1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File Number 000-26719
MERCANTILE BANK CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3360865
-------------------------------------------------------------- ------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
216 NORTH DIVISION AVENUE, GRAND RAPIDS, MICHIGAN 49503
------------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
(616) 242-9000
---------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant Section 12(g) of the Act:
COMMON STOCK
----------------
(Title of Class)
9.60% CUMULATIVE PREFERRED SECURITIES, $10 LIQUIDATION AMOUNT
-------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such requirements for the
past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
As of February 1, 2001, there were issued and outstanding 2,596,102
shares of the Registrant's Common Stock. The aggregate value of the voting stock
held by non-affiliates (persons other than directors and executive officers) of
the Registrant, computed by reference to the average of the closing bid and
asked prices of the Common Stock as of February 1, 2001, $14.00, was $31.0
million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 2000 (Parts II and IV).
2. Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders
(Part III).
2
PART I
ITEM 1. BUSINESS
THE COMPANY
Mercantile Bank Corporation ("Mercantile") is a bank holding company
under the Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"). As a bank holding company, Mercantile is subject to regulation by
the Federal Reserve Board. Mercantile was organized on July 15, 1997, under the
laws of the State of Michigan, primarily for the purpose of holding all of the
stock of Mercantile Bank of West Michigan ("Bank"), and of such other
subsidiaries as Mercantile may acquire or establish. The Bank commenced business
on December 15, 1997. MBWM Capital Trust I (Capital Trust), a wholly-owned
business trust subsidiary of Mercantile, was formed in September 1999 for the
specific purpose of issuing 9.60% cumulative preferred securities. Mercantile
Bank Mortgage Company ("Mortgage Company"), a wholly-owned subsidiary of the
Bank, initiated business in October 2000 for the purpose of increasing the
profitability and efficiency of the Bank's mortgage loan function.
The expenses of Mercantile to date have generally been paid using the
proceeds from its initial public stock offering in October 1997, a secondary
public stock offering in July 1998, issuance of cumulative preferred securities
in September 1999, and dividends from the Bank. Mercantile's principal source of
future operating funds is expected to be dividends from the Bank.
Mercantile's election to become a financial holding company pursuant to
Title I of the Gramm-Leach-Bliley Act and implementing Federal Reserve Board
regulations was effective March 23, 2000. At the present time Mercantile has no
plans to engage in any of the expanded activities permitted under the new
regulations.
THE BANK
The Bank is a state banking company that operates under the laws of the
State of Michigan, pursuant to a charter issued by the Division of Financial
Institutions of the Michigan Department of Consumer & Industry Services. The
Bank's deposits are insured to the maximum extent provided by the Federal
Deposit Insurance Corporation. The Bank's primary service area is the Kent and
Ottawa County areas of West Michigan, which includes the City of Grand Rapids,
the second largest city in the State of Michigan.
The Bank, through its main office located at 216 North Division Avenue,
Grand Rapids, Michigan and its combined branch and operations center located at
4613 Alpine Avenue, Comstock Park, Michigan, provides a wide variety of
commercial banking services primarily to businesses, individuals and
governmental units. The Bank makes secured and unsecured commercial,
construction, mortgage and consumer loans, and accepts checking, savings and
time deposits. The Bank owns two automated teller machines ("ATM") that
participate in the MAC and NYCE regional network systems, as well as other ATM
networks throughout the country. The Bank also enables customers to conduct
certain loan and deposit transactions by telephone and personal computer.
Courier service is provided to certain commercial customers, and safe deposit
facilities are available at both locations. The Bank does not have trust powers.
THE CAPITAL TRUST
In 1999 Mercantile formed Capital Trust, a Delaware business trust.
Capital Trust's business and affairs are conducted by its property trustee, a
Delaware trustee, and three individual administrative trustees who are employees
and officers of Mercantile. Capital Trust was established for the purpose of
issuing and selling its preferred securities and common securities, and used the
proceeds from the sales of those securities to acquire subordinated debentures
issued by Mercantile. Substantially all of the net proceeds received by
Mercantile from the transaction were contributed to the Bank as capital.
Additional information regarding Capital Trust is incorporated by reference to
"Note 14 - Sale of Trust Preferred Securities" and "Note 16 - Regulatory
Matters" of the Consolidated Financial Statements included in this Annual Report
on pages F-36 through F-38.
- --------------------------------------------------------------------------------
2.
3
THE MORTGAGE COMPANY
The Mortgage Company commenced operations on October 24, 2000 when the
Bank contributed most if its residential mortgage loan portfolio and
participation interests in certain commercial mortgage loans to the Mortgage
Company. On the same date the Bank also transferred its residential mortgage
origination function to the Mortgage Company. Mortgage loans originated and held
by the Mortgage Company are serviced by the Bank pursuant to a servicing
agreement.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of Mercantile are affected by domestic economic conditions
and the monetary and fiscal policies of the United States government, its
agencies, and the Federal Reserve Board. The Federal Reserve Board's monetary
policies have had, and will likely continue to have, an important impact on the
operating results of commercial banks through its power to implement national
monetary policy in order to, among other things, curb inflation or avoid a
recession. The policies of the Federal Reserve Board have a major effect upon
the levels of bank loans, investments and deposits through its open market
operations in United States government securities, and through its regulation
of, among other things, the discount rate on borrowings of member banks and the
reserve requirements against member bank deposits. It is not possible to predict
the nature and impact of future changes in monetary and fiscal policies. The
Bank maintains reserves directly with the Federal Reserve Bank of Chicago to the
extent required by law.
REGULATION AND SUPERVISION
Mercantile, as a bank holding company under the Bank Holding Company
Act, is required to file an annual report with the Federal Reserve Board and
such additional information as the Federal Reserve Board may require pursuant to
the Bank Holding Company Act, and is subject to examination by the Federal
Reserve Board.
The Bank Holding Company Act limits the activities which may be engaged
in by Mercantile and its subsidiary to those of banking and the management of
banking organizations, and to certain non-banking activities, including those
activities which the Federal Reserve Board may find, by order or regulation, to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. The Federal Reserve Board is empowered to differentiate
between activities by a bank holding company, or a subsidiary, and activities
commenced by acquisition of a going concern.
With respect to non-banking activities, the Federal Reserve Board has,
by regulation, determined that certain non-banking activities are closely
related to banking within the meaning of the Bank Holding Company Act. These
activities include, among other things, operating a mortgage company, finance
company, credit card company or factoring company, performing certain data
processing operations, providing certain investment and financial advice, acting
as an insurance agent for certain types of credit related insurance, leasing
property on a full-payout, nonoperating basis; and, subject to certain
limitations, providing discount securities brokerage services for customers. The
Mortgage Company formed in 2000 complies with the regulations of the Federal
Reserve Board. Neither Mercantile nor its subsidiaries currently engage in any
other activity referred to above.
The Bank is subject to certain restrictions imposed by federal law on
any extension of credit to Mercantile for investments in stock or other
securities of Mercantile, and on the taking of such stock or securities as
collateral for loans to any borrower. Federal law prevents Mercantile from
borrowing from the Bank unless the loans are secured in designated amounts.
With respect to the acquisition of banking organizations, Mercantile is
required to obtain the prior approval of the Federal Reserve Board before it can
acquire all or substantially all of the assets of any bank, or acquire ownership
or control of any voting shares of any bank, if, after such acquisition, it will
own or control more than 5% of the voting shares of such bank. Acquisitions
across state lines are subject to certain state and Federal Reserve Board
restrictions.
EMPLOYEES
As of December 31, 2000, Mercantile or the Bank employed 56 full-time
and 18 part-time persons. Management believes that relations with employees are
good.
- --------------------------------------------------------------------------------
3.
4
LOAN POLICY
As a routine part of business, the Bank makes loans to businesses and
individuals located within its market area. The loan policy of the Bank states
that the function of the lending operation is twofold: to provide a means for
the investment of funds at a profitable rate of return with an acceptable degree
of risk, and to meet the credit needs of the creditworthy businesses and
individuals who are customers of the Bank. However, the Board of Directors of
the Bank recognizes that in the normal business of lending, some losses on loans
will be inevitable and should be considered a part of the normal cost of doing
business.
The Bank's loan policy anticipates that priorities in extending loans
will be modified from time to time as interest rates, market conditions and
competitive factors change. The policy sets forth guidelines on a
nondiscriminatory basis for lending in accordance with applicable laws and
regulations. The policy describes various criteria in granting loans, including
the ability to pay; the character of the customer; evidence of financial
responsibility; purpose of the loan; knowledge of collateral and its value;
terms of repayment; source of repayment; payment history; and economic
conditions.
The Board of Directors has delegated significant lending authority to
officers of the Bank. The Board of Directors believes this empowerment,
supported by the Bank's strong credit culture and the significant experience of
the commercial lending staff, makes the Bank more responsive to its customers.
The loan policy currently specifies lending authority for certain officers up to
$1.0 million, and $6.0 million for the Bank's Chairman of the Board and its
President and Chief Executive Officer; however, the latter $6.0 million lending
authority is used in rare circumstances where timing is of the essence.
Generally, loan requests exceeding $2.5 million require approval by the Officers
Loan Committee, and loan requests exceeding $3.0 million, up to the legal
lending limit of approximately $10.4 million, require approval by the Board of
Directors. In most circumstances the Bank applies an in-house lending limit that
is less than the legal lending limit.
The loan policy also limits the amount of funds that may be loaned
against specified types of real estate collateral. For certain loans secured by
real estate the policy requires an appraisal of the property offered as
collateral by a state certified independent appraiser. The policy also provides
general guidelines for loan to value limits for other types of collateral, such
as accounts receivable and machinery and equipment. In addition, the loan policy
provides general guidelines as to environmental analysis, loans to employees,
executive officers and directors, problem loan identification, maintenance of an
allowance for loan losses, loan review and grading, mortgage and consumer
lending, and other matters relating to the Bank's lending practices.
LENDING ACTIVITY
Commercial Loans. The Bank's commercial lending group originates
commercial loans primarily in the Bank's market area. Commercial loans are
originated by six lenders, with over 75 years of combined commercial lending
experience. Loans are originated for general business purposes, including
working capital, accounts receivable financing, machinery and equipment
acquisition, as well as commercial real estate financing including new
construction and land development.
Working capital loans are often structured as a line of credit and are
reviewed periodically in connection with the borrower's year-end financial
reporting. These loans are generally secured by all of the assets of the
borrower, and have an interest rate tied to the national prime rate. Loans for
machinery and equipment purposes typically have a maturity of three to five
years and are fully amortizing, while commercial real estate loans are usually
written with a five-year maturity and amortized over a 15 year period. These
commercial loan types have an interest rate that is fixed to maturity or is tied
to the national prime rate.
The Bank evaluates many aspects of a commercial loan transaction in
order to minimize credit and interest rate risk. Underwriting includes an
assessment of management, products, markets, cash flow, capital, income and
collateral. The analysis includes a review of historical and projected financial
results. Appraisals are generally required by certified independent appraisers
who are well known to the Bank where real estate is the primary collateral, and
in some cases, where equipment is the primary collateral. In certain situations,
for creditworthy customers, the Bank may accept title reports instead of
requiring lenders' policies of title insurance.
- --------------------------------------------------------------------------------
4.
5
Commercial real estate lending involves more risk than residential
lending because loan balances are greater and repayment is dependent upon the
borrower's operation. The Bank attempts to minimize risk associated with these
transactions by generally limiting its exposure to owner-operated properties of
well-known customers or new customers with an established profitable history. In
many cases, risk is further reduced by limiting the amount of credit to any one
borrower to an amount less than the Bank's legal lending limit and avoiding
certain types of commercial real estate financings.
The Bank has no material foreign or agricultural loans, and no material
loans to energy producing customers.
Single-Family Residential Real Estate Loans. The Mortgage Company
originates single-family residential real estate loans in its market area
usually according to secondary market underwriting standards; however, loans not
conforming to those standards are made in limited circumstances. These loans
provide borrowers with a fixed or adjustable interest rate with terms up to 30
years.
The Bank also has a home equity line of credit program. Home equity
credit is generally secured by either a first or second mortgage on the
borrower's primary residence. The program provides revolving credit at a rate
tied to the national prime rate.
Consumer Loans. The Bank originates consumer loans for a variety of
personal financial needs, including new and used automobiles, boat loans, credit
cards and overdraft protection for checking account customers. Consumer loans
generally have shorter terms and higher interest rates and usually involve more
credit risk than single-family residential real estate loans because of the type
and nature of the collateral.
While the Bank does not utilize a formal credit scoring system, the
Bank believes its consumer loans are underwritten carefully, with a strong
emphasis on the amount of the down payment, credit quality, employment stability
and monthly income. These loans are generally repaid on a monthly repayment
schedule with the source of repayment tied to the borrower's periodic income. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and are thus likely to be adversely affected by
job loss, illness and personal bankruptcy. In many cases, repossessed collateral
for a defaulted consumer loan will not provide an adequate source of repayment
of the outstanding loan balance because of depreciation of the underlying
collateral.
The Bank believes that the generally higher yields earned on consumer
loans compensate for the increased credit risk associated with such loans and
that consumer loans are important to its efforts to serve the credit needs of
the communities and customers that it serves.
LOAN PORTFOLIO QUALITY
The Bank has a comprehensive loan grading system for commercial loans
as well as residential mortgage and consumer loans. Administered as part of the
loan review program, all commercial loans are graded on an eight grade rating
system. Utilizing a standardized grade paradigm that analyzes several critical
factors such as cash flow, management and collateral coverage, all commercial
loans are graded at inception and at various intervals thereafter. Residential
mortgage and consumer loans are graded on a four grade rating system using a
separate standardized grade paradigm that analyzes several critical factors such
as debt-to-income and credit and employment histories. Residential mortgage and
consumer loans are generally only graded once subsequent to the loans being
extended.
The Bank's independent loan review program is primarily responsible for
the administration of the loan grading systems and ensuring adherence to
established loan policies and procedures, and is an integral part of maintaining
the strong asset quality culture. The loan review function works closely with
senior management, although functionally reports to the Board of Directors. All
commercial loan relationships exceeding $1 million are formally reviewed at
least annually. Watch list credits are formally reviewed monthly. Credits
between $0.5 million but less than $1 million are formally reviewed every two
years, with a random sampling performed on credits under $0.5 million.
- --------------------------------------------------------------------------------
5.
6
Loans are placed in a nonaccrual status when, in the opinion of
management, uncertainty exists as to the ultimate collection of principal and
interest. For the period ended December 31, 2000, loans placed in nonaccrual
status were nominal in amount. At December 31, 2000, there were no significant
loans where known information about possible credit problems of borrowers causes
management to have serious doubts as to the ability of the borrower to comply
with present loan repayment terms. Furthermore, management is not aware of any
potential problem loans that could have a material effect on Mercantile's
operating results, liquidity, or capital resources. Management is not aware of
any other factors that would cause future net loan charge-offs, in total and by
loan category, to significantly differ from those experienced by institutions of
similar size.
Additional detail and information relative to the loan portfolio is
incorporated by reference to Management's Discussion and Analysis of Financial
Condition and Results of Operations ("Management's Discussion and Analysis")
beginning on Page F-4 and Note 3 of the Consolidated Financial Statements on
pages F-28 and F-29 included in this Annual Report.
ALLOWANCE FOR LOAN LOSSES
In each accounting period, the allowance for loan losses is adjusted by
management to the amount management believes is necessary to maintain the
allowance for loan losses at adequate levels. Through its loan review and credit
departments, management attempts to allocate specific portions of the allowance
for loan losses based on specifically identifiable problem loans. Management's
evaluation of the allowance for loan losses is further based on, but not limited
to, consideration of internally prepared calculations based upon the experience
of senior management and lending staff making similar loans in the same
community over the past 15 years, composition of the loan portfolio, third party
analysis of the loan administration processes and loan portfolio and general
economic conditions. In addition, Mercantile's status as a de novo banking
organization and the rapid loan growth since inception is taken into account.
Management believes that the present allowance for loan losses is adequate,
based on the broad range of considerations listed above.
The primary risk elements with respect to commercial loans are the
financial condition of the borrower, the sufficiency of collateral, and lack of
timely payment. Management has a policy of requesting and reviewing periodic
financial statements from its commercial loan customers, and periodically
reviews existence of collateral and its value. The primary risk element
considered by management with respect to each consumer and residential real
estate loan is lack of timely payment. Management has a reporting system that
monitors past due loans and has adopted policies to pursue its creditor's rights
in order to preserve the Bank's collateral position.
Additional detail regarding the allowance for loan losses is
incorporated by reference to Management's Discussion and Analysis beginning on
Page F-4 and Note 3 of the Consolidated Financial Statements on pages F-28 and
F-29 included in this Annual Report.
Although management believes that the allowance for loan losses is
adequate to absorb losses as they arise, there can be no assurance that the Bank
will not sustain losses in any given period which could be substantial in
relation to, or greater than, the size of the allowance for loans and lease
losses.
