for that quarter. Such amount shall be computed by multiplying the account balance at the beginning of the quarter by a fraction, the numerator of which is a rate equal to 80% of the prime rate generally prevailing in the State of Michigan on the first day of the quarter, and the denominator of which is 4. (2) Next, the account shall be credited with the amount, if any, of Directors' fees deferred during that quarter. A separate record of deferred Directors' fees and applicable interest shall be maintained by the Company for each participant in the Plan. The computations of the Company with respect to the amount equivalent to interest shall be conclusive and binding. SECTION V PAYMENT OF DEFERRED DIRECTORS' FEES Deferred Directors' fees shall be paid to a Director or, in the event of his death, to his designated beneficiary in accordance with the Notice of Election and Beneficiary Designation forms that have been filed with the Secretary of the Company. If a Director elects to receive payment of his deferred fees in installments rather than in a lump sum, the payment period shall not exceed ten years following the payment commencement date. The amounts of any installment payment shall be determined by multiplying the balance of the Director's unpaid deferred fees and applicable amounts equivalent to interest on the date of such installment by a fraction, the numerator of which is one and the denominator of which is the number of remaining unpaid installments. Such balance shall be appropriately reduced to reflect the installment payments made hereunder. SECTION VI WHEN PAYMENT OF DEFERRED DIRECTORS' FEES COMMENCES The payment in a lump sum or installments of amounts deferred pursuant to an election under the Plan shall commence at the time the participant ceases to be a Director, and shall be paid in accordance with the terms of such election. Installment payments shall be made either annually or quarter-annually as the Director has elected. 2 3 SECTION VII DESIGNATION OF BENEFICIARY Each Director on becoming a participant shall file with the Secretary of the Company a beneficiary designation in the form attached as Exhibit C designating one or more beneficiaries to whom amounts otherwise due the participant shall be made in the event of his death while serving as a Director or after leaving the Board. A beneficiary designation will be effective only if the signed beneficiary designation form is filed with the Secretary of the Company while the Director is alive, and will cancel all beneficiary designations signed and filed previously. If the primary beneficiary shall survive the Director but dies before receiving all the amounts due hereunder, the deferred amounts remaining unpaid at the time of death shall be paid in one lump sum to the legal representative of the primary beneficiary's estate. If the primary beneficiary shall predecease the Director, amounts remaining unpaid at the time of the Director's death shall be paid in the order specified by the Director, on the effective beneficiary designation form filed by the Director, to the contingent beneficiary(s) surviving the Director. If the contingent beneficiary(s) dies before receiving all the amounts due hereunder the unpaid amount shall be paid in one lump sum to the legal representative of such contingent beneficiary(s) estate. If the Director shall fail to designate a beneficiary(s) as provided in this Section, or if all designated beneficiaries shall predecease the Director, the amounts remaining unpaid at the time of such Director's death shall be paid in one lump sum to the legal representative of the Director's estate. SECTION VIII NON-ALIENATION OF BENEFITS Neither the Director nor any beneficiary designated by him shall have any right, directly or indirectly, to alienate, sell, transfer, assign, pledge or encumber any amount that is or may be payable under the Plan and any such amount shall not be subject to attachment or garnishment by creditors of the Director. SECTION IX ADMINISTRATION OF PLAN Full power and authority to construe, interpret, and administer the Plan shall be vested in the Board of Directors of the Company. Decisions of the Board shall be final, conclusive, and binding upon all parties. SECTION X AMENDMENT OR TERMINATION OF PLAN The Board of Directors may amend or terminate the Plan at any time. Any amendment or termination of the Plan shall not affect the rights of participants or beneficiaries to the amounts in the Directors' deferred fee account at the time of such amendment or termination. SECTION XI APPLICABLE LAW The provisions of the Plan shall be interpreted and construed in accordance with the laws of the State of Michigan. 3 4 SECTION XII EFFECTIVE DATE OF PLAN This Plan shall become operative and in effect on the date the Plan is approved by the Board of Directors of the Company. 