INVESTMENTS
The principal investments of Mercantile are its investment in the
common stock of the Bank and Capital Trust. Funds retained by Mercantile from
time to time may be invested in various debt instruments, including but not
limited to obligations of or guaranteed by the United States, general
obligations of a state or political subdivision or agency thereof, banker's
acceptances or certificates of deposit of United States commercial banks, or
commercial paper of United States issuers rated in the highest category by a
nationally-recognized investment rating service. Although Mercantile is
permitted to make unlimited portfolio investments in equity securities and to
make equity investments in subsidiary corporations engaged in certain
non-banking activities which may include real estate-related activities, such as
mortgage banking, community development, real estate appraisals, arranging
equity financing for commercial real estate, and owning and operating real
estate used substantially by the Bank or acquired for its future use, Mercantile
has no present plans to make any such equity investment. Mercantile's Board of
Directors may alter the investment policy without shareholder approval.
- --------------------------------------------------------------------------------
6.
7
The Bank may invest its funds in a wide variety of debt instruments and
may participate in the federal funds market with other depository institutions.
Subject to certain exceptions, the Bank is prohibited from investing in equity
securities. Under one such exception, in certain circumstances and with the
prior approval of the FDIC, the Bank could invest up to 10% of its total assets
in the equity securities of a subsidiary corporation engaged in the acquisition
and development of real property for sale, or the improvement of real property
by construction or rehabilitation of residential or commercial units for sale or
lease. The Bank has no present plans to make such an investment. Real estate
acquired by the Bank in satisfaction of or foreclosure upon loans may be held by
the Bank, subject to a determination by a majority of the Bank's Board of
Directors at least annually of the advisability of retaining the property, for a
period not exceeding 60 months after the date of acquisition, or such longer
period as the Division of Financial Institutions of the State of Michigan's
Department of Consumer & Industry Services may approve. The Bank is also
permitted to invest an aggregate amount not in excess of two-thirds of the
capital and surplus of the Bank in such real estate as is necessary for the
convenient transaction of its business. The Bank's Board of Directors may alter
the investment policy without shareholder approval.
Additional detail and information relative to the securities portfolio
is incorporated by reference to Management's Discussion and Analysis beginning
at Page F-4 and Note 2 of the Consolidated Financial Statements on pages F-27
and F-28 included in this Annual Report.
COMPETITION
Mercantile and the Bank face strong competition for deposits, loans and
other financial services from numerous banks, savings banks, thrifts, credit
unions and other financial institutions as well as from other entities which
provide financial services, including consumer finance companies, securities
brokerage firms, mortgage companies, insurance companies, mutual funds and other
lending sources and investment alternatives. Some of the financial institutions
and financial service organizations with which the Bank competes are not subject
to the same degree of regulation as the Bank. Many of the financial institutions
and financial service organizations aggressively compete for business in the
Bank's market area. Most of these competitors have been in business for many
years, have customer bases, deposits and lending limits that are substantially
larger than those of the Bank, and are able to offer services that the Bank does
not currently provide, including extensive branch networks, trust services and
international banking services. In addition, most of these entities have greater
capital resources than the Bank, which, among other things, may allow them to
price their services at levels more favorable to the customer and to provide
larger credit facilities than could the Bank. Additionally, recently enacted
legislation regarding interstate branching and banking has resulted in increased
competition.
SELECTED STATISTICAL INFORMATION
Management's Discussion and Analysis beginning at Page F-4 in this
Annual Report includes selected statistical information.
RETURN ON EQUITY AND ASSETS
Return on Equity and Asset information is included in Management's
Discussion and Analysis beginning at Page F-4 in this Annual Report.
ITEM 2. PROPERTIES
The Bank leases a one story building in downtown Grand Rapids, Michigan
for use as the Bank's main office and Mercantile's headquarters. This building
is of masonry construction and has approximately 11,000 square feet of usable
space with on-site parking. The lease for this facility, which commenced in
1997, has an initial term of ten years and the Bank has four, five-year renewal
options. The address of this facility is 216 North Division Avenue, and is
located between Lyon Street and Michigan Street in downtown Grand Rapids.
- --------------------------------------------------------------------------------
7.
8
The Bank designed and constructed a full service branch and operations
facility in Alpine Township, a northwest suburb of Grand Rapids, that opened in
July of 1999. The facility is one story, of masonry construction, and has
approximately 8,000 square feet of usable space. The land and building is owned
by the Bank. The facility has multiple drive-through lanes and ample parking
space. The address of this facility is 4613 Alpine Avenue NW, Comstock Park,
Michigan.
In October 2000, construction began on two new facilities, both of
which are being built on a 4-acre parcel of land purchased by the Bank earlier
in 2000. The land is located in the City of Wyoming, a southwest suburb of Grand
Rapids. The larger of the two buildings, a two-story facility of masonry
construction with approximately 25,000 square feet of usable space, will serve
as the new location for the operations and accounting departments and will
include a full service branch. The other building, a single-story facility of
masonry construction with approximately 7,000 square feet of usable space, will
accommodate the administration function. The facilities, which will be owned by
the Bank, are scheduled to open in August 2001. The location of these facilities
will be on the southeast corner of 56th Street and Byron Center Avenue, Wyoming,
Michigan.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Mercantile and the Bank may be involved in various
legal proceedings that are incidental to their business. In the opinion of
management, neither Mercantile nor the Bank is a party to any current legal
proceedings that are material to their financial condition, either individually
or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Position Age
----------------- ---
Gerald R. Johnson, Jr. 54
Chairman of the Board and Chief
Executive Officer
Michael H. Price 44
President and Chief Operating
Officer
Robert B. Kaminski 39
Senior Vice President and
Secretary
Charles E. Christmas 35
Senior Vice President, Chief Financial
Officer and Treasurer
Each of the persons named above has held the designated office with the Company
since 1997, except for Mr. Christmas, who joined the Company in 1998 and held
the position of Vice President of Finance, Treasurer and Compliance Officer
before being promoted to Chief Financial Officer and Treasurer and Compliance
Officer effective January 1, 1999. On October 12, 2000 Mr. Christmas was
promoted to Senior Vice President, Chief Financial Officer and Treasurer.
- --------------------------------------------------------------------------------
8.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Mercantile is quoted on the Nasdaq National Market
under the symbol MBWM. Prior to July 19, 1999 Mercantile's common stock was
quoted on the OTC Bulletin Board under the same symbol. At February 1, 2001,
there were 102 record holders of Mercantile's common stock. In addition,
Mercantile estimates that there were approximately 2,400 beneficial owners of
its common stock who own their shares through brokers or banks. On January 10,
2001, Mercantile declared a 5% stock dividend on its common stock, payable on
February 1, 2001 to record holders as of January 19, 2001. The stock dividend
increased the number of common shares outstanding from 2,472,500 to 2,596,102.
Mercantile has not paid cash dividends on its common stock since its formation
in 1997, and currently has no intention of doing so in the foreseeable future.
The following table shows the high and low bid prices by quarter during
2000 and 1999. The quotations reflect bid prices as reported by the OTC Bulletin
Board through July 18, 1999, and as reported by the Nasdaq National Market on
and after July 19, 1999. The quotations do not include retail mark-up, mark-down
or commission, but have been adjusted for the stock dividend paid on February 1,
2001
BID PRICES
HIGH LOW
---- ---
CALENDAR YEAR 2000
First Quarter.............................................................................$12.35 $9.50
Second Quarter............................................................................$10.45 $8.79
Third Quarter.............................................................................$11.76 $8.91
Fourth Quarter............................................................................$12.35 $10.57
CALENDAR YEAR 1999
First Quarter.............................................................................$16.63 $12.35
Second Quarter............................................................................$15.79 $12.35
Third Quarter.............................................................................$15.20 $13.30
Fourth Quarter............................................................................$14.73 $11.64
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data on page F-3 in this Annual Report is
incorporated here by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Management's Discussion and Analysis on pages F-4 through F-18 in this
Annual Report is incorporated here by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the heading "Market Risk Analysis" on pages F-16
through F-18 in this Annual Report is incorporated here by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial
Statement and the Report of Independent Public Accountants on pages F-19 through
F-40 in this Annual Report are incorporated here by reference.
- --------------------------------------------------------------------------------
9.
10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information listed under the captions "Information about Directors,
Nominees and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the definitive Proxy Statement of Mercantile for its
April 19, 2001 Annual Meeting of Shareholders (the "Proxy Statement"), a copy of
which will be filed with the Securities and Exchange Commission before the
meeting date, is incorporated here by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information presented under the captions "Summary Compensation
Table," "Options Granted in 2000," "Aggregated Stock Option Exercises in 2000
and Year End Option Values" and "Employment Agreements" and in the last
paragraph under the caption "Board of Directors Meetings and Committees", in the
Proxy Statement is incorporated here by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information presented under the caption "Stock Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated here by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information listed under the caption "Certain Transactions" in the
Proxy Statement is incorporated here by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. The following financial statements and report of
independent public accountants of Mercantile Bank Corporation and its
subsidiaries are filed as part of this report:
Report of Independent Public Accountants dated January 19, 2001
Consolidated Balance Sheet --- December 31, 2000 and 1999
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2000
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years in the period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2000
- --------------------------------------------------------------------------------
10.
11
Notes to Consolidated Financial Statements
The financial statements, the notes to financial statements, and the
report of independent public accountants listed above are incorporated
by reference in Item 8 of this report.
(2) Financial Statement Schedules
Not applicable
(b) Reports on Form 8-K
Mercantile has not filed any reports on Form 8-K during the last
quarter of the period covered by this Report.
(c) Exhibits:
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
3.1 Articles of Incorporation of Mercantile are incorporated by
reference to exhibit 3.1 of Mercantile's Registration
Statement on Form SB-2 (Commission File no. 333-33081) that
became effective on October 23, 1997
3.2 Bylaws of Mercantile are incorporated by reference to
exhibit 3.2 of Mercantile's Registration Statement on Form
SB-2 (Commission File No. 333-33081) that became effective
on October 23, 1997
10.1 1997 Employee Stock Option Plan of Mercantile is
incorporated by reference to exhibit 10.1 of Mercantile's
Registration Statement on Form SB-2 (Commission File No.
333-33081) that became effective on October 23, 1997
(Management contract or compensatory plan)
10.2 Lease Agreement between Mercantile and Division Avenue
Partners, L.L.C. dated August 16, 1997, is incorporated by
reference to exhibit 10.2 of Mercantile's Registration
Statement on Form SB-2 (Commission File No. 333-33081) that
became effective October 23, 1997
10.3 Agreement between Fiserve Solution, Inc. and the Bank dated
September 10, 1997, is incorporated by reference to exhibit
10.3 of Mercantile's Registration Statement on Form SB-2
(Commission File No. 333-33081) that became effective on
October 23, 1997
10.4 Agreement between the Bank and Visser Brothers Construction
Inc. dated November 16, 1998, on modified Standard Form of
Agreement Between Owner and Construction Manager where the
Construction Manager is also the Constructor, is
incorporated by reference to exhibit 10.4 of Mercantile's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 (Commission File No. 333-33081)
10.5 Employment Agreement among Gerald R. Johnson, Jr.,
Mercantile and the Bank dated December 1, 1998, is
incorporated by reference to exhibit 10.5 of Mercantile's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 (Commission File No. 333-33081)
(management contract or compensatory plan)
10.6 Employment Agreement among Michael H. Price, Mercantile and
the Bank dated December 1, 1998, is incorporated by
reference to exhibit 10.6 of Mercantile's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998
(Commission File No. 333-33081) (management contract or
compensatory plan)
- --------------------------------------------------------------------------------
11.
12
Exhibit No. EXHIBIT DESCRIPTION
----------- -------------------
10.7 Mercantile Bank of West Michigan Deferred Compensation Plan
for Members of the Board of Directors (1999) is
incorporated by reference to exhibit 10.7 of the
Registration Statement of Mercantile and MBWM Capital Trust
I on Form SB-2 (Commission File Nos. 333-84313 and
333-84313-01) that became effective on September 13, 1999.
10.8 Subordinated Indenture dated as of September 17, 1999
between Mercantile and Wilmington Trust Company, as
Trustee, relating to 9.60% Junior Subordinated Debentures
due 2029 is incorporated by reference to exhibit 4.1 of the
Registration Statement of Mercantile and MBWM Capital Trust
I on Form SB-2 (Commission File Nos. 333-84313 and
333-84313-01) that became effective on September 13, 1999)
10.9 Amended and Restated Trust Agreement dated as of September
17, 1999 among Mercantile, as depositor, Wilmington Trust
Company, as Property Trustee, Wilmington Trust Company, as
Delaware Trustee, and the Administrative Trustees is
incorporated by reference to exhibit 4.5 of the
Registration Statement of Mercantile and MBWM Capital Trust
I on Form SB-2 (Commission File Nos. 333-84313 and
333-84313-01) that became effective on September 13, 1999
10.10 Preferred Securities Guarantee Agreement between Mercantile
and Wilmington Trust Company dated September 17, 1999, is
incorporated by reference to exhibit 4.7 of the
Registration Statement of Mercantile and MBWM Capital Trust
I on Form SB-2 (Commission File Nos. 333-84313 and
333-84313-01) that became effective on September 13, 1999
10.11 Agreement as to Expenses and Liabilities dated as of
September 17, 1999, between Mercantile and MBWM Capital
Trust I (included as exhibit D to exhibit 10.9)
10.12 Amended and Restated Employment Agreement dated as of
December 31, 1999, among Mercantile, the Bank and Gerald R.
Johnson, Jr., is incorporated by reference to exhibit 10.12
of Mercantile's Form 10-KSB for the fiscal year ended
December 31, 1999 (Commission File No. 000-26719)
(management contract or compensatory plan)
10.13 Amended and Restated Employment Agreement dated as of
December 31, 1999, among Mercantile, the Bank and Michael
H. Price, is incorporated by reference to exhibit 10.13 of
Mercantile's Form 10-KSB for the fiscal year ended December
31, 1999 (Commission File No. 000-26719) (management
contract or compensatory plan)
10.14 Mercantile Bank Corporation 2000 Employee Stock Option
Plan, approved by the shareholders at the annual meeting on
April 20, 2000
10.15 Extension Agreement of Data Processing Contract between
Fiserve Solution, Inc. and the Bank dated May 12, 2000
extending the agreement between Fiserve Solution, Inc. and
the Bank dated September 10, 1997
10.16 Amended and Restated Employment Agreement dated as of
October 12, 2000, among Mercantile, the Bank and Gerald R.
Johnson, Jr. (management contract or compensatory plan)
- --------------------------------------------------------------------------------
12.
13
Exhibit No. EXHIBIT DESCRIPTION
----------- -------------------
10.17 Amended and Restated Employment Agreement dated as of
October 12, 2000, among Mercantile, the Bank and Michael H.
Price (management contract or compensatory plan)
10.18 Employment Agreement dated as of October 12, 2000, among
Mercantile, the Bank and Robert B. Kaminski (management
contract or compensatory plan)
10.19 Employment Agreement dated as of October 12, 2000, among
Mercantile, the Bank and Charles E. Christmas (management
contract or compensatory plan)
10.20 Agreement between the Bank and C.D. Barnes dated October
28, 2000, on Amendment to Standard Form of Agreement
Between Owner and Construction Manager where the
Construction Manager is also the Constructor, for
construction of two Bank facilities in Wyoming, Michigan
21 Subsidiaries of Mercantile
23 Consent of Independent Accountants
(d) Financial Statements Not Included In Annual Report
Not applicable
- --------------------------------------------------------------------------------
13.
14
MERCANTILE BANK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
F-1
15
MERCANTILE BANK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
CONTENTS
SELECTED FINANCIAL DATA................................................... F-3
MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... F-4
REPORT OF INDEPENDENT AUDITORS............................................ F-19
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.......................................... F-20
CONSOLIDATED STATEMENTS OF INCOME.................................... F-21
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY........... F-22
CONSOLIDATED STATEMENTS OF CASH FLOWS................................ F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... F-24
- --------------------------------------------------------------------------------
F-2
16
SELECTED FINANCIAL DATA
2000 1999 1998
---- ---- ----
(In thousands except per share data)
CONSOLIDATED RESULTS OF OPERATIONS:
Interest income $ 36,835 $ 22,766 $ 10,168
Interest expense 24,560 13,330 5,629
--------- --------- ---------
Net interest income 12,275 9,436 4,539
Provision for loan losses 1,854 1,961 2,572
Noninterest income 1,192 848 488
Noninterest expense 7,515 5,888 3,564
--------- --------- ---------
Income (loss) before income tax expense and cumulative
effect of change in accounting principle 4,098 2,435 (1,109)
Income tax expense 1,303 292 0
--------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle 2,795 2,143 (1,109)
Cumulative effect of change in accounting principle .. 0 (42) 0
--------- --------- ---------
Net income (loss) $ 2,795 $ 2,101 $ (1,109)
========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 512,746 $ 368,037 $ 216,237
Cash and cash equivalents 18,102 13,650 6,456
Investment securities 60,457 41,957 24,160
Loans, net of deferred loan fees 429,804 308,006 184,745
Allowance for loan losses 6,302 4,620 2,765
Deposits 425,740 294,829 171,998
Securities sold under agreements to repurchase 32,151 26,607 17,038
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures 16,000 16,000 0
Shareholders' equity 31,854 27,968 26,701
CONSOLIDATED FINANCIAL RATIOS:
Return on average assets 0.63% 0.71% (0.86)%
Return on average shareholders' equity 9.48% 7.70% (6.40)%
Nonperforming loans to loans 0.02% 0.00% 0.00%
Allowance for loan losses to loans 1.47% 1.50% 1.50%
Tier 1 leverage capital 8.59% 10.88% 13.83%
Tier 1 leverage risk-based capital 8.59% 10.64% 11.79%
Total risk-based capital 10.97% 13.67% 13.01%
PER SHARE DATA:
Net Income (Loss):
Basic before cumulative effect of change
in accounting principle $ 1.08 $ 0.83 $ (0.55)
Diluted before cumulative effect of change
in accounting principle 1.07 0.82 (0.55)
Basic 1.08 0.81 (0.55)
Diluted 1.07 0.80 (0.55)
Book value at end of period 12.24 10.74 10.26
Dividends declared NA NA NA
NA - Not Applicable
Note: 1997 data not meaningful as operations commenced on December 15, 1997.
- --------------------------------------------------------------------------------
F-3
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that are based on
management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about
Mercantile Bank Corporation ("Mercantile"), Mercantile Bank of West Michigan
("Bank"), MBWM Capital Trust I ("Capital Trust") and Mercantile Bank Mortgage
Company ("Mortgage Company"). Words such as "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "is likely," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
("Future Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such
forward-looking statements. Mercantile undertakes no obligation to update,
amend, or clarify forward-looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services: the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; and changes in the national and local economy. These are representative
of the Future Factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement.
INTRODUCTION
This Management's Discussion and Analysis should be read in conjunction with the
consolidated financial statements contained herein. This discussion provides
information about the consolidated financial condition and results of operations
of Mercantile and its wholly-owned subsidiaries, the Bank and Capital Trust, as
well as the Mortgage Company, a wholly-owned subsidiary of the Bank.
Mercantile was incorporated on July 15, 1997 as a bank holding company to
establish and own the Bank. The Bank, after receiving all necessary regulatory
approvals, began operations on December 15, 1997. The Bank has a strong
commitment to community banking and offers a wide range of financial products
and services, primarily to small- to medium-sized businesses, as well as
individuals. The Bank's lending strategy focuses on commercial lending, and, to
a lesser extent, residential mortgage and consumer lending. The Bank also offers
a broad array of deposit products, including checking, savings, money market,
and certificates of deposit, as well as security repurchase agreements. The
Bank's primary market area is the Kent and Ottawa County areas of West Michigan,
which includes the City of Grand Rapids, the second largest city in the State of
Michigan. Mercantile utilizes certificates of deposit from customers located
outside of the primary market area to assist in funding the rapid asset growth
Mercantile has experienced since inception.
The Capital Trust, a business trust subsidiary of Mercantile, was incorporated
in 1999 for the purpose of issuing 1.6 million shares of 9.60% Cumulative
Preferred Securities ("trust preferred securities") at $10.00 per trust
preferred security. The proceeds from the September 1999 sale were used by
Capital Trust to purchase an equivalent amount of subordinated debentures of
Mercantile. Mercantile, in turn, used a majority of the proceeds from the
issuance of the subordinated debentures for a capital contribution to the Bank.
The Mortgage Company, formed to increase the profitability and efficiency of
Mercantile's mortgage loan operations, initiated business on October 24, 2000
from the Bank's contribution of most of its residential mortgage loan portfolio
and participation interests in certain commercial mortgage loans to the Mortgage
Company. On the same date the Bank also transferred its residential mortgage
origination function to the Mortgage Company. Mortgage loans originated and held
by the Mortgage Company will be serviced by the Bank pursuant to a servicing
agreement.
- --------------------------------------------------------------------------------
F-4
18
At certain times during 2000 Mercantile was engaged in preliminary discussions
with several unaffiliated banking organizations to explore the possibility of an
acquisition by Mercantile. To date the discussions have been exploratory in
nature and no likely candidate has been identified. Mercantile expects that such
discussions will continue with these or other banking organizations in future
periods.
FINANCIAL CONDITION
Mercantile continued to experience significant asset growth during 2000. Assets
increased from $368.0 million on December 31, 1999 to $512.7 million on December
31, 2000. This represents an increase in total assets of $144.7 million, or 39%.
The increase in total assets was primarily comprised of a $120.1 million
increase in net loans, an $18.5 million increase in investment securities and a
$4.4 million increase in cash and cash equivalents. The increase in assets was
primarily funded by a $130.9 million increase in deposits, a $5.5 million
increase in securities sold under agreements to repurchase ("repurchase
agreements"), and an increase of $2.8 million in retained income.
EARNING ASSETS
Average earning assets equaled over 96% of average total assets during 2000.
Although Mercantile experienced significant asset growth during 2000, the asset
structure remained relatively constant. The loan portfolio continued to comprise
a majority of earning assets, followed by investments securities, federal funds
sold, and short-term investments.
Mercantile's loan portfolio, which equaled 86% of average earnings assets during
2000, is primarily comprised of commercial loans. Constituting 91% of average
loans and growing by $108.2 million during 2000, the commercial loan portfolio
represents loans to business interests generally located within Mercantile's
market area. Approximately 61% of the commercial loan portfolio is primarily
secured by real estate properties, with the remaining generally secured by other
business assets such as accounts receivable, inventory, and equipment. There are
no significant industry concentrations within the commercial loan portfolio. The
concentration and rapid growth in commercial loans is in keeping with
Mercantile's strategy of focusing a substantial amount of its efforts on
commercial banking. Business lending is an area of expertise for all of
Mercantile's senior management team and commercial lending staff. Residential
mortgage and consumer lending, while averaging only 9% of average loans during
2000, also experienced excellent growth; however, Mercantile's strategy for
growth and profitability is expected to result in the commercial sector of the
lending efforts and resultant assets continuing to be the dominant loan
portfolio category.
The following table presents the maturity of total loans outstanding, other than
residential mortgages and personal loans, as of December 31, 2000, according to
scheduled repayments of principal on fixed rate loans and repricing frequency on
variable rate loans.
0-1 1-5 After 5
Year Years Years Total
---- ----- ----- -----
Construction and land development
- fixed rate $ 4,488,620 $ 10,305,471 $ 1,586,551 $ 16,380,642
Construction and land development
- variable rate 22,434,794 22,434,794
Real estate - secured by nonfarm
nonresidential properties - fixed rate 3,704,514 151,771,603 4,596,848 160,072,965
Real estate - secured by nonfarm
nonresidential properties - variable rate 39,072,144 39,072,144
Commercial - fixed rate 2,393,673 66,243,029 6,337,305 74,974,007
Commercial - variable rate 76,278,024 91,997 76,370,021
------------ ------------ ------------ ------------
$148,371,769 $228,412,100 $ 12,520,704 $389,304,573
============ ============ ============ ============
- --------------------------------------------------------------------------------
F-5
19
Mercantile's credit policies establish guidelines to manage credit risk and
asset quality. These guidelines include loan review and early identification of
problem loans to provide effective loan portfolio administration. The credit
policies and procedures are meant to minimize the risk and uncertainties
inherent in lending. In following these policies and procedures, Mercantile must
rely on estimates, appraisals and evaluations of loans and the possibility that
changes in these could occur quickly because of changing economic conditions.
Identified problem loans, which exhibit characteristics (financial or otherwise)
that could cause the loans to become nonperforming or require restructuring in
the future, are included on the internal "Watch List." Senior management reviews
this list regularly and adjusts for changing conditions.
Reflective of Mercantile's strong credit culture, past due loans and net loan
charge-offs remained very low and well below banking industry averages during
2000. As of December 31, 2000, past due loans and nonaccrual loans totaled
$271,000, or only 0.06% of total loans. Of this amount, $176,000 was fully
guaranteed by the U.S. Small Business Administration. Net loan charge-offs
during 2000 totaled $173,000, or only 0.05% of average total loans. During 1999
net loan charge-offs equaled 0.04% of average total loans.
In each accounting period the allowance for loan and lease losses ("allowance")
is adjusted by management to the amount believed necessary to maintain the
allowance at adequate levels. Through its loan review and credit department,
management attempts to allocate specific portions of the allowance based on
specifically identifiable problem loans. Management's evaluation of the
allowance is further based on, although not limited to, consideration of the
internally prepared Loan Loss Reserve Analysis ("Reserve Analysis"), composition
of the loan portfolio, third party analysis of the loan administration processes
and loan portfolio and general economic conditions. In addition, Mercantile's
rapid loan growth since inception is taken into account.
The Reserve Analysis, used since the inception of the Bank and completed
monthly, applies reserve allocation factors to outstanding loan balances to
calculate an overall allowance dollar amount. For commercial loans, which have
averaged about 92% of total loans since the inception of the Bank, reserve
allocation factors are based on the loan ratings as determined by Mercantile's
comprehensive loan rating paradigm which is administered by the loan review
function. For retail loans reserve allocation factors are based on the type of
credit. Adjustments for specific loan relationships are made on a case-by-cases
basis. The reserve allocation factors are primarily based on the experience of
senior management and lending staff making similar loans in the same community
over the past 15 years, and are adjusted periodically based upon identifiable
trends and experience. The Reserve Analysis is under regular review by senior
management and the Board of Directors.
The following table illustrates the breakdown of the allowance balance to loan
type (dollars in thousands).
2000 1999
---- ----
Balance at End Percent of Loans Percent of Loans
of Period in each Category in each Category
Applicable to Amount to Total Loans Amount to Total Loans
------------- ------ -------------- ------ --------------
Commercial, financial and agricultural $5,839 90.6% $4,306 91.3%
Residential real estate 369 7.8 239 7.3
Installment loans to individuals 94 1.6 75 1.4
Unallocated 0 N/A 0 N/A
------ ------ ------ ------
$6,302 100.0% $4,620 100.0%
====== ====== ====== ======
The primary risk elements with respect to commercial loans are the financial
condition of the borrower, the sufficiency of collateral, and lack of timely
payment. Management has a policy of requesting and reviewing periodic financial
statements from its commercial loan customers, and periodically reviews
existence of collateral and its value. The primary risk element considered by
management with respect to each installment and residential real estate loan is
lack of timely payment. Management has a reporting system that monitors past due
loans and has adopted policies to pursue its creditor's rights in order to
preserve the Bank's position.
- --------------------------------------------------------------------------------
F-6
20
Although management believes that the allowance is adequate to sustain losses as
they arise, there can be no assurance that the Bank will not sustain losses in
any given period that could be substantial in relation to, or greater than, the
size of the allowance.
The investment securities portfolio also experienced significant growth during
2000, increasing from $42.0 million on December 31, 1999 to $60.5 million at
December 31, 2000. Mercantile maintains the portfolio at levels to provide
adequate pledging for the repurchase agreement program and secondary liquidity
for Mercantile's daily operations. In addition, the portfolio serves a primary
interest rate risk management function. During 2000, the portfolio equaled 12%
of average earning assets. At December 31, 2000, the portfolio was comprised of
high credit quality U.S. Government Agency issued and guaranteed mortgage-backed
securities (57%), municipal general obligation and revenue bonds (26%), U.S.
Government Agency issued bonds (16%) and Federal Home Loan Bank stock (1%).
All securities with the exception of tax-exempt municipal bonds have been
designated as "available for sale" as defined in Financial Accounting Standards
Board Standard No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115). Securities designated as available for sale are
stated at fair value, with the unrealized gains and losses, net of income tax,
reported as a separate component of shareholders' equity. The fair value of
securities designated as available for sale at December 31, 2000 and 1999 was
$45.9 million and $34.9 million, respectively. The net unrealized gain/(loss)
recorded at December 31, 2000 and 1999, was $290,000 and $(802,000),
respectively. All tax-exempt municipal bonds have been designated as "held to
maturity" as defined in SFAS No. 115, and are stated at amortized cost. As of
December 31, 2000 and 1999, held to maturity securities had an amortized cost of
$14.5 million and $7.1 million and a fair value of $14.9 million and $7.0
million, respectively.
Federal funds sold, consisting of excess funds sold overnight to correspondent
banks, are used to manage daily liquidity needs and interest rate sensitivity.
During 2000, the average balance of these funds equaled 2% of average earning
assets. This level is within internal policy guidelines, and is not expected to
change significantly in the future.
SOURCE OF FUNDS
Mercantile's major source of funds is from deposits. Total deposits increased
from $294.8 million at December 31, 1999, to $425.7 million on December 31,
2000. Included within these numbers is the excellent success Mercantile achieved
in generating deposit growth from customers located within the market area
during 2000. Local deposits increased from $103.3 million at December 31, 1999,
to $126.7 million on December 31, 2000, an increase of over 22%. In addition,
Mercantile's repurchase agreement program, which contains the characteristics of
an interest-bearing checking account, increased by $5.5 million, or 21%, during
the same time period. However, despite this success in obtaining funds from
local customers, the substantial asset growth has necessitated the continued
acquisition of funds from depositors outside of the market area. While
Mercantile's business plan anticipated the reliance on out-of-area deposits in
the early stages of the Bank's development, Mercantile's longer-term strategy
for funding the Bank is to increase local deposits and lower its reliance on
out-of-area deposits. However, although local deposits have and are expected to
increase as new business, governmental and consumer deposit relationships are
established and existing customers increase their deposit accounts, the high
reliance on out-of-area deposits will likely remain.
During 2000 Mercantile experienced excellent growth in its check-writing deposit
accounts, which include noninterest-bearing demand accounts, interest-bearing
checking accounts and money market deposit accounts. In aggregate these deposit
types grew by 26%. Leading the growth were noninterest-bearing demand accounts.
Comprised primarily of business loan customers, noninterest-bearing demand
accounts grew $7.9 million, or 40%, and equaled 5% of average funding sources
during 2000. Interest-bearing checking accounts increased $1.9 million, or 18%,
and equaled 3% of average funding sources during 2000. Money market deposit
accounts decreased $0.4 million, or 7%, and equaled 1% of average funding
sources during 2000, respectively. Business loan customers also comprise the
majority of interest-bearing checking and money market deposit types, although
to a lower extent than noninterest-bearing checking accounts. Pursuant to
banking regulations, incorporated businesses may not own interest-bearing
checking accounts and transactions from money market accounts are limited.
Mercantile anticipates continued growth of its check-writing deposit accounts as
additional business loans are extended.
- --------------------------------------------------------------------------------
F-7
21
Savings account balances recorded a decline of $3.4 million, or 9%, during 2000,
and equaled 8% of average funding sources during 2000. The decline was due
primarily from several large customers withdrawing funds for business purposes,
not from account closings. Business loan customers also comprise the majority of
savings account holders, although to a lower extent than checking-writing
accounts. Mercantile anticipates an increase in savings account balances as
additional business loans are extended.
Certificates of deposit purchased by customers located within the market area
increased significantly during 2000, growing from $27.4 million at December 31,
1999, to $44.8 million on December 31, 2000, a growth rate of 63%. These
deposits accounted for 9% of average funding sources during 2000. Leading the
growth were certificates of deposit issued to local municipalities, primarily
counties, cities and townships, increasing from $7.0 million at December 31,
1999, to $18.6 million on December 31, 2000. The increase is due primarily from
Mercantile qualifying for additional funds from existing customers through a
combination of asset growth and profitability as measured by the municipalities'
investment policy guidelines, and is a trend that Mercantile expects to
continue.
During 2000 certificates of deposit obtained from customers located outside of
the market area increased by $107.5 million, and represented 56% of average
funding sources during 2000. At December 31, 2000, this deposit type totaled
$299.0 million. These certificates of deposit were primarily placed by deposit
brokers for a fee, but also include certificates of deposit obtained from the
deposit owners directly. Out-of-area certificates of deposit are utilized to
support the asset growth of Mercantile, and are generally a lower cost source of
funds when compared to the interest rates that would have to be offered in the
local market to generate a commensurate level of funds. During most of 2000
rates paid on new out-of-area certificates of deposit were very similar to rates
paid on new certificates of deposit issued to local customers. In addition, the
overhead costs associated with the out-of-area certificates of deposit are
considerably less than the overhead costs that would be incurred to administer a
similar level of local deposits. The reliance on out-of-area certificates of
deposit is expected to remain given Mercantile's asset growth expectations.