4 5 EXHIBIT A NOTICE OF ELECTION DEFERRED COMPENSATION PLAN Board of Directors Mercantile Bank of West Michigan Re: Deferred Compensation Plan (the "Plan") Pursuant to provisions of the Plan, I hereby elect to have the indicated portion of the cash fees payable to me by the Mercantile Bank of West Michigan (the "Company") for future services as a member of the Board of Directors deferred. It is understood and agreed that (i) for 1999, the election will be effective on the first day of the month following receipt by the Secretary of the Company of this Notice of Election, provided that the Secretary receives this Notice of Election within thirty (30) days from the effective date of the Plan; (ii) for subsequent years, this election shall be effective on the next following January 1; and (iii) for newly eligible Directors, the election will be effective on the first day of the month following receipt by the Secretary of this Notice of Election so long as such notice is delivered within 30 days of the date the individual first becomes eligible to participate in the Plan. This election shall continue in effect for subsequent years unless I change or revoke it. Any change or revocation shall be effective on the next following January 1. Year to Which Election Applies: 19 ---- Percentage of Cash Fees Deferred: % ---------- Date: Signature: --------------------- --------------------------------- --------------------------------- (print name) 6 EXHIBIT B NOTICE OF TERMINATION Board of Directors Mercantile Bank of West Michigan Re: Deferred Compensation Plan (the "Plan") Pursuant to provisions of the Plan, I hereby elect to terminate my election to defer cash fees paid to me for service as a director of Mercantile Bank of West Michigan, effective as of the date as of which this Notice of Termination is signed. Date: Signature: -------------------------- ---------------------------- 6 7 EXHIBIT C BENEFICIARY DESIGNATION DEFERRED COMPENSATION PLAN In the event of my death, I hereby designate -------------------------- (print name of beneficiary) whose relationship to me is ---------------------------------------------------- and whose address is ----------------------------------------------------------- ----------------------------------------------------------- and whose Social Security Number is as -----------------------------------------, the beneficiary to whom I direct the Board of Directors of Mercantile Bank of West Michigan (the "Company") to pay any amounts otherwise due to me under the Plan. In the event the foregoing beneficiary is not living at the time of my death, I hereby designate --------------------------------------------- (print name of beneficiary) whose relationship to me is ---------------------------------------------------- and whose address is ----------------------------------------------------------- ----------------------------------------------------------- and whose Social Security Number is , as ----------------------------------------- the contingent beneficiary to whom I direct the Board of Directors of the Company to pay any amounts otherwise due to me under the Plan. I understand that, should both my designated beneficiary and my contingent beneficiary predecease me, the amount which otherwise would have been payable to such designated beneficiary or contingent beneficiary shall be payable to my estate. I hereby authorize the Board of Directors of the Company to make payment to the beneficiary or beneficiaries in accordance with the above designations and agree on behalf of myself and my heirs that payment so made shall be a complete discharge of any claim that I or my heirs may have and shall constitute a release of the Company from any further obligation under the Plan. I hereby revoke any and all prior beneficiary designations in connection with the Plan and I reserve the right to revoke or change at any time the designations made above. - -------------------------- ------------------------------- Date Name (print) - ------------------------- ------------------------------- Signature of Witness Signature EX-23.1 10 CONSENT OF CROWE, CHIZEK & COMPANY LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the use of our report dated January 20, 1999 on the consolidated financial statements of Mercantile Bank Corporation for the years ended December 31, 1998 and 1997, to be included within the Registration Statement on Form SB-2 and Prospectus of Mercantile Bank Corporation. We also consent to the use of our name as "Experts" in the Prospectus. /s/ Crowe, Chizek and Company LLP --------------------------------- Crowe, Chizek and Company LLP Grand Rapids, Michigan July 30, 1999 EX-27.1 11 FINANCIAL DATA SCHEDULE
9 0001042729 Mercantile Bank Corp. 6-MOS DEC-31-1999 JUN-30-1999 7,304,576 536,285 5,100,000 0 0 29,605,715 29,593,986 246,724,786 (3,701,000) 291,934,894 245,811,249 17,865,592 1,184,288 13,325 0 0 28,181,798 (1,121,359) 291,934,894 8,757,526 811,697 174,416 9,743,639 5,196,684 5,549,147 4,194,492 935,900 0 2,642,777 1,031,373 897,373 0 42,210 855,163 0.35 0.35 3.41 0 0 0 0 (2,765,100) 0 0 (3,701,000) (3,701,000) 0 0
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