Repurchase agreements increased $5.5 million and equaled 7% of average funding
sources during 2000. Part of Mercantile's sweep account program, collected funds
from certain business noninterest-bearing checking accounts, are invested into
overnight interest-bearing repurchase agreements. The securities collateralizing
the repurchase agreement program are recorded as assets of Mercantile. Although
not considered deposits, and therefore not afforded Federal Deposit Insurance
Corporation insurance, funds generated by this product enable Mercantile to
provide the equivalent of an interest-bearing checking account to incorporated
businesses that are prohibited by banking regulations from owning such an
account. The sweep account program is designed for businesses that maintain
relatively large checking account balances.
Shareholders' equity increased $3.9 million and equaled 7% of average funding
sources during 2000. The increase is attributable to net income from operations,
which totaled $2.8 million, and a $1.1 million mark-to-market adjustment for
available for sale securities as defined in SFAS No. 115. This adjustment is due
solely to the changes in the interest rate environment during 2000.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
SUMMARY
Mercantile recorded strong earnings performance during 2000, only its third full
year of operations. Net income was $2.8 million, or $1.08 per basic share and
$1.07 per diluted share. This earnings performance compares very favorably to
net income of $2.1 million, or $0.81 per basic share and $0.80 per diluted
share, recorded in 1999. The 1999 net income figure includes a one-time charge
of $42,210 ($0.02 per share), reflecting a change in accounting for organization
costs. The earnings improvement during 2000 over that of 1999 is primarily
attributable to increased net interest income and improved operating
efficiencies resulting from asset growth, strong credit culture, and controlled
overhead expenses, and was achieved despite a significant increase in federal
income tax expense. As in 1999, significant loan growth necessitated large
provisions to the allowance during 2000, substantially impacting Mercantile's
earnings performance. A rate of loan growth exceeding the banking average is
anticipated in 2001.
- --------------------------------------------------------------------------------
F-8
22
The following table shows some of the key performance and equity ratios for the
years ended December 31, 2000 and 1999.
2000 1999
---- ----
Return on average total assets 0.6% 0.7%
Return on average equity 9.5 7.7
Dividend payout ratio N/A N/A
Average equity to average assets 6.6 9.2
NET INTEREST INCOME
Net interest income, the difference between revenue generated from earning
assets and the interest cost of funding those assets, is Mercantile's primary
source of earnings. Interest income (adjusted for tax-exempt income) and
interest expense totaled $37.1 million and $24.6 million during 2000,
respectively, providing for net interest income of $12.5 million. This
performance compares very favorably to that of 1999 when interest income and
interest expense were $22.8 million and $13.3 million, respectively, providing
for net interest income of $9.5 million. The level of net interest income is
primarily a function of asset size, as the weighted average interest rate
received on earning assets is greater than the weighted average interest cost of
funding sources; however, factors such as types of assets and liabilities,
interest rate risk, liquidity, and customer behavior also impact net interest
income as well as the net interest margin. The net interest margin declined from
3.30% in 1999 to 2.90% in 2000, primarily resulting from the full-year's impact
of the September 1999 issuance of trust preferred securities, increased reliance
on out-of-area certificates of deposit and lower level of shareholders' equity
as a percent of average assets.
The following table depicts the average balance, interest earned and paid, and
weighted average rate of Mercantile's assets, liabilities and shareholders'
equity during 2000, 1999 and 1998 (dollars in thousands). The table also depicts
the dollar amount of change in interest income and interest expense of
interest-earning assets and interest-bearing liabilities, segregated between
change due to volume and change due to rate. For tax-exempt securities interest
income and yield have been computed on a tax equivalent basis using a marginal
tax rate of 34%.
Years ended December 31,
--------------2000------------- ---------------1999------------- -------------1998----------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
Taxable securities $ 38,788 $ 2,662 6.86% $ 30,124 $ 1,869 6.20% $ 15,375 $ 881 5.73%
Tax-exempt
securities 10,972 782 7.12 1,251 84 6.74 0 0 0.00
--------- --------- --------- --------- --------- ---------
Total securities 49,760 3,444 6.92 31,375 1,953 6.22 15,375 881 5.73
Loans 372,428 33,057 8.88 246,921 20,410 8.27 105,075 9,008 8.57
Short-term
investments 115 6 4.74 551 26 4.68 413 23 5.68
Federal funds sold 8,986 567 6.31 8,099 406 5.01 4,821 256 5.32
--------- --------- --------- --------- --------- ---------
Total earning
assets 431,289 37,074 8.60 286,946 22,795 7.94 125,684 10,168 8.09
Allowance for
loan losses (5,527) (3,681) (1,590)
Cash and due
from banks 8,926 7,096 4,229
Other non-earning
assets 10,044 6,099 2,540
--------- --------- ---------
Total assets $ 444,732 $ 296,460 $ 130,863
========= ========= =========
- --------------------------------------------------------------------------------
F-9
23
Years ended December 31,
--------------2000-------------- ---------------1999------------ -------------1998-------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
Interest-bearing
demand
deposits $ 11,207 $ 501 4.47% $ 8,575 $ 351 4.09% $ 4,025 $ 171 4.24%
Savings deposits 36,040 1,875 5.20 38,886 1,871 4.81 17,494 904 5.17
Money market
accounts 5,405 251 4.64 4,411 189 4.29 1,170 58 4.98
Time deposits 288,791 18,992 6.58 173,158 9,629 5.56 68,243 4,008 5.87
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-
bearing
deposits 341,443 21,619 6.33 225,030 12,040 5.35 90,932 5,141 5.65
Short-term
borrowings 29,331 1,369 4.67 20,229 835 4.13 10,376 488 4.71
Long-term
borrowings 16,033 1,572 9.80 4,654 455 9.78 0 0 0.00
-------- -------- -------- -------- -------- --------
Total interest-
bearing
liabilities 386,807 24,560 6.35 249,913 13,330 5.33 101,308 5,629 5.56
-------- -------- --------
Demand deposits 23,568 17,812 10,782
Other liabilities 4,893 1,447 343
-------- -------- --------
Total liabilities 415,268 269,172 112,433
Average equity 29,464 27,288 18,430
-------- -------- --------
Total liabilities
and equity $444,732 $296,460 $130,863
======== ======== ========
Net interest
income $ 12,514 $ 9,465 $ 4,539
======== ======== ========
Rate spread 2.25 2.61 2.53
Net interest
margin 2.90 3.30 3.61
Years ended December 31,
-------------2000 over 1999--------------- -------------1999 over 1998--------------
Total Volume Rate Total Volume Rate
----- ------ ---- ----- ------ ----
Increase (decrease) in interest income
Taxable securities $ 793,736 $ 579,224 $ 214,512 $ 988,140 $ 909,383 $ 78,757
Tax exempt securities 697,304 692,256 5,048 84,286 84,286 0
Loans 12,646,547 11,042,857 1,603,690 11,402,485 11,736,016 (333,531)
Short term investments (20,358) (20,681) 323 2,336 6,926 (4,590)
Federal funds sold 161,720 47,814 113,906 149,236 165,035 (15,799)
------------ ------------ ------------ ------------ ------------ ------------
Net change in tax-equivalent
income 14,278,949 12,341,470 1,937,479 12,626,483 12,901,646 (275,163)
Increase (decrease) in interest expense
Interest-bearing demand deposits
150,459 115,433 35,026 180,447 186,460 (6,013)
Savings deposits 3,864 (142,183) 146,047 966,973 1,033,269 (66,296)
Money market accounts 61,803 45,219 16,584 130,733 139,968 (9,235)
Time deposits 9,363,466 7,352,358 2,011,108 5,620,966 5,845,057 (224,091)
Short term borrowings 533,604 413,787 119,817 346,867 413,370 (66,503)
Long term borrowings 1,116,660 1,115,539 1,121 455,216 455,216 0
------------ ------------ ------------ ------------ ------------ ------------
Net change in interest
expense 11,229,856 8,900,153 2,329,703 7,701,202 8,073,340 (372,138)
------------ ------------ ------------ ------------ ------------ ------------
Net change in tax-equivalent
net interest income $ 3,049,093 $ 3,441,317 $ (392,224) $ 4,925,281 $ 4,828,306 $ 96,975
============ ============ ============ ============ ============ ============
Interest income is primarily generated from the loan portfolio, and to a lesser
degree from investment securities, federal funds sold and short term
investments. Interest income increased $14.3 million during 2000 from that
earned in 1999, totaling $37.1 million in 2000 compared to $22.8 million in the
previous year. Approximately 86% of the increase is due to the growth in earning
assets, with the remaining amount due to the increased interest rate environment
during 2000. The yield on average earning assets increased from the 7.94%
recorded in 1999 to 8.60% in 2000.
- --------------------------------------------------------------------------------
F-10
24
The growth in interest income is primarily attributable to an increase in
earning assets. During 2000, earning assets averaged $431.3 million, a level
substantially higher than the average earning assets of $286.9 million during
1999. Growth in average total loans, totaling $125.5 million, comprised 87% of
the increase in average earnings assets. Interest income generated from the loan
portfolio increased $12.6 million during 2000 over the level earned in 1999,
comprised of an increase of $11.0 million due to growth in the loan portfolio
and an increase of $1.6 million due to an increase in the yield earned on the
loan portfolio. The improved loan portfolio yield is primarily due to increased
market interest rates during 2000.
Growth in the investment securities portfolio and a slightly larger federal
funds sold position also added to the increase in interest income during 2000
over that of 1999. Average investment securities increased by $18.4 million in
2000, increasing from $31.4 million in 1999 to $49.8 million in 2000. This
growth equated to an increase in interest income of $1.3 million. A higher
investment securities portfolio yield during 2000 also increased interest income
by $0.2 million. Average federal funds sold increased about $0.9 million in 2000
that, when combined with an increase in yield, added $0.2 million to interest
income. The improved yield on investment securities and federal funds sold is
the result of increased market rates during 2000.
Interest expense is primarily generated from interest-bearing deposits, and to a
lesser degree repurchase agreements and trust preferred securities. Interest
expense increased $11.2 million during 2000 from that paid in 1999, totaling
$24.5 million in 2000 compared to $13.3 million in the previous year. The growth
in interest expense is primarily attributable to an increase in interest-bearing
liabilities and increased market interest rates during 2000. Interest-bearing
liabilities averaged $386.8 million during 2000, a level substantially higher
than the average interest-bearing liabilities of $249.9 million during 1999.
This growth resulted in increased interest expense of $8.9 million. Increased
interest expense of $2.3 million was recorded during 2000 due to higher market
interest rates on all interest-bearing liability categories except trust
preferred securities that have a fixed interest rate. The cost of average
interest-bearing liabilities increased from the 5.33% recorded in 1999 to 6.35%
in 2000.
Growth in average certificates of deposits, totaling $115.6 million, comprised
84% of the increase in average interest-bearing liabilities between 2000 and
1999. The certificate of deposit growth during 2000 equated to an increase in
interest expense of $7.4 million. In addition, interest expense of $2.0 million
was recorded due to the increase in the average rate paid. Growth in repurchase
agreements also added to the increased interest expense during 2000 over that of
1999, as average repurchase agreements grew from $20.2 million in 1999 to $29.3
million in 2000. The growth equated to an increase in interest expense of $0.4
million, with an additional $0.1 million in interest expense recorded due to the
increase in the average rate paid. Higher interest rates paid on
interest-bearing checking accounts, savings deposits and money market accounts
added, in aggregate, $0.2 million in interest expense during 2000, while the
change in volume added less than $0.1 million in interest expense. The September
1999 issuance of $16.0 million trust preferred securities had a sizeable impact
on interest expense during 2000, adding $1.1 million in interest expense over
that recorded during 1999.
PROVISION FOR LOAN LOSSES
Reflecting continued significant loan growth the provision for loan losses
totaled approximately $1.9 million during 2000, compared to the $2.0 million
expensed during 1999. The allowance as a percentage of total loans outstanding
as of December 31, 2000 was 1.47%, slightly lower than the 1.50% at year-end
1999. Net loan charge-offs during 2000 approximated $173,000, or only 0.05% of
average total loans. Loan charge-offs during 1999 totaled $106,000, or 0.04% of
average total loans. Mercantile maintains the allowance at a level management
feels is adequate to absorb losses contained within the loan portfolio.
NONINTEREST INCOME
Other income totaled $1.2 million in 2000, a significant increase over the $0.8
million earned in 1999. Deposit and repurchase agreement service charges totaled
$346,000 in 2000, an increase of $144,000, or 71%, from the amount earned in
1999. The increase is primarily due to the growth in the number of deposit
accounts. Reflecting additional letter of credit issuances, letter of credit
commitment fees increased to $391,000 in 2000, an increase of $123,000, or 46%,
from the fees earned in 1999. Credit card and debit card interchange income,
reflecting increased issuance and usage, increased $46,000 during 2000, totaling
$144,000 for the year. Fees earned on referring residential mortgage loan
applicants to various third parties, reflecting a decline in volume due to the
increased rate environment, totaled $175,000 in 2000, compared to the $208,000
earned in 1999.
- --------------------------------------------------------------------------------
F-11
25
To reduce the negative impact of rising interest rates on net interest income,
during the second quarter of 2000 Mercantile entered into a $50 million two-year
interest rate swap agreement with a correspondent bank. Due to market
expectations and the resulting impact on the value of the interest rate swap
agreement, Mercantile terminated the interest rate swap agreement to lock-in the
earned benefit shortly thereafter. A termination fee of $275,000 was received
from the correspondent bank. At the same time Mercantile elected to sell $7.0
million in relatively low-yielding U.S. Government-Sponsored Agency callable
bonds and reinvest the monies in higher-yielding U.S. Government-Sponsored
mortgage-backed securities. The loss on the sale of the bonds totaled $275,000;
however, the consummation of this transaction will generate a higher level of
interest income than would have otherwise been earned over at least the next
three years on a present value basis, while at the same time improving
Mercantile's interest rate risk position.
NONINTEREST EXPENSE
Noninterest expense during 2000 totaled $7.5 million, a significant increase
over the $5.9 million expensed in 1999. An increase in all major overhead cost
categories, including salaries and benefits, occupancy, and furniture and
equipment, was recorded. The increases primarily result from the hiring of
additional staff and the construction of a new combined branch and operations
center in mid-1999. All other noninterest costs also increased, reflecting
additional expenses required to administer the significantly increased loan and
deposit base.
Monitoring and controlling overhead expenses, while at the same time providing
high quality of service to customers, is of utmost importance to Mercantile.
While the dollar volume of noninterest costs have increased, as a percent of
average assets the level has substantially declined as a result of Mercantile's
growth and realized operating efficiencies. During 2000, noninterest costs were
1.69% of average assets, a significant decline from the 1.99% level in 1999. The
efficiency ratio, a banking industry standardized calculation that attempts to
reflect the utilization of overhead costs, also declined during 2000. Computed
by dividing noninterest expenses by net interest income plus noninterest income,
the efficiency ratio was 55.8% in 2000. This level compares very favorably to a
very respectable 57.3% recorded in 1999, and reflects the improved efficiencies
resulting from increased asset growth and controlled costs. In addition,
Mercantile's lending philosophy of concentrating on commercial lending results
in higher average loan balances compared to residential mortgage or consumer
loans, which provides for a greater volume of loans with fewer people, thereby
improving its efficiency. This point is demonstrated by Mercantile's total
assets per employee ratio, which as of December 31, 2000 was a relatively high
$7.9 million.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $1.3 million in 2000, or 32% of pre-tax net
operating income, compared to $0.3 million, or 12% of pre-tax net operating
income, in 1999. During 1999 Mercantile used tax-loss carryforwards generated in
1997 and 1998 to reduce federal income tax expense. These tax-loss carryforwards
were fully utilized over the course of 1999; therefore, Mercantile had to
expense the full statutory tax rate in 2000.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
SUMMARY
Mercantile recorded a net operating profit during 1999, only its second full
year of operations. Net operating income was $2.1 million, or $0.85 per basic
share ($0.84 diluted). This earnings performance compares very favorably to the
net operating loss of $1.1 million, or $0.58 per basic and diluted share,
recorded in 1998. The 1999 net operating income includes a one-time charge of
$42,210 ($0.02 per share), reflecting a change in accounting for organization
costs. In accordance with previous accounting guidelines, these costs were being
amortized over a five-year period; however, as required by AICPA Statement of
Position 98-5, the unamortized balance was written off effective January 1,
1999, and is reflected in the Consolidated Financial Statements as a change in
accounting principle. The earnings improvement during 1999 over that of 1998 is
primarily attributable to increased net interest income and improved operating
efficiencies resulting from asset growth, strong credit culture, and controlled
overhead expenses. As in 1998, significant loan growth necessitated large
provisions to the allowance during 1999, substantially impacting Mercantile's
earnings performance. Continued loan growth exceeding the banking average is
anticipated.
- --------------------------------------------------------------------------------
F-12
26
Although Mercantile's overall earnings performance is expected to improve, a
change in federal income tax status will have a substantial impact when
comparing the earnings performance recorded in 1999 with future reporting
periods. Federal income tax expense for 1999 totaled $292,000, or 12% of pre-tax
net operating income. While Mercantile is subject to the statutory federal
income tax rate of 34%, use of tax loss carryforwards generated during 1997 and
1998 enabled Mercantile to reduce its federal income tax expense during 1999.
The entire tax loss carryforward was utilized during 1999; therefore,
Mercantile's federal income tax expense will be at the statutory tax rate in
future reporting periods.
NET INTEREST INCOME
Net interest income, the difference between revenue generated from earning
assets and the interest cost of funding those assets, is Mercantile's primary
source of earnings. Interest income and interest expense totaled $22.7 million
and $13.3 million during 1999, respectively, providing for net interest income
of $9.4 million. This performance compares very favorably to that of 1998 when
interest income and interest expense were $10.1 million and $5.6 million,
respectively, providing for net interest income of $4.5 million. The level of
net interest income is primarily a function of asset size, as the weighted
average interest rate received on earning assets is greater than the weighted
average interest cost of funding sources; however, factors such as types of
assets and liabilities, interest rate risk, liquidity, and customer behavior
also impact net interest income as well as the net interest margin. The net
interest margin declined from 3.61% in 1998 to 3.30% in 1999. Although the
weighted average cost of interest-bearing liabilities declined at a faster rate
than the decline of the yield on interest-earning assets during 1999, the net
interest margin declined primarily due to a lower level of interest-free demand
deposits and shareholders' equity as a percent of average earning assets, as
well as the issuance of trust preferred securities.
Interest income is primarily generated from the loan portfolio, and to a lesser
degree from investment securities, Federal funds sold and short term
investments. Interest income increased $12.6 million during 1999 from that
earned in 1998, totaling $22.8 million in 1999 compared to $10.2 million in the
previous year. The yield on average earning assets declined from the 8.09%
recorded in 1998 to 7.94% in 1999.
The growth in interest income is primarily attributable to an increase in
earning assets. During 1999 earning assets averaged $286.9 million, a level
substantially higher than the average earning assets of $125.7 million during
1998. Growth in average total loans, totaling $141.8 million, comprised 88% of
the increase in average earnings assets between 1999 and 1998. The loan growth
during 1999 equated to an increase in interest income of $11.4 million, although
the increase in interest income was partially offset by a decline in the loan
portfolio yield from 8.57% in 1998 to 8.27% in 1999, or $0.3 million. The
decline in the loan portfolio yield is primarily due to the overall decline of
market interest rates during the latter part of 1998 and early part of 1999.
Growth in the investment securities portfolio and a larger Federal funds sold
position also added to the increase in interest income during 1999 over that of
1998. Average investment securities increased by $16.0 million in 1999,
increasing from $15.4 million in 1998 to $31.4 million in 1999. This growth
equated to an increase in interest income of $1.1 million. A higher investment
securities portfolio yield during 1999 also increased interest income. Average
Federal funds sold increased from $4.8 million in 1998 to $8.1 million in 1999
that, after accounting for a decline in the yield, added approximately $150,000
to interest income.
Interest expense is primarily generated from interest-bearing deposits, and to a
lesser degree repurchase agreements and trust preferred securities. Interest
expense increased $7.7 million during 1999 from that paid in 1998, totaling
$13.3 million in 1999 compared to $5.6 million in the previous year. The cost of
average interest-bearing liabilities declined from the 5.56% recorded in 1998 to
5.33% in 1999.
The growth in interest expense is primarily attributable to an increase in
interest-bearing liabilities. During 1999 interest-bearing liabilities averaged
$249.9 million, a level substantially higher than the average interest-bearing
liabilities of $101.3 million during 1998. Growth in average certificates of
deposit, totaling $104.9 million, comprised 71% of the increase in average
interest-bearing liabilities between 1999 and 1998. The certificate of deposit
growth during 1999 equated to an increase in interest expense of $5.6 million,
although the increase in interest expense was partially offset by a decline in
the average rate from 5.87% in 1998 to 5.56% in 1999, or $0.2 million. The
decline in the average rate of certificates of deposit is primarily due to the
aforementioned overall decline of market interest rates during the latter part
of 1998 and early part of 1999.
- --------------------------------------------------------------------------------
F-13
27
Growth in savings deposits and repurchase agreements also added to the increase
in interest expense during 1999 over that of 1998. Average savings deposits
increased significantly during 1999, growing from $17.5 million in 1998 to $38.9
million in 1999. The growth equated to an increase in interest expense of $1.0
million, although the increase in interest expense was partially offset by a
decline in the average rate from 5.17% in 1998 to 4.81% in 1999, or
approximately $66,000. Average repurchase agreements increased from $10.4
million in 1998 to $20.2 million in 1999 that, after accounting for a decline in
the average rate, added approximately $300,000 to interest expense. Increases in
average interest-bearing checking accounts and money market accounts of $4.6
million and $3.2 million, respectively, also partially offset with a decline in
the average rate, added approximately $300,000 in aggregate to interest expense.
The September 1999 issuance of $16 million trust preferred securities had a
sizeable impact on interest expense. With an average annualized balance of $4.7
million, trust preferred securities added approximately $500,000 to interest
expense in just the three and one-half months outstanding. At an effective rate
of 9.81% when taking into account the amortization of brokerage fees, it is
anticipated that the trust preferred securities will have a much larger impact
on Mercantile's earnings performance in future periods, although the effect is
expected to decline over time as assets increase and the trust preferred
securities decline as a percent of average earning assets.
PROVISION FOR LOAN LOSSES
Reflecting continued significant loan growth the provision for loan losses
totaled approximately $2.0 million during 1999, compared to the $2.6 million
expensed during 1998. The allowance for loan losses as a percentage of total
loans outstanding as of December 31, 1999 was 1.5%, which also represents the
average ratio for 1999 and 1998. Net loan charge-offs during 1999 approximated
$106,000, or only 0.04% of average total loans. There were no loan charge-offs
during 1998. Mercantile maintains the allowance for loan losses at a level
management feels is adequate to absorb losses inherent in the loan portfolio.
The evaluation is based upon a continuous review of Mercantile's and banking
industry's historical loan loss experience, known and inherent risks contained
in the loan portfolio, composition and growth of the loan portfolio, current and
projected economic conditions and other factors.
NONINTEREST INCOME
Other income totaled $848,000 in 1999, a significant increase over the $488,000
earned in 1998. Deposit and repurchase agreement service charges in 1999 totaled
$202,000, an increase of approximately $120,000 from the amount earned in 1998.
The increase is primarily due to the growth in the number of deposit accounts.
Reflecting additional letter of credit issuances, letter of credit commitment
fees increased to $268,000 in 1999, an increase of approximately $109,000 from
the fees earned in 1998. Credit card and debit card interchange income,
reflecting increased issuance and usage, increased $69,000 during 1999, totaling
$98,000 for the year. Fees earned on referring residential mortgage loan
applicants to various third parties totaled $208,000 in 1999, a level very
similar to the $210,000 earned in 1998.
NONINTEREST EXPENSE
Noninterest expense during 1999 totaled $5.9 million, a significant increase
over the $3.6 million expensed in 1998. An increase in all major overhead cost
categories, including salaries and benefits, occupancy, and furniture and
equipment, was recorded. The increases primarily result from the hiring of
additional staff and the construction of a new combined branch and operations
center. All other noninterest costs also increased, reflecting additional
expenses required to administer the significantly increased loan and deposit
base.
Monitoring and controlling overhead expenses, while at the same time providing
high quality of service to customers, is of utmost importance to Mercantile.
While the dollar volume of noninterest costs have increased, as a percent of
average assets the level has substantially declined as a result of Mercantile's
growth and realized operating efficiencies. During 1999 noninterest costs were
2.1% of average assets, a significant decline from the 2.8% level in 1998. The
efficiency ratio, a banking industry standardized calculation that attempts to
reflect the utilization of overhead costs, also declined significantly during
1999. Computed by dividing noninterest expenses by net interest income plus
noninterest income, the efficiency ratio was 57.3% in 1999. This level compares
very favorably to 70.9% recorded in 1998, and reflects the improved efficiencies
resulting from increased asset growth and controlled costs. In addition,
Mercantile's lending philosophy of concentrating on commercial lending results
in higher average loan balances compared to residential mortgage or consumer
loans, which provides for a greater volume of loans with fewer people, thereby
improving its efficiency. This point is demonstrated by Mercantile's total
assets per employee ratio, which as of December 31, 1999 was approximately $6.3
million. This level compares very favorably to the $3.4 million level of banks
of similar asset size.
- --------------------------------------------------------------------------------
F-14
28
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $292,000 in 1999, or 12% of pre-tax net operating
income. Although Mercantile is subject to the statutory federal income tax rate
of 34%, use of tax loss carryforwards generated during 1997 and 1998 resulting
from recorded net operating losses, enabled Mercantile to reduce its federal
income tax expense during 1999. The entire tax loss carryforward was utilized
during 1999; therefore, Mercantile's federal income tax expense will be at the
statutory tax rate in future reporting periods. Because of the aforementioned
net loss from operations recorded by Mercantile in 1998, no provisions to
federal income tax expense were necessary during 1998.
CAPITAL RESOURCES
Shareholders' equity is a noninterest-bearing source of funds that provides
support for asset growth. Shareholders' equity was $31.9 million and $28.0
million at December 31, 2000 and 1999, respectively. The increase during 2000 is
attributable to net income from operations totaling $2.8 million and a $1.1
million mark-to-market adjustment for available for sale securities as defined
in SFAS No. 115. The mark-to-market adjustment was due to the difference in the
interest rate environment between year-end 2000 and year-end 1999.
In September 1999 Mercantile, through its wholly-owned business trust
subsidiary, Capital Trust, issued 1.6 million shares of trust preferred stock at
$10.00 per share. Net proceeds from the sale, after the payment of underwriting
costs, were $15.0 million. Substantially all of the net proceeds were ultimately
contributed to the Bank and were used to support anticipated growth in assets,
fund investments in loans and securities, and for general corporate purposes.
Subject to certain limitations the trust preferred securities are considered a
component of capital for purposes of calculating regulatory capital ratios. At
December 31, 2000, $10.5 million of the $16.0 million was considered Tier 1
capital, with the remaining amount included as Tier 2 capital. The amount
includable as Tier 1 capital is expected to gradually increase in future periods
as shareholders' equity increases from anticipated net income from operations.
To provide sufficient capital for anticipated asset growth, Mercantile has been
evaluating alternatives for increasing its capital. On February 21, 2001
Mercantile sold 70,000 shares of common stock in a private placement for
approximately $1.0 million. Mercantile contributed the proceeds to the Bank as
capital. In order to maintain adequate capital to support continuing asset
growth, Mercantile expects to continue evaluating alternatives for increasing
its capital.
Mercantile and the Bank are subject to regulatory capital requirements
administered by the State of Michigan and federal banking agencies. Failure to
meet the various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements. Since the Bank began
operations, both Mercantile and the Bank have been categorized as "Well
Capitalized," the highest classification contained within the banking
regulations. The capital ratios of Mercantile and the Bank as of December 31,
2000 and 1999 are disclosed under Note 16 on page F-37 of the Notes to
Consolidated Financial Statements.
The ability of Mercantile to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. Mercantile declared a 5% stock dividend on January 10, 2001, payable
on February 1, 2001 to record holders as of January 19, 2001. Mercantile has not
paid cash dividends on its common stock since its formation in 1997, and
currently has no intention of doing so in the foreseeable future.
LIQUIDITY
Liquidity is measured by Mercantile's ability to raise funds through deposits,
borrowed funds, capital or cash flow from the repayment of loans and investment
securities. These funds are used to meet deposit withdrawals, maintain reserve
requirements, fund loans and operate Mercantile. Liquidity is primarily achieved
through the growth of deposits (both local and out-of-area) and liquid assets
such as securities available for sale, matured securities, and Federal funds
sold. Asset and liability management is the process of managing the balance
sheet to achieve a mix of earning assets and liabilities that maximizes
profitability, while providing adequate liquidity.
- --------------------------------------------------------------------------------
F-15
29
Mercantile's liquidity strategy is to fund loan growth with deposits and
repurchase agreements and to maintain an adequate level of short- and
medium-term investments to meet typical daily loan and deposit activity.
Although deposit and repurchase agreement growth from depositors located in the
market area increased by $29.0 million, or 22%, during 2000, the growth was not
sufficient to meet the substantial loan growth of $121.8 million and provide
monies for additional investing activities. To assist in providing the
additional needed funds Mercantile regularly obtained certificates of deposit
from customers outside of the market area and placed by deposit brokers for a
fee, but also included certificates of deposit obtained from the deposit owners
directly. These funds are generally a lower cost source of funds when compared
to the interest rates that would have to be offered in the local market to
generate a commensurate level of funds. In addition, the overhead costs
associated with the out-of-area certificates of deposit are considerably less
than the overhead costs that would be incurred to administer a similar level of
local deposits. As of December 31, 2000, out-of-area deposits totaled $299.0
million, or 65% of combined deposits and repurchase agreements, an increase from
the $191.5 million, or 59% of combined deposits and repurchase agreements, as of
December 31, 1999. Reliance on out-of-area deposits is expected to be ongoing
due to the planned future growth.
Mercantile has the ability to borrow money on a daily basis through
correspondent banks using established federal funds purchased lines; however,
this is viewed as only a secondary and temporary source of funds. The federal
funds purchased lines were utilized on only rare occasions during 2000. During
2000, Mercantile's federal funds sold position averaged $9.0 million. In
addition, as a member of the Federal Home Loan Bank of Indianapolis ("FHLBI"),
Mercantile has access to the FHLBI's borrowing programs. Based on ownership of
FHLBI stock and available collateral at December 31, 2000, the Bank could borrow
up to $15.0 million. The Bank has yet to use its established borrowing line at
the FHLBI.
On February 28, 2001 Mercantile was extended a $10.0 million unsecured revolving
line of credit from a correspondent bank. The line of credit matures on February
27, 2002. Proceeds from the line of credit may be used for working capital,
investment in the Bank or acquisition of financial institutions.
In addition to normal loan funding and deposit flow, Mercantile also needs to
maintain liquidity to meet the demands of certain unfunded loan commitments and
standby letters of credit. As of December 31, 2000, Mercantile had a total of
$121.5 million in unfunded loan commitments and $36.9 million in unfunded
standby letters of credit. Of the total unfunded loan commitments, $101.4
million were commitments available as lines of credit to be drawn at any time as
customers' cash needs vary, and $20.1 million were for loan commitments
scheduled to close and become funded within the next three months. Mercantile
monitors fluctuations in loan balances and commitment levels, and includes such
data in its overall liquidity management.
MARKET RISK ANALYSIS
Mercantile's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. All of Mercantile's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. Mercantile has only limited
agricultural-related loan assets and therefore has no significant exposure to
changes in commodity prices. Any impact that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be
insignificant. Interest rate risk is the exposure of Mercantile's financial
condition to adverse movements in interest rates. Mercantile derives its income
primarily from the excess of interest collected on its interest-earning assets
over the interest paid on its interest-bearing liabilities. The rates of
interest Mercantile earns on its assets and owes on its liabilities generally
are established contractually for a period of time. Since market interest rates
change over time, Mercantile is exposed to lower profitability if it cannot
adapt to interest rate changes. Accepting interest rate risk can be an important
source of profitability and shareholder value; however, excessive levels of
interest rate risk could pose a significant threat to Mercantile's earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to Mercantile's safety and soundness.
- --------------------------------------------------------------------------------
F-16
30
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. Mercantile's interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information systems and
internal controls are in place to maintain interest rate risk at prudent levels
with consistency and continuity. In evaluating the quantitative level of
interest rate risk Mercantile assesses the existing and potential future effects
of changes in interest rates on its financial condition, including capital
adequacy, earnings, liquidity and asset quality.
There are two interest rate risk measurement techniques used by Mercantile. The
first, which is commonly referred to as GAP analysis, measures the difference
between the dollar amounts of interest-sensitive assets and liabilities that
will be refinanced or repriced during a given time period. A significant
repricing gap could result in a negative impact to the net interest margin
during periods of changing market interest rates. The following table depicts
Mercantile's GAP position as of December 31, 2000 (dollars in thousands):
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------ -------- ------ ------ -----
Assets:
Commercial loans $ 139,454 $ 8,917 $ 228,412 $ 12,521 $ 389,304
Residential real estate loans 9,186 1,913 16,181 6,429 33,709
Consumer loans 1,559 917 4,107 208 6,791
Investment securities (1) 785 604 14,497 44,571 60,457
Federal funds sold 6,300 6,300
Short term investments 109 109
Allowance for loan losses (6,302) (6,302)
Other assets 22,378 22,378
--------- ----------- ----------- --------- ---------
Total assets 157,393 12,351 263,197 79,805 512,746
Liabilities:
Interest-bearing checking 12,968 12,968
Savings 36,331 36,331
Money market accounts 5,196 5,196
Time deposits under $100,000 17,923 35,245 8,257 61,425
Time deposits $100,000 and over 64,939 172,967 44,546 282,452
Short term borrowings 32,151 32,151
Long term borrowings 57 16,000 16,057
Noninterest-bearing checking 27,368 27,368
Other liabilities 6,944 6,944
--------- ----------- ----------- --------- ---------
Total liabilities 169,565 208,212 52,803 50,312 480,892
Shareholders' equity 31,854 31,854
--------- ----------- ----------- --------- ---------
Total sources of funds 169,565 208,212 52,803 82,166 512,746
--------- ----------- ----------- --------- ---------
Net asset (liability) GAP $ (12,172) $ (195,861) $ 210,394 $ (2,361)
========= =========== =========== =========
Cumulative GAP $ (12,172) $ (208,033) $ 2,361
========= =========== ===========
Percent of cumulative GAP to
total assets (2.4)% (40.6)% 0.5%
========= =========== ===========
(1) Mortgage-backed securities are categorized by expected maturities based
upon prepayment trends as of December 31, 2000.
- --------------------------------------------------------------------------------
F-17
31
The second interest rate risk measurement used is commonly referred to as net
interest income simulation analysis. Mercantile believes that this methodology
provides a more accurate measurement of interest rate risk than the GAP
analysis, and therefore, serves as the primary interest rate risk measurement
technique used by Mercantile. The simulation model assesses the direction and
magnitude of variations in net interest income resulting from potential changes
in market interest rates. Key assumptions in the model include prepayment speeds
on various loan and investment assets; cash flows and maturities of
interest-sensitive assets and liabilities; and changes in market conditions
impacting loan and deposit volume and pricing. These assumptions are inherently
uncertain, subject to fluctuation and revision in a dynamic environment;
therefore, the model cannot precisely estimate net interest income or exactly
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions and
Mercantile's strategies, among other factors.
Mercantile conducted multiple simulations as of December 31, 2000, whereby it
was assumed that a simultaneous, instant and sustained change in market interest
rates occurred. The following table reflects the suggested impact on net
interest income over the next twelve months, which are well within the policy
parameters established to manage and monitor interest rate risk.
Dollar Change In Percent Change In
Interest Rate Scenario Net Interest Income Net Interest Income
---------------------- ------------------- -------------------
Interest rates down 200 basis points $687,000 4.8%
Interest rates down 100 basis points 451,000 3.2
No change in interest rates 213,000 1.5
Interest rates up 100 basis points 137,000 1.0
Interest rates up 200 basis points 64,000 0.5
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of other variables, including: the growth,
composition and absolute levels of loans, deposits, and other earning assets and
interest-bearing liabilities; economic and competitive conditions; potential
changes in lending, investing, and deposit gathering strategies; client
preferences; and other factors.
- --------------------------------------------------------------------------------
F-18
32
[CROWE CHIZEK LOGO]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Mercantile Bank
Corporation as of December 31, 2000 and 1999 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of Mercantile's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mercantile Bank
Corporation as of December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000 in conformity with generally accepted accounting principles.
As disclosed in Note 1, the Corporation changed its method of accounting for
start-up costs in 1999 to comply with new accounting guidance.
/s/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 19, 2001
- --------------------------------------------------------------------------------
F-19
33
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
Cash and due from banks $ 11,692,825 $ 6,570,631
Short term investments 108,846 579,725
Federal funds sold 6,300,000 6,500,000
------------- -------------
Total cash and cash equivalents 18,101,671 13,650,356
Securities available for sale 45,147,493 34,115,303
Securities held to maturity (fair value of $14,942,311 at
December 31, 2000 and $6,982,329 at December 31, 1999) 14,524,341 7,056,492
Federal Home Loan Bank stock 784,900 784,900
Total loans 429,804,105 308,006,476
Allowance for loan losses (6,301,805) (4,620,469)
------------- -------------
Total loans, net 423,502,300 303,386,007
Premises and equipment - net 4,119,385 3,461,187
Accrued interest receivable 2,758,054 1,842,874
Other assets 3,808,218 3,739,969
------------- -------------
Total assets $ 512,746,362 $ 368,037,088
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 27,368,257 $ 19,513,231
Interest-bearing 398,372,056 275,315,741
------------- -------------
Total 425,740,313 294,828,972
Securities sold under agreements to repurchase 32,151,391 26,607,289
Other borrowed money 56,510 13,755
Accrued expenses and other liabilities 6,944,262 2,619,203
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures 16,000,000 16,000,000
------------- -------------
Total liabilities 480,892,476 340,069,219
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares
authorized, none issued
Common stock, no par value; 9,000,000 shares
authorized; 2,596,102 and 2,472,500 shares
outstanding at December 31, 2000 and 1999 29,935,401 28,181,798
Retained earnings 1,628,277 587,639
Accumulated other comprehensive income (loss) 290,208 (801,568)
------------- -------------
Total shareholders' equity 31,853,886 27,967,869
------------- -------------
Total liabilities and shareholders' equity $ 512,746,362 $ 368,037,088
============= =============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-20
34
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Interest income
Loans, including fees $ 33,056,700 $ 20,410,153 $ 9,007,668
Investment securities 3,206,105 1,925,065 880,639
Federal funds sold 567,379 405,659 256,422
Short term investments 5,464 25,822 23,487
------------ ------------ ------------
Total interest income 36,835,648 22,766,699 10,168,216
Interest expense
Deposits 21,619,499 12,039,907 5,140,788
Short term borrowings 1,368,901 835,297 488,430
Long term borrowings 1,571,876 455,216 0
------------ ------------ ------------
Total interest expense 24,560,276 13,330,420 5,629,218
------------ ------------ ------------
NET INTEREST INCOME 12,275,372 9,436,279 4,538,998
Provision for loan losses 1,854,000 1,960,900 2,571,800
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,421,372 7,475,379 1,967,198
Noninterest income
Service charges on accounts 346,131 201,796 82,170
Letter of credit fees 391,143 267,753 159,064
Mortgage loan referral fees 174,579 208,042 209,667
Gain on sale of loans 49,975 13,047 0
Gain (loss) on sale of securities (275,321) 0 128
Interest rate swap termination fee 275,000 0 0
Other income 230,395 156,905 37,149
------------ ------------ ------------
Total noninterest income 1,191,902 847,543 488,178
Noninterest expense
Salaries and benefits 4,274,262 3,256,456 1,891,264
Occupancy 510,357 412,531 304,231
Furniture and equipment 440,378 350,131 176,756
Data processing 435,433 335,079 170,990
Advertising 196,763 157,973 110,431
Loan processing cost 74,855 63,582 153,835
Other expense 1,583,659 1,312,203 756,916
------------ ------------ ------------
Total noninterest expenses 7,515,707 5,887,955 3,564,423
------------ ------------ ------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 4,097,567 2,434,967 (1,109,047)
Federal income tax expense 1,303,000 292,000 0
------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 2,794,567 2,142,967 (1,109,047)
Cumulative effect of change in accounting principle
(net of taxes) 0 (42,210) 0
------------ ------------ ------------
NET INCOME (LOSS) $ 2,794,567 $ 2,100,757 $ (1,109,047)
============ ============ ============
Earnings (loss) per share before cumulative effect of change
in accounting principle:
Basic $ 1.08 $ 0.83 $ (0.55)
============ ============ ============
Diluted $ 1.07 $ 0.82 $ (0.55)
============ ============ ============
Per share cumulative effect of change in accounting principle $ 0.00 $ 0.02 $ 0.00
============ ============ ============
Earnings (loss) per share:
Basic $ 1.08 $ 0.81 $ (0.55)
============ ============ ============
Diluted $ 1.07 $ 0.80 $ (0.55)
============ ============ ============
Average shares outstanding 2,596,102 2,596,102 2,003,018
============ ============ ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-21
35
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
Accumulated
Retained Other Total
Common Earnings Comprehensive Shareholders'
Stock (Deficit) Income Equity
------- --------- ------------- ------------
BALANCE, JANUARY 1, 1998 $ 13,880,972 $ (404,071) $ (3,631) $ 13,473,270
Common stock sale, July 31, 1998 14,300,826 14,300,826
Comprehensive income (loss):
Net loss (1,109,047) (1,109,047)
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassification and tax effect 35,467 35,467
------------
Total comprehensive income (loss) (1,073,580)
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 1998 28,181,798 (1,513,118) 31,836 26,700,516
Comprehensive income:
Net income 2,100,757 2,100,757
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassification and tax effect (833,404) (833,404)
------------
Total comprehensive income 1,267,353
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 1999 28,181,798 587,639 (801,568) 27,967,869
Payment of 5% stock dividend 1,753,603 (1,753,929) (326)
Comprehensive income:
Net income 2,794,567 2,794,567
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassification and tax effect 1,091,776 1,091,776
------------
Total comprehensive income 3,886,343
------------ ----------- ------------ ------------
BALANCES, DECEMBER 31, 2000 $ 29,935,401 $ 1,628,277 $ 290,208 $ 31,853,886
============ =========== ============ ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-22
36
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,794,567 $ 2,100,757 $ (1,109,047)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 590,087 538,996 274,364
Provision for loan losses 1,854,000 1,960,900 2,571,800
Gain on sale of loans (49,975) (13,047) 0
(Gain)/loss on sale of securities 275,321 0 (128)
Net change in
Accrued interest receivable (915,180) (695,042) (1,095,021)
Other assets (827,706) (2,869,730) (432,695)
Accrued expenses and other liabilities 4,325,059 2,118,482 208,517
------------- ------------- -------------
Net cash from operating activities 8,046,173 3,141,316 417,790
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and payments, net (121,920,318) (123,354,358) (171,857,839)
Purchase of:
Securities available for sale (19,816,814) (17,765,304) (28,320,575)
Securities held to maturity (7,472,674) (7,056,858) 0
Federal Home Loan Bank stock 0 (784,900) 0
Premises and equipment (1,098,833) (1,926,748) (1,082,815)
Proceeds from:
Sales of available for sale securities 6,718,120 0 1,000,313
Maturities and repayments of available
for sale securities 3,497,789 6,526,816 6,203,087
------------- ------------- -------------
Net cash from investing activities (140,092,730) (144,361,352) (194,057,829)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 130,911,341 122,830,953 162,309,755
Proceeds from the sale of trust preferred securities 0 16,000,000 0
Net proceeds from sale of common stock 0 0 14,300,826
Net increase in other borrowed money 42,755 13,755 0
Fractional shares purchased (326) 0 0
Net increase in securities sold under agreements
to repurchase 5,544,102 9,569,688 16,382,154
------------- ------------- -------------
Net cash from financing activities 136,497,872 148,414,396 192,992,735
------------- ------------- -------------
Net change in cash and cash equivalents 4,451,315 7,194,360 (647,304)
Cash and cash equivalents at beginning of period 13,650,356 6,455,996 7,103,300
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,101,671 $ 13,650,356 $ 6,455,996
============= ============= =============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 20,382,032 $ 11,796,860 $ 5,237,768
Federal income tax 1,693,000 1,620,773 165,000
Cash received during the year for
Gain on termination of interest rate swap 275,000 0 0
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-23
37
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Mercantile Bank Corporation and its wholly-owned subsidiaries,
Mercantile Bank of West Michigan, and its wholly-owned subsidiary, Mercantile
Bank Mortgage Company, and MBWM Capital Trust I, after elimination of
significant intercompany transactions and accounts.
Nature of Operations: Mercantile Bank Corporation ("Mercantile") was
incorporated on July 15, 1997 to establish and own Mercantile Bank of West
Michigan ("Bank") based in Grand Rapids, Michigan. The Bank is a community-based
financial institution. The Bank began operations on December 15, 1997, after
several months of work by incorporators and employees in preparing applications
with the various regulatory agencies and obtaining insurance and building space.
The Bank's primary deposit products are checking, savings, and term certificate
accounts, and its primary lending products are commercial, residential mortgage,
and installment loans. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets and real estate.
Commercial loans are expected to be repaid from cash flow from operations of
businesses. Real estate loans are secured by both residential and commercial
real estate. The Bank's loan accounts are primarily with customers located in
western Michigan, within Kent County. The Bank's retail deposits are also to
customers located in western Michigan. As an alternative source of funds, the
Bank has also issued certificates to depositors outside of the Bank's primary
market area. Substantially all revenues are derived from banking products and
services.
Mercantile Capital Trust I ("Capital Trust") was formed in September 1999. All
of the common securities of this special purpose trust are owned by Mercantile.
The Trust exists solely to issue capital securities. For financial reporting
purposes, the Trust is reported as a subsidiary and is consolidated into the
financial statements of Mercantile. The capital securities are presented as a
separate line item on the consolidated balance sheet as guaranteed preferred
beneficial interests in Mercantile's subordinated debentures.
During 2000, the Mercantile Bank Mortgage Company ("Mortgage Company"), a
wholly-owned subsidiary of the Bank, was established to increase the
profitability and efficiency of its mortgage loan operations. The Mortgage
Company initiated business on October 24, 2000 via the Bank's contribution of
most of its residential mortgage loan portfolio and participation interests in
certain commercial mortgage loans. On the same date the Bank also transferred
its residential mortgage origination function to the Mortgage Company. Mortgage
loans originated and held by the Mortgage Company are serviced by the Bank
pursuant to a servicing agreement.
Mercantile's election to become a financial holding company pursuant to Title I
of the Gramm-Leach-Bliley Act and implementing Federal Reserve Board regulations
was effective March 23, 2000. At the present time Mercantile has no plans to
engage in any of the expanded activities permitted under the new regulations.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses and the fair values of
financial instruments are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand
deposits with other financial institutions, short-term investments (securities
with daily put provisions) and federal funds sold. Cash flows are reported net
for customer loan and deposit transactions, interest-bearing time deposits with
other financial institutions and short-term borrowings with maturities of 90
days or less.
- --------------------------------------------------------------------------------
(Continued)
F-24
38
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities classified as held to maturity are carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities available for sale consist of those securities which might
be sold prior to maturity due to changes in interest rates, prepayment risks,
yield and availability of alternative investments, liquidity needs or other
factors. Securities classified as available for sale are reported at their fair
value and the related unrealized holding gain or loss is reported, net of
related income tax effects, as a separate component of shareholders' equity,
until realized. Other securities such as Federal Home Loan Bank stock are
carried at cost.
Premiums and discounts on securities are recognized in interest income using the
interest method over the estimated life of the security. Gains and losses on the
sale of securities available for sale are determined based upon amortized cost
of the specific security sold. Securities are written down to fair value when a
decline in fair value is not temporary.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an allowance for
loan losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income is not reported when full loan repayment is in doubt, typically when the
loan is impaired or payments are past due over 90 days. Payments received on
such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and recoveries, and decreased by charge-offs. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, and economic conditions. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in aggregate for smaller-balance loans of similar nature
such as residential mortgage, consumer and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when the internal grading system indicates a doubtful classification.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both straight-line and
accelerated methods over the estimated useful lives of the respective assets.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. These assets are
reviewed for impairment under SFAS No. 121 when events indicate the carrying
amount may not be recoverable.
Cumulative Effect of Change in Accounting Principle: In 1998, the Accounting
Standards Executive Committee (AcSEC) of the American Institute of Certified
Public Accountants promulgated Statement of Position (SOP) 98-5. This SOP
provides guidance on the financial reporting of start-up costs and organization
costs. It requires cost of start-up activities and organization costs to be
expensed as incurred. Initial application of this SOP should be reported as a
cumulative effect of a change in accounting principle. Mercantile elected to
adopt the provisions of SOP 98-5 on January 1, 1999. Included in the December
31, 1999 Consolidated Statement of Income is a charge to operations of $42,210
reported as a cumulative effect of change in accounting principle.
- --------------------------------------------------------------------------------
(Continued)
F-25
39
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts. Issuance costs of trust preferred securities are amortized
over the term of the securities.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Stock Options: No expense for stock options is recorded, as the grant price
equals the market price of the stock at grant date. Pro-forma disclosures show
the effect on income and earnings per share had the options' fair value been
recorded using an option pricing model. The pro-forma effect is expected to
increase in the future as more options are granted.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Financial Instruments: Financial instruments include off-balance-sheet credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financials instruments are recorded when they are funded.
Interest Rate Hedge Agreements: Mercantile may enter into interest rate hedge
agreements which involve the exchange of fixed and floating rate interest
payments over the life of the agreement without the exchange of the underlying
principal amounts. The differential to be paid or received is accrued as
interest rates change and is recognized over the life of the agreements as an
adjustment to interest income.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
Earnings (Loss) Per Share: Basic earnings (loss) per share is based on weighted
average common shares outstanding during the period. Diluted earnings (loss) per
share includes the dilutive effect of additional potential common shares
issuable under stock options. Earnings (loss) per share are restated for all
stock dividends, including the 5% stock dividend paid on February 1, 2001.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity.
- --------------------------------------------------------------------------------
(Continued)
F-26
40
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. Adoption of this
standard on January 1, 2001 did not have a material effect on the Bank's
condition or results of operations.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at year-end were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
---------- ---------- ----------- -----------
AVAILABLE FOR SALE
2000
U.S. Government agency
debt obligations $ 9,800,282 $ 137,309 $ (60,271) $ 9,877,320
Mortgage-backed securities 33,907,502 475,643 (117,287) 34,265,858
Municipal revenue bonds 1,000,000 4,315 0 1,004,315
------------ ------------ ------------ ------------
$ 44,707,784 $ 617,267 $ (177,558) $ 45,147,493
============ ============ ============ ============
1999
U.S. Government agency
debt obligations $ 14,071,776 $ 0 $ (408,337) $ 13,663,439
Mortgage-backed securities 20,258,091 0 (796,283) 19,461,808
Municipal revenue bonds 1,000,000 0 (9,944) 990,056
------------ ------------ ------------ ------------
$ 35,329,867 $ 0 $ (1,214,564) $ 34,115,303
============ ============ ============ ============
HELD TO MATURITY
2000
Municipal general obligation bonds $ 13,065,553 $ 394,004 $ (926) $ 13,458,631
Municipal revenue bonds 1,458,788 30,463 (5,571) 1,483,680
------------ ------------ ------------ ------------
$ 14,524,341 $ 424,467 $ (6,497) $ 14,942,311
============ ============ ============ ============
1999
Municipal general obligation bonds $ 6,433,594 $ 0 $ (51,132) $ 6,382,462
Municipal revenue bonds 622,898 0 (23,031) 599,867
------------ ------------ ------------ ------------
$ 7,056,492 $ 0 $ (74,163) $ 6,982,329
============ ============ ============ ============
The amortized cost and fair values of debt investment securities at year-end
2000, by contractual maturity, are shown below. The contractual maturity is
utilized below for U.S. Government agency debt obligations and municipal bonds.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Securities not due at a single maturity date, mortgage backed
securities, are shown separately.
- --------------------------------------------------------------------------------
(Continued)
F-27
41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
--------------Held-to-Maturity------ --------Available-for-Sale----------
Weighted Weighted
Average Amortized Fair Average Amortized Fair
Yield Cost Value Yield Cost Value
--------- --------- ----- ------ --------- -----
Due in one year or less 5.38% $ 102,257 $ 102,210 6.35% $ 500,000 $ 501,395
Due from one to five years 6.66 2,459,284 2,494,428 6.12 5,500,813 5,471,660
Due from five to ten years 6.87 5,470,924 5,626,116 7.35 3,899,383 3,946,710
Due after ten years 7.67 6,491,876 6,719,557 7.74 900,086 961,870
Mortgage-backed NA -- -- 6.98 33,907,502 34,265,858
----------- ----------- ----------- -----------
7.19 $14,524,341 $14,942,311 6.92 $44,707,784 $45,147,493
=========== =========== =========== ===========
During 2000, investment securities with an aggregated amortized cost basis of
$6,993,441 were sold, resulting in an aggregate realized loss of $275,321. There
were no sales of investment securities during 1999. The sale of an investment
security during 1998 resulted in a realized gain of $128.
The carrying value of investment securities that are pledged to secure
securities sold under agreements to repurchase and other deposits was
$40,015,759 and $28,733,258 at December 31, 2000 and 1999, respectively.
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Year-end loans are as follows:
Percent
December 31, 2000 December 31, 1999 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
Real Estate:
Construction and land
development $ 38,815,436 9.0% $ 37,224,847 12.1% 4.3%
Secured by 1 - 4
family properties 33,708,709 7.8 22,535,386 7.3 49.6
Secured by multi-
family properties 2,127,047 0.5 2,326,684 0.8 (8.6)
Secured by nonfarm
nonresidential properties 197,018,062 45.9 157,686,466 51.2 24.9
Commercial 151,344,028 35.2 83,908,726 27.2 80.4
Consumer 6,790,823 1.6 4,324,367 1.4 57.0
------------ ----- ------------ ----- -----
$429,804,105 100.0% $308,006,476 100.0% 39.5%
============ ===== ============ ===== =====
Activity in the allowance for loan losses is as follows:
2000 1999 1998
---- ---- ----
Beginning balance $ 4,620,469 $ 2,765,100 $ 193,300
Provision charged to operating expense 1,854,000 1,960,900 2,571,800
Charge-offs (185,876) (108,531) 0
Recoveries 13,212 3,000 0
----------- ----------- -----------
Ending balance $ 6,301,805 $ 4,620,469 $ 2,765,100
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
F-28
42
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans were as follows:
2000 1999
---- ----
Year-end loans with no allocated allowance for loan losses $ 0 $ 0
Year-end loans with allocated allowance for loan losses 94,892 0
-------- --------
$ 94,892 $ 0
======== ========
Amount of the allowance for loan losses allocated $ 20,000 $ 0
Average of impaired loans during the year 138,518 24,347
The Bank did not recognize any interest income on impaired loans during 2000,
1999 or 1998.
Concentrations within the loan portfolio were as follows at year-end:
2000 1999
---- ----
Percentage of Percentage of
Balance Loan Portfolio Balance Loan Portfolio
------- -------------- ------- --------------
Commercial real estate loans to
operators of non-residential
buildings $ 62,089,376 14.4% $ 41,039,899 13.3%
NOTE 4 - PREMISES AND EQUIPMENT - NET
Year-end premises and equipment are as follows:
2000 1999
---- ----
Land and improvements $1,134,548 $ 443,408
Buildings and leasehold improvements 2,128,353 2,111,049
Construction in process 220,797 0
Furniture and equipment 1,586,621 1,417,086
---------- ----------
5,070,319 3,971,543
Less: accumulated depreciation 950,934 510,356
---------- ----------
$4,119,385 $3,461,187
========== ==========
- --------------------------------------------------------------------------------
(Continued)
F-29
43
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS
Deposits at year-end are summarized as follows:
Percent
December 31, 2000 December 31, 1999 Increase/
Balance % Balance % (Decrease)
------- - ------- - ----------
Noninterest-bearing
demand $ 27,368,257 6.4% $ 19,513,231 6.6% 40.3%
Interest-bearing
checking 12,968,028 3.1 11,040,426 3.7 17.5
Money market 5,196,217 1.2 5,604,816 1.9 (7.3)
Savings 36,331,140 8.6 39,737,096 13.5 (8.6)
Time, under $100,000 6,164,803 1.4 4,873,222 1.7 26.5
Time, $100,000 and
over 38,681,764 9.1 22,573,206 7.7 71.4
------------ ----- ------------ ----- -----
126,710,209 29.8 103,341,997 35.1 22.6
Out-of-area time,
under $100,000 55,260,216 13.0 71,997,053 24.4 (23.2)
Out-of-area time,
$100,000 and over 243,769,888 57.2 119,489,922 40.5 104.0
------------ ----- ------------ ----- -----
299,030,104 70.2 191,486,975 64.9 56.2
------------ ----- ------------ ----- -----
$425,740,313 100.0% $294,828,972 100.0% 44.4%
============ ===== ============ ===== =====
Out-of-area certificates of deposit consist of certificates obtained from
depositors outside of the primary market area. As of December 31, 2000,
out-of-area certificates of deposit totaling $288,389,984 were obtained through
deposit brokers, with the remaining $10,640,120 obtained directly from the
depositors.
The following table depicts the maturity distribution for certificates of
deposit at year-end.
2000 1999
---- ----
In one year $291,073,673 $203,685,797
In two years 49,585,317 13,534,313
In three years 3,195,678 623,293
In four years 22,003 1,090,000
In five years 0 0
------------ ------------
$343,876,671 $218,933,403
============ ============
The following table depicts the maturity distribution for certificates of
deposit with balances of $100,000 or more at year-end.
2000 1999
---- ----
Up to three months $ 64,938,960 $ 48,761,878
Three months to six months 65,612,880 53,506,644
Six months to twelve months 107,354,179 32,250,070
Over twelve months 44,545,633 7,544,536
------------ ------------
$282,451,652 $142,063,128
============ ============
- --------------------------------------------------------------------------------
(Continued)
F-30
44
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 6 - SHORT-TERM BORROWINGS
Information relating to short-term borrowings, comprised entirely of securities
sold under agreements to repurchase, at December 31 is summarized below:
2000 1999
---- ----
Outstanding balance at yearend $32,151,391 $26,607,289
Average interest rate at yearend 4.63% 4.22%
Average balance during the year 29,190,780 20,229,314
Average interest rate during the year 4.66% 4.13%
Maximum month end balance during the year 35,473,498 26,607,289
Securities sold under agreements to repurchase (repurchase agreements) generally
have original maturities of less than one year. Repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as liabilities. Securities involved with the repurchase agreements are
recorded as assets of the Bank and are primarily held in safekeeping by
correspondent banks. Repurchase agreements are offered principally to certain
large deposit customers as uninsured deposit equivalent investments.
NOTE 7 - FEDERAL INCOME TAXES
The consolidated provision for income taxes is as follows:
2000 1999 1998
---- ---- ----
Current $ 1,913,297 $ 1,820,858 $ 399,852
Deferred benefit (610,297) (636,480) (1,147,247)
Change in valuation allowance 0 (892,378) 747,395
----------- ----------- -----------
Tax expense $ 1,303,000 $ 292,000 $ 0
=========== =========== ===========
The recorded consolidated income tax provision in both 2000 and 1999 differs
from that computed by multiplying pre-tax income by the statutory federal income
tax rates as follows:
2000 1999 1998
---- ---- ----
Statutory rates $ 1,393,173 $ 827,889 $ (377,076)
Increase (decrease) from
Tax-exempt interest (110,102) (14,972) 0
Valuation allowance 0 (526,565) 365,813
Nondeductible expenses 19,929 5,648 11,263
----------- ----------- -----------
Tax expense $ 1,303,000 $ 292,000 $ 0
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
F-31
45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 7 - FEDERAL INCOME TAXES (Continued)
The net deferred tax asset recorded includes the following amounts of deferred
tax assets and liabilities as of December 31, 2000 and 1999:
2000 1999
---- ----
Deferred tax assets
Provision for loan losses $2,023,051 $1,392,691
Start-up/pre-opening expenses 59,537 73,973
Deferred loan fees 91,507 92,822
Unrealized loss on securities available for sale 0 412,953
Deferred compensation 19,213 4,677
Miscellaneous accruals 0 5,500
---------- ----------
2,193,308 1,982,616
Deferred tax liabilities
Unrealized gain on securities available for sale 154,000 0
Miscellaneous expenses 0 0
Accretion 7,978 2,659
Depreciation 29,775 21,746
---------- ----------
191,753 24,405
Net deferred tax asset $2,001,555 $1,958,211
========== ==========
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits related to such
assets will not be realized. Management has determined that no valuation
allowance was required for 2000 or at year-end 1999.
NOTE 8 - STOCK OPTION PLAN
Stock option plans are used to reward employees and provide them with additional
equity interest. Stock options are granted at the market price on the date of
grant. The stock options fully vest within three years and expire ten years from
the date of grant. At year-end 2000 there were 95,970 shares authorized for
future grants.
2000 1999 1998
---- ---- ----
Stock options outstanding
Beginning 127,836 127,836 81,636
Granted 38,690 0 46,200
-------- -------- --------
Ending 166,526 127,836 127,836
======== ======== ========
Options exercisable at year-end 114,186 80,236 52,674
-------- -------- --------
Minimum exercise price $ 9.52 $ 9.52 $ 9.52
Maximum exercise price 12.98 12.98 12.98
Average exercise price 11.01 10.95 10.95
Average remaining option term 7.6 Years 8.0 Years 9.0 Years
Estimated fair value of stock options granted: $155,003 $172,510
Assumptions used:
Risk-free interest rate 5.99% 4.56%
Expected option life 10 Years 7 Years
Expected stock volatility 37% 11%
Expected dividends 0% 0%
- --------------------------------------------------------------------------------
(Continued)
F-32
46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 8 - STOCK OPTION PLAN (Continued)
SFAS No. 123, Accounting for Stock Based Compensation, requires proforma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. The following proforma information presents
net income and basic and diluted earnings per share had the fair value been used
to measure compensation cost for stock option plans. The exercise price of
options granted is equivalent to the market value of underlying stock at the
grant date. No compensation cost was actually recognized for stock options.
2000 1999 1998
---- ---- ----
Pro-forma income (loss), assuming SFAS 123 fair
value method was used for stock options:
Income (loss) before cumulative effect of
change in accounting principle $ 2,741,602 $ 2,065,991 $ (1,299,991)
Basic income (loss) per share before cumulative
effect of change in accounting principle 1.06 0.80 (0.65)
Diluted income (loss) per share before cumulative
effect of change in accounting principle 1.05 0.79 (0.65)
Net income (loss) $ 2,741,602 $ 2,023,781 $ (1,299,991)
Basic income (loss) per share 1.06 0.78 (0.65)
Diluted income (loss) per share 1.05 0.77 (0.65)
NOTE 9 - RELATED PARTIES
Certain directors and executive officers of the Bank, including their immediate
families and companies in which they are principal owners, were loan customers
of the Bank. At year-end 2000 and 1999, the Bank had approximately $7,099,000
and $9,046,000 in loan commitments to directors and executive officers, of which
approximately $3,914,000 and $5,063,000 were outstanding at December 31, 2000
and 1999, respectively, as reflected in the following table.
2000 1999
---- ----
Beginning balance $ 5,063,000 $ 9,095,000
New loans 2,035,000 876,000
Repayments (3,184,000) (4,908,000)
----------- -----------
Ending balance $ 3,914,000 $ 5,063,000
=========== ===========
Related party deposits and repurchase agreements totaled approximately
$13,173,000 at December 31, 2000 and $14,800,000 at December 31, 1999.
- --------------------------------------------------------------------------------
(Continued)
F-33
47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Loan commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized, if any, in the balance sheet. The Bank's maximum
exposure to loan loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Collateral, such as
accounts receivable, securities, inventory, property and equipment, is generally
obtained based on management's credit assessment of the borrower.
Fair value of the Bank's off-balance sheet instruments (commitments to extend
credit and standby letters of credit) is based on rates currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. At December 31, 2000 and
1999, the rates on existing off-balance sheet instruments were substantially
equivalent to current market rates, considering the underlying credit standing
of the counterparties.
The Bank's maximum exposure to credit losses for loan commitments and standby
letters of credit outstanding at December 31 was as follows:
2000 1999
---- ----
Commercial unused lines of credit $ 87,121,094 $ 87,488,616
Unused lines of credit secured by 1 - 4 family
residential properties 7,641,057 6,112,897
Credit card unused lines of credit 4,578,325 3,419,628
Other consumer unused lines of credit 2,062,084 3,126,906
Commitments to make loans 20,110,500 26,395,600
Standby letters of credit 36,889,288 28,963,217
------------ ------------
$158,402,348 $155,506,864
============ ============
Mercantile was required to have $689,000 and $564,000 of cash on hand or on
deposit with the Federal Reserve Bank of Chicago to meet regulatory reserve and
clearing requirements at year-end 2000 and 1999. These balances do not earn
interest.
The Bank leases the main office facility under an operating lease agreement.
Total rental expense for the lease for 2000, 1999 and 1998 was $160,566,
$155,889 and $151,349, respectively. Future minimum rentals under this lease as
of December 31, 2000 are as follows:
2001 $ 163,740
2002 163,740
2003 163,740
2004 163,740
2005 163,740
Thereafter 272,900
----------
$1,091,600
==========
- --------------------------------------------------------------------------------
(Continued)
F-34
48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 11 - BENEFIT PLANS
Mercantile established a 401(k) benefit plan effective January 1, 1998, covering
substantially all of its employees. Mercantile's 2000, 1999 and 1998 matching
401(k) contribution charged to expense was $135,613, $85,080 and $59,705,
respectively. The percent of Mercantile's matching contributions to the 401(k)
is determined annually by the Board of Directors. During 1999, the 401(k)
benefit plan allowed employee contributions up to 15% of their compensation,
which are matched at 100% of the first 4% of the compensation contributed.
Matching contributions are immediately vested. The Plan was amended, effective
January 1, 2000, to increase the employer match from 4% of compensation
contributed to 5%.
Mercantile established a deferred compensation plan effective May 1, 1999, in
which all persons serving on the Board of Directors during the time the plan is
in effect are eligible to participate. Participants may elect to defer annual
director fees, with distributions to be paid only upon termination of service as
a director. Expense for the plan during 2000 and 1999 was $2,085 and $625,
respectively.
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end.
2000 1999
---- ----
Carrying Fair Carrying Fair
Values Values Values Values
-------- -------- -------- --------
Financial assets
Cash and cash equivalents $ 18,101,671 $ 18,101,671 $ 13,650,356 $ 13,650,356
Securities available for sale 45,147,493 45,147,493 34,115,303 34,115,303
Securities held to maturity 14,524,341 14,942,311 7,056,492 6,982,329
Federal Home Loan Bank stock 784,900 784,900 784,900 784,900
Loans, net 423,502,300 424,690,000 303,386,007 294,581,000
Accrued interest receivable 2,758,054 2,758,054 1,842,874 1,842,874
Financial liabilities
Deposits 425,740,313 424,359,000 294,828,972 295,078,734
Securities sold under agreements
to repurchase 32,151,391 32,151,391 26,607,289 26,607,289
Accrued interest payable 6,134,491 6,134,491 1,956,247 1,956,257
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures 16,000,000 11,527,593 16,000,000 11,402,303
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable, demand
deposits, securities sold under agreements to repurchase, and variable rate
loans or deposits that reprice frequently and fully. Security fair values are
based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair value of guaranteed preferred beneficial interests in the
Corporation's subordinated debentures is based on current rates for similar
financing.
- --------------------------------------------------------------------------------
(Continued)
F-35
49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 13 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
2000 1999 1998
---- ---- ----
Basic
Net income (loss) $ 2,794,567 $ 2,100,757 $(1,109,047)
=========== =========== ===========
Weighted average common shares outstanding 2,596,102 2,596,102 2,003,041
----------- ----------- -----------
Basic earnings (loss) per common share $ 1.08 $ 0.81 $ (0.55)
=========== =========== ===========
Diluted
Net income (loss) $ 2,794,567 $ 2,100,757 $(1,109,047)
=========== =========== ===========
Weighted average common shares outstanding for
basic earnings per common share 2,596,102 2,596,102 2,003,018
Add: Dilutive effects of assumed exercises of
stock options 7,229 27,627 0
----------- ----------- -----------
Average shares and dilutive potential
common shares 2,603,331 2,623,729 2,003,018
=========== =========== ===========
Diluted earnings (loss) per common share $ 1.07 $ 0.80 $ (0.55)
=========== =========== ===========
Stock options for 127,838 shares of common stock were not considered in
computing diluted earnings per common share for 1998 because they were
antidilutive.
NOTE 14 - SALE OF TRUST PREFERRED SECURITIES
MBWM Capital Trust I, a business subsidiary of Mercantile, sold 1.6 million
Cumulative Preferred Securities ("trust preferred securities") at $10.00 per
trust preferred security in a September 1999 offering. The proceeds from the
sale of the trust preferred securities were used by MBWM Capital Trust I to
purchase an equivalent amount of subordinated debentures from Mercantile. The
trust preferred securities carry a fixed rate of 9.60%, have a stated maturity
of 30 years, and, in effect, are guaranteed by Mercantile. The securities are
redeemable at par after 5 years. Distributions on the trust preferred securities
are payable quarterly on January 15, April 15, July 15 and October 15. The first
distribution was paid on October 15, 1999. Under certain circumstances,
distributions may be deferred for up to 20 calendar quarters. However, during
any such deferrals, interest accrues on any unpaid distributions at the rate of
9.60% per annum.
NOTE 15 - SALE OF COMMON STOCK
During 1998, Mercantile completed a secondary stock offering, selling 1,026,375
shares, as adjusted for the 5% stock dividend paid on February 1, 2001. Net of
issuance expenses the common stock sale raised $14.3 million. Substantially all
of the net proceeds were contributed to the Bank, which were used to support the
anticipated growth in assets, fund investments in loans and securities, and for
general corporate purposes.
- --------------------------------------------------------------------------------
(Continued)
F-36
50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 16 - REGULATORY MATTERS
Mercantile and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year end, actual capital levels (in thousands) and minimum required levels
for Mercantile and the Bank were:
Minimum Required
to be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2000
Total capital (to risk
weighted assets)
Consolidated $53,685 11.0% $39,163 8.0% $48,953 10.0%
Bank 51,596 10.6 39,017 8.0 48,771 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 42,085 8.6 19,589 4.0 29,383 6.0
Bank 45,497 9.3 19,517 4.0 29,275 6.0
Tier 1 capital (to average
assets)
Consolidated 42,085 8.6 19,601 4.0 24,502 5.0
Bank 45,497 9.3 19,528 4.0 24,410 5.0
1999
Total capital (to risk
weighted assets)
Consolidated $49,275 13.7% $28,830 8.0% $36,038 10.0%
Bank 47,402 13.2 28,714 8.0 35,893 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated 38,359 10.6 14,420 4.0 21,630 6.0
Bank 42,914 12.0 14,363 4.0 21,544 6.0
Tier 1 capital (to average
assets)
Consolidated 38,359 10.9 14,097 4.0 17,621 5.0
Bank 42,914 12.2 14,042 4.0 17,554 5.0
The Bank was categorized as well capitalized at year-end 2000 and 1999.
- --------------------------------------------------------------------------------
(Continued)
F-37
51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 16 - REGULATORY MATTERS (Continued)
Federal and state banking laws and regulations place certain restrictions on the
amount of dividends the Bank can transfer to Mercantile and on the capital
levels that must be maintained. At year-end 2000, under the most restrictive of
these regulations (to remain well capitalized), the Bank could distribute
approximately $2,825,000 to Mercantile as dividends without prior regulatory
approval.
The capital levels as of December 31, 2000 and December 31, 1999 include an
adjustment for the 1.6 million trust preferred securities issued by MBWM Capital
Trust I in September 1999 subject to certain limitations. Federal Reserve
guidelines limit the amount of trust preferred securities which can be included
in Tier 1 capital of Mercantile to 25% of total Tier 1 capital. As of December
31, 2000 and December 31, 1999, approximately $10.5 million and $9.6 million of
the $16.0 million of the trust preferred securities were included as Tier 1
capital of Mercantile, respectively. The remaining dollar amounts are included
as Tier 2 capital, a component of risk-based capital. The trust preferred
securities are used to support Mercantile's current capital position allowing
for future growth and increased common shareholder value.
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows.
2000 1999 1998
---- ---- ----
Unrealized holding gains and losses on $ 1,378,885 $(1,262,733) $ 53,866
available-for-sale securities
Reclassification adjustments for gains
and losses later recognized in income 275,321 0 (128)
----------- ----------- -----------
Net unrealized gains and losses 1,654,206 (1,262,733) 53,738
Tax effect (562,430) 429,329 (18,721)
----------- ----------- -----------
Other comprehensive income (loss) $ 1,091,776 $ (833,404) $ 35,467
=========== =========== ===========
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Income Before Earnings per Share
Cumulative Effect of Before Cumulative Effect of
Interest Net Interest Change in Accounting Net Change in Accounting Principle
Income Income Principle Income Basic Diluted
-------- ------------ -------------------- -------- ----- -------
2000
First quarter $ 7,864,181 $ 2,797,414 $ 500,292 $ 500,292 $ 0.19 $ 0.19
Second quarter 8,848,268 3,004,000 636,472 636,472 0.25 0.25
Third quarter 9,741,242 3,133,073 778,160 778,160 0.30 0.30
Fourth quarter 10,381,957 3,340,885 879,643 879,643 0.34 0.33
1999
First quarter $ 4,531,195 $ 1,929,778 $ 393,901 $ 351,691 $ 0.15 $ 0.15
Second quarter 5,212,444 2,264,714 503,472 503,472 0.19 0.19
Third quarter 6,111,378 2,591,024 562,340 562,340 0.22 0.22
Fourth quarter 6,911,682 2,650,763 683,254 683,254 0.27 0.26
- --------------------------------------------------------------------------------
(Continued)
F-38
52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 19 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements.
CONDENSED BALANCE SHEETS
2000 1999
---- ----
ASSETS
Cash and cash equivalents $ 626,986 $ 671,235
Investment in subsidiaries 46,291,805 42,617,182
Other assets 1,800,569 1,533,198
----------- -----------
Total assets $48,719,360 $44,821,615
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 370,624 $ 358,896
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures 16,494,850 16,494,850
Shareholders' equity 31,853,886 27,967,869
----------- -----------
Total liabilities and shareholders' equity $48,719,360 $44,821,615
=========== ===========
CONDENSED STATEMENTS OF INCOME
2000 1999 1998
---- ---- ----
Income
Dividends from subsidiaries $ 1,583,506 $ 123,162 $ 0
Other 29,663 33,348 28,868
----------- ----------- -----------
Total income 1,613,169 156,510 28,868
Expenses
Interest expense 1,617,300 468,316 0
Other operating expenses 433,149 415,018 187,797
----------- ----------- -----------
Total expenses 2,050,449 883,334 187,797
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARIES (437,280) (726,824) (158,929)
Federal income tax expense (649,000) (420,000) 0
Equity in undistributed net income (loss) of subsidiary 2,582,847 2,407,581 (950,118)
----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 2,794,567 2,142,967 (1,109,047)
Cumulative effect of change in accounting principle
(net of applicable taxes 0 (42,210) 0
----------- ----------- -----------
NET INCOME (LOSS) $ 2,794,567 $ 2,100,757 $(1,109,047)
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
F-39
53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 19 - MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,794,567 $ 2,100,757 $ (1,109,047)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Equity in undistributed (income) loss of subsidiary (2,582,847) (2,407,581) 950,118
Capital investment into Mercantile Bank of
West Michigan 0 (14,828,112) (13,771,888)
Change in other assets (267,371) (1,451,293) 44,640
Change in other liabilities 11,728 347,396 (41,405)
------------ ------------ ------------
Net cash from operating activities (43,923) (16,238,833) (13,927,582)
CASH FLOWS FROM FINANCING ACTIVITIES
Fractional shares paid (326) 0 0
Proceeds from the sale of trust preferred securities
and issuance of debentures 0 16,494,850 0
Investment in common stock of MBWM Capital Trust I 0 (494,850) 0
Proceeds from sale of common stock 0 0 14,300,826
------------ ------------ ------------
Net cash from financing activities (326) 16,000,000 14,300,826
------------ ------------ ------------
Net change in cash and cash equivalents (44,249) (238,833) 373,244
Cash and cash equivalents at beginning of period 671,235 910,068 536,824
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 626,986 $ 671,235 $ 910,068
============ ============ ============
- --------------------------------------------------------------------------------
(Continued)
F-40
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 7, 2001.
MERCANTILE BANK CORPORATION
/s/ Gerald R. Johnson, Jr.
--------------------------
Gerald R. Johnson, Jr.
Chairman of the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 7, 2001.
/s/ Betty S. Burton /s/ Lawrence W. Larsen
- ------------------- ----------------------
Betty S. Burton, Director Lawrence W. Larsen, Director
/s/ Edward J. Clark /s/ Calvin D. Murdock
- ------------------- ---------------------
Edward J. Clark, Director Calvin D. Murdock, Director
/s/ Peter A. Cordes /s/ Michael H. Price
- ------------------- --------------------
Peter A. Cordes, Director Michael H. Price, President and Chief Operating Officer
/s/ C. John Gill /s/ Dale J. Visser
- ---------------- ------------------
C. John Gill, Director Dale J. Visser, Director
/s/ David M. Hecht /s/ Donald Williams, Sr.
- ------------------ ------------------------
David M. Hecht, Director Donald Williams, Director
/s/ Gerald R. Johnson, Jr. /s/ Robert M. Wynalda
- -------------------------- ---------------------
Gerald R. Johnson, Jr., Chairman of the Board and Chief Robert M. Wynalda, Director
Executive Officer (principal executive officer)
/s/ Susan K. Jones /s/ Charles E. Christmas
- ------------------ ------------------------
Susan K. Jones, Director Charles E. Christmas, Senior Vice President, Chief
Financial Officer and Treasurer (principal financial
and accounting officer)
55
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
3.1 Articles of Incorporation of Mercantile are
incorporated by reference to exhibit 3.1 of
Mercantile's Registration Statement on Form SB-2
(Commission File no. 333-33081) that became
effective on October 23, 1997
3.2 Bylaws of Mercantile are incorporated by reference
to exhibit 3.2 of Mercantile's Registration
Statement on Form SB-2 (Commission File No.
333-33081) that became effective on October 23,
1997
10.1 1997 Employee Stock Option Plan of Mercantile is
incorporated by reference to exhibit 10.1 of
Mercantile's Registration Statement on Form SB-2
(Commission File No. 333-33081) that became
effective on October 23, 1997 (Management contract
or compensatory plan)
10.2 Lease Agreement between Mercantile and Division
Avenue Partners, L.L.C. dated August 16, 1997, is
incorporated by reference to exhibit 10.2 of
Mercantile's Registration Statement on Form SB-2
(Commission File No. 333-33081) that became
effective October 23, 1997
10.3 Agreement between Fiserve Solution, Inc. and the
Bank dated September 10, 1997, is incorporated by
reference to exhibit 10.3 of Mercantile's
Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on
October 23, 1997
10.4 Agreement between the Bank and Visser Brothers
Construction Inc. dated November 16, 1998, on
modified Standard Form of Agreement Between Owner
and Construction Manager where the Construction
Manager is also the Constructor, is incorporated by
reference to exhibit 10.4 of Mercantile's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1998 (Commission File No. 333-33081)
10.5 Employment Agreement among Gerald R. Johnson, Jr.,
Mercantile and the Bank dated December 1, 1998, is
incorporated by reference to exhibit 10.5 of
Mercantile's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998 (Commission
File No. 333-33081) (management contract or
compensatory plan)
10.6 Employment Agreement among Michael H. Price,
Mercantile and the Bank dated December 1, 1998, is
incorporated by reference to exhibit 10.6 of
Mercantile's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998 (Commission
File No. 333-33081) (management contract or
compensatory plan)
10.7 Mercantile Bank of West Michigan Deferred
Compensation Plan for Members of the Board of
Directors (1999) is incorporated by reference to
exhibit 10.7 of the Registration Statement of
Mercantile and MBWM Capital Trust I on Form SB-2
(Commission File Nos. 333-84313 and 333-84313-01)
that became effective on September 13, 1999.
10.8 Subordinated Indenture dated as of September 17,
1999 between Mercantile and Wilmington Trust
Company, as Trustee, relating to 9.60% Junior
Subordinated Debentures due 2029 is incorporated by
reference to exhibit 4.1 of the Registration
Statement of Mercantile and MBWM Capital Trust I on
Form SB-2 (Commission File Nos. 333-84313 and
333-84313-01) that became effective on September
13, 1999)
56
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
10.9 Amended and Restated Trust Agreement dated as of
September 17, 1999 among Mercantile, as depositor,
Wilmington Trust Company, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and
the Administrative Trustees is incorporated by
reference to exhibit 4.5 of the Registration
Statement of Mercantile and MBWM Capital Trust I on
Form SB-2 (Commission File Nos. 333-84313 and
333-84313-01) that became effective on September
13, 1999
10.10 Preferred Securities Guarantee Agreement between
Mercantile and Wilmington Trust Company dated
September 17, 1999, is incorporated by reference to
exhibit 4.7 of the Registration Statement of
Mercantile and MBWM Capital Trust I on Form SB-2
(Commission File Nos. 333-84313 and 333-84313-01)
that became effective on September 13, 1999
10.11 Agreement as to Expenses and Liabilities dated as
of September 17, 1999, between Mercantile and MBWM
Capital Trust I (included as exhibit D to exhibit
10.9)
10.12 Amended and Restated Employment Agreement dated as
of December 31, 1999, among Mercantile, the Bank
and Gerald R. Johnson, Jr., is incorporated by
reference to exhibit 10.12 of Mercantile's Form
10-KSB for the fiscal year ended December 31, 1999
(Commission File No. 000-26719) (management
contract or compensatory plan)
10.13 Amended and Restated Employment Agreement dated as
of December 31, 1999, among Mercantile, the Bank
and Michael H. Price, is incorporated by reference
to exhibit 10.13 of Mercantile's Form 10-KSB for
the fiscal year ended December 31, 1999 (Commission
File No. 000-26719) (management contract or
compensatory plan)
10.14 Mercantile Bank Corporation 2000 Employee Stock
Option Plan, approved by the shareholders at the
annual meeting on April 20, 2000
10.15 Extension Agreement of Data Processing Contract
between Fiserve Solution, Inc. and the Bank dated
May 12, 2000 extending the agreement between
Fiserve Solution, Inc. and the Bank dated September
10, 1997
10.16 Amended and Restated Employment Agreement dated as
of October 12, 2000, among Mercantile, the Bank and
Gerald R. Johnson, Jr. (management contract or
compensatory plan)
10.17 Amended and Restated Employment Agreement dated as
of October 12, 2000, among Mercantile, the Bank and
Michael H. Price (management contract or
compensatory plan)
10.18 Employment Agreement dated as of October 12, 2000,
among Mercantile, the Bank and Robert B. Kaminski
(management contract or compensatory plan)
10.19 Employment Agreement dated as of October 12, 2000,
among Mercantile, the Bank and Charles E. Christmas
(management contract or compensatory plan)
10.20 Agreement between the Bank and C.D. Barnes dated
October 28, 2000, on Amendment to Standard Form of
Agreement Between Owner and Construction Manager
where the Construction Manager is also the
Constructor, for construction of two Bank
facilities in Wyoming, Michigan
21 Subsidiaries of Mercantile
23 Consent of Independent Accountants